-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N8zpDfBZ6mWN5UQTK6+xF5DcLUTeOaLfeAm4d6UOKtneAtPfS2Hq0B2YdEfQ7OQS c8ukww02JXm7qmgXlWVlpw== 0000926236-00-000036.txt : 20000331 0000926236-00-000036.hdr.sgml : 20000331 ACCESSION NUMBER: 0000926236-00-000036 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 28 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRINGTON LABORATORIES INC /TX/ CENTRAL INDEX KEY: 0000718007 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 751435663 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10862 FILM NUMBER: 585897 BUSINESS ADDRESS: STREET 1: 2001 WALNUT HILL LANE CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 972-518-1300 MAIL ADDRESS: STREET 1: PO BOX 168128 CITY: IRVING STATE: TX ZIP: 75016-8128 FORMER COMPANY: FORMER CONFORMED NAME: AVACARE INC DATE OF NAME CHANGE: 19860521 10-K 1 1999 FORM 10-K 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, 1999 Commission File Number 0-11997 Carrington Laboratories, Inc. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) Texas 75-1435663 ---------------------- ------------------- (State of Incorporation) (IRS Employer ID No.) 2001 Walnut Hill Lane, Irving, Texas 75038 ------------------------------------------ (Address of principal executive offices) Registrant's telephone number, including area code: (972) 518-1300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) (Title of class) Preferred Share Purchase Rights (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock held by non- affiliates of the Registrant on March 24, 2000, was $31,187,000. (This figure was computed on the basis of the closing price of such stock on the NASDAQ National Market on March 24, 2000, using the aggregate number of shares held on that date by, or in nominee name for, shareholders who are not officers, directors or record holders of 10% or more of the Registrant's outstanding voting stock. The characterization of such officers, directors and 10% shareholders as affiliates is for purposes of this computation only and should not be construed as an admission for any other purpose that any of such persons are, in fact, affiliates of the Registrant.) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 9,516,923 shares of Common Stock, par value $.01 per share, were outstanding on March 24, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its annual meeting of shareholders to be held on May 18, 2000 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 biopharmaceutical, medical device and raw materials and nutraceutical company engaged in the development, manufacturing and marketing of naturally-derived complex carbohydrates and other natural product therapeutics for the treatment of major illnesses, the dressing and management of wounds and nutritional supplements. The Company is comprised of two business segments. See Note Fourteen to the consolidated financial statements in this Annual Report for financial information about these business divisions. The Company sells, using a network of distributors, prescription and nonprescription human and veterinary products through its Medical Services Division and consumer and bulk raw material products through its consumer products subsidiary, Caraloe, Inc. The Company's research and product portfolio are based primarily on complex carbohydrates isolated from the Aloe vera L. 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. Medical Services Division Carrington's Medical Services Division offers a comprehensive line of wound management products to hospitals, nursing homes, 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's primary marketing emphasis for its wound and skin care business is directed toward hospitals and nursing homes, alternate care facilities, home health care providers and managed care organizations, with wound and skin care products being promoted primarily to physicians and specialty nurses, e.g., enterostomal therapists. Many of these organizations enter into pricing agreements with the Company based upon purchase volumes or member enrollments. These agreements allow the Company to promote its products to the group on an exclusive or non-exclusive basis. As some segments of the market shift from home health care to nursing homes, the Company has developed and is marketing a specialized educational and training program to nursing homes. Opportunities in the growing Internet market are also addressed through the Company's websites, www.carringtonlabs.com.and www.woundcare.com. The Company currently has 48 employees and independent representatives engaged in the sales and marketing of the Company's products. The Company's field sales force currently employs 16 sales representatives, each assigned to a specific geographic area in the United States, 4 regional sales managers, 1 representative in Puerto Rico and 1 in Belgium. The Company also uses 6 independent sales companies employing 13 sales representatives to sell its products on a commission basis. In addition to this field sales force, the medical services division employs 2 telemarketers, who focus on alternative care facilities and the home health care market, and 11 employees in customer service, administrative support and executive management. The Company's products are primarily sold through a network of distributors. Three of the Company's largest distributors in the hospital market are McKesson HBOC/General Medical("McKesson"), Owens & Minor and Bergen Brunswig. During fiscal 1997, 1998 and 1999, sales of wound and skin care products to McKesson represented 12%, 11%, and 5%, respectively, of the Company's total net sales. Sales to Owens & Minor represented 11%, 10%, and 9%, respectively, of total net sales during the same periods. Sales to Bergen Brunswig represented 9%, 5%, and 4%, respectively, of total net sales during the same periods. The Company has over 200 pricing agreements in effect as of December 31, 1999. Many of these are for small purchasing groups, managed care organizations or facilities or are for a limited number of products. The Company also has over 30 national pricing agreements which allow its representatives to make presentations in member facilities throughout the country. In February 2000, the Company announced the extension of it's existing purchase agreement with the Veterans Administration ("VA") for wound and skin cleansers. In March 2000, the Company announced the award of two new purchase agreements with the VA, one for it's amorphous hydrogel products and one for it's full line of incontinence products. All three agreements are for a period of two years and all are sole-source contracts. The Company also announced in March 2000 that it was awarded two non-exclusive national contracts with Novation, a supply cost management company which serves the purchasing needs of over 6,600 health care organizations nationwide. One agreement is for wound care products and the other for incontinence and skin care products. Both agreements are for three year periods, effective May 1, 2000. The Company currently has 20 distribution and licensing agreements for the promotion and sale of its products. In November 1995, the Company signed a Sales Distribution Agreement with Laboratorios PiSA S.A. de C.V., a Mexican corporation, for the exclusive distribution rights to sell the Company's wound care products in Mexico, Guatemala, Nicaragua, Panama, El Salvador and the Dominican Republic for a period of five years. On May 15, 1998, the Sales Distribution Agreement was amended to delete the Dominican Republic from the territories covered by the agreement. On September 3, 1996, the Company signed an exclusive contract with Faulding Pharmaceuticals ("Faulding") to market the Company's wound care products in Australia and New Zealand. On January 12, 1998, Faulding and Carrington executed Amendment Number One to the existing Distribution Agreement between the parties. This Amendment adds the following countries to the territories covered under that Agreement: Thailand, Vietnam, Singapore, the Philippines, Malaysia and Myanmar. Pursuant to the Amendment, products are being shipped on order. In December 1996, the Company entered into an agreement with Suco International Corp. ("Suco") whereby the Company appointed Suco as exclusive distributor of certain of the Company's products in Haiti, Columbia, Venezuela, Uruguay, Bolivia, Peru, Paraguay and Ecuador for a five-year term, subject to early termination under certain circumstances. The agreement requires Suco to register the products covered by the agreement in each of those countries. On May 15, 1998, the agreement was amended to include the Dominican Republic as a territory and to extend the agreement's term for an additional two (2) years. In December 1996, the Company and Darrow Laboratories S/A ("Darrow") entered into a Sales Distribution Agreement whereby the Company appointed Darrow as a marketer and distributor of certain of the Company's wound care products for a term of ten years (subject to early termination under certain circumstances) in Brazil, with a limited right of first refusal to distribute those products in Argentina, Uruguay, Paraguay, and Chile. The agreement requires Darrow to register in the Company's name such of the Company's products as the Company directs, at the Company's expense, in Brazil and each other country where Darrow is authorized to distribute such products. As of December 31, 1999, these registrations were still pending completion. In December 1996, the Company and its Belgian subsidiary entered into an agreement with Recordati Industria Chimica & Farmaceutica S.P.A. ("Recordati") whereby the Company and its subsidiary jointly granted exclusive distribution rights to Recordati for certain of the Company's products in Italy, Vatican City and San Marino for a term of ten years, subject to automatic renewal for an additional two years unless either party elects to terminate the agreement at the end of the initial term, and subject to early termination under certain circumstances. In return for the grant of the distribution rights, Recordati made three initial payments to the Company, the first when the agreement was signed, the second when the products to be sold were registered, and the third when the products were initially launched. Under the agreement, the Company applied for, and was granted in February 1998, the CE mark, a quality certification recognized by members of the European Economic Community and certain other countries. In January 1998, the Company signed a Sales Distribution Agreement with Henry Schein UK Holdings, Ltd. ("Schein"), a British company, for the exclusive distribution rights to sell The Carrington[R] Patch in the United Kingdom and Ireland for a period of ten years. Schein markets the product under the name UlcerEze[TM]. In January 1998, the Company signed a Sales Distribution Agreement with Saude 2000 ("Saude"), a Portuguese company, for the exclusive distribution rights to sell The Carrington[R] Patch in Portugal for a period of five years. Saude markets the product under the name PazAftas[TM]. In June 1998, the Company also signed a letter of intent granting Saude the exclusive distribution rights to sell the Company's wound care products, including the DiaB[TM] product line, under the terms of the initial agreement. Pricing for the wound care products is subject to negotiation. In March 1998, the Company signed a Sales Distribution Agreement with Hemofarm, GmbH, a German company, for the exclusive distribution rights to sell the Company's wound and skin care products and The Carrington[R] Patch in Yugoslavia for a period of five years. In March 1998, the Company signed an Exclusive Sales Distribution Agreement with Vincula International Trade Company for the exclusive distribution rights to sell the Company's wound and skin care products and The Carrington[R] Patch in Oman and Saudi Arabia for a period of five years, with options for other countries in the Middle East to be negotiated in the future. In April 1998, the Company signed an Agency and Sales Distribution Agreement with Egyptian American Medical Industries, Inc. for the exclusive distribution rights to sell the Company's wound and skin care products and The Carrington[R] Patch in Egypt for a period of five years. In April 1998, the Company signed a Sales Distribution Agreement with CSC Pharmaceuticals, Ltd., an Austrian company, for the exclusive distribution rights to sell the Company's DiaB[TM], RadiaCare[TM] and CarraKlenz[TM] products in Austria, Croatia, Hungary, the Czech Republic, the Slovak Republic, Romania, Bulgaria, Slovenia and Poland for a period of ten years. In May 1999, an amendment was made to this agreement modifying certain performance requirements and product registration provisions. In February 2000, a second amendment was made to this agreement modifying certain trademark provisions. In October 1999, the Company signed a Sales Distribution Agreement with E-Wha International, Inc., a Korean company, for the exclusive distribution rights to sell the Company's RadiaCare[TM] products in Korea for a period of three years. In 1999, total international sales of wound care products were $1,160,000, of which $631,000 were related to the above-mentioned international agreements. The Company presently estimates the expected sales associated with these agreements in 2000 to be between $800,000 and $1,000,000. The company also sells wound care products into international markets on a non-contract, purchase order basis. In 1999, total non-contract, international wound care sales were $529,000 and included sales into Argentina, Jamaica, Puerto Rico, Singapore and United Arab Emirates. The Company also 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 the Company can market the product in limited areas but additional work must be done. The "conditional" aspect of the approval is renewed on an annual basis and will be removed upon completion and acceptance by the USDA of additional potency testing. A submission was made in December 1998 for this purpose and as of the date of this report a final response from the USDA has not been received. However, there can be no assurance that these tests will result in the removal of the conditional restriction on the USDA's approval of Acemannan Immunostimulant. In September 1990, the Company granted Solvay Animal Health, Inc. ("Solvay") an exclusive, world-wide license to use and sell an adjuvant processed from Aloe vera L. for poultry disease. In January 1992, Solvay received approval from the USDA to market Acemannan Immunostimulant as an adjuvant to a vaccine for Marek's disease, a virus infection that kills chickens or renders them unfit for human consumption. On March 1, 1997, Fort Dodge Animal Health("Fort Dodge"), a division of American Home Products Corporation, acquired the business and assets of Solvay, including the License Agreement dated September 20, 1990 and an Addendum thereto between Carrington and Solvay granting Solvay an exclusive world-wide field of use license to use and sell Acemannan Immunostimulant as a component/adjuvant to enhance the performance of poultry vaccines. Fort Dodge notified Carrington in the summer of 1997 that, as successor in interest to Solvay, it intended to terminate the License Agreement. This agreement was terminated effective February 1, 1999. All sales of this product are now on a non- exclusive basis. In March 1996, the Company signed an agreement with Farnam Companies, Inc., a leading veterinary marketing company, to promote and sell the CarraVet[R] product line, including Acemannan Immunostimulant. The CarraVet[R] product line currently consists of eight products. Consumer Health Caraloe, Inc., a subsidiary of the Company ("Caraloe"), markets or licenses consumer products and bulk raw materials utilizing the Company's patented complex carbohydrate technology into the consumer health and nutritional products markets. Caraloe's premier product is Manapol[R] powder, a bulk raw material rich in complex carbohydrates. Manapol[R] powder is marketed to manufacturers of nutritional products who desire quality complex carbohydrate ingredients for their finished products. Caraloe also markets finished products containing Manapol[R] powder into the health and nutritional products markets through health food stores and over the Internet at AloeVera.com. Caraloe also offers contract manufacturing services to the nutritional and skin care market. In February 1996, Caraloe signed an agreement with Mannatech, Inc. ("Mannatech") granting it an exclusive license in the United States for Manapol[R] powder. This agreement, including the grant of the exclusive license, was terminated by Mannatech effective March 31, 1997, and Caraloe began to market Manapol[R] powder to third parties as well as use it in Caraloe's products. In August 1997, Caraloe signed a new, nonexclusive supply agreement with Mannatech to supply Manapol[R] powder. This agreement is effective through July 2000 and contains monthly minimum purchase requirements. On January 12, 2000, the agreement was extended through August 14, 2002. During 1997, 1998 and 1999, sales of Manapol[R] powder to Mannatech represented 15%, 23% and 41%, respectively, of the Company's total consolidated net sales. In December 1997, Caraloe signed a supply agreement with Met-Trim, Inc. ("Met-Trim"), for the sale of Manapol[R] powder. The agreement was terminated on January 11, 1999 due to the failure of Met-Trim to meet first year minimum requirements. In October 1996, Caraloe made a $200,000 equity investment in Aloe Commodities International, Inc. ("ACI"). In February 1997, Caraloe entered into a Supply Agreement with ACI for a term of ten years (subject to early termination under certain circumstances). The agreement contemplates that ACI will purchase from Caraloe all of certain raw materials that ACI needs for drinks and other consumer products. In December 1997, Caraloe made an additional equity investment of $400,000 in ACI. Carrington owns less than 10% of the total outstanding shares of ACI and the entire investment was reserved in 1998. In February 1997, Caraloe entered into a Supply Agreement with Light Resources Unlimited ("LRU"), and effective March 1, 1997, Carrington entered into a related Trademark License Agreement with LRU. The terms of the Supply Agreement and the Trademark License Agreement end on May 12, 2002, and May 4, 2002, respectively, and the term of each agreement is subject to early termination under certain circumstances. The Supply Agreement provides that LRU will purchase from Caraloe annually at least the minimum quantities of Manapol[R] powder specified in the agreement. The Supply Agreement also contemplates that LRU will be Caraloe's sole distributor of Manapol[R] powder to natural health care practitioners in the United States and Canada, subject to Caraloe's right to sell "simple purchase bulk product" to natural health care practitioners in quantities exceeding certain specified limits. The Trademark License Agreement grants LRU a non-exclusive license to use the trademarks AVMP[R] powder and Manapol[R] powder in connection with the advertising and sale of the LRU brand (Manapol[R] Gold[TM] powder) to the targeted group. Sales to LRU in 1998 under this agreement were $197,000. Sales in 1999 were $110,200, a decrease of 44% from 1998. In October 1998, Caraloe signed a Supply Agreement and a Trademark License Agreement with One Family, Inc. ("One Family"), a direct sales company with headquarters located in Colorado. One Family will be marketing Manapol[R] powder in capsule form. No sales were made under this agreement in 1999. In December 1998, Caraloe signed a supply agreement and trademark license agreement with Eventus International, Inc. ("Eventus"), the consumer health subsidiary of BeautiControl. Eventus will market a variety of products containing Manapol[R] powder to promote a natural, healthy lifestyle. Sales under this agreement in 1999 were $271,000. In March 1999, Caraloe signed a Supply Agreement and Trademark License Agreement with For Your Health, Inc. ("For Your Health"), a direct sales company with headquarters in Seattle, Washington. For Your Health will be marketing Manapol[R] powder in capsule form. In April 1999, Caraloe signed an Exclusive Sales Representative Agreement with Classic Distributing Company ("Classic") of San Fernando, California. Classic will be acting as Caraloe's exclusive, independent marketing representative in the state of California. In April 1999, Caraloe also signed an Exclusive Sales Representative Agreement with Glenn Corporation ("Glenn") of St. Paul, Minnesota. Glenn will be acting as Caraloe's exclusive, independent representative in 24 states in the central and northern portions of the country. In June 1999, Caraloe signed a Sales and Trademark License Agreement with Nutra Vine ("Nutra Vine"), a direct sales company with headquarters in Spring, Texas. Nutra Vine will be marketing Manapol[R] powder in capsule form. Caraloe also sells products into international markets on a non- contract, purchase order basis. In 1999, total international sales for Caraloe were $266,000 and included sales into Australia, Japan and South Africa Research and Development General Carrington has developed a proprietary process for purifying a material that has been designated bulk pharmaceutical mannan ("BPM"). This material is a natural product mixture which contains a high percentage of complex carbohydrates. The Company intends to seek approval of the Food and Drug Administration (the "FDA") and other regulatory agencies to sell drugs and/or medical devices derived from BPM-based materials in the United States and in foreign countries. For a more comprehensive listing of the type, indication and status of products currently under development by the Company, see "Research and Development - Summary " below. The regulatory approval process, both domestically and internationally, can be protracted and expensive, and there is no assurance that the Company will obtain approval to sell its products for any treatment or use (see "Governmental Regulation" below). The Company expended approximately $3,006,000, $2,589,000 and $5,300,000 on research and development in fiscal 1997, 1998, and 1999, respectively. The Company has adopted a focused approach to its research and development efforts. The Company returned to the clinic in April 1999 to conduct a Phase III trial in ulcerative colitis, and as a result expenditures for fiscal 1999 were increased 105% over 1998. The Company continued in 1999 with its efforts to structure research and development to meet the challenges and demands for drug development in the 21st century. In addition to establishing a strong nucleus or infrastructure for chemistry, assay development and formulation development, with outsourcing capabilities for high-throughput drug screening, and preclinical and clinical drug and device development, the Company also strengthened its documentation and product development activities. This approach is intended to enable the Company to maximize its opportunities in a timely and cost-effective manner. Currently, the Company's research staff comprises 14 full-time employees. Dr. Robert A. Fildes, a director of the Company, continues to serve as part-time Executive Vice President, Research and Development as he has since October 1, 1997. Dr. Kenneth (Bill) Yates was promoted to Vice President, Research and Development in January 1999. Preclinical Research The Company's main preclinical research and development objective for 1999 was to initiate and support the ulcerative colitis program. The Company returned to the clinic in April 1999, treating patients with a new dosage form of Aliminase[TM] as a powder for reconstitution. Patient treatment was completed in February 2000. Final results were announced at the end of March 2000 and no significant differences were found to support a therapeutic drug effect. Other preclinical studies conducted in the Company's laboratories and in outside laboratories have shown that certain of the Company's complex carbohydrates enhance macrophages and other cell types to produce cytokines, which regulate other cells. In addition, laboratory experiments conducted by the Company have shown that some compounds from Aloe vera L. have pro- or anti-inflammatory actions as shown in animal models of wound healing and in inflammation of the lung, colon, joint and ear. The Company believes that its products' pharmacological actions and lack of toxicity make them excellent candidates for further development as therapeutic agents for the treatments and uses for which the Company intends to seek regulatory approvals. The preclinical efforts for the future will focus on supporting existing business developing "proof of concept" data for potential pharmaceutical partners. There is no assurance, however, that the Company will be successful in its efforts. The Company sponsors a research and development laboratory at Texas A&M University in association with the College of Veterinary Medicine to expand preclinical research in various wound healing applications and mechanisms of action. Pursuant to this arrangement, the Company has access to leading authorities in immunology, as well as facilities and equipment to engage in experimentation and analysis at the basic research level. Further processed BPM, including CarraVex[TM] injectable (formerly CARN 750), are immunomodulating agents that have the potential to be used in the treatment of neutropenia or as an adjunct in the treatment of cancer. In 1991, the USDA granted the Company conditional approval to market an injectable form of a complex carbohydrate as an aid to surgery in the treatment of canine and feline fibrosarcoma, a form of soft tissue cancer, under the name Acemannan Immunostimulant. The product was conditionally approved based on safety and efficacy studies. The Company continues to work on developing a suitable, cost-effective potency assay that will meet USDA requirements for the purpose of removal of the conditional status. A submission was made in December 1998 for this purpose and as of the date of this report a final response from the USDA has not been received. Of course, there can be no assurance as to whether or when the USDA will remove the conditional restriction on its approval of this product. An extensive series of animal studies was initiated in 1997 to assess the direct and adjunct effects of CarraVex[TM] and Acemannan Immunostimulant. The primary purpose of these studies was to identify a suitable model to evaluate new product formulations (see "Human Studies" below). These studies were completed successfully in 1998, and models have been identified to assess future drug candidates. In 1998, a new and unique pectin (complex carbohydrate) was isolated from the cell walls of the inner gel of Aloe vera L. Basic research is continuing on this material. Pilot scale production of this material was postponed in 1999 to allow for additional efforts to be placed in support of ulcerative colitis. The product has near-term utility as a product to be used in wound healing, and other future potential applications are being explored. Two patent applications covering this invention were filed in July 1998, and the first of the two resulted in the issuance of a patent in July 1999. In 1999, the Company, in conjunction with Baylor College of Dentistry, completed a series of ex vivo studies evaluating the adherence of Radiacare[TM] and Salicept[TM] Oral Wound Rinse to epithelial cells and keratin associated with the mouth in support of a pain reduction claim for the products. A florescent labeled material was applied to mucosal scrapings and then examined microscopically. Adherence to both keratin and epithelial cells was shown, demonstrating the coating and protecting effects of the product. Human Studies Evaluation of Aliminase[TM] (formerly CARN 1000) in the Treatment of Ulcerative Colitis. In late 1996, the Company placed on hold its testing of Aliminase[TM] oral capsules for the treatment of ulcerative colitis. The Company has reformulated the product into a single unit dose powder for reconstitution. (See "Preclinical Research" above and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below.) The Company initiated a Phase III trial of the new dosage form, with the treatment of patients beginning on April 5, 1999. Patient enrollment was completed in December 1999, and final results were announced at the end of March 2000 and no significant differences were found to support a therapeutic drug effect. The program will be discountinued. Evaluation of CarraVex[TM] Injectable (formerly CARN 750) in the Treatment of Solid Tumors in Humans. In 1993, the Company completed a Phase I safety study in normal volunteers using CarraVex[TM], which led to a Phase I clinical trial in disease patients using CarraVex[TM] injectable in certain solid tumor indications. The trial began in the United States in late 1995 and continued until mid-1997. Eighteen patients completed the study, with no safety concerns noted. The product required filtration at the bedside, which the Company believes is not the best delivery approach for CarraVex[TM]. A program for improving the formulation is in progress, and a decision on future clinical trials will be made once a suitable formulation is developed. Evaluation of Carrasyn[R] Freeze-Dried Gel (CarraSorb[TM] M) in Wound Healing. Following the submission of a 510(k) pre-market notification for a preservative-free, freeze-dried gel for wound care, the FDA cleared Carrington to market CarraSorb[TM] M, and it was launched in early 1996. The Company sponsored a small pilot clinical study at the University of Wales to evaluate the effect of CarraSorb[TM] M on wound macrophages. The results of this study showed that seven out of nine patients with previously non-healing wounds showed some degree of wound closure, with two wounds progressing to near or complete healing. An association between the healing effects and macrophage activity was not established. Evaluation of RadiaCare[TM] Oral Wound Rinse. In March 1997, the FDA cleared Carrington to market RadiaCare[TM] Oral Wound Rinse for the management and relief of pain associated with mucositis and all types of oral wounds. The Company is sponsoring individual case studies and co-sponsoring a pilot study of 50 patients in a placebo-controlled, double-blind trial in radiation-induced mucositis. This trial continues, and results should be known by the end of 2000. Two market studies evaluating patient acceptance and pain relief associated with use of the product were completed in August 1999. In these trials, which involved 28 patients, 93% reported some pain relief associated with its use of the product. Summary. The following table outlines the status of the products and potential indications of the Company's aloe-based products developed, planned or under development. There is no assurance of successful development, completion or regulatory approval of any product not yet on the market. PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED, PLANNED OR UNDER DEVELOPMENT PRODUCT OR POTENTIAL POTENTIAL INDICATION MARKET APPLICATIONS STATUS -------------------- ------------------- ------ Topical ------- Dressings Pressure and Vascular Ulcers Marketed Dressings Diabetic Ulcers Marketed Cleansers Wounds Marketed Anti-fungal Cutaneous Fungal Infection Marketed Hydrocolloids Wounds Marketed Alginates Wounds Marketed Skin Protectants Incontinence Care Marketed Oral ---- Human Anti-inflammatory Ulcerative Colitis Discontinued Pain Reduction Mucositis Marketed Dental Pain Reduction Aphthous Ulcers, Oral Wounds Marketed Injectable ---------- Human Adjunct for cancer Neutropenia associated with Preclinical Neutropenia cancer and Formulation Development Underway Veterinary Adjunct for cancer Fibrosarcoma Marketed Vaccine Adjuvant ---------------- Veterinary Poultry Vaccines Marek's Disease Marketed
Licensing Strategy The Company expects that prescription pharmaceutical products containing certain defined drug substances will require a substantial degree of development effort and expense. Before governmental approval to market any such product is obtained, the Company may license these products for certain indications to other pharmaceutical companies in the United States or foreign countries and require such licensees to undertake the steps necessary to obtain marketing approval for specific indications or in a particular country. Similarly, the Company intends to license third parties to market products containing defined chemical entities for certain human indications when it lacks the expertise or financial resources to market effectively. If the Company is unable to enter into such agreements, it may undertake to market the products itself for such indications. The Company's ability to market these products for specific indications will depend largely on its financial condition at the time and the results of related clinical trials. There is no assurance that the Company will be able to enter into any license agreements with third parties or that, if such license agreements are concluded, they will contribute to the Company's overall profits. Raw Materials and Processing The principal raw material used by the Company in its operations is the leaf of the plant Aloe barbadensis Miller, popularly known as Aloe vera L. Through patented processes, the Company produces bulk pharmaceutical and injectable mannans and freeze-dried aloe extract from the central portion of the Aloe vera L. leaf known as the gel. A basic bulk pharmaceutical mannan (acemannan), in the form of a hydrogel, is used as an ingredient in certain of the Company's wound and skin care products. Through additional processing, bulk mannans may be produced in both oral and injectable dosage forms. In May 1990, the Company purchased a 405-acre farm in the Guanacaste province of northwest Costa Rica which currently has approximately 125 acres planted with Aloe vera L. The Company's current need for leaves exceeds the supply of harvestable leaves from the Company's farm, requiring the purchase of leaves from other sources in Central and South America at considerably higher prices. Due to economic and political instability in the Central American region, the supply of imported leaves cannot be guaranteed. A 10% increase in Aloe vera L. leaf prices from other sources would result in a 2% decrease in the Company's gross profit. The Company's sensitivity analysis of the effects of changes in leaf prices does not factor in a potential change in sales levels or a change in the percentage of leaves purchased from other sources. The Company has been exploring other options to obtain leaves to meet its projected requirements at lower costs. In May 1998, Aloe and Herbs International, Inc. ("Aloe & Herbs"), a Panamanian corporation was formed for the purpose of purchasing 5,000 acres of land in Costa Rica and establishing an Aloe vera L. farm. The Company received 1.5 million shares of Aloe & Herbs common stock for agreeing to make certain loans to Aloe & Herbs, arranging for Aloe vera L. plants to be supplied to the farm and providing know-how in farming Aloe vera L. plants. Aloe & Herbs formed a Costa Rica subsidiary, Rancho Aloe (C.R.), S.A. ("Rancho Aloe"), which owns and operates the farm. The Company purchased the initial plants for the farm on behalf of Rancho Aloe in exchange for unsecured notes and accounts receivable. In March 1998, prior to the incorporation of Aloe & Herbs, the Company's Caraloe subsidiary signed a letter of intent with one of the organizers of Aloe & Herbs to enter into a supply agreement with Aloe & Herbs to purchase, at mutually agreeable, locally competitive prices, all of the Aloe vera L. leaves that Caraloe needs, to the extent its needs exceed the leaves available from the Company's farm plus up to 200,000 kilograms of leaves per month from another local source. At the date of this report, no such supply agreement has been negotiated or entered into, but in March 1999, the Company began receiving approximately eight percent of its monthly requirements of leaves from Rancho Aloe. In September 1999, the Company leased approximately 17.6 acres of land from Rancho Aloe for one year with provisions for automatic renewal in one-year increments unless terminated by the Company or Rancho Aloe, and planted its own Aloe vera L. plants on the leased plot due to the lack of additional productive land on its own farm. The Company also pays a monthly fee for the maintenance of the plot. As of December 31, 1999, Rancho Aloe was providing an average of 52% of the Company's monthly requirement of leaves. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note Six to the consolidated financial statements for further information regarding the Company's relationship with Aloe & Herbs. Manufacturing During the last quarter of 1994 and the first three quarters of 1995, the Company moved its wound and skin care product manufacturing operations from a leased facility in Dallas, Texas to the Company's headquarters in Irving, Texas. In connection with this move, the Company upgraded and expanded its manufacturing capacity by installing higher capacity equipment and upgraded its capabilities to produce injectable-grade pharmaceutical products. The Company believes that the plant's capacity will provide sufficient capacity for the present line of products and accommodate new products and sales growth. Final packaging of certain of the Company's wound care products is completed by outside vendors. The Company's calcium alginates, films, hydrocolloids, foam dressings, gel sheets, tablets, capsules, and freeze-dried products are being provided by third parties. In 1998, the Company engaged Elemco, a consulting firm, to review and modernize the Company's manufacturing and quality control processes and make recommendations for process improvements. During 1999, Elemco consultants made a number of recommendations which were implemented, resulting in increased factory throughput and reduced product cost. All of the Company's bulk pharmaceutical mannans, bulk injectable mannans and freeze-dried Aloe vera L. extracts are produced in its processing plant in Costa Rica. This facility has the ability to supply the bulk aloe raw materials requirements of the Company's current product lines and bulk material contracts for the foreseeable future. A process improvement program was initiated in late 1998 and continued through 1999 to further meet requirements for a "product by process." Finished oral and injectable dosage forms of products will be produced by outside vendors until in-house production becomes economically justified. Competition Research and Development. The biopharmaceutical field is expected to continue to undergo rapid and significant technological change. Potential competitors in the United States are numerous and include pharmaceutical, chemical and biotechnology companies. Many of these companies have substantially greater capital resources, research and development staffs, facilities and expertise (in areas including research and development, manufacturing, testing, obtaining regulatory approvals and marketing) than the Company. This competition can be expected to become more intense as commercial applications for biotechnology and pharmaceutical products increase. Some of these companies may be better able than the Company to develop, refine, manufacture and market products which have application to the same indications as bulk pharmaceutical mannans and bulk injectable mannans. The Company understands that certain of these competitors are in the process of conducting human clinical trials of, or have filed applications with government agencies for approval to market, certain products that will compete with the Company's products both in its present wound care market and in markets associated with products the Company currently has under development. Medical Services Division and Caraloe, Inc. The Company competes against many companies that sell products which are competitive with the Company's products, with many of its competitors using very aggressive marketing efforts. Many of the Company's competitors are substantially larger than the Company in terms of sales and distribution networks and have substantially greater financial and other resources. The Company's ability to compete against these companies will depend in part on the expansion of the marketing network for its products. The Company believes that the principal competitive factors in the marketing of its products are 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 "FFDC Act"), the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. For marketing outside the United States, the Company is subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement may vary widely from country to country. Food and Drug Administration. The contents, labeling and advertising of many of the Company's products are regulated by the FDA. The Company is required to obtain FDA approval before it can study or market any proposed prescription drugs and may be required to obtain such approval for proposed nonprescription products. This procedure involves extensive clinical research, and separate FDA approvals are required at various stages of product development. The approval process requires, among other things, presentation of substantial evidence to the FDA, based on clinical studies, as to the safety and efficacy of the proposed product. In order to initiate human clinical trials on a product, extensive basic research and development information must be submitted to the FDA in an investigational new drug ("IND") application. The IND application contains a general investigational plan, a copy of the investigator's brochure (a comprehensive document provided by the drug manufacturer), copies of the initial protocol for the first study, a review of the chemistry, manufacturing and controls information for the drug, pharmacology and toxicology information, any previous human experience with the drug, results of preclinical studies and any other information requested by the FDA. If permission is obtained to proceed to clinical trials based on the IND application, initial trials, usually categorized as Phase I, are instituted. The initial or Phase I trials typically involve the administration of small, increasing doses of the investigational drug to healthy volunteers, and sometimes patients, in order to determine the general overall safety profile of the drug and how it is metabolized. Once the safety of the drug has been established, Phase II efficacy trials are conducted in which the expected therapeutic doses of the drug are administered to patients having the disease for which the drug is indicated, and a therapeutic response is sought as compared to the expected progression of the underlying disease or compared to a competitive product or placebo. Information also is sought on any possible short-term side effects of the drug. If efficacy and safety are observed in the Phase II trials, Phase III trials (usually two trials) are undertaken on an expanded group in which the patients receiving the drug are compared to a different group receiving either a placebo or some form of accepted therapy in order to establish the relative safety and efficacy of the new drug compared with the control group. Data are also collected to provide an adequate basis for future physician prescribing information. If Phases I through III are successfully completed, the data from these trials are compiled into a new drug application ("NDA"), which is filed with the FDA in an effort to obtain marketing approval. In general, an NDA will include a summary of the components of the IND application, a clinical data section reviewing in detail the studies from Phases I through III and the proposed description of the benefits, risks and uses, or labeling, of the drug, and how both the drug substance and drug product will be manufactured and controlled. In general, a more comprehensive NDA and a more prolonged review process are required for drugs not previously approved for marketing by the FDA. If a second indication for an already approved product is sought, since many of the components of the review process are the same, a shortened review process generally can be anticipated. However, the FDA gives high priority to novel drugs providing unique therapeutic benefits and a correspondingly lower priority to drugs similar to or providing comparable benefits to others already on the market. In addition to submitting safety and efficacy data derived from clinical trials for FDA approval, NDA approval requires the manufacturer of the drug to demonstrate the identity, potency, quality and purity of the active ingredients of the product involved, the stability of these ingredients and compliance of the manufacturing facilities, processes and quality control with the FDA's current Good Manufacturing Practices regulations. After approval, manufacturers must continue to expend time, money and effort in production and quality control to assure continual compliance with the current Good Manufacturing Practices regulations. Also, under the new program for harmonization between Europe and the U.S. and the ISO 9001 Certification Program, a company can, under certain circumstances after application, have a new drug approved under a process known as centralization rather than having to go through a country-by-country approval in the European Union. 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 FFDC 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. The Company currently markets seven (7) products which require a prescription as medical devices. 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 "FTC"), 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 (the "EPA"), as well as the FDA. The Company believes that it is in substantial compliance with all applicable laws and regulations relating to its operations, but there is no assurance that such laws and regulations will not be changed. Any such change may have a material adverse effect on the Company's operations. The manufacturing, processing, formulating, packaging, labeling and advertising of products of the Company's subsidiary, Caraloe, are also subject to regulation by one or more federal agencies, including the FDA, the FTC, the USDA and the EPA. These activities are also regulated by various agencies of the states, localities and foreign countries to which Caraloe's products are distributed and in which Caraloe's products are sold. The FDA, in particular, regulates the formulation, manufacture and labeling of vitamin and other nutritional supplements. On October 25, 1994, the President signed into law the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). This new law revised the provisions of the FFDC Act concerning the composition and labeling of dietary supplements and, in the judgment of the Company, is favorable to the dietary supplement industry. The legislation created a new statutory class of "dietary supplement." This new class includes vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, and the legislation grandfathers, with certain limitations, dietary ingredients on the market before October 15, 1994. A dietary supplement which contains a new dietary ingredient, one not on the market before October 15, 1994, will require evidence of a history of use or other evidence of safety establishing that it will reasonably be expected to be safe. The majority of the products marketed by Caraloe are classified as dietary supplements under the FFDC Act. Both foods and dietary supplements are subject to the Nutrition Labeling and Education Act of 1990 (the "NLEA"), which prohibits the use of any health claim for foods, including dietary supplements, unless the health claim is supported by significant scientific agreement and is either pre-approved by the FDA or the subject of substantial government scientific publications and a notification to the FDA. To date, the FDA has approved the use of only limited health claims for dietary supplements. However, among other things, the DSHEA amends, for dietary supplements, the NLEA by providing that "statements of nutritional support" may be used in labeling for dietary supplements without FDA preapproval if certain requirements, including prominent disclosure on the label of the lack of FDA review of the relevant statement, possession by the marketer of substantiating evidence for the statement and post-use notification to the FDA, are met. Such statements may describe how particular nutritional supplements affect the structure, function or general well-being of the body (e.g., "promotes cardiovascular health"). The FDA issued final dietary supplement labeling regulations in 1997 that required Caraloe to revise most of its product labels by 1999, and Caraloe completed the revisions required for compliance with these regulations in January 1999. In compliance with these regulations, Caraloe maintains supporting documentation on file for its "statement of nutritional support." Advertising and label claims for dietary supplements and conventional foods have been regulated by state and federal authorities under a number of disparate regulatory schemes. There can be no assurance that a state will not interpret claims presumptively valid under federal law as illegal under that state's regulations, or that future FDA regulations or FTC decisions will not restrict the permissible scope of such claims. Governmental regulations in foreign countries where Caraloe plans to commence or expand sales may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of Caraloe's products. Compliance with such foreign governmental regulations is generally the responsibility of Caraloe's distributors for those countries. These distributors are independent contractors over which the Company has limited control. As a result of Caraloe's efforts to comply with applicable statutes and regulations, Caraloe has from time to time reformulated, eliminated or relabeled certain of its products and revised certain provisions of its sales and marketing program. Caraloe cannot predict the nature of any future laws, regulations, interpretations or applications, nor can it determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not capable of reformulation, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all of such requirements could have a material adverse effect on the Company's results of operations and financial condition. Compliance with the provisions of national, state and local environmental laws and regulations has not had a material adverse effect upon the capital expenditures, earnings, financial position, liquidity or competitive position of the Company. Patents and Proprietary Rights As is industry practice, the Company has a policy of using patents, trademarks and trade secrets to protect 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 26 other countries in three series regarding the compositions of acetylated mannan derivatives, the processes by which they are produced and the methods of their use. The first series of patent applications, relating to the compositions of acetylated mannan derivatives and certain basic processes of their production, was filed in a chain of United States patent applications and its counterparts in the other 26 countries. The first United States patent application in this first series, covering the composition claims of acetylated mannan derivatives, matured into United States Patent No. 4,735,935 (the "935 Patent"), which was issued on April 5, 1988. United States Patent No. 4,917,890 (the "890 Patent") was issued on April 17, 1990 from a divisional application to the 935 Patent. This divisional application pertains to most of the remaining claims in the original application not covered by the 935 Patent. The 890 Patent generally relates to the basic processes of producing acetylated mannan derivatives, to certain specific examples of such processes and to certain formulations of acetylated mannan derivatives. Two other divisional applications covering the remaining claims not covered by the 890 Patent matured into patents, the first on September 25, 1990, as United States Patent No. 4,959,214, and the second on October 30, 1990, as United States Patent No. 4,966,892. Foreign patents that are counterparts to the foregoing United States patents have been granted in some of the member states of the European Economic Community and several other countries. The second series of patent applications related to preferred processes for the production of acetylated mannan derivatives. One of them matured into United States Patent No. 4,851,224, which was issued on July 25, 1989. This patent is the subject of a Patent Cooperation Treaty application and national foreign applications in several countries. An additional United States patent based on the second series was issued on September 18, 1990, as United States Patent No. 4,957,907. The third series of patent applications, relating to the uses of acetylated mannan derivatives, was filed subsequent to the second series. Three of them matured into United States Patent Nos. 5,106,616, issued on April 21, 1992, 5,118,673, issued on June 2, 1992, and 5,308,838, issued on May 3, 1994. The Company has filed a number of divisional applications to these patents, each dealing with specific uses of acetylated mannan derivatives. Patent Cooperation Treaty applications based on the parent United States applications have been filed designating a number of foreign countries where the applications are pending. In addition, the Company has also obtained a patent in the United States relating to a wound cleanser, U.S. Patent No. 5,284,833, issued on February 8, 1994. The Company has obtained a patent in the United States relating to a therapeutic device made from freeze-dried complex carbohydrate hydrogel (U.S. Patent No. 5,409,703, issued on April 25, 1995). A Patent Cooperation Treaty application based on the parent United States application has been filed designating a number of foreign countries where the applications are pending. The Company has obtained patents in the United States (U.S. Patent No. 5,760,102, issued on June 2, 1998) and Taiwan (Taiwan Patent No. 89390, issued on August 21, 1997) related to the uses of a denture adhesive and also a patent in the United States relating to methods for the prevention and treatment of infections in animals (U.S. Patent No. 5,703,060, issued on December 30, 1997). Additional patents concerning various areas of interest were issued in 1999. The Company obtained a patent in the United States (U.S. Patent No.5,902,796, issued on May 11, 1999) related to the process for obtaining bioactive material from Aloe vera L. The Company obtained an additional patent in the United States (U.S. Patent No. 5,929,051, issued on July 27, 1999) related to the composition and process for a new complex carbohydrate (pectin) isolated from Aloe vera L. Also obtained was a United States patent (U.S. Patent No. 5,925,357, issued on July 20, 1999) related to the process for a new Aloe vera L. product that maintains the complex carbohydrates with the addition of other substances normally provided by "Whole Leaf Aloe." Additionally, the Company obtained a Japanese letters-patent (Patent No. 2888249, having a Patent Registration Date of February 19, 1999) for the use of acemannan (a) in a vaccine product; (b) in enhancing natural kill cell activity and in enhancing specific tumor cell lysis by white cells and/or antibodies; (c) in correcting malabsorption and mucosal cell maturation syndromes in man or animals; and (d) in reducing symptoms associated with multiple sclerosis. The Company also received the grant of European Patent Application under No. 0611304, having the date of publication and mention of the grant of the patent of September 15, 1999. This European Letters Patent claims the use of acetylated mannan for the regulation of blood cholesterol levels and for the removal of plaque in blood vessels. The Company has filed and intends to file patent applications with respect to subsequent developments and improvements when it believes such protection is in the best interest of the Company. Although the scope of protection which ultimately may be afforded by the patents and patent applications of the Company is difficult to quantify, the Company believes its patents will afford adequate protection to conduct the business operations of the Company. However, there can be no assurance that (i) any additional patents will be issued to the Company in any or all appropriate jurisdictions, (ii) litigation will not be commenced seeking to challenge the Company's patent protection or such challenges will not be successful, (iii) processes or products of the Company do not or will not infringe upon the patents of third parties or (iv) the scope of patents issued to the Company will successfully prevent third parties from developing similar and competitive products. It is not possible to predict how any patent litigation will affect the Company's efforts to develop, manufacture or market its products. The Company also relies upon, and intends to continue to rely upon, trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive position. The Company typically enters into confidentiality agreements with its scientific consultants, and the Company's key employees have entered into agreements with the Company requiring that they forbear from disclosing confidential information of the Company and assign to the Company all rights in any inventions made while in the Company's employ relating to the Company's activities. Accordingly, the Company believes that its valuable trade secrets and unpatented proprietary know-how are adequately protected. The technology applicable to the Company's products is developing rapidly. A substantial number of patents have been issued to other biopharmaceutical companies. In addition, competitors have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights relating to products or processes competitive with those of the Company. To the Company's knowledge, acetylated mannan derivatives do not infringe any valid, enforceable United States patents. A number of patents have been issued to others with respect to various extracts of the Aloe vera L. plant and their uses and formulations, particularly in respect to skin care and cosmetic uses. While the Company is not aware of any existing patents which conflict with its current and planned business activities, there can be no assurance that holders of such other Aloe vera L.-based patents will not claim that particular formulations and uses of acetylated mannan derivatives in combination with other ingredients or compounds infringe, in some respect, on these other patents. In addition, others may have filed patent applications and may have been issued patents relating to products and technologies potentially useful to the Company or necessary to commercialize its products or achieve their business goals. There is no assurance that the Company will be able to obtain licenses of such patents on acceptable terms. The Company has given the trade name Carrasyn[R] to certain of its products containing acetylated mannans. The Company has filed a selected series of domestic and foreign trademark applications for the marks Manapol[R] powder, Carrisyn[R] and Carrasyn[R]. Further, the Company has registered the trademark AVMP[R] Powder and the trade name Carrington[R] in the United States. In 1999, the Company obtained four additional registered trademarks in Brazil. The Company believes that its trademarks and trade names are valuable assets. The Company has filed a petition with the United States Patent and Trademark Office to cancel the registration of the mark CURAKLENSE by The Kendall Company of Mansfield, Massachusetts. Employees As of January 31, 2000, the Company employed 336 persons, of whom 29 were engaged in the operation and maintenance of its Irving, Texas processing plant, 221 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, 95 were located in Texas, 221 in Costa Rica and one in Puerto Rico. In addition, 19 sales personnel were located in 15 other states. The Company considers relations with its employees to be good. The employees are not represented by a labor union. Financing In November 1997, the Company entered into a financing arrangement with Comerica Bank-Texas ("Comerica"). The agreement was composed of a $3,000,000 line of credit structured as a demand note without expiration with an interest rate equal to the Comerica prime rate. The line of credit is collateralized by the Company's accounts receivable and inventory. This credit facility will be used for operating needs, as required, and is currently being used to secure a letter of credit in the amount of $1,100,000. As of December 31, 1999, there was a $200,000 balance owed to Comerica under the terms of the financing agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for information regarding a supply agreement between the Company and its supplier of freeze-dried products that obligates the Company to purchase more of such products than it is currently able to sell, and the use of the above-mentioned letter of credit to secure the Company's obligations under that agreement. Year 2000 Issues See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000 Issues" for information regarding the Company's efforts to assess, and to deal with the effects of, the types of Year 2000 issues described in that discussion. 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, although the farm is not adequate to supply all of the Company's needs for Aloe vera L. leaves. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information regarding the Company's arrangements to purchase Aloe vera L. leaves.) Walnut Hill Facility. The Company's corporate headquarters and principal U.S. manufacturing facility occupy all of the 35,000 square foot office and manufacturing building (the "Walnut Hill Facility"), which is situated on an approximate 6.6 acre tract of land located in the Las Colinas area of Irving, Texas. The Company owns the land and the building. The manufacturing operations occupy approximately 19,000 square feet of the facility, and administrative offices occupy approximately 16,000 square feet. Laboratory Facility. The Company leases 24,000 square feet of office, manufacturing and laboratory space (the "Laboratory Facility") in Irving, Texas pursuant to a lease that expires in July 2001. The Company's in-house research and development and quality assurance activities are conducted at the Laboratory Facility for the production of injectable dosage forms of Acemannan Immunostimulant. The Company is currently evaluating alternative facility sites. Warehouse and Distribution Facility. Since September 1994, the Company's warehouse and distribution center has been located in a 35,050 square foot facility that the Company leases in Irving, Texas, near the Walnut Hill Facility. The warehouse and distribution center occupies approximately 27,000 square feet of the leased facility, and the remaining space is used for offices. The lease expires in October 2001. Costa Rica Facility. The Company owns approximately 405 acres of land in the Guanacaste province of northwest Costa Rica. This land is being used for the farming of Aloe vera L. plants and for a processing plant to produce bulk pharmaceutical and injectable mannans and freeze-dried extracts from Aloe vera L. used in the Company's operations. Construction of the processing plant was completed during the second quarter of 1993, and the plant became operational in June 1993. In 1994, the Company upgraded the production plant to meet regulatory requirements for the production of bulk pharmaceutical oral and injectable mannans as required for INDs. This project was completed in the fourth quarter of 1994. In order to meet demand for new products, a new compounding area and high-speed filling line were constructed as an addition to the Costa Rica facility during 1998. Also, other new equipment was installed in January 1999 to refine the BPM manufacturing process. ITEM 3. LEGAL PROCEEDINGS. In October 1998, the Company was served with a Summons and Notice by the Chapter 7 Trustee for the estates of FoxMeyer Corporation and certain related companies ("FoxMeyer"), in Case Nos. 96-1329 (SB) through 96-1334 (HSB) in the U.S. Bankruptcy Court for the District of Delaware, regarding an alleged claim of $28,159.69. In July 1998, the Company's counsel advised FoxMeyer that the Company believed that the October 1998 claim had been settled in the July 1998 settlement. As of the date of this report, FoxMeyer has not contradicted the Company's position, nor has it formally confirmed that it will release the October 1998 claim. If FoxMeyer fails to acknowledge that the October 1998 claim was previously settled, or if FoxMeyer asserts that the October 1998 claim was not covered by the July 1998 settlement, the Company intends to vigorously defend the October 1998 claim. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matter to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of the Company is traded on the NASDAQ National Market under the symbol "CARN." The following table sets forth the high and low sales prices per share of the Common Stock for each of the periods indicated. Fiscal 1998 High Low ----------- ---- ----- First Quarter $5 1/2 $4 Second Quarter 6 7/16 4 Third Quarter 5 3/8 2 1/2 Fourth Quarter 3 5/8 2 Fiscal 1999 High Low ----------- ---- ----- First Quarter $4 1/4 $2 1/8 Second Quarter 3 3/16 2 1/2 Third Quarter 3 1 13/16 Fourth Quarter 2 3/4 1 1/2
At March, 16, there were 946 holders of record (including brokerage firms) of Common Stock. The Company has not paid any cash dividends on the Common Stock and presently intends to retain all earnings for use in its operations. Any decision by the Board of Directors of the Company to pay cash dividends in the future will depend upon, among other factors, the Company's earnings, financial condition and capital requirements. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The selected consolidated financial data below should be read in conjunction with the consolidated financial statements of the Company and notes thereto and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial information for the five years ended December 31, 1999, is derived from the consolidated financial statements of the Company, of which the years 1995 and 1996, have been audited by Arthur Andersen LLP, independent public accountants, and the years 1997 through 1999 have been audited by Ernst & Young LLP, independent public accountants. Years ended December 31, (Dollars and numbers of shares in ---------------------------------------- thousands except per share amounts) 1995 1996 1997 1998 1999 ------------------------------------------------------------------------------- OPERATIONS STATEMENT INFORMATION: Net sales $24,374 $21,286 $23,559 $23,625 $28,128 Costs and expenses: Cost of sales 7,944 10,327 9,530 10,870 13,640 Selling, general and administrative 12,442 10,771 10,814 10,254 10,346 Research and development 4,662 3,762 3,006 2,589 2,434 Research and development, Aliminase[TM] clinical trial expenses 708 2,165 - - 2,866 Charges related to ACI and Aloe & Herbs - - - 1,750 - Charges related to Oregon Freeze Dry, Inc. - - - - 1,042 Interest expense (income), net 115 (304) (37) (233) (105) Other income - - - - (62) ------ ------ ----- ------ ------ Income (loss) before income taxes (1,497) (5,435) 246 (1,605) (2,033) Provision for income taxes 131 88 20 10 - ------ ------ ----- ------ ------ Net income (loss) $(1,628) $(5,523) $ 226 $(1,615) $(2,033) ====== ====== ===== ====== ====== Net income (loss) per common share - basic and diluted(1) $ (0.22) $ (0.74) $ 0.02 $ (0.17) $ (0.22) ====== ====== ===== ====== ====== Weighted average shares used in per share computations 7,933 8,798 8,953 9,320 9,376 BALANCE SHEET INFORMATION (as of December 31): Working capital $ 9,095 $13,910 $ 9,484 $ 9,716 $ 7,911 Total assets 27,934 31,202 25,796 24,247 23,493 Long-term debt, net of current portion 88 - - - - Total shareholders' investment $22,399 $27,757 $22,826 $21,363 $19,504 (1) For a description of the calculation of basic and diluted net income (loss) per share, see Note Thirteen to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Background The Company is a research-based biopharmaceutical, medical device, raw materials and nutraceutical company engaged in the development, manufacturing and marketing of naturally-derived complex carbohydrates and other natural product therapeutics for the treatment of major illnesses, the dressing and management of wounds and nutritional supplements. The Company is comprised of two business segments. See Note Fourteen to the consolidated financial statements for financial information about these business segments. The Company sells, using a network of distributors, prescription and nonprescription human and veterinary products through its Medical Services Division and consumer and bulk raw material products through its consumer products subsidiary, Caraloe, Inc. The Company's research and product portfolio are based primarily on complex carbohydrates isolated from the Aloe vera L. plant. Liquidity and Capital Resources At December 31, 1999 and 1998, the Company held cash and cash equivalents of $2,453,000 and $3,931,000, respectively, a decrease of $1,478,000. Net cash used by operating activities in 1999 was $889,000, as compared to cash provided by operating activities in 1998 of $1,065,000. Significant cash outflows during 1999 included investments in property and equipment of $963,000 and expenses related to the Aliminase[TM] clinical trial of $2,866,000. Customers with significant accounts receivable balances at the end of 1999 included Mannatech, Inc. ($1,144,000) and McKesson/General Medical ($571,000); and of these amounts, $1,533,000 had been collected as of March 8, 2000. As of December 31, 1999, the Company had no material capital commitments other than its leases and agreements with suppliers. In March 1998, the Company, with four other investors, formed Aloe and Herbs International, Inc., a Panamanian corporation, with the sole intent of acquiring a 5,000-acre tract of land in Costa Rica to be used for the production of Aloe vera L. leaves to be sold to the Company at competitive, local market rates. This would allow the Company to save approximately 50% on the per-kilogram cost of leaves as compared to the cost of importing leaves from other Central and South American countries. Aloe & Herbs subsequently formed a wholly-owned subsidiary, Rancho Aloe (C.R.), S.A., a Costa Rica corporation, which acquired the land in April 1998. The Company received 1,500,000 shares of Aloe & Herbs common stock, which represents a 19.3% ownership position, which was increased to 28.2% in 1999, in exchange for providing expertise in farming aloe plants and providing a cash advance to Rancho Aloe to be used for the purchase of aloe plants. This cash advance of $187,000 is evidenced by a note receivable, payable in installments, with the final payment due in June 2000. The Company also advanced $300,000 to Aloe & Herbs in November 1998 for the acquisition of an irrigation system to improve production on the farm and allow harvesting of leaves year- round. This advance was evidenced by a note receivable which is payable in full in May 2000. The Company was also granted a five-year warrant to purchase 300,000 shares of common stock of Aloe & Herbs. In the fourth quarter of 1998, the Company fully reserved all amounts owed to it by Aloe & Herbs, in the total amount of $487,000, due to the start-up nature of the business. In 1999, the Company received payments totaling $18,000 from Aloe & Herbs against the amount due. The first shipment of leaves from Rancho Aloe to the Company was made in March 1999 and the Company purchased a total of $364,000 of Aloe vera L. leaves from Rancho Aloe during the remainder of the year. In November 1997, the Company entered into an agreement with Comerica Bank-Texas for a $3,000,000 line of credit, secured by accounts receivable and inventory. This credit facility had an outstanding balance of $200,000 at December 31, 1999 to fund operating needs and is being used to secure the letter of credit described below. In November 1995, the Company signed a licensing agreement with a supplier of calcium alginates and other wound care products. Under the agreement, the Company has exclusive marketing rights for ten years to advanced calcium alginate products for North and South America and in the People's Republic of China. Under the agreement, the Company made an up-front payment to the supplier of $500,000 in November 1995. In July 1997 and October 1997, additional payments of $166,000 and $167,000, respectively, were paid to this supplier upon delivery of the CarraSmart[TM] Hydrocolloid, a product launched in the third quarter of 1997. These payments resulted in an increase to other assets of the Company. As of December 31, 1999, the net book value of this agreement was $528,000. Additional payments totaling $167,000 are to be made to the supplier as new products are delivered. In February 1995, the Company entered into a supply agreement with Oregon Freeze Dry, Inc. ("OFD"), its supplier of freeze-dried products. The agreement required that the Company establish a letter of credit equal to 60% of the minimum purchase commitment of $2,500,000, but allowed for the amount of the letter of credit to be reduced by 60% of the purchases made under the agreement. As of December 31, 1999, the letter of credit was $1,100,000. OFD currently produces the CarraSorb[TM] M Freeze-Dried Gel and The Carrington[R] (Aphthous Ulcer) Patch for the Company. Both of these products represent new technology and are in the early phase of marketing. The Company had approximately $364,000 of CarraSorb[TM] M and Carrington[R] (Aphthous Ulcer) Patch inventory on hand as of December 31, 1999. The supply agreement also required the Company to make minimum monthly purchases of $30,000. In February 1998, the supply agreement was amended to allow for unmet monthly minimum purchase requirements to be met by prepayments, to be applied to future purchases under the agreement, which allows the Company to keep inventory at levels appropriate for sales demand. In December 1999, OFD agreed to add a freeze-dried gel product as a listed product under the agreement. The Company is continuing its effort to develop the market for its freeze- dried products. Due to the unique technology of these products, the effort has taken longer than was initially expected. The current agreement expires in August 2000. The Company no longer believes that it can satisfy the minimum purchase requirements of this agreement and has established a reserve of $1,042,000 to cover its estimated liability to OFD under the agreement. The Company is currently negotiating with OFD regarding purchase arrangements beyond the term of the current agreement. The Company believes that its available cash resources and expected cash flows from operations will provide the funds necessary to finance its current operations. However, the Company does not expect that its current cash resources will be sufficient to finance future major clinical studies and costs of filing new drug applications necessary to develop its products to their full commercial potential. Additional funds, therefore, may need to be raised through equity offerings, borrowings, licensing arrangements or other means, and there is no assurance that the Company will be able to obtain such funds on satisfactory terms when they are needed. The Company is subject to regulation by numerous governmental authorities in the United States and other countries. Certain of the Company's proposed products will require governmental approval prior to commercial use. The approval process applicable to prescription pharmaceutical products usually takes several years and typically requires substantial expenditures. The Company and any licensees may encounter significant delays or excessive costs in their respective efforts to secure necessary approvals. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of the Company's or any licensees' products. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested could delay or preclude the Company or any licensees from marketing their products, or could limit the commercial use of the products, and thereby have a material adverse effect on the Company's liquidity and financial condition. Impact of Inflation The Company does not believe that inflation has had a material impact on its results of operations. Fiscal 1999 Compared to Fiscal 1998 Net sales were $28,128,000 in 1999, compared with $23,625,000 in 1998. Sales of Manapol[R] by Caraloe in the form of raw materials and consumer nutritional products, increased 77.3%, from $7,187,000 in 1998 to $12,739,000 in 1999. This increase in Caraloe sales was offset by a decrease in wound care sales of 6.4%. Total sales of the Company's wound and skin care products in 1999 were $15,389,000 as compared to $16,438,000 in 1998. Of the 1999 total Manapol[R] sales, $11,982,000 was related to the sale of bulk Manapol[R] powder. Caraloe currently sells bulk Manapol[R] powder to Mannatech under a three-year, non-exclusive supply and licensing agreement. The current agreement, which expires in August 2000, was extended in January 2000 to August 2002. Sales to Mannatech increased from $5,508,000 in 1998 to $11,422,000 in 1999. In March 1999, Caraloe signed a supply and license agreement with For Your Health, Inc., allowing For Your Health to purchase Manapol[R] powder and market it in capsule form. In June 1999, Caraloe signed a sales and license agreement with Nutra Vine also allowing Nutra Vine to purchase Manapol[R] powder and market it in capsule form. In December 1998, Caraloe signed supply and license agreements with Eventus International, Inc., allowing Eventus to market a variety of products containing Manapol[R] powder to promote a natural, healthy lifestyle. Sales to Eventus during the first year of this agreement were $271,000. In July 1999, Caraloe launched its new AloeCeuticals[TM] line of immune enhancing dietary supplements containing Manapol[R], which are available in liquid capsule and tablet forms. These products will be sold directly to health and nutrition stores or through broker/distributors. They will also be sold through the Company's Internet sites. Sales of these products in 1999 totaled $131,000. Caraloe also continued to develop its contract manufacturing business during 1999. In September 1998, Caraloe began to manufacture products on a contract manufacturing basis for SkinCeuticals, Inc., a direct sales company selling skin care products through licensed professionals. Products manufactured include gels and creams utilizing formulas developed by SkinCeuticals. In September 1999, Caraloe began to produce nutritional beverages for NuSkin International, Inc., a direct sales company selling nutritional products through a multi-level sales organization. Total contract manufacturing sales in 1999 under the agreements with SkinCeuticals and NuSkin were $292,000. The Company's wound and skin care products are marketed domestically to hospitals, nursing homes, home health care agencies and acute care providers. This market has continued to be very competitive and price sensitive as a result of pressures to control health care costs and has become increasingly commodity oriented. In addition, the market is heavily influenced by government reimbursement programs. The home health care segment of the market again experienced significant turmoil in 1999 as many of the Company's customers either went out of business or postponed buying decisions due to changes in government reimbursement programs. This had a negative impact on the Company's wound care sales to that segment. Nursing homes were also impacted by government regulations in 1999, as government-mandated reimbursement changes due to go into effect in January 1999 were postponed until the year 2000. Many nursing home facilities and the dealers who supply them postponed buying decisions and liquidated inventory in anticipation of the regulations taking effect. In response to these market trends, the Company pursued a strategy to move its wound care line of products toward value-added specialty products which focus more on product performance rather than price alone, such as the RadiaCare[TM] line of products for the management of the side effects of cancer therapy. The Company also sells its wound care products to international distributors, primarily in Italy, Australia, Singapore, Mexico and Argentina, with lesser sales to a number of Central and South American countries. Total international sales in 1999 were $1,423,000. Included in this amount were sales of $1,160,000 of wound care products, which was an increase of $475,000 over 1998. Sales of the Company's oral technology products increased from $278,000 in 1998 to $374,000 in 1999. Included in this line are products for the management of oral mucositis/stomatitis and oral lesions and ulcers. Sales of the Company's veterinary products decreased from $146,000 in 1998 to $47,000 in 1999. These products were marketed on behalf of the Company in 1999 by Farnam Companies, Inc., a leading marketer of veterinary products. Cost of sales increased from $10,870,000 to $13,640,000, or 25.5%. As a percentage of sales, cost of sales increased from 46.0% to 48.5%. The increase in cost of goods sold was largely attributable to product mix, as sales in 1999 of Caraloe products were a greater percentage of total sales than in 1998, 45.3% as compared to 30.4%. Caraloe products have historically had a higher cost as a percentage of sales than wound care products. Selling, general and administrative expenses ("SG&&A") increased to $10,346,000 from $10,254,000, or .9%. Selling expenses related to wound care sales in 1999 were trimmed by $354,000 from the 1998 level as the Company reduced expenditures in response to the changing market conditions. Partially offsetting the decrease was an increase in the selling and marketing expenses for Caraloe products of $297,000. This increase primarily represents the costs for the development of marketing materials supporting the launch of the AloeCeuticals[TM] brand of Manapol[R] immune enhancing products. Research and development ("R&D") expenses increased to $5,300,000 from $2,589,000, or 104.7%. This increase was primarily the result of the expenditure of $2,866,000 for the unsuccessful Aliminase[TM] clinical trial. The Company continued its efforts in basic research during 1999, including work on a new and unique pectin in the inner gel of Aloe vera L. which has potential near-term utility as a product to be used in wound healing. Also included in the total R&D activities during 1999 were various small clinical trials designed to collect data in support of the Company's products. In the fourth quarter of 1999, the Company determined that it could no longer satisfy the minimum purchase requirements of its agreement with Oregon Freeze Dry, Inc. and thus established a reserve of $1,042,000 to cover its estimated liability to OFD. In 1998, the Company established a reserve of $1,250,000 against its investment in and notes and accounts receivable from ACI. In December 1999, ACI transferred to the Company 700,000 shares of Aloe & Herbs common stock, previously pledged by ACI to secure one of its notes to the Company, in satisfaction of the balance of $695,000 of principal and interest owed on that note. In 1998, the Company also established a reserve of $500,000 against its loans to Aloe & Herbs. During 1999, the Company received $18,000 in repayment of these loans and established a repayment program with Aloe & Herbs for the repayment of the entire debt. See Note Six to the consolidated financial statements for additional discussion of the ACI and Aloe & Herbs transactions. Net interest income of $105,000 was realized in 1999, versus $233,000 in 1998, with the variance primarily due to lower cash balances in 1999. There was no provision for income taxes in 1999 as compared to $10,000 in 1998. A tax benefit was not recognized in 1999 due to the Company's recording an offsetting deferred tax asset valuation allowance. The Company has provided a valuation allowance against all deferred tax asset balances at December 31, 1999 and 1998 due to uncertainty regarding realization of the asset. The Company's net loss for 1999 was $2,033,000, versus a net loss of $1,615,000 for 1998. The 1999 net loss was primarily due to the $2,866,000 of costs for the Aliminase[TM] clinical trial plus the effect of reserving $1,042,000 for the OFD contract. The 1998 net loss was primarily due to the $1,750,000 in charges related to ACI and Aloe & Herbs. The net loss per share was $.22 in 1999, compared to a net loss per share of $.17 in 1998. Excluding the clinical trial expenses in 1999 and reserves in 1999 and 1998, the net income for 1999 was $1.9 million, or $.20 per share, as compared to a net income in 1998 of $135,000, or $.01 per share. Fiscal 1998 Compared to Fiscal 1997 Net sales were $23,625,000 in 1998, compared with $23,559,000 in 1997. Sales of consumer nutritional products by Caraloe, Inc., the Company's consumer products subsidiary, increased 32.0%, from $5,444,000 in 1997 to $7,187,000 in 1998. This increase in Caraloe sales was offset by a decrease in wound care sales of 9.4%. Total sales of the Company's wound and skin care products in 1998 were $16,292,000 as compared to $17,990,000 in 1997. Sales to Mannatech increased from $3,547,000 in 1997 to $5,508,000 in 1998. Sales of the Company's oral technology products, which were launched in late 1997, were $278,000 in 1998. Included in this line are products for the management of oral mucositis/stomatitis and oral lesions and ulcers. Sales of the Company's veterinary products increased from $125,000 in 1997 to $146,000 in 1998. These products were marketed on behalf of the Company in 1998 by Farnam Companies, Inc., a leading marketer of veterinary products. Cost of sales increased from $9,530,000 to $10,870,000, or 14.1%. As a percentage of sales, cost of sales increased from 40.5% to 46.0%. The increase in cost of goods sold was largely attributable to product mix, as sales in 1998 of Caraloe products were a greater percentage of total sales than in 1997, 30.4% as compared to 23.1%, and Caraloe products have a higher cost as a percentage of sales than wound care products. SG&A expenses decreased to $10,254,000 from $10,814,000, or 5.2%. Selling expenses related to wound care sales in 1998 were trimmed by $753,000 from the 1997 level as the Company reduced expenditures in response to the changing market conditions. Partially offsetting the decrease was an increase in Caraloe selling and marketing expenses of $310,000. This increase primarily represented costs for additional personnel for sales and formulation development in support of Caraloe's raw material and contract manufacturing efforts. R&D expenses decreased to $2,589,000 from $3,006,000, or 13.9%. This decrease was primarily the result of the completion of the Company's preclinical pharmacology studies in early 1998. Included in the total R&D activities during 1998 were various small clinical trials designed to collect data in support of the Company's products, including the reformulation of Aliminase[TM]. In 1998, the Company established a reserve of $1,250,000 against its investment in and notes and accounts receivable from ACI and a reserve of $500,000 against its loans to Aloe & Herbs. See Note Six to the consolidated financial statements for additional discussion of the ACI and Aloe & Herbs transactions. Net interest income of $233,000 was realized in 1998, versus $37,000 in 1997, with the variance primarily due to the costs associated with the repurchase of the Series E Preferred Stock in 1997. Provision for income taxes was $10,000 in 1998 as compared to $20,000 in 1997. A tax benefit was not recognized in 1998 due to the Company's recording an offsetting deferred tax asset valuation allowance. The Company had provided a valuation allowance against all deferred tax asset balances at December 31, 1998 and 1997 due to uncertainty regarding realization of the asset. The Company's net loss for 1998 was $1,615,000, versus net income of $226,000 for 1997. This change was primarily the result of charges related to ACI and Aloe & Herbs in the amount of $1,750,000. Net loss per share was $.17 in 1998, compared to net income per share of $.02 in 1997. Net income per share in 1998, excluding the charges related to ACI and Aloe & Herbs, was $.01. Year 2000 Issues Like many organizations, the Company faced the prospect of what would happen to computers and other microprocessor-controlled equipment using two-digit data fields when they encountered the Year 2000, which could be mistaken as the Year 1900. This was known as the Year 2000 issue. With respect to this issue, the Company undertook efforts to assess the impact on its information technology systems, non-information technology systems, such as production and laboratory equipment, and third-party business partners such as vendors and customers. The results of this assessment, which included analysis and compliance testing, showed that virtually all of the Company's internal systems, as well as the systems of almost all of its vendors and customers, were prepared to handle the Year 2000 issue without interruption of sales or service. Nevertheless, the Company prepared an assessment of its most reasonably likely worst-case scenario for dealing with Year 2000 related disruptions and estimated that it would spend approximately $100,000 on equipment and software remediation and approximately $500,000 on a buildup of inventory. The Company did find several minor instances of software programs which needed upgrading, and several equipment items which needed upgrading or replacing, in order to be Year 2000 ready. The Company spent approximately $34,000 on the upgrading or replacement of such programs and equipment. The Company spent approximately $500,000 on its inventory buildup program, but did not experience any unusual levels of order demand in the fourth quarter of 1999 relating to Year 2000 concerns. The Company has subsequently been reducing its inventory to normal levels excluding this buildup. The Company did not experience any significant disruptions to its business systems or equipment as a result of Year 2000 issues, nor does it expect to experience any such disruptions to its systems in the future. The Company also did not experience any disruptions in the delivery of products or services obtained from its vendors as a result of Year 2000 issues. Forward Looking Statements All statements other than statements of historical fact contained in this report, including but not limited to statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations (and similar statements contained in the Notes to Consolidated Financial Statements) concerning the Company's financial position, liquidity, capital resources and results of operations, its prospects for the future and other matters, are forward-looking statements. Forward-looking statements in this report generally include or are accompanied by words such as "anticipate", "believe", "estimate", "expect", "intend" or words of similar import. Such forward-looking statements include, but are not limited to, statements regarding the Company's plan or ability to achieve growth in demand for or sales of products, to reduce expenses and manufacturing costs and increase gross margin on existing sales, to initiate, continue or complete clinical and other research programs, to obtain financing when it is needed, to fund its operations from revenue and other available cash resources, to enter into licensing agreements, to develop and market new products and increase sales of existing products, to obtain government approval to market new products, to sell all of the freeze- dried, calcium alginate and certain other wound care products that it is required to purchase under its existing agreements with the suppliers of those products, to purchase sufficient supplies of Aloe vera L. leaves at reasonable prices, and to properly assess its situation with respect to Year 2000 issues and avoid any material adverse effects of the Year 2000 problem, as well as various other matters. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include but are not limited to the possibilities that the Company may be unable to obtain the funds needed to carry out large scale clinical trials and other research and development projects, that the results of the Company's clinical trials may not be sufficiently positive to warrant continued development and marketing of the products tested, that new products may not receive required approvals by the appropriate government agencies or may not meet with adequate customer acceptance, that the Company may not be able to obtain financing when needed, that the Company may not be able to obtain appropriate licensing agreements for products that it wishes to market or products that it needs assistance in developing, that the Company's efforts to improve its sales and reduce its costs may not be sufficient to enable it to fund its operating costs from revenues and available cash resources, that one or more of the customers that the Company expects to purchase significant quantities of products from the Company or Caraloe may fail to do so, that competitive pressures may require the Company to lower the prices of or increase the discounts on its products, that the Company's sales of products it is contractually obligated to purchase from suppliers may not be sufficient to enable and justify its fulfillment of those contractual purchase obligations, that other parties who owe the Company substantial amounts of money may be unable to pay what they owe the Company, that the Company may suffer adverse effects from Year 2000 problems affecting the Company or its vendors (including utility companies) or customers, and that the Company may be unable to produce or obtain, or may have to pay excessive prices for, the raw materials or products it needs. All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in the two immediately preceding paragraphs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Currency The Company's manufacturing operation in Costa Rica accounted for 62% of cost of sales for the year ended December 31, 1999. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or economic conditions in Costa Rica. When the U.S. Dollar strengthens against the Costa Rica Colon, the cost of sales decreases. During 1999, the exchange rate from U.S. Dollars to Costa Rica Colones increased by 10% to 297 at December 31, 1999. The effect of an additional 10% strengthening in the value of the U.S. Dollar relative to the Costa Rica Colones would result in an increase of $315,000 in gross profit. The Company's sensitivity analysis of the effects of changes in foreign currency rates does not factor in a potential change in sales levels or local currency prices. Sales of products to foreign markets comprised 5% of sales for 1999. These sales are generally denominated in U.S. Dollars. The Company does not believe that changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company distributes its product would have a significant effect on operating results. If sales to foreign markets increase in future periods, the effects could become significant. For quantitative and qualitative disclosures about market risk related to the supply of Aloe vera L. leaves, see "Business." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The response to Item 8 is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in or disagreements with the Company's independent public accountants on accounting matters or financial disclosure during 1998, 1999 or 2000 (to the date of filing of this report). PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to its 2000 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1999. 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 2000 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Security Ownership of Management" and "Principal Shareholders" in the Company's definitive Proxy Statement relating to its 2000 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1999. 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 2000 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1999. 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. Other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (2) Financial Statement Schedules. Reference is made to the index on page F-1 for a list of all financial statement schedules filed as a part of this Annual Report. (3) Exhibits. Reference is made to the Index to Exhibits on pages E-1 through E-9 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, 1999. CARRINGTON LABORATORIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Consolidated Financial Statements of the Company: Consolidated Balance Sheets - December 31, 1998 and 1999 F - 2 Consolidated Statements of Operations - years ended December 31, 1997, 1998 and 1999 F - 3 Consolidated Statements of Shareholders' Investment - years ended December 31, 1997, 1998 and 1999 F - 4 Consolidated Statements of Cash Flows - years ended December 31, 1997, 1998 and 1999 F - 5 Notes to Consolidated Financial Statements F - 6 Financial Statement Schedule Valuation and Qualifying Accounts F - 18 Report of Ernst & Young LLP, Independent Public F - 19 Accountants Consolidated Balance Sheets (Amounts in thousands, except share amounts) December 31, 1998 1999 ------- ------- ASSETS: Current Assets: Cash and cash equivalents $ 3,931 $ 2,453 Accounts receivable, net of allowance for doubtful accounts of $922 and $304 in 1998 and 1999, respectively 2,961 3,690 Inventories 4,969 5,184 Prepaid expenses 739 573 ------- ------- Total current assets 12,600 11,900 Property, plant and equipment, net 11,050 10,985 Other assets 597 608 ------- ------- Total assets $ 24,247 $ 23,493 ======= ======= LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Note payable $ - $ 200 Accounts payable 1,369 1,871 Accrued liabilities 1,515 1,918 ------- ------- Total current liabilities 2,884 3,989 Commitments and contingencies SHAREHOLDERS' INVESTMENT: Common stock, $.01 par value, 30,000,000 shares authorized, 9,350,064 and 9,440,921 shares issued and outstanding at December 31, 1998 and 1999, respectively 94 94 Capital in excess of par value 51,736 51,910 Deficit (30,467) (32,500) ------- ------- Total shareholders' investment 21,363 19,504 ------- ------- Total liabilities and shareholders' investment $ 24,247 $ 23,493 ======= ======= The accompanying notes are an integral part of these balance sheets. F-2
Consolidated Statements of Operations (Amounts in thousands, except per share amounts) Years Ended December 31, 1997 1998 1999 ------- ------- ------- Net sales $ 23,559 $ 23,625 $ 28,128 Costs and expenses: Cost of sales 9,530 10,870 13,640 Selling, general and administrative 10,814 10,254 10,346 Research and development 3,006 2,589 2,434 Research and development, Aliminase[TM] clinical trial expenses - - 2,866 Charges related to ACI and Aloe & Herbs - 1,750 - Charges related to Oregon Freeze Dry, Inc. - - 1,042 Interest income, net (37) (233) (105) Other income - - (62) ------- ------- ------- Income (loss) before income taxes 246 (1,605) (2,033) Provision for income taxes 20 10 - ------- ------- ------- Net income (loss) 226 (1,615) (2,033) Dividends and income attributed to preferred shareholders (70) - - Net income (loss) available to common shareholders $ 156 $ (1,615) $(2,033) ======= ======= ======= Net income (loss) available to common shareholders per share - basic and diluted $ 0.02 $ (0.17) $ (0.22) ======= ======= ======= The accompanying notes are an integral part of these statements. F-3
Consolidated Statements of Shareholders' Investment For the Years Ended December 31, 1997, 1998 and 1999 (Amounts in thousands) Capital in Total Preferred Common Excess of Shareholders' Stock Stock Par Value Deficit Investment Shares Amount Shares Amount ------ ------ ------ ------ --------- ------- ---------- Balance, January 1, 1997 1 $ 66 8,870 $ 89 $56,680 $(29,078) $27,757 Issuance of common stock for employee stock purchase plan - - 21 - 153 - 153 Sale of common stock net of issuance costs of $21 - - 415 4 2,471 - 2,475 Repurchase of convertible preferred stock (Series E), $100 Par (1) (66) - - (7,719) - (7,785) Net income and comprehensive income - - - - - 226 226 --------------------------------------------------------------------------------------------- Balance, December 31, 1997 - - 9,306 93 51,585 (28,852) 22,826 Issuance of common stock for employee stock purchase plan - - 44 1 151 - 152 Net loss and comprehensive loss - - - - - (1,615) (1,615) --------------------------------------------------------------------------------------------- Balance, December 31, 1998 - - 9,350 94 51,736 (30,467) 21,363 Issuance of common stock for employee stock purchase plan - - 81 - 149 - 149 Issuance of common stock for employee stock option plan - - 10 - 25 - 25 Net loss and comprehensive loss - - - - - (2,033) (2,033) --------------------------------------------------------------------------------------------- Balance, December 31, 1999 - $ - 9,441 $ 94 $51,910 $(32,500) $19,504 The accompanying notes are an integral part of these statements. F-4
Consolidated Statements of Cash Flows (Amounts in thousands) Years Ended December 31, 1997 1998 1999 ------ ------ ------ Cash flows provided by (used in) operating activities: Net income (loss) $ 226 $(1,615) $(2,033) Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,196 1,043 1,028 Charge related to ACI investment - 600 - Charge related to Oregon Freeze Dry, Inc. - - 1,042 Provision for inventory obsolescence 523 53 - Changes in assets and liabilities: Accounts receivable, net (1,545) 129 (729) Inventories (1,903) (19) (215) Prepaid expenses 40 (411) (177) Other assets (360) 1,340 (11) Accounts payable and accrued liabilities (76) (55) 206 ------ ------ ------ Net cash provided by (used in) operating activities (1,899) 1,065 (889) Cash flows used in investing activities: Purchases of property, plant and equipment (295) (1,278) (963) ------ ------ ------ Net cash used in investing activities (295) (1,278) (963) Cash flows provided by (used in) financing activities: Issuances of common stock 2,628 152 174 Retirement of preferred stock (7,785) - - Proceeds of short-term debt - - 200 Principal payments of capital lease obligations (32) (31) - ------ ------ ------ Net cash provided by (used in) financing activities (5,189) 121 374 ------ ------ ------ Net decrease in cash and cash equivalents (7,383) (92) (1,478) Cash and cash equivalents at beginning of year 11,406 4,023 3,931 ------ ------ ------ Cash and cash equivalents at end of year $ 4,023 $ 3,931 $ 2,453 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest $ 10 $ 3 $ 7 Cash paid during the year for income taxes - 44 - The accompanying notes are an integral part of these statements. F-5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE. BUSINESS Carrington Laboratories, Inc. (the "Company") is a research-based biopharmaceutical, medical device, raw materials and nutraceutical company engaged in the development, manufacturing and marketing of naturally-derived complex carbohydrates and other natural product therapeutics for the treatment of major illnesses, the dressing and management of wounds, and nutritional supplements. The Company's Medical Services Division offers a comprehensive line of human wound management products to hospitals, nursing homes, alternative care facilities and the home health care market and also offers vaccines and wound and skin care products to the veterinary market. Sales are primarily in the United States through a network of distributors. Caraloe, Inc., a subsidiary, markets or licenses consumer products and bulk raw material products. Principal sales of Caraloe, Inc., are bulk raw material products which are sold to United States manufacturers who include the high quality extracts from Aloe vera L. in their finished products. The Company's products are produced at its plants in Irving, Texas and in Costa Rica. A portion of the Aloe vera L. leaves used for manufacturing the Company's products are grown on a Company-owned farm in Costa Rica. The remaining leaves are purchased from producers in Costa Rica, Mexico, Venezuela and Central America. NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Carrington Laboratories, Inc., and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company's policy is that all highly liquid investments purchased with a maturity of three months or less at date of acquisition are considered to be cash equivalents unless otherwise restricted. INVENTORY Inventories are recorded at the lower of cost (first-in, first- out) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost less accumulated depreciation. Land improvements, buildings and improvements, furniture and fixtures and machinery and equipment are depreciated on the straight-line method over their estimated useful lives. Leasehold improvements and equipment under capital leases are amortized over the terms of the respective leases. LONG-LIVED ASSETS The Company regularly reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Recoverability is based on whether the carrying amount of the asset exceeds the current and anticipated undiscounted cash flows related to the asset. TRANSLATION OF FOREIGN CURRENCIES The functional currency for international operations (primarily Costa Rica) is the U.S. Dollar. Accordingly, such foreign entities translate monetary assets and liabilities at year-end exchange rates, while non-monetary items are translated at historical rates. Revenue and expense accounts are translated at the average rates in effect during the year, except for depreciation and cost of sales, which are translated at historical rates. Translation adjustments and transaction gains or losses are recognized in the consolidated statement of operations in the year of occurrence. REVENUE RECOGNITION The Company recognizes revenue when title to the goods transfers and collectability is reasonably assured. For the majority of the Company's sales, this occurs at the time of shipment. The Company has rebate arrangements with certain distributors. These rebates are estimated and recorded at the time of sale. FEDERAL INCOME TAXES Deferred income taxes reflect the tax effect of temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. These deferred taxes are measured by applying currently enacted tax laws. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided against net deferred tax assets when realization is not reasonably assured. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Certain laboratory and test equipment determined to have alternative future uses in other research and development activities has been capitalized and is depreciated as research and development expense over the life of the equipment. ADVERTISING Advertising expense is charged to operations in the year in which such costs are incurred. Advertising expense has not been significant for 1997, 1998 or 1999. STOCK-BASED COMPENSATION The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees", in the primary financial statements and to provide supplementary disclosures required by FASB Statement No. 123, "Accounting for Stock-Based Compensation" (see Note Nine). NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is based on the weighted average number of shares of common stock outstanding during the year and excludes any dilutive effects of options, warrants and convertible securities. Diluted net income (loss) per share includes the effects of options, warrants and convertible securities unless the effect is antidilutive. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE THREE. INVENTORIES The following summarizes the components of inventory at December 31, 1998 and 1999, in thousands: 1998 1999 ------------------------------------------------------------------ Raw materials and supplies $1,135 $2,011 Work-in-process 1,182 673 Finished goods 2,652 2,500 ------------------------------------------------------------------ Total $4,969 $5,184 ------------------------------------------------------------------ The inventory balances are net of $525,000 and $430,000 of reserves for obsolete and slow moving inventory at December 31, 1998 and 1999, respectively. NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at December 31, 1998 and 1999, in thousands: Estimated 1998 1999 Useful Lives -------------------------------------------------------------------- Land and improvements $ 1,389 $ 1,389 Buildings and improvements 8,862 8,692 7 to 25 years Furniture and fixtures 930 873 4 to 8 years Machinery and equipment 8,165 9,505 3 to 10 years Leasehold improvements 928 349 1 to 3 years Equipment under capital leases 150 150 4 years -------------------------------------------------------------------- Total 20,424 20,958 Less accumulated depreciation and amortization 9,374 9,973 -------------------------------------------------------------------- Property, plant and equipment, net $11,050 $10,985 ====== ======
The Company's net investment in property, plant and equipment in Costa Rica at December 31, 1998 and 1999 was $4,310,000 and $4,518,000, respectively. NOTE FIVE. ACCRUED LIABILITIES The following summarizes significant components of accrued liabilities at December 31, 1998 and 1999, in thousands: 1998 1999 --------------------------------------------------------------- Accrued payroll $ 213 $ 231 Accrued sales commissions 185 36 Accrued taxes 377 200 Oregon Freeze Dry Reserve (see Note Ten) - 698 Other 740 753 --------------------------------------------------------------- Total $1,515 $1,918 --------------------------------------------------------------- NOTE SIX. CHARGES RELATED TO ACI AND ALOE & HERBS The Company had reserved approximately $0.1 million at December 31, 1997 to cover potential exposures on approximately $1.1 million of investment in and notes and accounts receivable from ACI. In 1998, the Company increased the reserves against its investment and notes and accounts receivable balances related to ACI by approximately $1.2 million to fully reserve all amounts related to ACI. During 1999, ACI paid $40,000 on its obligations to the Company. Additionally, in 1999, ACI assigned 700,000 shares in Aloe & Herbs in repayment of $695,000 of principal and interest on its obligations to the Company. Beginning in 1998, the Company invested a total of approximately $0.5 million in Aloe & Herbs and its subsidiary Rancho Aloe (collectively "Aloe & Herbs"), an aloe farm close to the Company's existing farm in Costa Rica. The Company obtained a 19.3% equity interest in Aloe & Herbs in return for agreeing to provide farming expertise, working capital and Aloe vera L. plants. The Company's ownership in Aloe & Herbs was increased to 28.2% through the assignment of shares by ACI. The Company accounts for its investment in the Common Stock of Aloe & Herbs under the equity method, however, as of December 31, 1999 Aloe & Herbs had not generated net income and thus the investment remains at a zero carrying amount (see below). Aloe & Herbs faced substantial capital requirements during 1999 and 2000 for debt payments, ongoing investments in aloe plants and other general start-up costs. Consequently, in 1998 the Company fully reserved the $0.5 million in notes and accounts receivable due from Aloe & Herbs due to the risk and uncertainty of Aloe & Herbs' ability to repay the amounts due the Company. Aloe & Herbs successfully met the third party debt obligations that it owed in 1999, and is currently seeking to refinance its remaining third party debt obligation. The Company received repayments of $18,000 during 1999 for amounts due from Rancho Aloe and has established a repayment program with Aloe & Herbs for the repayment of the entire debt. NOTE SEVEN. LINE OF CREDIT The Company has an agreement with a bank for a $3 million line of credit, collateralized by accounts receivable and inventory. This credit facility is available for operating needs and was used to issue a letter of credit in the amount of $1.1 million at December 31, 1999 collateralizing a supply agreement with the Company's supplier of freeze- dried products (see Note Ten). The interest rate on this credit facility is equal to the bank's prime rate. As of December 31, 1999 there was $200,000 outstanding on the credit line. There was no balance outstanding at December 31, 1998. NOTE EIGHT. PREFERRED STOCK SERIES E SHARES The Series E Shares, issued in October 1996, were convertible into shares of the Company's common stock beginning on December 20, 1996, and prior to October 21, 1999, at a conversion price per share equal to the lower of $25.20 (120% of the market price per share of the Company's common stock as determined at the time of issuance of the Series E Shares) or 87% of the market price immediately preceding the conversion date. In early 1997, the Company's Board of Directors concluded that it was in the best interest of the Company and its shareholders that the Company repurchase the Series E Shares. In March 1997, the Company completed a repurchase of 50% of the Series E Shares for $3,832,000, a premium of 13% over the original purchase price. In May 1997, the Company repurchased the remaining shares of its Series E Shares for a total cash purchase price of $3,852,000. For both transactions, amounts paid to preferred shareholders in excess of par totaled $70,000 more than the embedded deemed dividend of $986,000 recognized in 1996. This additional deemed dividend was used in the net income (loss) per share calculation in 1997 to reduce net income available to common shareholders. NOTE NINE. COMMON STOCK PRIVATE PLACEMENT OF COMMON STOCK In June 1997, the Company sold 415,000 shares of common stock at a price of $6.00 per share. Total proceeds, net of issuance costs, were $2,454,000. SHARE PURCHASE RIGHTS PLAN The Company has a share purchase rights plan which provides, among other rights, for the purchase of common stock by certain existing common stockholders at significantly discounted amounts in the event a person or group acquires or announces the intent to acquire 20% or more of the Company's common stock. The rights expire in 2001 and may be redeemed at any time at the option of the Board of Directors for $.01 per right. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan under which employees may purchase common stock at a price equal to the lesser of 85% of the market price of the Company's common stock on the last business day preceding the enrollment date (defined as January 1, April 1, July 1 or October 1 of any plan year) or 85% of the market price on the last business day of each month. A maximum of 500,000 shares of common stock was reserved for purchase under this Plan. As of December 31, 1999, a total of 222,226 shares had been purchased by employees at prices ranging from $1.65 to $29.54 per share. STOCK OPTIONS The Company has an incentive stock option plan which was approved by the shareholders in 1995 under which incentive stock options and nonqualified stock options may be granted to employees, consultants and non-employee directors. Options are granted at a price no less than the market value of the shares on the date of the grant, except for incentive options to employees who own more than 10% of the total voting power of the Company's common stock, which are granted at a price no less than 110% of the market value. Employee options are normally granted for terms of 10 years. Options granted prior to December 1998 normally vested at the rate of 25% per year beginning on the first anniversary of the grant date. Options granted in or subsequent to December 1998 normally vest at the rate of 33-1/3% per year beginning on the first anniversary of the grant date, but certain options granted in December 1998 and 1999 were 25%, 50% or 100% vested on the grant date, with the remainder of each option vesting in equal installments on the first, second and third anniversaries of the grant date. Options to non- employee directors have terms of four years and are 100% vested on the grant date. The Company has reserved 1,500,000 shares of common stock for issuance under the this Plan. As of December 31, 1999 options to purchase 114,926 shares were available for future grants under the Plan. The following summarizes stock option activity for each of the three years ended December 31, 1997, 1998 and 1999 (shares in thousands): Weighted Average Exercise Shares Price Per Share Price ------------------------------------------------------------------- Balance, Janurary 1, 1997 667 $ 6.25 to $47.75 $21.99 Granted 470 $ 5.31 to $ 7.50 $ 6.84 Lapsed or canceled (178) $ 7.50 to $47.75 $18.38 ------------------------------------------------------------------- Balance, December 31, 1997 959 $ 5.31 to $47.75 $15.19 Granted 678 $ 2.50 to $13.13 $ 3.26 Lapsed or canceled (249) $ 4.63 to $35.25 $11.02 ------------------------------------------------------------------- Balance, December 31, 1998 1,388 $ 2.50 to $28.75 $ 4.58 Granted 345 $ 2.06 to $ 3.63 $ 2.41 Lapsed or canceled 316 $ 2.50 to $27.00 $ 4.71 Exercised 10 $ 2.50 to $ 2.50 $ 2.50 ------------------------------------------------------------------- Balance, December 31, 1999 1,407 $ 2.06 to $28.75 $ 4.05 ------------------------------------------------------------------- Options exercisable at December 31, 1999 553 $ 2.50 to $28.75 $ 4.68 ------------------------------------------------------------------- Options exercisable at December 31, 1998 417 $ 2.50 to $28.75 $ 5.71 ------------------------------------------------------------------- Options exercisable at December 31, 1997 314 $ 7.50 to $47.75 $20.87 -------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1999: Options Outstanding Options Exercisable ------------------------------ ------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price --------------------------------------------------------------------- $2.06 $ 5.25 1,258 8.83 years $3.48 455 $3.60 6.00 28.75 149 6.61 8.94 98 9.67 --------------------------------------------------------------------- $2.06 $28.75 1,407 8.60 years $4.05 553 $4.68 ---------------------------------------------------------------------
The Company accounts for employee stock-based compensation under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost been determined based on the fair value of options at their grant dates consistent with the method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net income (loss) and diluted net income (loss) available to common shareholders per share would have been the following pro forma amounts: ------------------------------------------------------------------- 1997 1998 1999 ------------------------------------------------------------------- Net income (loss) (in thousands): As reported $ 226 $(1,615) $(2,033) Pro forma (2,199) (4,155) (3,411) Diluted net income (loss) available to common shareholders per share: As reported $ 0.02 $ (0.17) (0.22) Pro forma (0.25) (0.96) (0.36) ------------------------------------------------------------------- Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost may not be representative of the pro forma cost to be expected in future years. The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants to employees in 1997, 1998, and 1999, respectively: risk-free interest rates of 6.13%, 5.38% and 6.00%, expected volatility of 57.0%, 54.7% and 29.8% and expected lives of 5.0, 2.4 and 2.9 years. The Company used the following weighted-average assumptions for grants to directors in 1997, 1998 and 1999: expected dividend yields of 0% and expected lives of 4.0 years. The weighted average fair values of options granted were $6.84, $1.05 and $0.64 in 1997, 1998, and 1999, respectively. STOCK WARRANTS From time to time, the Company has granted warrants to purchase common stock to the Company's research consultants and other persons rendering services to the Company. The exercise price of such warrants was normally the market price or in excess of the market price of the common stock at date of issuance. The following summarizes warrant activity for each of the periods ending December 31, 1997, 1998, and 1999 (shares in thousands): Weighted Average Shares Price Per Share Exercise Price ------------------------------------------------------------------- Balance, January 1, 1997 51 $ 9.75 to $20.13 $15.03 ------------------------------------------------------------------- Balance, December 31, 1997 51 $ 9.75 to $20.13 $15.03 Lapsed or canceled 10 $ 9.75 $ 9.75 ------------------------------------------------------------------- Balance, December 31, 1998 41 $13.00 to $20.13 $16.32 Issued 50 $ 3.50 $ 3.50 Lapsed or canceled (26) $16.00 to $19.75 $16.87 ------------------------------------------------------------------- Balance, December 31, 1999 65 $ 3.50 to $20.13 $ 6.24 ------------------------------------------------------------------- Warrants exercisable at December 31, 1999 65 $ 3.50 to $20.13 $ 6.24 Warrants outstanding at December 31, 1999 had a weighted average remaining contractual life of 3.88 years. COMMON STOCK RESERVED At December 31, 1999 the Company had reserved a total of 1,864,892 common shares for future issuance relating to the employee stock purchase plan, stock option plans and stock warrants, disclosed above. NOTE TEN. COMMITMENTS AND CONTINGENCIES 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 in 2001. In addition, the Company leases certain office equipment under operating leases that expire over the next three years. The Company's commitments under noncancellable operating leases as of December 31, 1999 are as follows, in thousands: Years Ending December 31, ------------------------------------------------------------------- 2000 $ 654 2001 467 2002 53 2003 53 ------------------------------------------------------------------- Total minimum lease payments $1,227 ------------------------------------------------------------------- Total rental expense under operating leases was $465,000, $451,000 and $455,000 for the years ended December 31, 1997, 1998 and 1999, respectively. In February 1995, the Company entered into a commitment to purchase $2.5 million of freeze-dried products from Oregon Freeze Dry, Inc. ("OFD") over a 66-month period ending in August 2000. The commitment, which also provides for monthly minimum purchases, is required to be supported to the extent of 60% of the remaining commitment by a letter of credit from a bank or a pledged certificate of deposit (see Note Seven). The Company has made purchases pursuant to this commitment of $245,000, $95,000 and $54,000 in 1997, 1998 and 1999, respectively. At December 31, 1999, the Company had made prepayments of $672,000 toward future deliveries under the commitment. In the fourth quarter of 1999, the Company determined that it could no longer satisfy the minimum purchase requirements of the agreement and thus the Company has established a reserve of $1,042,000 for estimated losses under this contract. Of this amount, $698,000 is recorded in accrued liabilities and $344,000 offsets the aforementioned prepayments. The Company is currently negotiating with OFD regarding purchase arrangements beyond the term of the current agreement. NOTE ELEVEN. INCOME TAXES The tax effects of temporary differences that gave rise to deferred tax assets and deferred tax liabilities at December 31, 1998 and 1999 were as follows, in thousands: 1998 1999 --------------------------------------------------------------- Net operating loss carryforward $ 14,391 $ 14,090 Research and development and other credits 867 748 Property, plant and equipment 259 307 Patents 285 270 Inventory 401 368 Other, net 244 600 Bad debt reserve 568 549 Oregon Freeze Dry reserve - 354 Less - Valuation allowance (17,015) (17,286) ------- ------- $ 0 $ 0 ======= =======
The Company has provided a valuation allowance against the entire deferred tax asset at December 31, 1998 and 1999 due to the uncertainty as to the realization of the asset. The provisions for income taxes for the years ended December 31, 1997, 1998 and 1999 consisted of the following, in thousands: 1997 1998 1999 ------------------------------------------------------------------- Current provision $ 20 $ 10 $ - Deferred provision, net - - - ------------------------------------------------------------------- Total provision $ 20 $ 10 $ - ------------------------------------------------------------------- The differences (expressed as a percentage of pre-tax income or loss) between the statutory and effective income tax rates are as follows: 1997 1998 1999 ------------------------------------------------------------------- Statutory tax rate 34.0% (34.0%) (34.0%) Unrecognized deferred tax benefit/change in valuation allowance (20.8) 34.0 34.0 Other (4.9) - - ------------------------------------------------------------------- Effective tax rate 8.3% 0.0% 0.0% -------------------------------------------------------------------
At December 31, 1999, the Company had net operating loss carryforwards of approximately $41.4 million for federal income tax purposes, which began to expire in 1999, and research and development tax credit carryforwards of approximately $748,000, which began to expire in 1999, all of which are available to offset federal income taxes due in future periods. The Company had a $6 million net operating loss carryforward expire during the year ended December 31, 1999. Additionally, $15,000 in research and development tax credits expired in 1999. The Company has approximately $28,000 in alternative minimum tax credits which do not expire. NOTE TWELVE. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's customers are not concentrated in any specific geographic region but are concentrated in the health care industry. Significant sales were made to three customers. McKesson HBOC/General Medical accounted for 12%, 11% and 5%; and Owens & Minor accounted for 11%, 10% and 9%; of the Company's net sales in 1997, 1998 and 1999, respectively. Sales to Mannatech, Inc., accounted for 15%, 23% and 41% of the Company's net sales in 1997, 1998 and 1999, respectively. Accounts receivable from Mannatech represented 28% of gross accounts receivable at December 31, 1999. 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. NET INCOME (LOSS) PER SHARE Basic net income (loss) available to common shareholders per share was computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding of 8,953,000, 9,320,000 and 9,376,000 in 1997, 1998, and 1999, respectively. In calculating the diluted net loss available to common shareholders per share for 1998 and 1999, no effect was given to options, warrants or convertible securities, because the effect of including these securities would have been antidilutive. In 1997, diluted net income available to common shareholders per share was also based only on the weighted average number of common shares outstanding. There was no additional dilution related to options whose exercise price was below the average market price due to the application of the treasury stock method. Remaining options and warrants to purchase 885,000 shares at an average exercise price of $16.84 per share were excluded because their exercise price exceeded the average market price and were, therefore, antidilutive. NOTE FOURTEEN. REPORTABLE SEGMENTS The Company operates in two reportable segments: human and veterinary products sold through its Medical Services Division and Caraloe, Inc., a consumer products subsidiary, which sells bulk raw materials, consumer beverages, and nutritional and skin care products. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies (Note Two). Corporate Income Before Income Taxes set forth in the following table includes research and development expenses which were related to the development of pharmaceutical products not associated with the reporting segments. Assets which are used in more than one segment are reported in the segment where the predominant use occurs. The Company's production facility in Costa Rica, which provides bulk ingredients for all segments, and total cash for the Company are included in the Corporate Assets figure. Reportable Segments (in thousands) Medical Caraloe, 1998 Services Inc. Corporate Total ----------------------------------------------------------------- >C> Sales to unaffiliated customers $16,438 $7,187 $ - $23,625 Income(loss) before income taxes 1,023 854 (3,482) (1,605) Identifiable assets 14,319 1,923 8,005 24,247 Capital expenditures 344 - 934 1,278 Depreciation and amortization 737 - 306 1,043 ----------------------------------------------------------------- 1999 ----------------------------------------------------------------- Sales to unaffiliated customers $15,389 $12,739 $ - $28,128 Income(loss) before income taxes (775) 3,247 (4,505) (2,033) Identifiable assets 12,623 2,019 8,851 23,493 Capital expenditures 405 - 558 963 Depreciation and amortization 679 - 349 1,028 -----------------------------------------------------------------
NOTE FIFTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA The unaudited selected quarterly financial data below reflect the fiscal year ended December 31, 1998 and 1999, respectively. (Dollar amounts in thousands, except shares and per share amounts) -------------------------------------------------------------------------- 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------------------------------------------------------------------- Net sales $ 5,788 $ 6,027 $ 6,003 $ 5,807 Gross profit 3,208 3,428 3,237 2,882 Net income (loss) 152 60 101 (1,928)(1) Diluted income (loss) available to common shareholders per share $ .02 $ .00 $ .01 $ (.21) Weighted average common shares 9,306,000 9,315,000 9,330,000 9,343,000 -------------------------------------------------------------------------- 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------------------------------------------------------------------- Net sales $ 6,898 $ 6,750 $ 7,224 $ 7,256 Gross profit 3,287 3,380 3,949 3,872 Net income (loss) (1,005) (394) 145 (779)(2) Diluted income (loss) available to common shareholders per share $ (0.11) $ (0.04) $ 0.02 $ (0.08) Weighted average common shares 9,351,000 9,358,000 9,368,000 9,424,000 (1) After a charge of $1,750,000 for ACI and Aloe & Herbs as described in Note Six. (2) After a charge of $1,042,000 for OFD as described in Note Ten.
Financial Statement Schedule Valuation and Qualifying Accounts (In thousands) Description Additions ---------------- Balance Charged Charged at to to Balance Beginning Cost and Other at End of Period Expenses Accounts Deductions of Period --------------------------------------------------------------------------- 1997 --------------------------------------------------------------------------- Bad debt reserve $ 213 $ 280 $ - $ 15 $ 478 Inventory reserve 322 523 - 329 516 Rebates 136 331 - 125 342 --------------------------------------------------------------------------- 1998 --------------------------------------------------------------------------- Bad debt reserve $ 478 $ 564 $ - $ 120 $ 922 Inventory reserve 516 53 - 44 525 Rebates 342 3,499 - 3,437 404 ACI and Aloe & Herbs non-current notes and investments included in other assets - 1,350 - - 1,350 --------------------------------------------------------------------------- 1999 --------------------------------------------------------------------------- Bad debt reserve $ 922 $ 107 $ - $ 726 $ 303 Inventory reserve 525 - - 95 430 Rebates 404 2,058 - 2,122 340 ACI and Aloe & Herbs non-current notes and investments included in other assets 1,350 - - 58 1,292 Oregon Freeze Dry, Inc. - 1,042 (343) - 699
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Shareholders and Board of Directors Carrington Laboratories, Inc. We have audited the accompanying consolidated balance sheets of Carrington Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at item 14(a) for the same periods. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carrington Laboratories, Inc. and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Dallas, Texas February 21, 2000 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARRINGTON LABORATORIES, INC. Date: March 29, 2000 By: /s/ Carlton E. Turner --------------------- Carlton E. Turner, Ph.D.,D.Sc. President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date ------------------------- ----------------------------- -------------- /s/ Carlton E. Turner President, Chief Executive March 29, 2000 Carlton E. Turner, Ph.D., Officer and Director D.Sc. (principal executive officer) /s/ Robert W. Schnitzius Chief Financial Officer March 29, 2000 Robert W. Schnitzius (principal financial and accounting officer) /s/ R. Dale Bowerman Director March 29, 2000 R. Dale Bowerman /s/ George DeMott Director March 29, 2000 George DeMott /s/ Robert A. Fildes, Ph.D. Director March 29, 2000 Robert A. Fildes, Ph.D. /s/ Thomas J. Marquez Director March 29, 2000 Thomas J. Marquez /s/ Selvi Vescovi Director March 29, 2000 Selvi Vescovi INDEX TO EXHIBITS Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 3.1* Restated Articles of Incorporation of Carrington Laboratories, Inc. 3.2* Statement of Change of Registered Office and Registered Agent of Carrington Laboratories, Inc. 3.3* Statement of Resolution Establishing Series D Preferred Stock of Carrington Laboratories, Inc. 3.4 Bylaws of Carrington Laboratories, Inc., as amended through March 3, 1998 (incorporated herein by reference to Exhibit 3.8 to Carrington's 1997 Annual Report on Form 10-K). 4.1 Form of certificate for Common Stock of Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 4.5 to Carrington's Registration Statement on Form S-3 (No. 33-57360) filed with the Securities and Exchange Commission on January 25, 1993). 4.2* Rights Agreement dated as of September 19, 1991 between Carrington Laboratories, Inc. and Ameritrust Company National Association. 4.3 Amendment No. 1 to Rights Agreement dated October 21, 1998 (incorporated herein by reference to Exhibit 4 to the Company's Form 8/A/A Post- Effective Amendment No. 1). 10.1H Retirement and Consulting Agreement dated August 14, 1997 between Carrington Laboratories, Inc. and David Shand (incorporated herein by reference to Exhibit 4.1 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997). 10.2H First Amendment to Retirement and Consulting Agreement dated September 30, 1997 between Carrington Laboratories, Inc. and David G. Shand (incorporated herein by reference to Exhibit 4.2 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997). Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.3* Contract Research Agreement dated as of August 8, 1991 between Carrington Laboratories, Inc. and Texas Agriculture Experimental Station, as agent for the Texas A&M University System (incorporated herein by reference to Exhibit 10.55 to Carrington's 1991 Annual Report on Form 10-K). 10.4* Lease Agreement dated as of August 30, 1991 between Carrington Laboratories, Inc. and Western Atlas International, Inc. 10.5* First Lease Amendment dated April 16, 1992 between Carrington laboratories, Inc. and Western Atlas International, Inc. 10.6* Second Lease Amendment dated September 23, 1993 between Carrington Laboratories, Inc. and Western Atlas International, Inc. 10.7* Third Lease Amendment dated December 1, 1994 between Carrington Laboratories, Inc. and Western Atlas International, Inc. 10.8* Fourth Lease Amendment dated August 31, 1999 between Western Atlas International, Inc. and Carrington Laboratories, Inc. 10.9H* Employee Stock Purchase Plan of Carrington Laboratories, Inc., as amended through June 15, 1995. 10.10* Common Stock Purchase Warrant dated September 14, 1993 issued by Carrington Laboratories, Inc. to E. Don Lovelace. 10.11* Common Stock Purchase Warrant dated September 14, 1993, issued by Carrington Laboratories, Inc., to Jerry L. Lovelace. 10.12* Lease Agreement dated June 15, 1994 between DFW Nine, a California limited partnership, and Carrington Laboratories, Inc. 10.13* Lease Amendment dated August 23, 1994 amending Lease Agreement listed as Exhibit 10.12. Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.14* Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. 10.15* Modification Number One dated February 19, 1996 to the Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. 10.16* Modification Number Two dated November 11, 1996 to the Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. 10.17 Modification Number Three to the Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. (incorporated herein by reference to Exhibit 10.89 to Carrington's 1998 Annual Report on Form 10-K). 10.18H 1995 Management Compensation Plan (incorporated herein by reference to Exhibit 4.1 to Form S-8 Registration Statement No. 33-64403 filed with the Commission on November 17, 1995). 10.19 Trademark License Agreement dated August 14, 1997 between Caraloe, Inc. and Mannatech, Inc. (incorporated herein by reference to Exhibit 10.2 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997). 10.20 Supply Agreement dated August 14, 1997 between Caraloe, Inc. and Mannatech, Inc.(incorporated herein by reference to Exhibit 10.3 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997). 10.21* Letter of Agreement dated January 12, 2000 extending Trademark License Agreement and Supply Agreement between Caraloe, Inc. and Mannatech, Inc.. 10.22 Trademark License and Product Supply Agreement dated July 22, 1997 between Caraloe, Inc., and Nu Skin International, Inc. (incorporated herein by reference to Exhibit 10.1 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997). Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.23 Non-exclusive Sales and Distribution Agreement dated August 22, 1995 between Innovative Technologies Limited and Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.6 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.24 Supplemental Agreement dated October 16, 1995 to Non-exclusive Sales and Distribution Agreement between Innovative Technologies Limited and Carrington Laboratories, Inc.(incorporated herein by reference to Exhibit 10.7 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.25 Product Development and Exclusive Distribution Agreement dated November 10, 1995 between Innovative Technologies Limited and Carrington Laboratories, Inc.(incorporated herein by reference to Exhibit 10.8 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.26 Form of Stock Purchase Agreement dated April 5, 1995 between Carrington Laboratories, Inc. and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.1 to Carrington's Registration Statement 33-60833 on Form S-3). 10.27 Form of Registration Rights Agreement dated June 20, 1995 between Carrington Laboratories, Inc. and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.2 to Carrington's Registration Statement 33-60833 on Form S-3). 10.28 Supply and Distribution Agreement dated March 22, 1996 between Farnam Companies, Inc. and Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.76 to Carrington's 1995 Annual Report on Form 10-K). 10.29 Distribution Agreement dated March 1, 1996 between Carrington Laboratories, Inc. and Ching Hwa Pharmaceutical Co., Ltd. (incorporated herein by reference to Exhibit 10.1 to Carrington's First Quarter 1996 Report on Form 10-Q). 10.30H Carrington Laboratories, Inc. 1995 Stock Option Plan, As Amended and Restated Effective January 15, 1998 (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.31H Form of Nonqualified Stock Option Agreement with Outside Director, relating to the Registrant's 1995 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.32H Form of Incentive Stock Option Agreement for Employees (incorporated herein by reference to Exhibit 4.4 to Carrington's Second Quarter 1996 Report on Form 10-Q). 10.33 Sales Distribution Agreement dated September 30, 1996 between Faulding Pharmaceuticals Laboratories and Carrington Laboratories, Inc.(incorporated herein by reference to Exhibit 10.1 to Carrington's Third Quarter 1996 Report on Form 10-Q). 10.34 Amendment Number One to Sales Distribution Agreement dated January 12, 1998 between Carrington Laboratories, Inc., and Faulding Pharmaceuticals/David Bull Laboratories (incorporated herein by reference to Exhibit 10.75 to Carrington's 1997 Annual Report on Form 10-K). 10.35 Sales Distribution Agreement dated December 1, 1996 between Suco International Corp. and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.54 to Carrington's 1996 Annual Report on Form 10-K). 10.36 Sales Distribution Agreement dated December 20, 1996 between Recordati, S.P.A. and Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V.(incorporated by reference to Exhibit 10.55 to Carrington's 1996 Annual Report on Form 10-K). 10.37 Nonexclusive Distribution Agreement dated November 15, 1996 between Polymedica Industries, Inc. and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.56 to Carrington's 1996 Annual Report on Form 10-K). 10.38 Sales Distribution Agreement dated December 24, 1996 between Gamida-Medequip Ltd. and Carrington Laboratories, Inc. (incorporated by reference to Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- Exhibit 10.57 to Carrington's 1996 Annual Report on Form 10-K). 10.39 Sales Distribution Agreement dated December 24, 1996 between Gamida For Life BV and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.58 to Carrington's 1996 Annual Report on Form 10-K). 10.40 Sales Distribution Agreement dated December 4, 1996 between Darrow Laboratorios S/A and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.59 to Carrington's 1996 Annual Report on Form 10-K). 10.41* Independent Sales Representative Agreement dated June 1, 1998 between Meares Medical Sales Associates and Carrington Laboratories, Inc.. 10.42 Supply Agreement dated February 13, 1997 between Aloe Commodities International, Inc. and Caraloe, Inc. (incorporated by reference to Exhibit 10.63 to Carrington's 1996 Annual Report on Form 10-K). 10.43 Trademark License Agreement dated March 1, 1997 between Light Resources Unlimited and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.64 to Carrington's 1996 Annual Report on Form 10-K). 10.44 Supply Agreement dated February 13, 1997 between Light Resources Unlimited and Caraloe, Inc. (incorporated by reference to Exhibit 10.65 to Carrington's 1996 Annual Report on Form 10-K). 10.45 Sales Distribution Agreement dated December 27, 1996 between Penta Farmaceutica, S.A. and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.66 to Carrington's 1996 Annual Report on Form 10-K). 10.46 Sales Distribution Agreement dated November 1, 1995 between Laboratories PiSA S.A. DE C.V. and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.70 to Carrington's 1996 Annual Report on Form 10-K). Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.47 Sales Distribution Agreement dated January 1, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and Henry Schein U.K. Holdings, Ltd., (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.48 Sales Distribution Agreement dated January 5, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and Saude 2000 (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.49 Sales Distribution Agreement dated March 27, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and Hemopharm GmbH (incorporated herein by reference to Exhibit 10.4 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.50 Sales Distribution Agreement dated March 27, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and Vincula International Trade Company (incorporated herein by reference to Exhibit 10.5 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 10.51 Agency and Sales Distribution Agreement dated April 13, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and Egyptian American Medical Industries, Inc. (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.52 Sales Distribution Agreement dated April 24, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and CSC Pharmaceuticals Ltd. Dublin (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.53 Amendment Number One dated May 27, 1999 to the Sales Distribution Agreement dated April 17, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories, Belgium, NV and CSC Pharmaceuticals, Ltd., Dublin (incorporated herein by reference to Exhibit 10.5 to Carrington's Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10.54 Promissory Note of Aloe Commodities International, Inc.,dated June 17, 1998, payable to the order of the Registrant in the principal amount of $200,000 (incorporated herein by reference to Exhibit 10.4 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.55 Letter agreements dated September 30, 1998 and November 4, 1998 between Aloe Commodities International, Inc. and the Registrant amending due date of Promissory Note dated June 17, 1998 from Aloe Commodities International, Inc. to the Registrant (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.56 Letter Agreement dated February 4, 1999 between Aloe Commodities International, Inc. and the Registrant amending due date of Promissory Note dated June 17, 1998 from Aloe Commodities International, Inc. to the Registrant (incorporated herein by reference to Exhibit 10.98 to Carrington's 1998 Annual Report on Form 10-K). 10.57 Promissory Note dated July 1, 1998 of Rancho Aloe, (C.R.) S.A. payable to the order of the Registrant in the principal amount of $186,655.00 (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.58 Wound and Skin Care Purchase Agreement dated August 27, 1998 between American Association for Homes & Services for the Aging and Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.59 Purchase Agreement dated October 1, 1998 between Vencor, Inc. and Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.60 Supply Agreement dated October 12, 1998 between Caraloe, Inc. and One Family, Inc. (incorporated herein by reference to Exhibit 10.90 to Carrington's 1998 Annual Report on Form 10-K). Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.61 Trademark License Agreement dated October 12, 1998 between Caraloe, Inc. and One Family, Inc. (incorporated herein by reference to Exhibit 10.91 to Carrington's 1998 Annual Report on Form 10-K). 10.62 Promissory Note of Aloe & Herbs International, Inc. dated November 23, 1998 payable to the order of the Registrant in the principal amount of $300,000 (incorporated herein by reference to Exhibit 10.92 to Carrington's 1998 Annual Report on Form 10-K). 10.63 Supply Agreement dated December 3, 1998 between Caraloe, Inc. and Eventus International, Inc. (incorporated herein by reference to Exhibit 10.93 to Carrington's 1998 Annual Report on Form 10-K). 10.64 Trademark License Agreement dated December 3, 1998 between Caraloe, Inc. and Eventus International, Inc. (incorporated herein by reference to Exhibit 10.94 to Carrington's 1998 Annual Report on Form 10-K). 10.65 Amendment Number One dated December 3, 1998 to Supply Agreement between Caraloe, Inc. and Eventus International, Inc. (incorporated herein by reference to Exhibit 10.95 to Carrington's 1998 Annual Report on Form 10-K). 10.66 Clinical Services Agreement dated January 25, 1999 between Carrington Laboratories, Inc. and PPD Pharmaco, Inc. (incorporated herein by reference to Exhibit 10.96 to Carrington's 1998 Annual Report on Form 10-K). 10.67 Common Stock Purchase Warrant dated November 23, 1998, issued by Aloe and Herbs International, Inc. to Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.99 to Carrington's 1998 Annual Report on Form 10-K). 10.68 Supply Agreement dated March 5, 1999 between Caraloe, Inc. and For Your Health, Inc. (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.69 Trademark License Agreement dated March 5, 1999 between Caraloe, Inc. and For Your Health, Inc. (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.70 Letter dated February 25, 1999 from Aloe Commodities, Inc. to Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). 10.71 Exclusive Sales Representative Agreement dated April 13, 1999, between Caraloe, Inc. and Classic Distributing Company (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10.72 Exclusive Sales Representative Agreement dated April 13, 1999, between Caraloe, Inc. and Glenn Corporation (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10.73 Terms Sheet for Lease of Rancho Aloe Farm Land to Sabila Industrial dated April 20, 1999 (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10.74 Terms Sheet for Maintenance of Sabila Industrial Plants on Leased Land dated April 20, 1999 (incorporated herein by reference to Exhibit 10.4 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 10.75 Exclusive Sales and Trademark Agreement dated June 11, 1999, between Caraloe, Inc. and Nutra Vine (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.76 Lease Agreement dated September 23, 1999 between Rancho Aloe and Sabila Industrial, S.A. (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). Exhibit Sequentially Number Exhibit Numbered Page ------ --------------------------------------------------- ------------- 10.77 Letter Agreement dated September 29, 1999 between Aloe Commodities International, Inc. and Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.78* Sales Distribution Agreement dated October 26, 1999. between Carrington Laboratories, Inc. and E- Wha International, Inc. 10.79* Amendment Number Two dated February 14, 2000 to the Sales Distribution Agreement dated April 17, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories, Belgium, NV and CSC Pharmaceuticals, Ltd. Dublin. 10.80* Supplier Agreement dated August 6, 1999 between Novation, LLC and Carrington Laboratories, Inc. MS 91022 10.81* Supplier Agreement dated August 6, 1999 between Novation, LLC and Carrington Laboratories, Inc. MS 91032 21.1* Subsidiaries of Carrington. 23.1* Consent of Independent Public Accountants 27.1* Financial Data Schedule * Filed herewith. H Management contract or compensatory plan. EX-3.1 2 Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF CARRINGTON LABORATORIES, INC. 1. Pursuant to the provisions of article 4.0 of the Texas Business Corporation act, CARRINGTON LABORATORIES, INC. corporation (hereinafter called the "corporation"), hereby adopts Restated Articles of Incorporation which accurately copy the corporation's Articles of Incorporation and all amendments thereto that are in effect to date, and such Restated Articles of Incorporation contain no change in any provision thereof. 2. The corporation's Restated Articles of Incorporation were adopted by resolution of the corporation's Board of Directors on September 14, 1988. 3. The corporation's Articles of Incorporation and all amendments and supplements thereto (excluding the Statement of Resolution Establishing series A cumulative Convertible Preferred stock of the corporation, filed in the office of the Secretary of State of Texas on Nay 18, 1987) are hereby superseded by the following Restated Articles of Incorporation which accurately copy the entire text thereof: ARTICLE ONE ----------- The name of the corporation is CARRINGTON LABORATORIES, INC. ARTICLE TWO ----------- The period of its duration is perpetual. ARTICLE THREE ------------- The purpose for which the corporation is organized is the transaction of any or all lawful business for which corporations may be incorporated under the Texas Business Corporation Act. ARTICLE FOUR ------------ 1.General. (a) Authorized Capital. the aggregate number of shares which the corporation shall have authority to issue is Thirty- one Million (31,000,000), consisting of Thirty Million (30,000,000) shares of the par value of One Cent ($0.01) each, to be designated "Common Stock," and One Million (1,000,000) shares of the par value of One Hundred Dollars ($100.00) each, to be designated "Preferred Stock" which may be divided into and issued in series. (b) Issuance. Subject to the provisions of law and of these Articles of Incorporation, the corporation may issue shares of any class or series from time to time for such consideration (not less than the par value thereof) as may be fixed by the Board of Directors of the corporation. Shares so issued for which the consideration has been paid or delivered to the corporation shall be deemed fully paid shares and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares. 2.Common stock. (a) General. Subject to the provisions of law and of any series of Preferred stock, dividends may be paid on the outstanding shares of Common Stock at such times and in such amounts as the Board of Directors shall determine. Each share of Common Stock shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. (b) Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, after payment or provision for payment of debts and amounts due under the provisions of this Article Four to the holders of Preferred stock, the holders of the Common Stock shall be entitled to share pro rata in the distribution of the remaining assets of the corporation. 3.Preferred Stock. (a) General. Shares of preferred Stock may be issued from time to time in one or more series, and the shares of each series shall have such designations, powers, preferences, rights, qualifications, limitations and restrictions as are stated and expressed herein and in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors as hereinafter provided. The holders of Preferred Stock shall not be entitled by virtue of being such holders to receive any dividends or to participate in any distribution of assets of the corporation upon any liquidation, dissolution or winding up of the corporation beyond the dividend and liquidation preferences with respect to such shares expressly provided for herein or in the resolution or resolutions adopted by the board of Directors providing for the issuance thereof. unless otherwise provided by any resolution or resolutions adopted by the Board of Directors providing for the issuance of Preferred stock, dividends on Preferred Stock shall be cumulative from the date of issue and shall not bear interest. (b) Authority of Directors to Issue Series. Authority is hereby expressly granted to the Board of Directors to authorize the issuance of Preferred Stock from tine to time in one or more Series, and, with respect to each series of Preferred Stock, to fix and determine by the resolution or resolutions from time to time adopted providing for the issuance thereof the number of shares to constitute the series and the designation thereof and any one or more of the following rights and preferences: (A) the rate of dividend payable with respect to such shares and the dates, terms and other conditions on which such dividends shall be payable, (B) the nature of the dividend payable with respect to such shares as cumulative, noncumulative or partially cumulative, (C) the price at and the terms and conditions on which such shares may be redeemed, (D) the amount payable on such shares in the event of involuntary liquidation, (E) the amount payable on such shares in the event of voluntary liquidation, (F) sinking fund provisions (if any) for the redemption or purchase of such shares, (G) the securities into which and the terms and conditions on which such shares may be converted, if such shares are issued with the privilege of conversion, (H) voting rights (including the number of votes per share, the matters on which the shares can vote and any contingency which makes the voting rights effective), and (I) subject to the provisions of law, the repurchase obligations of the corporation with respect to such shares. The shares of each series of Preferred Stock may vary from the shares of any other series thereof in any or all. of the foregoing respects. The Board of Directors may increase the number of shares designated for any existing series by adding to such series authorized and unissued shares not designated for any other series. The Board of Directors may decrease the number of shares designated for any existing series by subtracting from such series unissued shares designated for such series, and the shares so subtracted shall be authorized and unissued shares of preferred stock. ARTICLE FIVE ------------ The corporation will. not commence business until it has received for the issuance of its shares consideration of the value of $1,000.00 consisting of money, labor done, or property actually received. ARTICLE SIX ----------- No shareholder or other person shall have any pre-emptive rights whatsoever. ARTICLE SEVEN ------------- Directors shall be elected by plurality vote. Cumulative voting shall not be permitted. ARTICLE EIGHT ------------- The shareholders of the corporation hereby delegate to the Board of Directors power to adopt. alter, amend, or repeal the By-Laws of the corporation; such power shall be deemed to be vested exclusively in the Board of Directors and shall not be exercised by the shareholders. ARTICLE NINE ------------ If the By_Laws so provide, the Board of Directors may designate two or more of their number to constitute an Executive Committee, which committee shall for the time being, as provided in the By-Laws of this corporation, have and exercise any or all of the powers of the board of Directors in the management of the business and affairs of this corporation, and have power to authorize the seal. of this corporation to be affixed to all papers which may require it. ARTICLE TEN ----------- No contract or other transaction between the corporation and any other firm or corporation shall be affected or invalidated by the fact that any one or more of the Directors or officers of the corporation is or are interested in or is a member. Director, officer, or officers of such other firm or corporation or, individually or jointly, may be a party or parties to or may be interested in any contract or transaction of the corporation or in which the corporation is interested; and no contract, act or transaction of the corporation with any person, firm, corporation or association shall be affected or invalidated by the fact that any Director or Directors or officer or officers of the corporation is a patty or are parties to or interested in such contract, act or transaction, or in any way connected with such person, firm, corporation or association, and each and every person who nay become a Director or officer of the corporation is hereby relieved, as far as is legally permissible, from, any disability which might otherwise prevent him, or any firm, corporation or association in which he may in any way be interested, from so acting. ARTICLE ELEVEN -------------- The post office address of the corporation's present registered office is 1300 East Rochelle Blvd., Irving, Texas 75062, and the name of its present registered agent at such address is Clinton B. Howard. ARTICLE TWELVE -------------- The number of Directors constituting the present Board of Directors is six, and the names and addresses of the persons who are to serve as Directors until the next annual meeting of the shareholders or until their successors are elected and qualified are: Name Address ---- ------- Thomas J. Marquez 1300 East Rochelle Blvd. Irving, TX 75062 Clinton H. Howard 1300 East Rochelle Blvd. Irving, TX 75062 Herbert H. McDade, Jr. 50 Main St., Suite 1000 White Plains, NY 10606 Dale S. Vranes 750 N. St. Paul, Suite 1640 Dallas, TX 75201 Hubert C. Peltier. M.D. 9 Rum, Row Salem, SC 29676 Bill H. McAnalley, Ph.D. 1300 East Rochelle Blvd. Irving, TX 75062 ARTICLE THIRTEEN ---------------- The names and addresses of the incorporators are: Dan N. Cain 2605 Republic National Bank Tower Dallas, Texas 75201 Mark Davenport 2605 Republic National Bank Tower Dallas, Texas 75201 Marsha Eubank 2605 Republic National Bank Tower Dallas, Texas 75201 ARTICLE FOURTEEN ---------------- Subject to the limitations provided by applicable law, the corporation shall have, in addition to all rights and powers provided by applicable law, the right and power to purchase, directly or indirectly, shares of its own capital stock to the extent of the aggregate of unrestricted capital surplus available therefor and unrestricted reduction surplus available therefor. ARTICLE FIFTEEN --------------- To the fullest extent permitted by applicable law, no Director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for any act or omission in such Director's capacity as a Director, except that this Article does not eliminate or limit the liability of a Director for (i) a breach of such Director's duty of loyalty to the corporation or its shareholders; (ii) an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which such Director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of such Director's office; (iv) an act or omission for which the liability of a director is expressly provided for by statutes or (v) an act related to an unlawful stock repurchase or payment of a dividend. IN WITNESS WREREOF, the corporation has executed these Restated Articles of incorporation on September 14, 1988. CARRINGTON LABORATORIES, INC. By /s/ Clinton H. Howard ---------------------- Clinton H. Howard, President EX-3.2 3 Exhibit 3.2 STATEMENT OF CHANGE OF REGISTERED OFFICE AND REGISTERED AGENT OF CARRINGTON LABORATORIES, INC. Pursuant to the provisions of the Texas Business Corporation Act, the undersigned corporation (the "Corporation"), organized under the laws of the State of Texas, submits the following Statement for the purpose of changing its registered office and registered agent in the State of Texas: 1. The name of the Corporation is CARRINGTON LABORATORIES, INC 2. The post office address of the Corporation's present registered office, prior to the filing of this statement, is 2001 Walnut Hill Lane, Irving, Texas 75038. 3. The post office address to which the Corporation's registered office is to be changed is 350 N. St. Paul Street, Dallas, Texas 73201. 4. The name of the Corporation's present registered agent is Clinton H. Howard. 5. The name of the Corporation's successor registered agent is C T Corporation System. 6. The post office address of the Corporation's registered office and the post office address of the business office of its registered agent, as changed, will be identical, 7. The above changes of the Corporation's registered office and registered agent were authorized by the Board at Directors of the Corporation, IN WITNESS WHEREOF, the Corporation has caused this statement to be executed in its name and on its by the undersigned duly authorized officer on February 18th, 1991. CARRINGTON LABORATORIES, INC. By /s/ Dennis F. Willson ---------------------- Dennis F. Willson Executive Vice President EX-3.3 4 Exhibit 3.3 STATEMENT OF RESOLUTION ESTABLISHING AND DESIGNATING SERIES D PREFERRED STOCK of CARRINGTON LABORATORIES, INC. To the Secretary of State of the State of Texas: Pursuant to the provisions of Article 2.13 of the Texas Business Corporation Act, and pursuant to Article Four of its Articles of Incorporation, the undersigned, Carrington Laboratories, Inc., a corporation organized and existing under the Texas Business Corporation Act, as amended (the Company hereby submits the following statement for the purpose of establishing and designating 300,000 shares of its Preferred Stock, par value $100 per share, as "Series D Preferred Stock" (the "Series D Shares") and fixing and determining the relative rights thereof: 1. The name of the corporation is Carrington Laboratories, Inc. 2. Attached hereto as Annex I is a true and correct copy of the resolution establishing and designating the Series D Shares and fixing and determining the relative rights and preferences thereof. 3. Such resolution was duly adopted by the Board of Directors of the Company on September 19, 1991. Dated; September 19, 1991. CARRINGTON LABORATORIES, NC By: /s/ Dennis F. Wilson ------------------------ Dennis F. Wilson, Executive Vice President and Secretary Annex I RESOLUTION OF THE BOARD OF DIRECTORS OP CARRINGTON LABORATORIES, INC. RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company in accordance with provisions of its Articles of Incorporation, (a) the Board of Directors does hereby create, authorize and provide for the issuance, upon the exercise of the Rights, of a series of Preferred Stock of the Company to be designated "Series D Preferred Stock" (hereinafter referred to as the "Series D Preferred Stock"), initially consisting of 300,000 shares, and (b) the Board of Directors does also hereby (to the extent that the designations, preferences. limitations and relative rights (collectively, the "Terms") of the Series D Preferred Stock are not stated and expressed in the Articles of Incorporation and to the extent that if such Terms are slated or expressed in the Articles of Incorporation but the Articles of Incorporation permit the Board of Directors to otherwise fix and state such Terms) fix and state such designations, preferences, limitations and relative rights thereof, as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series D Preferred Stock", par value $100 per share (the "Series D Preferred Stock"), and the number of shares constituting the Series D Preferred Stock shall be 300,000. Notwithstanding the provisions of Section Q hereof, such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series D Preferred Stock to a number less than the number of shares then outstanding plus the number of Shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Series D Preferred Stock. Section 2. Dividends. Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series D Preferred Stock with respect to dividends, the holders of Series D Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable in cash. stock or otherwise. Section 3. Voting Rights. The holders of shares of Series D Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series D Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Company. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series D Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Statement of Resolution creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series D Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Company. (C) Except as set forth herein, or as otherwise provided by law, holders of Series D Preferred Stock shall have no special voting rights, and their consent Shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Preacquired Shares. Any shares of Series D Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock, subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other Statement of Resolution creating a series of Preferred Stock or any similar stock or as otherwise required by law, Section 5. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series D Preferred Stock unless, prior thereto, the holders of shares of Series D Preferred Stock shall have received $100 per share, provided that the holders of shares of Series D Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series 2) Preferred Stock, except distributions made ratably on the Series D Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series D Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which as the number of shares of Common Stock that were outstanding immediately prior to such event. Section 6. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series D Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series D Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7, No Redemption. The shares of Series D Preferred Stock shall not be redeemable. Section 8. Rank. The Series D Preferred Stock shall rank junior to all other Series of the Company's Preferred Stock as to payment of dividends and the distribution of assets on liquidation or otherwise, unless the terms of any such series shall provide otherwise. The Series D Preferred Stock shall rank senior to the Company's Common Stock as to the distribution of assets on liquidation or otherwise. Section 9. Amendment. The Articles of Incorporation of the Company shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series D Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series D Preferred Stock. voting together as a single class. Section 10. Fractional Shares. Series D Preferred Stock may be issued in fractions of a share which shall entitle the holder thereof, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all of the rights of holders of shares of Series D Preferred Stock. EX-4.2 5 Exhibit 4.2 RIGHTS AGREEMENT Rights Agreement, dated as of September 19, 1991 (the "Agreement"), between Carrington Laboratories, Inc., a Texas corporation (the "company"), and Ameritrust Company National Association (the "Rights Agent"). The Board of Directors of the Company has authorized and declared a dividend of one preferred share purchase right (a "Right") for each Common Share (as hereinafter defined) of the Company outstanding on October 15, 1991 (the "Record Date"), each Right representing the right to purchase one one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined). Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 20% or more of the Common Shares of the Company then outstanding, but shall not include the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 20% or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person". (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than these Rights), warrants or options, or otherwise; provided however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Persons Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of any securities of the Company. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding", when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder, (d) "Business Day" shall mean any day other than a Saturday. a Sunday or a day on which banking institutions in the State of Texas are authorized or obligated by law or executive order to close. (e) "Close of business" on any given date shall mean 5:00 P.M., Dallas, Texas time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Dallas, Texas time, an the next succeeding Business Day. (f) "Common Shares" when used with reference to the Company shall mean the shares of common stock, par value $0.01 per share, of the Company. "Common Shares" when used with reference 10 any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another person, the Person or Persons which ultimately control such first-mentioned Person. (g) "Distribution Date" shall have the meaning set forth in Section 3(a) hereof. (h) "Final Expiration Date" shall have the meaning set forth in Section 7(a) hereof. (i) "Flip-In Event" shall have the meaning set forth in Section 11(a)(ii)(A) hereof. (j) "Flip-Over Event" shall have the meaning set forth in Section 13 hereof. (k) "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity, (l) "Preferred Shares" shall mean shares of Series D Preferred Stock, par value $100 per share, of the Company having the rights and preferences set forth in the Form of Statement of Resolution Establishing and Designating Series D Preferred Stock of Carrington Laboratories, Inc. attached to this Agreement as Exhibit A. (m) "Redemption Date" shall have the meaning set forth iii Section 7(a) hereof. (n) "Shares Acquisition Date" shall mean the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such. (o)"Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. (p) "Triggering Event" shall mean any Flip-In Event or any Flip-Over Event. Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall, prior to the Distribution Date also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. Section 3. Issuance of Right Certificates. (a) Until the earlier of (i) the close of business on the tenth day after the Shares Acquisition Date or (ii) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person) after the date of the commencement by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) of, or of the first public announcement of the intention of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of Common Shares aggregating 20% or more of the then outstanding Common Shares (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Right Certificates) and not by separate Right Certificates, and (y) the right to receive Right Certificates will be transferable only in connection with the transfer of Common Shares. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first- class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing one Right for each Common Share so held, As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. (b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof. Until the Distribution Date (or the earlier of the Redemption Date or the Final Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding on the Record Date shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. (c) Certificates for Common Shares which become outstanding (including, without limitation, reacquired Common Shares referred to in the last sentence of this paragraph (c)) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entities the holder hereof to certain rights as set forth in a Rights Agreement between Carrington Laboratories, Inc. and Ameritrust Company National Association, dated as of September 19, 1991 (the "Rights Agreement", the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Carrington Laboratories, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate- Carrington Laboratories, Inc. will mall to the holder of this certificate a eon of the Rights Agreement without charge after receipt of a written request therefor at the principal place of business of Carrington Laboratories, Inc. Under certain circumstances, as set forth in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement) may become null and void, With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding, Section 4. Form of Right Certificates, The Right Certificates (and the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of one one-hundredths of a Preferred Share as shall be set forth therein at the price per one one-hundredth of a Preferred Share set forth therein (the "Purchase Price"), but the number of such one one-hundredths of a Preferred Share and the Purchase Price shall be subject to adjustment as provided herein. Section 5. Countersignature and Registration. (a) The Right Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President, its Chief Executive Officer, or any of its Vice Presidents, or its treasurer, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature, The Right Certificates shall be countersigned manually or by facsimile signature by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer, (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept. at its principal office, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer- Split-up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. (a) Subject to the provisions of section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11(a)(ii)(B) hereof or that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a Preferred Share (or, following a Flip-In Event. Common Shares, other securities, cash or other assets, as the case may be) as the Right certificate or Right Certificates entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the principal office or offices of the Rights Agent designated for such purpose. Thereupon the Rights Agent shall, subject to Section 14 hereof, countersign and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split-up, combination or exchange of Right Certificates. (b) Upon receipt by the Company arid the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request. reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will execute and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7 Exercise of Rights: Purchase Price: Expiration Date of Rights. (a) The registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each one one-hundredth of a Preferred Share (or other securities, cash or other assets, as the case may be) as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on October 15, 2001 (the "Final Expiration Date"). (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof. (b) The Purchase Price for each one one-hundredth of a Preferred Share (or other securities, cash or other assets, as the case may be) purchasable pursuant to the exercise of a Right shall initially be $80, and shall be subject to adjustment from time to time as provided in Section 11 or 13 hereof and shall be payable in lawful money of the United States of America an accordance with paragraph (c) below. (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per one one-hundredth of a Preferred Share (or other securities, cash or other assets, as the case may be) to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 10 hereof by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is .a transfer agent for such shares) certificates for the number of Preferred Shares to be purchased, and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) requisition from the depositary agent depositary receipts representing such number of one one-hundredths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent), and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder, and (iv) when appropriate, after receipt, deliver such cash to or upon the order of the registered holder of such Right Certificate. In the event that the Company is obligated to issue other securities (including stock of the Company), the Common Shares of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of section 14 hereof. Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split-up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, If surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificates purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Right Certificates, and in either such case shall deliver a certificate of destruction thereof or a certificate of cancellation thereof, as may be appropriate, to the Company. Section 9. Reservation and Availability of Capital Stock. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares (and, following the occurrence of a Triggering Event, out of its authorized and unissued Common Shares and/or other securities or out of its authorized and issued shares held in its treasury), the number of Preferred Shares (and following the occurrence of a Triggering Event, Common Shares and/or other securities) that, as provided in this Agreement including Section 11(a)(iii) hereof, will be sufficient to permit the exercise in full of all outstanding Rights. (b) So long as the Preferred Shares (and, following the occurrence of a Triggering Event, Common Shares and/or securities) issuable and deliverable upon the exercise of the Rights may be listed on any national securities exchange or inter-dealer quotation system of a registered national securities association on which the Preferred Shares may from time to time be listed, traded or quoted, the Company shall use reasonable efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange or quotation system upon official notice of issuance upon such exercise. (c) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all one one- hundredths of a Preferred Share (and, following the occurrence of a Triggering Event, Common Shares and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price). be duly and validly authorized and issued and fully paid and nonassessable. Section 10. Preferred Shares Record Date. Each person in whose name any certificate for Preferred Shares (or Common Shares and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares (or Common Shares and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made, provided, however that if the date of such surrender and payment is a date upon which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a shareholder of Preferred Shares of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section II, Adjustment of Purchase Price. Number and Kind of Shares or Number of Rights. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of Preferred Shares or shares of capital stock which, if such right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii)) hereof. (ii) (A) Subject to Sections 23 and 24 of this Agreement, in the event any Person becomes an Acquiring Person other than pursuant to a Flip-Over Event at any time after September 19, 1991 (a "Flip-In Event"), each holder of a Right shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Company (such number of Common Shares to be referred to hereinafter as the "Adjustment Shares") as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (y)) 50% of the then current per share market price of the Company's Common Shares (determined pursuant to Section 11(d) hereof) on the date of the occurrence of such event. In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Company shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights. (B) From and after the occurrence of a Flip-In Event, any Rights that are or were acquired or beneficially owned by any Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void, and any holder of such Rights shall thereafter have no right to exercise such Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Section 3 that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be canceled. (iii) In the event that the number of Common Shares which is authorized by the Company's Articles of Incorporation but not outstanding or not reserved for issuance for purposes other than upon exercise of the Rights is not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company shall, to the extent permitted by applicable law and regulation: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value") over (2) the Purchase Price (such excess to be referred to hereinafter as the "Spread"), and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, upon payment of the applicable Purchase Price, (I) cash, (2) a reduction in the Purchase Price, (3) Common Shares or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock which the Board of Directors has deemed to have the same value as the Common Shares (such shares of preferred stock, "common share equivalents"), (4) debt securities of the Company. (5) other assets or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors based upon the advice of an investment banking firm selected by the Board of Directors; provided, however, if the Company shall not have made adequate provisions to deliver value pursuant to clause above within 30 days following the first occurrence of a Flip-In Event (the "Flip-in Trigger Date", then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Common Shares (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Board of Directors determines in good faith that it is likely that sufficient additional Common Shares could be authorized for issuance upon exercise in full of the Rights, the 30-day period set forth above may be extended to the extent necessary, but not more than 90 days after the Flip-In Trigger Date, in order that the Company may seek shareholder approval for the authorization of such additional shares (such period, as it may be extended, the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11 (a)(iii), the Company (x) shall provide that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of the Common Shares shall be the current per share market price (as determined pursuant to Section 11(d) hereof) of the Common Shares on the Flip-In Trigger Date, and the value of any common share equivalent shall be deemed to have the same value as the Common Shares on such date, (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares ("equivalent preferred shares")) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares (as defined in Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided however that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants ate not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Preferred Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current per share market price of the Preferred Shares; provided, however that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder, other than computations made pursuant to Section 11(a)(iii) hereof, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)(i) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date, and for purposes of computations made pursuant to Section 11(a)(iii) hereof, the "current per share market price" of a Security on any date shall be deemed to be the average of the daily closing prices per share of such Security for the ten consecutive Trading Days immediately following such date; provided, however,. that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into shares of such Security (other than the Rights), or (B) any subdivision, combination or reclassification of such Security, and the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification shall not have occurred prior to the commencement of the requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth above, then, and in each such case, the "current per share market price" shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over- the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) For the purpose of any computation hereunder, the "current per share market price" of the Preferred Shares shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be the current per share market price of the Common Shares as determined pursuant to Section 11(d)i) (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by 100. If neither the Common Shares nor the Preferred Shares are publicly held or so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. For all purposes of this Agreement, the "current per share market price" of 1/100 of a Preferred Share shall be equal to the "current per share market price" of one Preferred Share divided by 100. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one-millionth of a Preferred Share or one ten- thousandth of any other share or security, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If as a result of an adjustment made pursuant to Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Companyother than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c), inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one one-hundredths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one one- hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one- hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment. or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned In the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-hundredths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-hundredths of a Preferred Share which were expressed in the initial Right Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-hundredth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided however. that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares or securities upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Shares, (ii) issuance wholly for cash of any Preferred Shares at less than the current market price, (iii) issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, (iv) stock dividends or (v) issuance of rights, options or warrants referred to hereinabove in this Section 11, hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such shareholders. (n) Anything herein to the contrary notwithstanding, in the event that at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case (A) the number of one one- hundredths of a Preferred Share purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of one one-hundredths of a Preferred Share so purchasable immediately prior to such event by a fraction, the numerator of which is the number of Common Shares outstanding immediately before such event and the denominator of which is the number of Common Shares outstanding immediately after such event, and (B) each Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights which each Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 or Section 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares or the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate (or, if prior to the Distribution Date, to each holder of a Certificate representing Common Shares) in accordance with Section 25 hereof. Section 13. Consolidation. Merger or Sale or Transfer of Assets or Earning Power. In the event that at any time on or after the Distribution Date, directly or indirectly, (a) the Company shall consolidate with, or merge with and into, any other Person other than a Subsidiary of the Company, (b) any Person other than a Subsidiary of the Company shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (c) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person other than the Company or one or more of its wholly-owned Subsidiaries (any such event described in clauses (a), (b) or (c) being referred to herein as a "Flip-Over Event"), then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one- hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one- hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of such other Person (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer. all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares thereafter deliverable upon the exercise of the Rights. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. Section 14 Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way. or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may. at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of one one-hundredth of a Preferred Share, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For the purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of such exercise. (c) Following the occurrence of a Triggering Event, the Company shall not be required to issue fractions of Common Shares upon exercise of the Rights or to distribute certificates which evidence fractional Common Shares. In lieu of fractional Common Shares the Company may pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Common Share. For purposes of this Section 14(c), the current market value of one Common Share shall be the closing price of one Common Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise. (d) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit. enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of. his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Agreement. Section 16. Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; (c) the Company and the Rights Agent may deem and treat the person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligations; provided, however, the Company must use reasonable efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 17. Right Certificate Holder Not Deemed a Shareholder. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. Section 18. Concerning, the Rights Agent. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnity the Rights Agent for, and to hold it harmless against, any loss, liability or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. (b) The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in section 20 hereof. Section 19. Merger or Consolidation or Change of Name of Rights Agent (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust powers of the Rights Agent or any successor Rights Agent, shall he the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case, at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or In the name of the successor Rights Agent; and in all such uses such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or willful misconduct, (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11(a)(ii)(B) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11. 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable, (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act. default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. Section 21. Change of Rights Agent. the Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of Texas (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of Texas in good standing), having an office in the State of Texas, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares or Preferred Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement Section 23 Redemption. (a) The Board of Directors of the Company may at its option, at any time prior to the close of business on the seventh day following a Shares Acquisition Date, redeem all but not less than all the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any stock spilt, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights by the Board of Directors may be made effective at such time. on such basis and with such conditions as the Board of Directors in its sole discretion may establish. Notwithstanding anything in this Agreement to the contrary, the Rights shall not be exercisable after the occurrence of a Flip-In Event until such time as the Company's right of redemption hereunder has expired. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to paragraph (a) of this Section 23. and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price, The Company shall promptly give public notice of any such redemption, provided however that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights, the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. Section 24. Exchange. (a) The Board of Directors of the Company may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 11(a)(ii)(B) hereof) for Common Shares at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 1l(a)(ii)(B) hereof) held by each holder of Rights. (c) In any exchange pursuant to this Section 24. the Company, at its option, may substitute Preferred Shares (or equivalent preferred shares, as such term is defined in Section 11(b) hereof) for Common Shares exchangeable for Rights, at the initial rate of one one-hundredth of a Preferred Share (or equivalent preferred share) for each Common Share, as appropriately adjusted to reflect adjustments in the voting rights of the Preferred Shares pursuant to the terms thereof, so that the fraction of a Preferred Share delivered in lieu of each Common Share shall have the same voting rights as one Common Share. (d) In the event that the number of Common or Preferred Shares which are authorized by the Company's Articles of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company may, at its option, take all such action as may be necessary to authorize additional Common or Preferred Shares. (e) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Common Shares would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this paragraph (e), the current market value of a whole Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section l1(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24, which date shall be fixed by or in the manner determined by the Board of Directors of the Company. Section 25. Notice of Certain Events. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to each holder of a Right Certificate, In accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend or distribution of rights or warrants. or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier. (b) In case a Flip-In Event shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 1l(a)(ii) hereof. Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Carrington Laboratories, Inc. 2001 Walnut Hill Lane Irving, Texas 75038 Attention: Corporate Secretary Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first- class mail, postage prepaid. addressed (until another address is filed in writing with the Company) as follows: Ameritrust Company National Association 1201 Elm Street Dallas, Texas 75270 Attention: Corporate Trust Department Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. Supplements and Amendments. The Company may from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions with respect to the Rights which the Company may deem necessary or desirable, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; provided, however that from and after such time as any Person becomes an Acquiring Person, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights. Without limiting the foregoing, the Company may at any time prior to such time as any Person becomes an Acquiring Person amend this Agreement to lower the thresholds set forth in Sections 1(a) and 3(a) to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding Common Shares then known by the Company to be beneficially owned by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan) and (ii) 10%. Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right. remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares). Section 30. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 31. GOVERNING LAW. THIS AGREEMENT AND EACH RIGHT CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF TEXAS AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SUCH STATE APPLICABLE TO CONTRACT TO BE MADE AND PERFORMED ENTIRELY WITHIN SUCH STATE. Section 32. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 33. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. CARRINGTON LABORATORIES, INC Attest: By: /s/ By: /s/ ----------------------- ------------------------ Title: Executive Vice President Title: President and Chief and Secretary Executive Officer Name: Dennis F- Willson Name: Karl II. Meister AMERITRUST COMPANY NATIONAL ASSOCIATION Attest: By: /s/ By: /s/ Title: Vice President Title: Vice President Name: Jill Wessel Name: Mark Asbury Exhibit A STATEMENT OF RESOLUTION ESTABLISHING AND DESIGNATING SERIES D PREFERRED STOCK of CARRINGTON LABORATORIES, INC. To the Secretary of State of the State of Texas: Pursuant to the provisions of Article 2.13 of the Texas Business Corporation Act, and pursuant to Article Four of its Articles of Incorporation, the undersigned, Carrington Laboratories, Inc., a corporation organized and existing under the Texas Business Corporation Act, as amended (the "Company"), hereby submits the following statement for the purpose of establishing and designating 300,000 shares of its Preferred Stock, par value $100 per share, as "Series D Preferred Stock" (the Series D Shares) and fixing and determining the relative rights thereof: 1. The name of the corporation is Carrington Laboratories. Inc. 2, Attached hereto as Annex I is a true and correct copy of the resolution establishing and designating the Series 1) Shares and fixing and determining the relative rights and preferences thereof, 3. Such resolution was duly adopted by the Board of Directors of the Company on September 19, 1991, Dated: September 19. 1991. CARRINGTON LABORATORIES, INC. By:________________ Dennis F. Willson, Executive Vice President and Secretary Annex I RESOLUTION OF THE BOARD OF DIRECTORS OF CARRINGTON LABORATORIES, INC. RESOLVED, that pursuant to the authority vested in the Board of Directors of the Company in accordance with provisions of its Articles of Incorporation, (a) the Board of Directors does hereby create, authorize and provide for the issuance, upon the exercise of the Rights, of a series Of Preferred Stock of the Company to be designated "Series D Preferred Stock" (hereinafter referred to as the Series I) "Preferred Stock"), initially consisting of 300,000 shares, and (b) the Board of Directors does also hereby (to the extent that the designations, preferences, limitations and relative rights (collectively, the "Terms") of the Series I) Preferred Stock are not stated and expressed in the Articles of Incorporation and to the extent that if such Terms are stated or expressed in the Articles of Incorporation but the Articles of Incorporation permit the Board of Directors to otherwise fix and state such Terms) fix and state such designations, preferences, limitations and relative rights thereof, as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series I) Preferred Stock", par value $100 per share (the "Series D Preferred Stock"), and the number of shares constituting the Series I) Preferred Stock shall be 300,000. Notwithstanding the provisions of Section 9 hereof, such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series D Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Series D Preferred Stock Section 2. Dividends, Subject to the prior and superior fights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series D Preferred Stock with respect to dividends, the holders of Series D Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable in ash, stock or otherwise. Section 3. Voting Rights The holders of shares of Series I) Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series D Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Company- In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or erect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series D Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event (B) Except as otherwise provided herein, in any other Statement of Resolution creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series b Preferred Stock and the holders of shares of Common Stock and any other capital stock of theCompany having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Company. (C) Except as set forth herein, or as otherwise provided by law, holders of Series D Preferred Stock shall have no special voting rights, and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Reacquired Shares. Any shares of Series D Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as pan of a new series of Preferred Stock subject. to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other Statement of Resolution creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 5. Liquidation. Dissolution or Winding Up Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding tip) to the Series I) Preferred Stock unless, prior thereto, the holders of shares of Series fl Preferred Stock shall have received $100 per share. provided that the holders of shares of Series I) Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the series I) Preferred Stock, except distributions made ratably on the Series D Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such ease the aggregate amount to which holders of shares of Series V Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding Immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event Section 6 Consolidation. Merger, etc. In case the Company shall enter into any consolidation. merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series P Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) Into a greater or lesser number of shares of Common Stock, then in each such ease the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series P Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event Section 7. No Redemption. The shares of Series P Preferred Stock shall not be redeemable. Section 8. Rank. The Series P Preferred Stock shall rank junior to all other series of the Company's Preferred Stock as to payment of dividends and the distribution of assets on liquidation or otherwise, unless the terms of any such series shall provide otherwise. The Series P Preferred Stock shall rank senior to the Company's Common Stock as to the distribution of assets on liquidation or otherwise. Section 9, Amendment. The Articles of Incorporation of the Company shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series 1) Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series 1) Preferred Stock, voting together as a single class. Section 10. Fractional Shares. Series D Preferred Stock may be issued in fractions of a share which shall entitle the holder thereof, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all of the rights of holders of shares of Series D Preferred Stock. Exhibit B Form of Right Certificate Certificate No. R- ____ Rights NOT EXERCISABLE AFTER OCTOBER 15, 2001 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. CARRINGTON LABORATORIES, INC. Right Certificate This certifies that ______________ , or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms. provisions and conditions of the Rights Agreement, dated as of September 19, 1991 (the "Rights Agreement"), between Carrington Laboratories, Inc., a Texas corporation (the "Company"), and Ameritrust Company National Association (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to S:00 P.M., Dallas, Texas time, on October 15, 2001 at the principal office or offices of the Rights Agent designated for such purpose, or at the designated office of its successor as Rights Agent, one one-hundredth of a fully paid non-assessable share of Series D Preferred Stock, par value $100 per share (the "Preferred Shares"), of the Company, at a purchase price of $80 per one one-hundredth of a Preferred Share (the Purchase Price), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-hundredths of a Preferred Share which may be purchased upon exercise hereof), and the Purchase Price set forth above, are the number and Purchase Price as of ___________. based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of one one-hundredths of a Preferred Share which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned offices of the Rights Agent, This Right Certificate, with or without other Right Certificates, upon surrender at the principal office or office of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in pan, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (0 may be redeemed by the Company at a redemption price of 3,01 per Right or (ii) may be exchanged in whole or in pan for Preferred Shares or shares of the Company/s Common Stock, par value 50.01 per share. No fractional Preferred Shares will be issued upon The exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time he issuable on the exercise hereof nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any Corporate action, or to receive notice Of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent, WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of ______________ Attest: CARRINGTON LABORATORIES. INC. ___________________________ By:__________________________ Name: _____________________ Name: _______________________ Title: ____________________ Title:_______________________ Countersigned: AMERITRUST COMPANY NATIONAL ASSOCIATION By: ______________________ Name:__________________ Title:_________________ [Form of Reverse Side of Right Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer Rights evidenced by this Right Certificate.) FOR VALUE RECEIVED _________________ hereby sells, assigns and transfers unto _____________________________________________________ (Please print name and address of transferee) ____________________________________________________________________ _____________________________ of the Rights evidenced by this Right Certificate, together with all right title and interest therein, and does hereby irrevocably constitute and appoint ___________________ Attorney, to transfer such Rights on the books of the within-named Company, with full power of substitution. Dated: _________________ _________________________________________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States. The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). _________________________________________ Signature [Form of Reverse Side of Right Certificate -- continued] FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights represented by the Right Certificate.) To CARRINGTON LABORATORIES, INC. The undersigned hereby irrevocably elects to exercise __________________________ Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of: Please insert social security or other indentifying number _______________________________________________________________ (Please print name and address) _______________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number _______________________________________________________________ (Please print name and address) _______________________________________________________________ Dated: ________________ ______________________________________ Signature Signature Guaranteed: Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers. Inc., or a commercial bank or trust company having an office or correspondent in the United States. _______________________________________________________________ The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement). ______________________________________ Signature _______________________________________________________________ [Form of Reverse Side of Right Certificate -- continued] NOTICE The signature in the Form of Assignment or Form of Election to Purchase, as the case may be, must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will not be honored. EXHIBIT C SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES On September 19, 1991, the Board of Directors of Carrington Laboratories, Inc. (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, par value $0.01 per share (the "Common Shares"), of the Company. the dividend is payable on October 15, 1991 (the "Record Date") to the shareholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series D Preferred Stock, par value $100 per share (the "Preferred Shares"), of the Company at a price of $80 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Ameritrust Company National Association; as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 20% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of the hoard of Directors prior to such time as any person or group of affiliated persons becomes all Acquiring Person) following the commencement of. or announcement of an intention to make. * tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Common Shares (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate. The Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Share certificates issued after the Record Date upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption Or expiration of the Rights), the surrender for transfer of any certificates for Common Shares outstanding as of the Record Date, even without such notation, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution bate, and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire On October 15, 2001 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (I) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then- current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Shares) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of one one- hundredths of a Preferred Share issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Shares or a stock dividend on the Common Shares payable in Common Shares or subdivisions, consolidations or combinations of the Common Shares occurring, in any such case, prior to the Distribution Date. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to receive a dividend payable in cash, stock or otherwise when, as and if declared by the Board of Directors. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per Common Share. each Preferred Share Will have 100 votes, voting together with the Common Shares. Finally, in the event of any merger, consolidation Or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 100 times. the amount received per Common Share, These rights are protected by customary antidilution provisions. Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold (a "Flip-Over Event"), proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person other than pursuant to a Flip-Over Event, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares (or, in certain circumstances, cash, property or other securities of the Company) having a market value of two times, the exercise price of the Right. At any time after any Person becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding Common Shares, the hoard or Directors of the Company may exchange the Rights (other than Rights owned by such person or group which will have become void). in whole or in part, at an exchange ratio of one Common Share, or one one- hundredth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Preferred Shares will be issued (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts) and, in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Shares on the last trading day prior to the date of exercise. At any time prior to the dose of business on the Seventh day following the first date of public announcement that a person or group became an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the "Redemption Print). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate, and the only right of the holders of Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to tower certain thresholds described above to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding Common Shares then known to the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%, except that from and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. dated September ___, 1991. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. EX-10.3 6 Exhibit 10.3 CONTRACT RESEARCH AGREEMENT This AGREEMENT made and entered into this 8th day of August, 1991, by and between CARRINGTON LABORATORIES, INC., a corporation organized and existing under the laws of the State of Texas (hereinafter referred to as "CARRINGTON"), and the TEXAS AGRICULTURE EXPERIMENTAL STATION (hereinafter referred to as "TAES"), an agency of the State of Texas, acting hereunder as agent for the Texas A&M University System (hereinafter referred to as "TAMUS"), WITNESSETH: WHEREAS, CARRINGTON is engaged in pharmaceutical research and wishes to enter into a long-term relationship with TAES to conduct a Research Program (as hereinafter defined); and WHEREAS, TAES is willing and able and has the facilities to assist CARRINGTON with this Research Program: NOW, THEREFORE, the parties hereby agree as follows: ARTICLE I: SCOPE 1.1 RESEARCH PROGRAM: The purpose of this AGREEMENT is to conduct the research program set out in Appendix A (the "Research Program"). 1.2 ANNUAL BUDGETS: The Research Program shall be divided into annual budgets which shall define in detail the work to be performed under the Research Program during that year, the specific milestones for such work and the amounts authorized to be spent (hereinafter referred to as the "Annual Budgets") and which shall be defined and agreed upon by the parties each year while this AGREEMENT remains in effect. The Annual Budgets shall run from December 1 of each year through November 30 of the immediately following year, corresponding to CARRINGTON's fiscal year, and shall be finalized and agreed upon by the parties each October during the term of this AGREEMENT. Once agreed, each such Annual Budget shall become a part of this AGREEMENT as Appendix B. 1.3 BEST EFFORTS: TAES agrees to use its best efforts to achieve the objectives of the Research Program in accordance with the Annual Budgets agreed to by the parties. ARTICLE II: TERM The term of this AGREEMENT shall begin July 1, 1991 and shall end on November 30, 1996, unless sooner terminated in accordance with the provisions of Article XII below. During the period from July 1, 1991 through November 30, 1991 the parties shall collaborate on the preparation of the first Annual Budget for the performance of the Research Program. ARTICLE III: CONSIDERATION AND PAYMENT PAYMENT FOR WORK: In consideration for TAES' performance of the Research Program, CARRINGTON shall pay TAES an amount agreed upon annually in connection with the negotiation of the Annual Budget. Notwithstanding this negotiation, the parties agree that the amount established under each Annual Budget shall not be less than $200,000, which is the minimum required for TAES to maintain a team of researchers dedicated to the Research Program. ARTICLE IV: PROJECT DIRECTION 4.1 SCIENTIFIC DIRECTION: TAES' performance of the Research Program shall be under the direction of an individual selected by CARRINGTON and agreed upon by TAES as Principal Investigator. Such individual shall be and shall remain an employee of TAES. The Principal Investigator shall serve at the discretion of both parties and shall exercise technical direction over the Research Program within the scope of each Annual Budget. 4.2 ADMINISTRATIVE DIRECTION: All matters affecting the administration of this AGREEMENT or the interpretation hereof shall be referred to an individual selected by CARRINGTON and agreed upon by TAES as Contract Administrator. The Contract Administrator shall serve at the discretion of both parties and shall have authority to make changes in the scope of work, period of performance and report requirements for the Research Program, within the limits of each Annual Budget. Notwithstanding his broad authority under this Section 4.2, nothing herein shall be construed to permit the Contract Administrator unilaterally to amend or modify any of the terms of this AGREEMENT or to exceed the spending limits established under an Annual Budget. 4.3 KEY INVESTIGATORS: The parties agree that the work of Ian Tizard, D.V.M., Ph.D., David Busbee, Ph.D. and Gerald Bratton, D.V.M., Ph.D. is crucial to the performance of the Research Program. The parties agree that CARRINGTON shall have the right to terminate this AGREEMENT upon 90 days' notice if at any time any of these individuals ceases to be connected with TAES as an employee. ARTICLE V: REPORTS 5.1 FREQUENCY OF REPORTS: TAES shall provide to CARRINGTON: a) interim reports as defined in the Annual Budgets; b) Any reports or memoranda pertaining to TAES' internal progress any time requested CARRINGTON; c) Copies of all research notebook pages or their equivalent ("Notebook") while the Research Program is in progress at any time requested by CARRINGTON; and d) A final report within 30 days of the completion of the Research Program. 5.2 PROCEDURE FOR REPORTING: All TAES personnel working on the Research Program shall deliver all reports, memoranda or Notebook pages required under Section 5.1 above to the Principal Investigator. The Principal Investigator shall copy the materials and transmit them on a timely basis to CARRINGTON. The Principal Investigator is the only person authorized to copy any material provided by CARRINGTON or any material generated by TAES in connection with the Research Program. ARTICLE VI: INDEPENDENT CONTRACTOR In the performance of its work hereunder, TAES is acting as an independent contractor and not as a partner, agent or employee of CARRINGTON. ARTICLE VII: PUBLICATION 7.1 RIGHT TO PUBLISH: Subject to the provisions of this Article VII, TAES shall have the right to publish results obtained under the Research Program. 7.2 PROCEDURE: Not less than 30 days prior to submission for publication, TAES shall provide CARRINGTON a copy of any paper it proposes to publish. CARRINGTON shall have the right to require TAES to delay submission for an additional period of up to 120 days from the time TAES requests publication order for CARRINGTON to secure patent or other intellectual property rights arising from or described in the paper. In addition CARRINGT0N shall have the right to prevent such publication where CARRINGTON claims in good faith that the publication would compromise its ability to maintain these results as a trade secret. 7.3 OTHER MATTERS: TAES agrees to give good faith consideration to any comments or suggestions offered by CARRINGTON in regard to any paper proposed for publication, In the event TAES decides not to publish any results obtained under the Research Program, CARRINGTON shall have the right to publish them. TAES' failure to submit such results for publication within one year following completion of the study in question shall he deemed conclusive evidence of its decision not to publish under this Section 1.3. ARTICLE VIII: INTELLECTUAL PROPERTY RIGHTS All data, inventions, discoveries, trademarks, copyrights, patent rights and other intellectual property rights (the "Intellectual Property") arising under the Research Program, shall be the property of TAMUS. TAES hereby agrees to have each of its employees who work on the Research Program execute an Employee Confidentiality and Invention Agreement substantially in the form set out in Appendix C. CARRINGTON shall have the exclusive right to use such Intellectual Property, and in those cases where such Intellectual Property is perfected by the grant of an enforceable patent, shall pay TAES a reasonable royalty to he negotiated between the parties based upon the following factors: i) The value of the intellectual Property to CARRINGTON; ii) The relative contribution of each of the parties to the discovery and/or development of the Intellectual Property; iii) The investment by CARRINGTON in the Research Program: and iv) Payments made by CARRINGT0N to TAES under the Research Program. TAES shall initiate and pay for all efforts to patent the intellectual Property and for the defense of any patents issued. CARRINGTON shall cooperate with such efforts and shall have the option, at its own cost and in its own name, to pursue patents for Intellectual Property and the defense of such patents in the event TAES declines to act in either regard within a reasonable period of time. ARTICLE IX: SECURITY Information and data supplied by CARRINGTON or generated by TAES under the Research Program constitute valuable trade secrets whose confidentiality TAES undertakes to protect in accordance with the procedures established in this Article. The Principal investigator shall assign to each TAES employee performing work on the Research Program a Notebook or Notebooks for each separate project under the Research Program. Each employee shall verify, in writing, receipt of the Notebook or Notebooks. Each employee shall keep the Notebook or Notebooks under lock and key when they are not being utilized and shall not remove them from the premises where they are stored without the approval of the Principal Investigator. The Principal Investigator will make copies of the pages from the Notebooks for CARRINGTON as provided in Article V. ARTICLE X: CONFIDENTIAL INFORMATION 10.1 TYPES OF INFORMATION: Information used or transmitted hereunder by the parties shall be classified as "administrative" or "confidential" Administrative information pertains to the organizational or day-to-day instructional aspects of the Research Program or an Annual Budget. Confidential information means information containing trade secrets or any information arising out of the Research Program that generally is not available to the public or known in the industry. 10.2 TRANSMISSION OF INFORMATION: Administrative information may be transmitted verbally or in writing. Confidential information must be transmitted in writing by registered or certified mail, by courier or as otherwise directed by CARRINGTON, postage prepaid, to the addresses of the parties set out in Article XIII, 10.3 Notebooks: All data generated under the Research Program shall he recorded in accordance with Good Laboratory Practices if required for government regulatory approval purposes. All work performed by TAES shall be kept in Notebooks provided by CARRINGTON. Entries shall be made daily, in the English language, dated and promptly corroborated, witnessed and understood by two responsible persons. The author may be one of the witnesses. Upon completion of the Research Program. if requested by CARRINGTON, TAES shall deliver all original Notebooks to CARRINGTON. TAES agrees that CARRINGTON is and shall remain the owner of all Notebooks and the research data contained therein. 10.4 OBLIGATlON TO MAINTAIN CONFIDENTIALITY: TAES shall not at anytime disclose confidential information to third parties or release such information for publication without CARRINGTON's prior consent in writing. TAES shall require all outside parties contracted to perform work under this AGREEMENT under TAES' supervision and who have access to confidential information to execute a confidential disclosure agreement substantially in the form set out in Appendix D. An executed copy of all such agreements shall be given by TAES to CARRINGTON. 10.5 LOSS OF CONFIDENTIALITY: TAES shall not be required to maintain the confidentiality of any information: a) that was already in TAES' possession as evidenced by existing documentation prior to receipt of confidential information from CARRINGTON: b) that appears in issued patents or printed publications otherwise than by reason of a default by TAES or any of its employees or contractors under this AGREEMENT or any agreement entered into pursuant to Article VIII or Section 10.4 hereof: c) that is or hereafter becomes generally available to the public on a non-confidential basis through no fault of TAES; or d) that is disclosed to TAES by third parties having the right to make such disclosures. ARTICLE XI: TERMINATION Either party may terminate this AGREEMENT at the end of the fiscal year covered by any Annual Budget by giving notice to the other party not less than 90 days prior to the end of the fiscal year upon which such Annual Budget is based. Such termination shall not relieve CARRINGTON from its obligation to pay for all services, orders, materials or facilities committed in good faith prior to such termination, nor shall such termination relieve TAES of its obligation to finish work to which it committed under an Annual Budget or of its obligations and the restrictions established in Articles V (Reports), VII (Publication), VIII (Intellectual Property Rights), IX (Security) and, (Confidential Information), all of which shall survive the termination of this AGREEMENT. ARTICLE XII: NOTICE Notices hereunder shall be deemed to have been properly given when sent by registered or certified mail, postage prepaid and addressed to the appropriate party at its address set forth below or such other address as such party shall have established by written notice to the other: If to CARRINGTON: 2001 Walnut Hill Lane Irving, TX 75038 Attn: President with a copy to: 1300 E. Rochelle Irving, TX 75062 Attn: Vice President. R&D If to TAES: Texas Agriculture Experimental Station P.0. Box 3578 College Station, TX 71843 ARTICLE XIII: MISCELLANEOUS 13.1 SOLE AGREEMENT: This AGREEMENT constitutes the sole agreement between the parties with respect to the subject matter hereof and supersedes any prior understanding, whether written or oral, with respect thereto. 13.2 AMENDMENTS: No provision of this AGREEMENT may be modified, waived or amended except by an instrument in writing signed by the party against which the change is sought to be enforced. Any such modification, waiver or amendment must be signed by the President or by the Executive Vice President in order to bind CARRINGTON. 13.3 NO ASSIGNABILITY: This AGREEMENT may not be assigned by either party without the written approval of the other party. 13.4 GOVERNING LAW: This AGREEMENT shall be governed by and construed in accordance with the laws of the State of Texas. 13.5 WAIVER: No delay or omission of CARRINGTON to exercise any right upon the occurrence of any default hereunder shall impair any such right or be construed as a waiver of such right or an acquiescence to such default. 13.6 AUTHORITY: Each person signing this AGREEMENT represents that he has full and complete authority to execute this AGREEMENT on behalf of the organization he is representing. IN WITNESS WHEREOF, the parties have executed this AGREEMENT in multiple copies on the day and date first written above. CARRINGTON LABORATORIES, INC. TEXAS AGRICULTURE EXPERIMENTAL STATION BY: /s/ BY: /s/ --------------- ---------------------------- KARL H. MEISIER TITLE: Robert G. Merrifield, PRESIDENT Deputy Direct APPENDIX A THE RESEARCH PROGRAM The Research Program consists of research in the form of testing, studies and publications consistent with the following broad objectives: 1. Testing of CARRINGTON Wound and Skin Care Division products. 2. Testing of CARRINGTON's experimental drug acemannan and its derivatives. 3. Investigation into the mechanism of action of polydispersed acemannan. 4. In vitro testing of the efficacy of molecular weight fractions of polydispersed acemannan. 5. In vitro testing of the efficacy of derivatives of molecular weight fractions of polydispersed acemannan. 6. Animal efficacy testing of molecular weight fractions of acemannnan. 7. Animal efficacy testing of derivatives of molecular weight fractions of acemannan. 8. Publication of papers demonstrating the superiority of CARRINGTON products. These general objectives shall be applied to the planning and approval of Annual Budgets. The research Program and these objectives may not be modified except upon the written approval of both parties. APPENDIX B ANNUAL BUDGET [TO BE NEGOTIATED ANNUALLY AND APPENDED HERETO IN ACCORDANCE WITH SECTION 12] APPENDIX C Employee's Confidentiality and Invention Agreement This agreement is made and entered into this ___ day of ________, 19_, by and between the Texas Agriculture Experimental Station ("TAES") and (Name of Emp1oyee) ("you"). In consideration of your, employment or continued employment by TAES, and of salary, wages, bonuses or other compensation to be paid by TABS to you, we agree as follows: As used in this agreement, the following definitions apply: Confidential Information means information disclosed to you or known to you as a result of your employment by TAES. where such information is not generally known to the pharmaceutical trade or industry, concerning products, processes, machines, services, and operations being developed by TAES in connection with a Contract Research Agreement (the "Contract Research Agreement") with Carrington Laboratories, Inc. ("Carrington"). Confidential Information includes, but is not limited to, research, development, manufacturing, purchasing, finance, data processing, engineering, marketing, merchandising and selling, and corresponding information about the products, processes, machines, services and operations of Carrington, as well as research projects, findings, or reports, business plans, formulas, processes, methods of manufacture, sales, costs, pricing data, new drug, cosmetic or device data and lists of suppliers and customers. Invention means any discovery, improvement, process, product, or device that is (a) conceived, discovered or made by you, either alone or with others, during or after the term of your employment with TAES; (b) based on Confidential Information; and (c) (i) related to the actual or anticipated business or activities of Carrington, (ii) related to Carrington's actual or anticipated research development, (iii) suggested by or resulting from any tasks assigned to you or work performed by you for or on behalf of TAES in connection with the Contract Research Agreement, or (iv) conceived, discovered or made with the use of Carrington's facilities, materials or personnel. 1. Disclosure of Confidential Information You acknowledge that Confidential Information is a valuable asset of TAES and Carrington and that unauthorized disclosure or utilization thereof could hurt their interests. Therefore, both during and after the term of your employment by TAES, you agree not to disclose to any person or organization, other than TAES and Carrington, or to utilize for your benefit or profit or the benefit or profit of any person or organization other than TAES and Carrington, any Confidential Information, except as may be authorized in writing by TAES. 2. Ownership of Inventions The following shall be the property of TAES exclusively: (a) Any Invention conceived, discovered or made by you, whether individually or with others, whether patentable or not: (b) Any patent, patent application or record relating to any Invention. 3. Disclosure of Inventions You will promptly disclose to TAES and keep adequate records on any Invention you make. 4. Obtaining and Enforcement of Patents Without further consideration from or charge to TAES, whenever requested to do so by TAES, you will give all testimony, execute any applications, assignments or other instruments, and in general do all lawful things reasonably requested of you by TAES to enable TAES to obtain, maintain and enforce protection of any intellectual property rights it may have in any Invention for and in the name of TAES or its nominee in all countries of the world. These obligations shall continue beyond the termination of your employment with TAES. TAES will pay any necessary expenses in connection with these matters, 5. Disclaimer You represent that you are under no obligation to any former employer or third party which is in any way inconsistent with this agreement or which imposes any restrictions on your activities with TAES, except as described in any attachment to this agreement. 6. Confidential Information of Prior Emplovers You will not disclose to TAES or induce TAES to use any secret or confidential information or material belonging to others, including former employers, if any. In case of doubt with respect to your obligations towards a prior employer, you should consult with TAES' General Counsel or designee. 7. Removal and Return of TAES Property You shall not keep elsewhere than on TAES premises, nor remove therefrom, any property of TAES or Carrington, except and only so long as may be required for the performance of your duties for TAES. Upon termination of employment with TAES, you shall turn over to a designated individual employed by TAES all property then in your possession or custody and belonging to TAES or Carrington. You shall not retain any copies or reproductions of correspondence, memoranda, reports, notebooks, drawings, photographs. or other documents relating in any way to the affairs of TABS or Carrington which are entrusted to you at any time during your employment with TABS. 8. Miscellaneous Provisions (a) Any failure on the part of TAES to insist upon the performance of this agreement, or any part thereof, will not constitute a waiver of any right under this agreement. (b) In the event any provision, or any portion of any provision of this agreement should be declared invalid or unenforceable for any reason by a court of competent jurisdiction, such provision or portion thereof shall be considered separate and apart from the remainder of this agreement, which shall remain in full force and effect. (c) This Agreement shall be binding upon and inure to the benefit of the heirs. executors, administrators, successors and assigns of the parties. (d) This Agreement shall be for and inure to the benefit of Carrington Laboratories. Inc. and its successors and assigns as a third party beneficiary. (e) This agreement shall be governed by and construed according to the laws of the State of Texas. (f) A breach or default by you of the provisions of this Agreement shall cause TAES or Carrington to suffer irreparable harm, and in such event, TAES or Carrington shall be entitled, as a matter of right, to a restraining order or other injunctive relief from any court of competent jurisdiction, restraining any further violation thereof by you, and those in active concert or participation with you. The right to a restraining order or other injunctive relief shall be supplemental to any other right or remedy TAES or Carrington may have, including, without limitation, the right to recover damages for the breach or default of any of the terms of this Agreement. IN WITNESS WHEREOF the parties have hereunto set their hands this ________ day _________of 19__. WITNESSES: (Your Name) TEXAS AGRICULTURE EXPERIMENTAL ----------------- STATION BY /s/ ----------------- --------------------------- APPENDIX D CONFIDENTIAL DISCLOSURE AGREEMENT THIS AGREEMENT, made effective as of this __ day of ______, 199_, by and between TEXAS AGRICULTURE EXPERIMENTAL STATION, an agency of the State of Texas with offices located in College Station, Texas 77843 (hereinafter referred to as "TAES") and [Name and address of Contractor] ("CONTRACTOR") (TAES and CONTRACTOR being hereinafter referred to singularly as a "PARTY" and collectively as the "PARTIES"), WITNESSETH: WHEREAS, TAES is performing work under a Contract Research Agreement with Carrington Laboratories, Inc. for the development of proprietary technology, know-how, data, info1 'nation and patents regarding a novel immune response modifier known under the generic name acemannan (hereinafter referred to as the "COMPOUND") and regarding a line of wound and skin care products (hereinafter referred to as the "PRODUCTS"), which technology, know-how, data, information and parents are hereinafter collectively referred to as the "INFORMATION"; WHEREAS, CONTRACTOR desires to receive INFORMATION and tangible objects embodying said INFORMATION (said tangible objects collectively referred to hereafter as 'MATERIAL') in order to perform work for TAES in regard to the COMPOUND and/or the PRODUCTS; and WHEREAS, TAES has the right and is willing to provide CONTRACTOR with the INFORMATION and the MATERLAL as may be necessary to permit CONTRACTOR to perform such work; NOW THEREFORE, in consideration of the covenants and conditions set forth below, TAES and COTRACTOR do hereby agree as follows: 1. TAES will provide CONTRACTOR with the INFORMATION and MATERIAL in order for CONTRACTOR to Perform its work. 2. CONTRACTOR shall hold in confidence the INFORMATION and MATERIAL provided to it by TAES under this AGREEMENT. This obligation shall continue in full force and effect unless (and only to the extent) waived by TAES in writing. 3. CONTRACTOR shall not use the INFORMATION or MATERIAL which it is required to hold in confidence hereunder for any purpose other than performing work for TAES. 4. CONTRACTOR agrees to limit disclosure of the INFORMATION and MATERIAL received from TAES hereunder to only those of its employees whom it' considers necessary to perform its work for TAES and then only after such employees have undertaken to comply with the terms of this AGREEMENT in a written statement signed by each employee. CONTRACIOR also agrees to take reasonable precautions to avoid unauthorized disclosure or use of the INFORMATION and MATERIALS by third parties. 5. CONTRACTOR represents that it has no obligations or commitments inconsistent with this AGREEMENT. 6. This AGREEMENT shall be binding upon and inure to the benefit of the permitted successors and assigns of the PARTIES hereto, but neither PARTY shall assign this AGREEMENT without the prior written consent of the other PARTY. 7. This AGREEMENT may be terminated by either PARTY upon thirty (30) days advance written notice to the other PARTY, at their respective addresses as written above, except that the provisions of Paragraphs 2, 3 and 4 above shall survive for a period of five (5) years from the date of termination. Upon termination CONTRACTOR within thirty (30) days shall confirm to TAES in writing that all MATERIAL have been returned to TAES. 8. CONTRACTOR shall promptly rerun] remaining tangible forms of INFORMATION and MATERIAL supplied by TAES pursuant to this AGREEMENT upon termination of this AGREEMENT, 9. It is understood by both PARTIES that of this AGREEMENT does not constitute a license to use the INFORMATION Or MATERIAL other than as specified herein. 10. It is understood by both PARTIES that the confidentiality obligations under Paragraphs 2, 3 and 4 above shall not apply to INFORMATION or MATERIAL disclosed to CONTRACTOR hereunder: (a) where use, publication or disclosure by CONTRACTOR of any INFORMATION or MATERIAL is permitted under terms of a written contract between TAES and CONTRACTOR; (b) where the INFORMATION or MATERIAL was known or used by CONTRACTOR prior to the disclosure by TAES, as evidenced by a written or printed document; (c) where the INFORMATION or MATERIAL was known to the public or generally available to the public prior to the date it was received by CONTRACTOR: (d) where the INFORMATION or MATERIAL became known to the public or generally available to the public, subsequent to the date it was received by CONTRACTOR, without CONTRACTOR being responsible therefor; or (e) where the INFORMATION or MATERIAL is lawfully disclosed to CONTRACTOR by a third party not deriving the same from TAES. Exceptions (d) and (e) above shall apply only from and after the date such INFORMATION or MATERIAL shall become known or generally available to the public or shall be received from said third party respectively. Specific INFORMATION or MATERIAL shall not be deemed to be within the exceptions (a) through (e) above merely because it is embraced by more general MATERIAL within one of the exceptions. In addition, any combination of features shall not be deemed to be within the foregoing exceptions merely because individual features are generally known to the public. 11. (a) This AGREEMENT shall be for and inure to the benefit of Carrington Laboratories, Inc. and its successors and assigns as a third party beneficiary. (b) This AGREEMENT shall be governed by and construed in accordance with the substantive Laws of the State of Texas without regard to Texas choice-of-law principles. (c) Any failure on the part of TAES to insist upon the performance of this AGREEMENT, or any part thereof, will not constitute a waiver of any right under this AGREEMENT. d) In the event any provision, or any portion of any provision, of this AGREEMENT should be declared invalid or unenforceable for any reason by a court of competent jurisdiction, such provision or portion thereof shall be considered separate and apart from the remainder of this AGREEMENT, which shall remain in full force and effect. e) This AGREEMENT shall be binding upon and shall inure to the benefit of the heirs, executors, administrators, successors and assigns of the PARTIES. IN WITNESS WHEREOF, the PARTIES hereto have caused this AGREEMENT to be executed by their duly authorized representatives to be effective as of the date first above written. BY: /s/ ----------------------------------- TEXAS AGRICULTURE EXPERIMENTAL STATION BY: ----------------------------------- CONTRACTOR EX-10.4 7 Exhibit 10.4 LEASE This LEASE AGREEMENT is entered into as of the 30th day of August, 1991, by and between WESTERN ATLAS INTERNATIONAL, INC. (hereinafter referred to as ("Landlord"), whose principal address for purposes hereof is 10205 Westheimer, Houston, Texas 77042, (mailing address: P. 0. Box 1407, Houston, Texas 77251-1407, Attn: General Counsel), and CARRINGTON LABORATORIES, INC., (hereinafter referred to as "Tenant"), whose principal address for purposes hereof is 2001 Wa1nut Hill Lane, Irving, Texas 75038. (1) DEFINITIONS. (a) "Area": The leased area within the Leased Premises is approximately 21,733 square feet (b) Deleted intentionally. (c) Deleted intentionally. (d) "Building": The office building located on land more particularly described on Exhibit "C" attached hereto and made a part hereof for all purposes, which building is known as the Core Laboratories Building, having a Post Office address of 1300 East Rochelle Boulevard, Irving, Texas 75062-3963. (e) "Commencement Date": January 1, 1992. (i) Deleted intentionally. (g) "Leased Premises": The area on Level A-1 of Building A shown cross-hatched on the floor plan attached hereto as Exhibit "A" and made a part hereof. (h) "Lease Term": The period commencing on January 1, 1994 and ending on December 31, 1995 unless sooner terminated as provided herein. (i) "Lease Year" shall mean January 1, 1992 to December 31. 1992, and each subsequent twelve (12) month period of time thereafter. (j) De1eted intentionally. (k) "Minimum Rent": $18,110.83 per month commencing on January 1, 1994 and continuing on or before the first day of each month of the term hereof through December 31, 1993 and $20,374.69 per month commencing on January 1, 1994 and continuing on or before the first day of each month of the term hereof through the balance of the term of this Lease. (1) "Operating Costs": See Paragraph 8 of this Lease (m) "Overtime Charge": $50.00 per hour subject to proportionate adjustments determined by Landlord to reflect changes in labor and utility costs. (n) "Permitted use": Business offices and laboratory used for analytical chemistry in connection with medical research, which shall not involve research with micro-organisms or toxins. (o) Deleted intentionally. (p) Deleted intentionally (i) Deleted intentionally 2. LEASE GRANT- Landlord, in consideration of the rent to be paid and to be paid and the covenants and agreements to be performed by Tenant, as herein set forth, does hereby Lease, Demise, and Let unto Tenant and Tenant accepts the Leased Premises for the Lease Term. 3(a). RENT. Beginning on the Commencement Date, as hereinbefore defined, Tenant promises and agrees to pay Landlord the Minimum Rent (subject to adjustment as hereinafter provided) without demand or any deduction or set off whatsoever, for each month of the entire contemporaneously with the execution of this lease, and a like monthly installment shall be due and payable beginning on the first day of the calendar month next following the expiration of the Lease Term. One such monthly installment shall be payable by tenant to Landlord first full calendar month of the tease term after the Commencement Date and continuing thereafter on or before the first day of each succeeding calendar month during the term hereof. Rent for any fractional month at the beginning of the tease term shall be prorated based on one three hundred sixty-fifth (1/365th) of the current annual Minimum Rent for each day of the partial month this Lease is in effect and shall be due and payable on the Commencement Date. (b) LATE CHARGES. In the event any monthly installment of the Minimum Rent, or any other sums which become owing by tenant to landlord under the provisions hereof are not received within ten (10) days after the due date thereof (without in any way implying Landlord's consent to such late payment), Tenant, to the extent permitted by law, agrees to pay, in addition to said installment of the Minimum Rent or such other sums owed, a late payment charge equal to ten percent (10%) of the installment of the Minimum Rent or such other sums owed. Notwithstanding the foregoing, the foregoing late charges shall not apply to any sums which may have been advanced by Landlord to or for the benefit of Tenant pursuant to the provisions of this Lease, it being understood that such sums shall bear interest, which Tenant hereby agrees to pay to Landlord, at the rate of eighteen percent (18%) per annum or at the maximum rate of interest permitted by law to be charged Tenant for the use or forbearance of such money, whichever is the lesser sum. 4. Deleted intentionally. 5. SERVICES BY LANDLORD. Landlord agrees to furnish the following services for the Leased Premises: (i) air conditioning, both heating and cooling (as required by the seasons), from 10 a.m. to 6:00 p.m. on weekdays and on Saturdays from 8:00 a.m. to 1:00 p.m. (except on legal holidays designated in the Building Rules and Regulations) and at such temperatures and in such amounts as may in the judgment of Landlord be required for comfortable use and occupancy under normal business operations; provided, that circulating air will not be available other than by air conditioning and if tenant shall require air conditioning at any time other than the hours and the days above specified. Landlord shall furnish the same for the area or areas specified in a written request of Tenant delivered to the superintendent of the Building before 3:00 p.m. of the business day preceding the extra usage, and for such service tenant shall pay Landlord the Overtime Charge as additional rent within five (5) days after receipt of a bill therefore; (ii) water at points of supply provided for general use of tenants of the Building: (iii) janitor and maid service to the Leased Premises on weekdays other than holidays and such window washing and wall cleaning as may in the judgment of Landlord be reasonably required; provided, however, that Tenant may elect to supply Tenant's own janitorial and maid service by giving Landlord thirty (30) days prior written notice and in such an event, tenant will be granted a monthly credit against the Minimum Rent payable under the terms of Paragraph 1(k) hereof equivalent to the Tenant's prorata share of the costs Landlord is paying for such cervices on a monthly basis as of the date of this lease. Which prorata share shall be that proportion of Landlord's costs determined by multiplying such costs by a fraction, the numerator of which is the square footage of the Leased Premises and the denominator of which is the total square footage of the Building covered by Landlord's contract for such services' provided further, however, that Tenant shall receive the foregoing credit only so long as the level of set-vice is equal to or exceeds the level of service which would have been provided under Landlord's contract as reasonably determined by Landlord; (iv) restroom facilities; (v) electric lighting for all public areas and special service areas of the Building in the manner and to the extent deemed by Landlord to be reasonable and standard including replacement of Buildings standard light bulbs and tubes; and (vi) a twenty-four (24) hour monitored security system similar or comparable to that presently maintained. 6. (a) TENANT'S ELECTRICITY CHARGE . Landlord shall, provided Tenant is not in default of its obligations under this Lease, furnish sufficient power for lighting and for typewriters, voice writers, calculating machines, and other standard office machines of similar low electrical consumption width use Voltage of 110 volts or lower. Landlord will provide power as required by tenant for laboratory equipment which requires up to 240 volts through the then existing feeders servicing the Building and will bill Tenant for its excess electricity requirements as set forth below. If Tenant has any equipment or machines that require excess counts of electricity, Landlord reserves the right, at its sole option except as provided hereinafter, to install a separate meter(s), at tenant's expense, to be reimbursed to Landlord as additional rent upon demand. For the Leased Premises or any part or parts thereof. If tenant has excess electricity requirements for which Landlord does not elect to install separate meter(s), Landlord's engineer may, but shall not be obligated to, determine the amount of excess electricity to be allocated to Tenant based on the power requirements of any such equipment, machines, or special lighting. If Tenant does not agree with the amount of such allocation, tenant may require Landlord to exercise Landlord's option to install separate meter(s) by giving written notice to Landlord. All installations of electrical fixtures, appliances, and equipment within the Leased Premises shall be subject to Landlord's prior written approval. All replacements lighting tubes and bulbs required in Building standard fixtures in the Leased Premises will be furnished and installed by Landlord at Landlord's expense. Whenever heat-generating machines or equipment (other than such standard office machines) which affect the temperatures otherwise maintained by the air conditioning system, are used in the Leased Premises by Tenant, Landlord shall have the right to install supplemental air conditioning units in the Leased Premises, and the cost thereof, including the cost of installation, operation, use and maintenance, shall be paid as additional rent by tenant to Landlord on demand. Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of existing feeders to the building, or the risers or wiring installations. Any riser or risers or wiring to meet Tenant's excess electrical requirements will be installed by Landlord upon written request of tenant, at the sole cost and expense of tenant to he reimbursed to Landlord an additional rent upon demand, if, in Landlord's sole judgment the same are necessary and will not cause permanent damage or injury to the building or the Leased Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs or expense or interfere with or disturb other tenants or occupants. Notwithstanding anything to the contrary hereinbefore contained, it is understood and agreed that electricity consumed in the Leased Premises other than electricity for the heating, ventilating and air conditioning system is metered through a sub meter installed by Landlord (the "Meter"). Should Tenant's consumption of electricity in the Leased Premises during any calendar month or partial calendar month during the term hereof as measured by the Meter exceed seventy (70) kilowatt hours per day for such month (the "Excess Usage"), Tenant shall pay the costs of the Excess Usage to Landlord as Additional Rent hereunder within fifteen (15) days after Tenant receives a bill therefor from Landlord. All such charges shall be at the same rate for electricity, which Landlord is being charged by the public utility serving the Building. (b) Tenant's Water Charge. Not withstanding anything to the contrary contained in this lease, it is understood and agreed that water consumed in the Leased Premises other than for drinking and restrooms is metered through a submeter installed by landlord (the "Water Meter"). Tenant shall pay Landlord the costs of such water as Additional Rent hereunder based on actual usage as measured by the water Meter at a cost equal to the actual charges therefor to Landlord by the local water utility within fifteen (15) days after Tenant receives a bill therefor from Landlord. 7. Service Interruptions. Landlord does not warrant that the services provided for in Paragraphs 5 and 6 above will be free from any slow-down, interruption or stoppage pursuant to voluntary agreement by and between Landlord and governmental bodies and regulatory agencies or caused by the maintenance, repair, substitution, renewal, replacement, or improvement of any of the equipment involved in the furnishing of any such services or caused by changes of services, alterations, strikes, lock-outs, labor controversies, fuel shortages, accidents acts of God, the elements, or any other cause beyond the reasonable control of Landlord, and specifically no such slow-down, interruption, or stoppage of any such services shall ever be construed as an eviction, actual or constructive, of Tenant nor shall same cause any abatement of the Minimum Rent payable hereunder or in any manner or for any purpose relieve Tenant from any of its obligations hereunder, and in no event shall Landlord he liable for damage to persons or property, or in default hereunder, as a result of such slow-down, interruption, or stoppage. Landlord agrees to use due diligence to resume the service upon any such slow-down, interruption, or stoppage. 8. Operating Costs. Operating Costs (as hereinafter defined) for 1992 (the "Base Year") shall be calculated by Landlord. Landlord shall split the Base Year Operating Costs into two parts, the first of which shall consist of taxes, special real estate assessments, electricity and other utility costs, and insurance premiums (hereinafter referred to as "Unrestricted Items") and the second of which shall consist of all other Operating Costs (hereinafter referred to as "Restricted Items"). Operating Costs per square foot shall be calculated for both Unrestricted Items and Restricted Items by dividing the Unrestricted Items and Restricted Items by the total square footage of the Building (i.e. approximately 205.893 square feet). Such Operating Costs per square foot shall be the "Base Year Operating Costs". Tenant shall pay Landlord for each calendar year or partial calendar year during the term hereof increases in the Operating Costs per square foot for Unrestricted Items and Restricted Items over the Base Year Operating Costs (hereinafter referred to as "Excess Operating Costs") for each square foot of the leased Premises (i.e. approximately 21,733 square feet): provided, however, that the Operating Costs per square foot for Restricted Items may not for the purposes hereof increase by more than five percent (5%) per calendar year on a compounded cumulative basis. The term "Operating Costs" as used herein shall mean and include all expenses (other than expenses for electricity covered by the terms of Paragraph 6(a) hereof and water covered by the terms of Paragraph 6(b) hereof) reasonably and directly incurred in the normal management, operating, maintenance, repair and security of the Building, including the grounds. Operating Costs shall include, but not be limited to, the cost of all utilities (except expenses for electricity covered by the terms of Paragraph 6(a) hereof and water covered by the terms of Paragraph 6(b) hereof), building supplies, janitorial service (except if Tenant elects to provide its own janitorial and maid service, janitorial and maid service for any period of time when Tenant is supplying such service shall not be included under Operating Costs to the extent such charges apply to occupied Tenant space in the Building as opposed to common use areas), maintenance and repairs, fire and extended coverage, public liability and other insurance, all labor and employee benefit costs (including wages, salaries and fees of all personnel engaged in the management, operating, maintenance, repair and security of the Building), ad valorem taxes and assessments and amortization of capital improvements costs which reduce operating expenses or are required to meet governmental regulations, management fees, consulting fees, legal fees and accounting fees, and the fair market rental of the property managers' offices in the Building, together with payments or credits Landlord may make to any tenant or tenants of the Building in lieu of Landlord providing any of the services or paying for any of such costs. In addition to Tenant's obligations to pay Minimum Rent, Tenant shall pay to Landlord monthly in advance on or before the first day in each calendar month during the term hereof, commencing on January 1, 1992, one twelfth (1/12th) of Landlord's estimate of tenant's proportionate share of Excess Operating Costs for the applicable calendar year. Landlord reserves the right to adjust the estimate at any time during the applicable calendar year if actual Excess Operating Costs are substantially different from the earlier estimate, and thereafter, payments by Tenant pursuant to this paragraph shall be adjusted accordingly, For the purposes hereof, the terms "calendar year" shall also include partial calendar years. After the expiration of each calendar year during the term hereof after the Base Year, as hereinbefore defined, Landlord shall furnish Tenant with a statement of the actual Excess Operating Costs of the Building. In the event the sum of the payments made by Tenant during the preceding calendar year or partial calendar year pursuant to the foregoing exceeds the amount which Tenant would have been obligated to pay if the actual Excess Operating Costs for such year were used in lieu of Landlord's estimate thereof, the difference shall be credited by Landlord to Tenant's account against the next payments due by Tenant under the provisions hereof. In the event the sum of payments made by Tenant during the preceding calendar year or partial calendar year pursuant to the above paragraph is less than the amount which Tenant would have been obligated to pay if the actual Excess Operating Costs for such year or partial year were used in lieu of Landlord's estimate thereof, Tenant shall pay the amount of such difference to Landlord in cash within thirty (30) days after delivery of any invoice for such by Landlord accompanied by a statement of the actual Excess Operating Costs for such year. Any payments by Tenant which exceed Tenant's prorate share of Excess Operating Costs for such period shall be refunded by Landlord to Tenant. 9. ACCEPTANCE OF LEASED PREMISES AND BUILDING BY TENANT. The taking of possession of the Leased Premises by Tenant shall be conclusive evidence that "Tenant" accepts the Leased Premises, the Building and all improvements and appurtenances thereto as suitable for the purposes herein set out as being in a good and satisfactory condition. 10. ASSIGNMENT AND SUBLETTTNC. (a) Tenant shall not, without any prior written consent of Landlord: (i) assign or in any manner transfer this lease or any estate or interest therein; or (ii) permit any assignment of this lease or any estate or interest therein by operation of law; or (iii) sublet the Leased Premises or any part thereof; or (iv) grant any license, concession, or other right of occupancy of any portion of the Leased Premises; or (v) permit the use of the Leased Premises by any parties other than Tenant, its agents and employees. Landlord agrees that its consent will not be unreasonably withheld or delayed with respect to a proposed sublease or assignment so long as any such proposed sublease or assignment meets the following criteria: (i) The use contemplated by such sublease or assignment is in accordance with the terms of this lease and is for an office purpose which is consistent with the image of Building as reasonably determined by Landlord; and (ii) The proposed sublessee or assignee will not engage in operations which violate any restrictive covenant affecting the Building; and (iii) The proposed sublease or assignment is made subject to this lease; and (iv) No option provided for in this lease will inure to the benefit of any such sublessee or assignee; and (v) A full and complete copy of the proposed sublease or assignment, together with a statement from Tenant outlining the financial terms of the proposed sublease or assignment will be provided to Landlord; and (vi) The proposed sublessee or assignee will occupy that portion of the Leased Premises covered by such sublease or assignment; and (vii) The proposed sublessee or assignee is a financially responsible entity as reasonably determined by Landlord. Consent by Landlord to one or more assignments or sublettings shall not operate as a waiver of Landlord's rights as to any subsequent assignments and sublettings. Notwithstanding any assignment or subletting, Tenant and any guarantor of Tenant's obligations under this lease shall at all times remain jointly and severally liable for the payment of the rent and all other payment obligations herein specified and for compliance with all of Tenant's other obligations under this lease. If an event of default, as hereinafter defined, should occur while the Leased Premises or any part thereof are then assigned or sublet, Landlord, in addition to any other remedies herein provided or provided by law, fly at its option collect directly from such assignee or sublessee all rents becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord by Tenant hereunder, and Tenant hereby authorizes and directs any such assignee or sublessee to make such payments of rent direct to Landlord upon receipt of notice from Landlord. No direct collection by Landlord from any such assignee or sublessee shall be construed to constitute a novation or a release of tenant or any guarantor of Tenant from the further performance of their obligations hereunder. Receipt by Landlord of rent from any assignee, sublessee, or occupant of the Leased Premises shall not be deemed a waiver of the covenant in this lease contained against assignment and subletting or a release of Tenant or any guarantor of Tenant's obligations under this lease. the receipt by Landlord from any such assignee or sublessee obligated to make payments of rent shall be a full and complete release, discharge, and acquittance to such assignee or sublessee to the fltent of any such amount of rent so paid to landlord. Landlord is authorized and empowered, on behalf of Tenant, to endorse the name of Tenant upon any check, draft, or other instrument payable to Tenant evidencing payment of rent, or any part thereof, and to receive and apply the proceeds therefrom in accordance with the terms thereof. Tenant shall not mortgage, pledge, or otherwise encumber its interest in this lease or in the teased Premises. (b) If Tenant requests Landlord's consent to an assignment of the lease or subletting of all or a part of the Leased Premises, it shall submit to Landlord, in writing, the name of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant. Landlord shall have the option, to be exercised within thirty (30) days from submission of Tenant's written request, to cancel this lease (or the applicable portion thereof as to a partial subletting) as of the commencement date stated in the above-mentioned request. If Landlord elects to cancel this lease as stated then the term of this lease, and the tenancy and occupancy of the Leased Premises by Tenant thereunder, shall cease, determine, expire, and come to an end as if the cancellation date was the original termination date of this lease. If Landlord does not thus cancel this lease and if the request of Tenant to sublet or assign is in accordance with Subparagraph (a) hereof, landlord will consent to such subletting or assignment. (c) Landlord shall have the right to transfer, assign, or convey, in whole or in part, the Building and the Land and any and all of its rights under this lease, and in the event Landlord transfers, assigns, or conveys its rights under his lease, Landlord shall thereby be released from any further obligations hereunder and Tenant agrees to look solely to such successor in interest of the Landlord for performance of such obligations. 11. (a) USE AND OCCUPANCY. Tenant agrees that the Leased Premises shall be used and occupied by Tenant only for the Permitted Use and for no other purpose, and Tenant agrees to use and maintain the leased Premises in a clean, careful, safe, and proper manner and to comply with all applicable laws ordinances, orders, rules, and regulations of all governmental bodies (state, federal, and municipal). Tenant will not in any manner deface or injure the Building or the land or any part thereof or overload the floors of the Leased Premises. Tenant agrees not to use or allow or permit the Leased Premises to be used for any purpose prohibited by law or by any restrictive covenants applicable to the Building and land, and Tenant agrees not to commit waste or suffer or permit waste to be committed or to allow or permit any nuisance on or in the leased Premises. Tenant will not use the Leased Premises for lodging or sleeping purposes or for any immoral or illegal purposes. "Tenant" will conduct its business and occupy the Leased Premises and will control its agents, employees, licensees, and invitees in such a manner so as not to create any nuisance or interfere with, annoy, or disturb any of the other tenants in the Building or Landlord in its management of the Building and so as not to injury the reputation of the Building. Tenant shall not use the Leased Premises or allow or permit same to be used in any way or for any purpose that landlord may deem to be extra hazardous on account of the possibility of fire or other casualty or which will increase the rate of fire or other insurance for the Building or its contents or in respect of the operation of the Building or which may render the Building uninsurable at normal rates by responsible insurance carriers authorized to do business in the State of Texas or which may render void or voidable any insurance on the Building. Tenant shall not erect, place, or allow to be placed any sign, advertising matter, stand, booth, or showcase in or upon the doorsteps, vestibules, halls, corridors, doors, walls, windows, or pavement of the Building or the land (except for lettering on the door or doors to the teased Premises as allowed by the Rules and Regulations forming a part of this tease) without the prior written consent of Landlord. (b) Hazardous Substances. Tenant covenants and agrees (i) that Tenant has not suffered, permitted, introduced or maintained in, on or about any portion of the Leased Premises since the commencement of the term of the Carrington Lease (as defined in Paragraph C of Exhibit "D" to this Lease), any Hazardous Material [as defined in Section ll(d)(i)) except as may be permitted by law, it being understood that Tenant may, from time to time, handle such substances in conjunction with Tenant's laboratory operations. Tenant further covenants and agrees to indemnify, protect and save Landlord harmless against and from any and all damage, losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses of any kind or of any nature whatsoever (including, without limitation. attorneys' and experts' fees and disbursements) which may at any time be iniposed upon, incurred by or asserted or awarded against landlord and arising from or out of any Hazardous Material on, in, under or affecting all or any portion of the Building. Leased premises, or Property, introduced by, or on behalf of, Tenant, including, without limitation, (i) the costs of removal of any and all Hazardous Materials from all or any portion of the Building, Leased Premises or Property, or released, discharged, leaked or spilled from the Building, teased Premises or Property into the air, surface water, groundwater or land, and (ii) any costs incurred to comply with or as a result of the violation of any Environmental Requirements [as defined in Section ll(d)(ii)]. The preceding portions of this provision do not apply to Hazardous Material which may be located in the Building, Leased Premises, or Property at or prior to the initial commencement (hereto or hereafter) of any work, construction, repairs or alterations therein by Tenant under the Carrington Lease (c) Remediation. Notwithstanding anything contained herein to the contrary, Tenant shall within a period of thirty (30) days following the date this Lease is cancelled or terminated or expires by virtue of its own terms, cause to be conducted by a duly licensed environmental consultant, inspections and tests in order to determine if any Hazardous Material [as defined in Section ll(d)(i)] exists in, on or about the Leased Premises in violation of any Environmental Requirements [as defined in Section ll(d)(ii)] (or materials ,which would constitute danger to any occupants or guests in the Leased Premises or Building) and Tenant' shall (i) furnish to landlord copies of any findings, conclusions and/or reports respecting such investigations and/or tests, and (ii) be responsible for restoring the teased Premises and Building with respect to any damages incurred incidental thereto as the result of Tenant's or Tenant's agents, employees or contractors introduction of such Hazardous Material to the Leased Premises or the Building. Any such reports shall include a so-called "Phase I" and, if necessary, "Phase II" environmental assessments, which shall be, addressed to Tenant, In the event any such report indicates the presence of any Hazardous Material [as defined in Section ll(d)(i)] (or materials which would constitute danger to any occupants or guests in the Leased Premises or Building), then Tenant shall at Tenant's sole cost and expense conduct such cleanup operations as may he reasonably required to clear such Hazardous Material (as defined in Section l1(d)(i)] from the Leased Premises and Building in accordance with the then existing Environmental Requirements Law defined in Section [l(d)(ii)] applicable thereto and Tenant shall Indemnify, save and hold Landlord harmless from any claims. losses, damages or judgments as a result of the introduction of such substances into the Leased Premises and Building and/or resulting because of the removal thereof. (d) Definitions (i) Hazardous Materials Hazardous Material means any substance: (1) the presence of which requires investigation or remediation under any federal. state or local statute. regulation, ordinance, order, action, policy or common law; or (2) which is or becomes defined as a "hazardous waste," "hazardous substance", pollutant or contaminant under any federal, state, or local statute, regulation, rule, or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (421 U.S.C. Section 9601 et seq.) and/or the resource Conservation and Recovery Act (42 V.S.C, Section 6901 et seq.); or (3) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by the governmental authority, agency, department, commission, board or instrumentality of the United States, the State of Texas or any political subdivision thereof: or (4) the presence of which on the Leased Premises causes or threatens to cause a nuisance upon the Leased Premises or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the teased Premises: or (5) without limitation, which contains polychlorinated biphenyls (PCBs) or asbestos. (ii) Environmental Requirements Environmental requirements means all applicable present and future statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations,. concessions, franchises. and similar items, of all governmental agencies, departments, commissions, boards, bureaus or instrumentalities of the United States, states and political subdivisions thereof and all applicable judicial, administrative, and regulatory decrees, judgments, and orders relating to the protection of human health or the environment, including, without limitation: (1) all requirements, including but not limited to those pertaining to reporting, licensing, permitting, investigation, and remediation of emissions, discharges, releases, or threatened releases of Hazardous Material, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, into the air, surface water, groundwater, or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials, or tastes, whether solid. fluid, or gaseous in nature: and (2) all requirements pertaining to the protection of the health and safety of employees or the public. (e) Survival and Investigation. The obligations of Tenant in subsections 11(b), (c), (d) and (e) shall survive the cancellation, expiration or termination of the Lease and shall not be affected by an investigation by or on behalf of Landlord or by any information which Landlord may have or obtain with respect thereto. 12. TENANTS REPAIRS AND ALTERATIONS. Tenant will not in any manner deface or injure the Leased Premises, the Building or any improvements on the land herein described, and will pay the cost of repairing any damage or injury done to the foregoing facilities by Tenant or Tenant's agents, employees or invitees. Tenant shall throughout the Lease Term take good care of the premises and keep them free from waste and nuisance of any kind. Tenant agrees to keep the premises, including all fixtures installed by Tenant and any plate glass and special store fronts, in good condition and make all necessary nonstructural repairs except those caused by fire, casualty or acts of God covered by Landlord's tire insurance policy covering the Building, provided that Tenant shall not be obligated to repair broken exterior plate glass unless it appears that such glass was broken by an impact originating in the leased Premises. If Tenant fails to make such repairs within fifteen (15) days after the occurrence of the damage or injury, Landlord may, at its option, make such repair, and Tenant shall, upon demand therefor, pay Landlord for the cost thereof. Tenant will not make or allow to be made any alterations or physical additions in or to the premises without the prior written consent of Landlord. All maintenance. repairs, alterations, additions or improvements shall be conducted only by contractors and subcontractors approved in writing by Landlord, it being understood that Tenant shall procure and maintain, and shall cause such contractors and subcontractors engaged by or on behalf of Tenant to procure and maintain, insurance coverage against such risks, in such amounts and with such companies as landlord may require in connection with any such maintenance, repair, alteration, addition or improvement. 13. MECHANIC'S LEINS . Tenant will not permit any mechanic's or materialman's lien or liens to be placed upon the Leased Premises, the Building or the lands herein described during the term, hereof ceased by or resulting from any work performed materials furnished or obligation incurred by or at the request of Tenant and nothing in this Lease contained shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration, or repair of or to the Leased Premises or any part thereof, nor as giving Tenant any right, power, or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to the filing of any mechanic's, materialman's or other liens against the interest of Landlord in the Leased Premises. In the case of the filing of any lien on the interest of Landlord or Tenant in the Leased Premises, Tenant shall cause the same to be discharged of record within twenty (20) days after the filing of same. If Tenant shall fail to discharge such lien within such period, then, in addition to any other right or remedy of landlord, Landlord may. but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit in court or bonding. Any amount paid by Landlord for any of the aforesaid purposes, or for the satisfaction of any other lien, not caused or claimed to be caused by Landlord, and all reasonable legal and other expenses of Landlord, including reasonable counsel fees, in defending any such action or in or about procuring the discharge of such lien, with all necessary disbursements in connection therewith, with interest thereon at the rate set out in Paragraph 3(c) hereof, 14. INDEMNIFICATION (a) Except to the extent of Landlord's negligence or willful misconduct, Tenant agrees to indemnify Landlord and save it harmless from all suits, actions, damages, liability and expense in connection with loss of life, bodily or personal injury or property damage (and each and all of them) arising from or out of any occurrence in, upon or from the Leased Premises or resulting from or attributable to the occupancy or use by Tenant of said Leased Premises or any part thereof, or occasioned wholly or in part by any act or omission of Tenant, its agents, contractors, employees, servants, invitees, licensees or concessionaires. Tenant shall store its property in, and shall occupy, the Leased Premises at its own risk, and releases Landlord, to the fullest extent permitted by law, from all claims of every kind resulting in loss of life, personal or bodily injury or property damage, no matter when or where or to whom same occurs without being limited by any other provision of this Lease. (b) Landlord shall not be responsible or liable to tenant or to any other person or persons for any loss or damage to either the person or property of Tenant or to any other person or persons, landlord shall not be responsible for any injury, loss or damage to any person or to any property of tenant or any other person caused by or resulting from bursting, breakage or from leakage, steam, or snow or ice, running, backing up, seepage or the overflow of water or sewage in any part of the teased Premises, the building or the lands herein described, or for any injury or damage caused by or resulting from acts of God or the elements, or for any injury or damage caused by or resulting from any defect or negligence in the occupancy, construction, operation or use of any of the Leased Premises, machinery, apparatus or equipment by anyone or by or from the negligence of any occupant of the Building. 15. INSURANCE, tenant shall, at its sole cost and expense, procure and maintain during the term hereof a policy or policies of insurance insuring Tenant against any and all liability for injury to or death of a person or persons and for damage to or destruction of property occasioned by or arising out of or in connection with the use or occupancy of the Leased Premises or by the condition of the Leased Premises (including the contractual liability of Tenant to indemnify landlord and/or property damages, or with such other limits as may be required by landlord, and to be written by an insurance company or companies satisfactory to landlord and licensed to do business in the State of Texas with Landlord named as an additional insured without restriction. If Tenant has an umbrella or excess policy, tenant will name landlord as an additional insured without restriction on all layers of umbrella or excess policies. Tenant shall obtain a written obligation on the part of each insurance company to notify landlord at least ten (10) days prior to cancellation of such insurance. Such policies or duly executed certificates of insurance relating thereto shall be promptly delivered to landlord within ten (10) days after the execution of this Lease and renewals thereof as required shall be delivered to Landlord at least thirty (30) days prior to the expiration of the respective policy terms. If tenant fails to comply with the foregoing requirements relating to insurance, landlord may obtain such insurance and Tenant shall pay as additional rent to landlord on demand the premium cost thereof plus interest at the rate set out in Paragraph 3(c) hereof. 16. WAIVER OF SUBROGATION. Each party hereto hereby waives any and every claim which arises or may arise in its favor and against the other party hereto, or anyone claiming through or under them, by way of subrogation or otherwise, during the term of this Lease or any extension or renewal thereof for any and all loss of, or damage to, any of its property or property of others it has in its care, custody or control or loss of use of such property (whether or not such loss or damage is caused by the fault or negligence of the other party or anyone for whom said other party may be responsible), which loss or damage is covered by valid and collectible fire and extended coverage insurance policies, to the extent that such loss or damage is recovered under said insurance policies. Said waivers shall be in addition to, and not in limitation or derogation of, any other waiver or release contained in this tease with respect to any loss or damage to property of the parties hereto. Inasmuch as the above mutual waivers will preclude the assignment of any aforesaid claim by way of subrogation (or otherwise) to an insurance company (or any other person), each party hereto hereby agrees immediately to give to each insurance company which has issued to it policies of fire and extended insurance coverage written notice of the terms of said mutual waivers, and to have said insurance policies properly endorsed, it necessary, to prevent the invalidation of said insurance coverages by reason of said waivers. 17. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord shall have the following rights, exercisable without notice and without liability to tenant for damage or injury to property, persons, or business and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession or giving rise to any claim for setoff or abatement of rent: (a) To change the Building's name or Street address. (b) To install, affix, and maintain any and all signs on the exterior and interior of the Building, subject to the provisions of Rider 1 of this Lease. (c) To designate and approve, prior to installation, all types of window shades, blinds, drapes, awnings, window ventilators, and similar equipment, and to control all internal lighting that nay be visible from the exterior of the Building. (d) To enter upon the Leased Premises at reasonable hours to inspect same or clean or wake repairs or alterations (but without any obligation to do so. except as expressly provided for herein) or to show the Leased Premises to prospective lenders or purchasers, and, during the last twelve (12) months of the term, to show them to prospective tenants at reasonable hours and, if they are vacated, to prepare them for re-occupancy. (e) To retain at all times, and to use in appropriate instances, keys to all doors within and into the teased Premises. No locks shall be changed or added without the prior written consent of Landlord. (f) To decorate and to make repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Building, or any part thereof, and for such purposes to enter upon the teased Premises and, during the continuance of any of said work, to temporarily close doors, entryways, public space, and corridors in the Building, to interrupt or temporarily suspend Building services and facilities and to change the arrangement and location of entrances or passageways, doors and doorways, corridors, elevators, stairs, toilets, or other public parts of the Building, an without abatement of rent or affecting any of Tenant's obligations hereunder, so long as the teased Premises are reasonably accessible. (g) To grant to anyone the exclusive right to conduct any business or render any service in or to the Building, provided such exclusive tight shall not operate to exclude tenant from the use expressly permitted herein, (h) To take all such reasonable measures as landlord may deem advisable for the security and safety of the Building and its occupants, (j) Landlord shall have the right to transfer, assign, or convey. in whole or in part, the Building and the land and any and all of its rights wider this tease, and in the event Landlord transfers, assigns, or conveys its rights under this tease, Landlord shall thereby be released from any further obligations hereunder and Tenant agrees to look solely to such successor in interest of the Landlord for performance of such obligations. 18. FIRE OR OTHER CASUALTY. If the Leased Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Landlords sole opinion, be required (whether or not the Leased Premises shall have been damaged by such fire or other casualty) or in the event any mortgagee under a mortgage or deed of trust covering the Building should require that the insurance proceeds payable as a result of said fire or other casualty be used to retire the mortgage debt, Landlord may, at its option, terminate this Lease and the term and estate hereby granted by notifying Tenant in writing of such termination within sixty (60) days after the date of such damage, in which event the rent hereunder shall be abated as of the date of such damage. If Landlord does not thus elect to terminate this Lease, Landlord shall within seventy-five (75) days after the date of such damage commence to repair and restore the Building and shall proceed with reasonable diligence to restore the Building (except that Landlord shall not be responsible for delays outside its control) to substantially the same condition in which it was immediately prior to the happening of the casualty, except that Landlord shall not be required to rebuild, repair or replace any part of Tenant's furniture or furnishings or of fixtures and equipment removable by Tenant under the provisions of this tease. Landlord shall not be liable for any inconvenience or annoyance to tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof; except that during the time and to the extent that the Leased Premises are unfit for occupancy, the Landlord shall, at its option, either furnish the Tenant with comparable space at prevailing market rates or a fair diminution of rent, the choice of which will be at the landlord's sole discretion, if the damages are caused by the negligence of Tenant, its agents, servants, employees, contractors, patrons, guests, licensees, or invitees there will be no abatement of rent and Tenant will be liable for any damages in excess of the amount paid by insurance proceeds received by Landlord. Any insurance which may be carried by Landlord or Tenant will be liable for any damages in excess of the amount paid by or insurance proceeds received by Landlord. Any insurance which may be carried by Landlord Tenant against loss or damage to the Building or to the Leased Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 19. CONDEMNATION. If the whole or substantially the whole of the Building and land or of the Leased Premises should be taken for any public or quasi-public use under any governmental law, ordinance or regulation or by right of eminent domain or should be sold to the condemning authority in lieu of condemnation, then this Lease shall terminate as of the date when physical possession of the Building and land or the Leased Premises is taken by the condemning authority. If less than the whole or substantially the whole of the Building and land or the Leased Premises are affected thereby, Landlord may terminate this Lease by giving written notice thereof to Tenant within sixty (60) days after the right of election accrues, in which event this Lease shall terminate as of the date when physical possession of such portion of the Building and land or Leased Premises is taken by the condemning authority. If upon any such taking or sale of less than the whole or substantially the whole of the Building and land or the teased Premises this Lease shall not be thus terminated, the rent payable hereunder shall be diminished by an amount representing that part of said rent as shall property be allocable to the portion of the Leased Premises which was so taken or sold and Landlord shall, at Landlord's sole expense, restore and reconstruct the Building and land and the Leased Premises to substantially their former condition to the extent that the same, in Landlord's judgment, may be feasible, but such work shall not exceed the scope of the work done by Landlord in originally constructing the Building and installing tenant improvements in the teased Premises nor shall Landlord in any event be required to spend for such work an amount in excess of the amount received by Landlord as compensation for damages (over and above amounts going to the mortgagee of the property taken) for the part of the Building and land or the teased Premises so taken. Landlord shall be entitled to receive all of the compensation awarded upon a taking of any part or all of the Building and land or the Leased Premises including any award for the value of unexpired term of this Lease and Tenant shall not be entitled to and expressly waives all claim to any such compensation provided, however, Tenant shall be entitled to receive an award for damages to Tenant's leasehold improvements. 20. TAXES. Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the teased Premises, and if any such taxes for which Tenant is liable are in any way levied or assessed against Landlord, tenant shalt pay to Landlord upon demand that part of such taxes for which Tenant is primarily liable hereunder. Notwithstanding any other provision contained in this tease. Tenant shall pay any and all licenses, charges and other fees of every kind and nature as and when they become due and before the saint become delinquent arising out of or in connection with use and occupancy of the Leased Premises, including, but not limited to, license fees, business license tax, the amount of any privilege, sales, excise or other tax (other than income) imposed upon rentals herein provided to be paid by Tenant or upon Landlord in an amount measured by such rentals received by Landlord. 21. SURRENDER UPON TERMINATION. At the termination of this Lease, whether caused by lapse of time or otherwise. Tenant shall at once surrender possession of the Leased Premises and deliver the Leased Premises to Landlord in as good repair and condition as at the commencement of Tenant's occupancy, reasonable wear and tear and damages or destruction by fire or other insured casualty excepted, and shall deliver to Landlord all keys to the Leased Premises, and, if such possession is not immediately surrendered, Landlord may forthwith enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying said premises, or any part thereof, by force, if necessary, without having any civil or criminal liability therefor. All alterations, additions, or improvements (whether temporary or permanent in character) made in or upon the Leased Premises shall, if Landlord elects, be Landlord's property on termination of this Lease and shall remain on the Leased Premises without compensation to Tenant. All furniture, movable trade fixtures, and equipment installed by Tenant may be removed by Tenant at the termination of this Lease, All removals permitted herein shall be accomplished in a good workmanlike manner so as not to damage the Leased Premises or the Building. Tenant, or Landlord at Tenant's expense, shall repair any damage to the Leased Premises, the Building or any improvement on the lands herein described caused by any such removal. All furniture, movable trade fixtures and equipment installed by tenant not removed at the end of the tease Term hereof shall thereupon be conclusively presumed to have been abandoned by Tenant and Landlord may, at its option, take over the possession of such property and either (i) declare same to be the property of Landlord by written notice thereof to Tenant or (ii) at the sole risk, cost, and expense of Tenant remove the same or any part thereof in any manner that Landlord shall choose and store the same or any part thereof in any manner that Landlord shall choose and store the same without incurring liability to Tenant or any other person. 22. DEFAULT. In the event of default in any of the covenants or conditions herein, Landlord may assert any remedies provided to an aggrieved landlord by law, without limiting the generality of the foregoing, Landlord, at its option, shall have any one or all of the following remedies which are cumulative and not exclusive: (a) Landlord may declare the Lease forfeited, but such declaration or forfeiture shall not terminate Tenant's duty to pay rentals and additional rent hereunder, nor waive any other rights of Landlord unless Landlord specifically so states in writing: (b) Landlord may re-enter the Leased Premises and remove all persons and property, including that of Tenant or any third persons therefrom, without being guilty of any manner of trespass or conversion, but any such re-entry shall not terminate Tenant's duty to pay rentals and additional rent hereunder nor waive any other rights of Landlord unless Landlord specifically so states in writing: (c) Landlord may resume possession of the Leased Premises and relet the same for the account of Tenant, who shall make good any deficiency: (d) Landlord may recover all arrearages of rent and additional rent hereunder: (e) Landlord may declare the entire amount of the rent and additional rent hereunder, which would have become due and payable during the term of this Lease, to be due and payable immediately, in which event, Tenant agrees to pay the same at once, together with all rents and additional rents theretofore due, to Landlord at the address specified herein or hereunder; provided, however, that such payments shall not constitute a penalty or forfeiture or liquidated damages, but shall merely constitute a penalty or forfeiture or liquidated damages, but shall merely constitute payment in advance of the rent for the remainder of the term: (f) Tenant, in addition to rentals and additional rent hereunder, shall be liable for all damages and expenses which Landlord has suffered by reason of Tenant's default: including, but not limited to, damage to the Leased Premises (which shall be measured at Landlord's option by landlord's cost to repair the same or by the difference in the market value of the Leased Premises before and after such damage), cost of reletting. (e.g., advertising the Leased Premises for lease, preparation of a new lease agreement, etc.), attorney fees, cost of court, cost of repossession and other special or consequential damages: (g) Landlord shall have, in addition to any statutory liens, the right to seize and possess, as security for all sins due hereunder from Tenant, all the goods, wares, merchandise, chattels, implements, fixtures, tools and other personal property which are or may be put upon the teased Premises and Landlord shall have a lien upon an such property which may be possessory but shall not be required to be. Tenant hereby waives all exemptions in connection with such property, which could otherwise be available to it. Landlord shall give Tenant ten (10) days written notice of any default herein. for the purpose of the foregoing. Tenant shall be deemed to be in default under this Lease if Tenant: (1) has failed to pay any installment of rent or other amount when due. Whether or not such payment shall have been demanded: (2) fails to perform or comply with any of the other conditions or agreements expressed or implied herein and fails to remedy such lack of compliance within thirty (30) days after written notice from Landlord of such default; (3) abandons, vacates or does not occupy the teased Premises for fourteen (1/4) consecutive days; and (4) liquidates or ceases to exist, admits insolvency, seeks relief under any law for the relief of debtors, makes an assignment for the benefit of creditors or is the subject of a voluntary or involuntary petition in bankruptcy or receivership, or in the event of any like occurrence which, in the sole and absolute judgment of Landlord, evidences the serious financial insecurity of Tenant or if the estate hereby created shall be levied upon or taken by execution or process of law, then and in any such event, regardless of any waiver or consent to any earlier event or events of default. In the event that any court or governmental authority shall limit any amount, which Landlord may be entitled to recover pursuant to the terms hereof, Landlord shall be entitled to recover the maximum amount permitted under law. Nothing herein contained shall be deemed to limit or restrict Landlord's recovery from Tenant of the maximum amount permitted under law or of any other sums or damages which Landlord way be entitled to so recover in addition to the damages set forth herein, Nothing contained herein shall be deemed to require Landlord to relet the Leased Premises or to take any other action with retard to the Leased Premises and Landlord shall not be liable for any failure to relet, collect rent, or take any other action with regard to the teased Premises after termination pursuant to the terms hereof. Tenant hereby waives any right of redemption, which Tenant may at any time have by reason of Tenant's default or eviction hereunder. The parties hereto expressly agree that this Lease and the estate created hereby shall not continue or inure to the benefit of any assignee, receiver or trustee in bankruptcy except at the option of Landlord. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease, or to a decree compelling performance of any of. The other covenants, agreements, conditions or provisions of this Lease, or to any other remedy allowed to Landlord at law or in equity. Tenant hereby expressly agrees that the damages provided for herein constitute just compensation for the loss or damages which may be actually sustained by Landlord and that such damages are just and reasonable. 23. NO IMPLIED WAIVER The failure of Landlord to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power, or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or redress for any violation of any term, covenant, agreement, or condition contained in this Lease or contained in the Rules and Regulations attached to and forming a part of this Lease shall not prevent a subsequent act, which would have originally constituted a violation from having all the force and effect of an original violation. No express waiver shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. A receipt by landlord of any rent with knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord, 24. ATTORNEYS' FEES AND LEGAL EXPENSES. Each party shall pay to the other party upon demand all reasonable attorneys fees and all expenses and court costs of such party incurred in enforcing any of the obligations of the other party under this Lease. 25. WORK AGREEMENT. The improvements and installations specified in Exhibit "E" hereof shall be made in accordance with the plans and specifications provided for in Exhibit "E" on or prior to the Rental Commencement Date. 26. LANDLORD'S LEIN In addition to the statutory landlord's lien, Landlord shall have, at all times, and Tenant hereby grants to Landlord, a valid security interest to secure payment of all rent and other suns of money becoming due hereunder from tenant, and to secure payment of any damages or loss which Landlord may suffer by reason of the breach by Tenant or any covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant presently or which may hereafter be situated on the Leased Premises, and all proceeds therefrom, and such property shall not be removed therefrom without the consent of Landlord until all arrearages in rent as well as any and all other sums of money then due to Landlord hereunder shall first have been paid and discharged and all the covenants. agreements and conditions hereof have been fully complied with and performed by Tenant. Landlord agrees that any such statutory lien or security interest shall be subject and subordinate to any purchase money security interest to the extent such purchase money security interest attaches to Tenant's computer systems or other laboratory equipment having a unit cost of $20,000.00 or more. Upon the occurrence of any event of default by Tenant, Landlord may, in addition to any other remedies provided herein, enter upon the Lease Premises and take possession of any and all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant situated on the Lease Premises, without liability for trespass or conversion, and sell the same at public or private sale, with or without having such property at the sale, after giving tenant reasonable notice of the time and place of any public sale or of the tine after which any private sale is to be made, at which sale Landlord or its assigns may purchase unless other-wise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable notice shall be met if such notice is given in the manner prescribed in this tease at least five (5) days before the time of sale. The proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the property (including reasonable attorneys' fees and other expenses), shall be applied as a credit against the indebtedness secured by the security interest granted in this Paragraph 25. Any surplus shall be paid to Tenant or as otherwise required by law, and Tenant agrees to execute and deliver to Landlord a financing statement in form sufficient to perfect the security interest of Landlord in the aforementioned property and proceeds thereof under the provisions of the Uniform Commercial Code in force in the State of Texas. The Statutory lien for rent is not hereby waived, the security interest herein granted being in addition and supplementary thereto. 27. SUBORDINATION. (a) Except as other-wise provided to the contrary herein, Tenant agrees that this Lease shall at all times be subject and subordinate to the lien of any mortgage (including any amendment or modification thereof, whether made prior or subsequent to request for subordination) which may be placed on the teased Premises by Landlord, if requested in writing by the bolder or prospective holder thereof; provided, that Tenant shall at all times be entitled to possession tinder this Lease so long as it complies with the terms herein set out, subject to the conditions hereinafter expressed. Tenant agrees, upon demand and without cost, to execute any instrument as nay be required to effectuate such subordination which instruments shall include, among and with any other provisions required by the Mortgagee, an agreement on the part of Tenant to attorn to any and all successors their interest to the Leased Premises resulting from any foreclosure of any such mortgage or conveyance in lieu of the foreclosure. At the-date hereof, there are no outstanding mortgages on the Building. (b) Anything to the contrary herein notwithstanding, Tenant covenants and agrees that if the present or future holder of any mortgage (including any amendment and/or modification thereof, whether made prior or subsequent to the subordination hereinabove provided for) affecting the Leased Premises subordinates said mortgage to this Lease, whether the same be part of a general subordination by such Mortgagee or specifically refers to this Lease, then this Lease shall for all intents and purposes be considered to be paramount and superior to said mortgage and shall survive and continue to remain in full force and effect, even though said mortgage be foreclosed; and, Tenant shall continue to comply with all of its obligations hereunder, whether or not said mortgage be foreclosed; and, in the event of any such foreclosure, Tenant agrees to thereafter attorn to the Mortgagee, its successors and assigns, and to any purchaser at foreclosure, its successors and assigns. (c) Tenant agrees that it will not (i) prepay any rents or other charges more than thirty (30) days in advance of the due date required by this Lease without prior written consent of said Mortgagee: (ii) terminate this lease or exercise a right of set- off, if any there be, except for the default of Landlord (after giving written notice to the Mortgagee and a reasonable time for the Mortgagee to correct such default) or (iii) amend this Lease without the prior consent of the Mortgagee. (d) Tenant will, upon receipt of demand therefor, at any time or times, execute, acknowledge, and deliver to Landlord any and all instruments and certificates that may be necessary or proper to more effectively effectuate the provisions hereof, This lease and all rights of Tenant hereunder are further subject and subordinate, to the extent that the same relate to the Leased Premises, to all applicable ordinances of the City of Irving, Texas, relating to easements, franchises, and other interests or rights upon, across or appurtenant to the building or any of the Land, and all utility easements and agreements. 28. QUIET ENJOYMENT. Provided Tenant pays the rent payable hereunder as and when due and payable and keeps and fulfills all of the terms, covenants, agreements and conditions to be performed by Tenant hereunder, Tenant shall at all times during the Lease Term peaceably and quietly enjoy the Leased Premises without any disturbances from Landlord or from any other person claiming by, through or under Landlord, subject to the terms, provisions, covenants, agreements and conditions of this tease and to the deeds of trust, mortgages. ground leases, ordinances, leases, utility easements and agreements to which this Lease is subject and subordinate, as hereinabove set forth. 29. NOTICE TO LANDLORD In the event of any act or omission by Landlord which would give Tenant the right to damages from Landlord or the right to terminate this Lease by reason of a constructive or actual eviction from all or part of the Leased Premises or otherwise, Tenant shall not sue (or such damages or exercise any such right to terminate until (i) it shall have given written notice of such act or omission to Landlord and Landlord's mortgagee, if any, and (ii) a reasonable period of time for remedying such act or omission shall have elapsed following the giving of such notice, during which time Landlord, its agents, employees or its mortgagee shall be entitled to enter upon the Leased Premises and do therein whatever may be necessary to remedy such act of omission. hiring the period after the giving of such notice and during the remedying of such act or omission the rent payable by tenant for such period as provided in this Lease shall be abated and apportioned only to the extent that any part of the Leased Premises shall be untenantable. 30. HOLDING OVER BY TENANT. Should Tenant or any of its successors in interest continue to hold the Leased Premises after the termination of this Lease, whether such termination occurs by lapse of time or otherwise, such holding over shall constitute and be construed as a tenancy from month to month only, at a monthly rental equal to 150% of the monthly rent provided herein at the time of such termination, hiring such time as Tenant shall continue to hold the Leased Premises after the termination hereof, Tenant shall continue to hold the Leased Premises after the termination hereof. Tenant shall be regarded as a Tenant from month to month; subject, however, to all of the terms, provisions covenants and agreements on the part of Tenant hereunder. No payments of money by Tenant to Landlord after the termination of this Lease shall reinstate, continue, or extend the term of this Lease and no extension of this Lease after the termination thereof shall be valid unless and until the same shall be reduced to writing and signed by both Landlord and Tenant. 31. RULES AND REGULATIONS Tenant and Tenant's agents, employees, and invitees will comply with all requirements of the Rules and Regulations (as changed from time to time as hereinafter provided) which are attached hereto as Exhibit "B" and made a part hereof as though fully set out herein. Landlord shall at all times have the right to change such Rules and Regulations or to promulgate other Rules and Regulations in such reasonable manner as may be deemed advisable for the safety, care or cleanliness of the Building and related facilities or premises and for preservation of good order therein; provided, however, that such changes shall not become effective and a part of this Lease until a copy thereof shall have been delivered to Tenant. Tenant shall further be responsible for the compliance with such Rules and Regulations by the employees, servants, agents, visitors, and invitees of Tenant. Landlord shall not be responsible to Tenant for failure of any person to comply with such Rules and Regulations No such amendment shall have the effect of changing any of the basic terms of this Lease. 32. ESTOPPEL CERTIFICATE Tenant will, at any time and from time to time, upon not less than twenty (20) days' prior request by Landlord, execute, acknowledge and deliver to landlord a statement in writing executed by Tenant certifying that this Lease is the entire agreement between the parties and is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications) and the dates to which the rent has been paid, that the Tenant has unconditionally accepted the Leased Premises, and either stating that to the knowledge of the signer of such certificate no default exists hereunder or specifying each such default of which the signer may have knowledge; it being intended that any such statement by Tenant may be relied upon by any prospective purchaser or mortgagee of the Building. 33. PERSONAL LIABILITY. The liability of Landlord to Tenant for any default by landlord under the terms of this Lease shall be limited to the interest of Landlord in the Building and land and landlord shall not be personally liable for any deficiency. This clause shall not be deemed to limit or deny any remedies which Tenant may have in the event of default by Landlord hereunder which do not involve the personal liability of Landlord, 34. BROKERAGE. Each party hereto warrants that it has had no dealings with any broker or agent in connection with the negotiation or execution of this Lease other than Cushman & Wakefield of Texas, Inc. and, JPI Realty, Inc. hereinafter collectively referred to as the "Brokers". Each party hereto agrees to indemnify the other party against all costs, expenses, attorneys' fees or other liability for commissions or other compensation or charges claimed by any broker or agent, other than Brokers, claiming the same by through, or under it with respect to the original term thereof or any renewal or extension thereof or with respect to any expansion of the Leased Premises. The brokerage commission payable to the Brokers, if any, shall be paid by Landlord pursuant to the terms of a separate agreement between landlord and the Brokers. 35. NOTICES. Each provision of this agreement, or of any applicable governmental lawn, ordinances, regulations and other requirements with reference to the sending, mailing or delivery of any notice, or with reference to the making of any payment by tenant to Landlord, shall be deemed to be complied with when and if the following steps are taken: (a) All rent and other payments required to be made by tenant to Landlord hereunder shall be payable to Landlord in Dallas County, Texas. at the address set forth on Page 1 hereof or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. (b) Any notice or document required to be delivered hereunder shall be deemed to be delivered if actually received and whether or not received when deposited in the United States wail, postage prepaid certified or registered mail (return receipt requested) addressed to the parties hereto at their respective addresses set forth on Page 1 hereof or at such other address as either of said parties have theretofore specified by written notice delivered in accordance herewith. 36. SEVERABILITY. Each and every covenant and agreement contained in this Lease is, and shall be construed to be, a separate and independent covenant and agreement. If any term or provision of this Lease or the application thereof to any person or circumstances shall to any extent be invalid and unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is invalid Or unenforceable, shall not be affected thereby. 37. NO MERGER. There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Leased Premises or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as welt as the fee estate in the Leased Premises or any interest in such fee estate. 38. FORCED MAJEURE. Whenever a period of time is herein prescribed for action to be taken by Landlord or Tenant, such party shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strike, acts of God, shortages of labor or materials, war, governmental laws, regulations, restrictions, or any other cause of any kind whatsoever which is beyond the reasonable control of such party; provided, however, that the foregoing shall not in any event excuse Tenant from the prompt payment of rent or any other monetary obligations hereunder. 39. GENDER. Words of any Lender used in this Lease shall be held and construed to include any other gender and words in the singular number shall be held to include the plural, unless the context otherwise requires. 40. JOINT SEVERAL ABILITY. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. 41. NO REPRESENTATIONS. Landlord or Landlord's agents have made no representations or promises with respect to the Leased Premises, the Building licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. 42. ENTIRE AGREEMENT This Lease sets forth the entire agreement between the parties and no amendment or modification of this Lease shall be binding or valid unless expressed in a writing executed by both parties hereto. 43. PARAGRAPH HEADINGS Paragraph headings contained in this Lease are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several paragraphs hereof. 44. BINDING EFFECT. All of the covenants, agreements, terms, and conditions to be observed and performed by the parties hereto shall be applicable to and binding upon their respective heirs, personal representatives, successors, and to the extent assignment is permitted hereunder, their respective assigns, 45. RIDERS AND EXHIBITS. the following numbered Riders and lettered Exhibits are attached hereto and incorporated herein by reference for all purposes. Riders No. 1 and 2 Exhibits No. A, B. C, and D 46. EXECUTION OF LEASE BY LANDLORD. Except for the person executing this lease as an officer of Landlord, employees or agents of Landlord, or of Landlord's broker, if any, have no authority to make or agree to make a lease or any other agreement or undertaking in connection herewith. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Leased Premises and this document becomes effective and binding only upon the execution and delivery hereof by Landlord and Tenant. All negotiations, considerations, representations and understandings between Landlord and Tenant are incorporated herein and may be modified or altered only by agreement in writing between Landlord and Tenant, and no act or omission or any employee or agent of Landlord or of Landlord's broker, if any, shall alter, change or modify any of the provisions herof. LANDLORD: WESTERN ATLAS INTERNATIONAL, INC. BY: /S/ ------------------------------ Printed Name: Title: TENANT: CARRINGTON LABORATORIES, INC. BY: /S/ ------------------------------ Printed Name: Title: EXHIBIT "B" To Lease By and Between WESTERN ATLAS INTERNATIONAL, INC, as Landlord and CARRINGTON LABORATORIES, INC., as Tenant Building Rules and Regulations 1. No birds, animals, reptiles, or any other creatures, shall be brought into or about the Building. 2. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. 3. Tenant shall not make or permit any improper noises in the Building, create a nuisance, or do or permit anything which, in Landlord's reasonable judgment, interferes in any way with other tenants or persons having business with them. 4. No equipment of any kind shall be operated on the Leased Premises that could in any way annoy any other tenant in the Building without the prior written consent of Landlord. 5. Tenant shall cooperate with Building employees in keeping the Leased Premises neat and clean 6. Corridor doors, when not in use, shall be kept closed. 7. No bicycles or similar vehicles will be allowed in the Building. 8. Tenant will refer all contractors, contractor's representatives, and installation technicians rendering any service on or to the leased premises for Tenant to Landlord, for Landlord's approval and supervision for performance of any contractual service. This provision shall apply to all work performed in the Building, including installation of telephones, telegraph equipment, electrical devices, and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceiling, equipment, or any other physical portion of the Building. 9. No nails, hooks, or screws shall be driven into or inserted in any part of the Building except by Building maintenance personnel. 10. Sidewalks, doorways, vestibules, halls, stairways, and similar areas shall not be obstructed by Tenant or its officers, agents, servants, and employees, or used for any purpose other than ingress and egress to and from the Leased Premises, or for going from one part of the Building to another part of the Building. No furniture shall be placed in front of the Building, or in any lobby or corridor without written consent of Landlord. 11. Tenant, its employees, or agents, or anyone else who desires to enter the Building after normal working hours, will be required to sign in upon entry and sign out upon leaving, giving the location during their stay and their time of arrival and departure. Normal working hours means 7:30 a.m. until 6:00 p.m. daily and 8:0O a.m. until 1:00 p.m. on Saturdays, holidays excepted, but the Building will be accessible by sign-in twenty- four (24) hours per day. 12. All deliveries must he made via the service entrance and service elevator, when provided during normal working hours or at such times as Landlord lay determine. Prior approval must be obtained from the Landlord for all deliveries that must be received after normal working hours. 13. Landlord or its agents or employees shall have the right to enter the Leased Premises to examine the same or to make such repairs, alterations, or additions as Landlord shall deem necessary for the safety, preservation, or improvement of the Building. 14. Landlord has the right to evacuate the Building in the event of an emergency or catastrophe. 15. Tenant shall not do anything, or permit anything to be done, in or about the building, or bring to keep anything therein, that will in any way increase the possibility of fire or other casualty, or do anything in conflict with the valid laws, rules, or regulations of any governmental authority. 16. Tenant shall notify the Building Manager when safes or other equipment are to be taken into or out of the Building. Moving of such items shall be done under the supervision of the Building Manager, after receiving written permission from him. 17. Landlord shall have the power to prescribe the weight and position of safes or other heavy equipment, which may overstress any portion of the floor. All damage done to the Building by the improper placing of heavy items which overstress the floor will be repaired at the sole expense of the Tenant. 18. No food shall be distributed from tenant's office without the prior written approval of the Building Manager. 19. No additional locks shall be placed upon any doors without the prior written consent of Landlord, All necessary keys shall be furnished by Landlord, and the same shall be surrendered upon termination of this Lease and Tenant shall then give Landlord or his agent an explanation of the combination of all locks on the doors and vaults. 20. Tenant shall comply with parking rules and regulations as may be posted and distributed from time to time. 21. Plumbing and appliances shall be used only for the purposes for which constructed, and no sweeping, rubbish, rags, or other unsuitable material shall be thrown or placed therein. Any stoppage or damage resulting to any such fixtures or appliances from misuse on the part of Tenant or Tenant's officers, agents, servants, and employees shall be paid by Tenant. 22. No signs, posters, advertisements, or notices shall be painted or affixed on any of the windows or doors, or other parts of the Building, except in such color, size, and style, and in such places, as shall be first approved in writing by Landlord. There shall be no obligation or duty on Landlord to give such approval. Building standard suite identification signs will be prepared by a sign writer, approved by Landlord. The cost of the Building standard sign will be paid by Tenant. Landlord shall have the right to remove all unapproved signs without notice to Tenant, at the expense of Tenant. Directories will be placed by Landlord at Landlord's own expense, inconspicuous places in the Building. No other directories shall be permitted. 23. No portion of the Building shall be used for the purpose for lodging rooms or any immoral or unlawful purposes. 24. Vending machines or dispensing machines of any kind will not be placed in the Leased Premises by Tenant unless prior written approval has been obtained from Landlord. 25. Prior written approval, which shall be at Landlord's sole discretion, must be obtained for installation of any solar screen material, window shades, blinds, drapes, awnings, window ventilators, or other similar equipment and any window treatment of any kind whatsoever. Landlord will control all internal lighting that may be visible from the exterior of the Building and shall have the right to change any unapproved lighting, without notice to Tenant, at Tenant's expense. 26. Holidays as defined in this agreement include New Year's flay, Memorial Day, Independence Day, Labor flay, Thanksgiving, and Christmas. 27. Landlord reserves the right to rescind any of these rules and make such other future rules and regulations as in the judgment of Landlord shall from time to time be Deeded for the safety, protection, care, and cleanliness of the Building, the operation thereof, the preservation of good order therein, and the protection and comfort of its tenants, their agents, employees, and invitees, which rules when made and notice thereof given to a tenant, shall be binding upon him in like manner as if originally herein prescribed. 28. Tenant shall at all times keep a chair pad under every chair, which has rollers and is located in a carpeted area. 29. Landlord will require all employees and visitors to wear identification badges as prescribed by the Landlord at all times. Landlord shall exercise reasonable discretion in refusing entry to any person not wearing such identification. RIDER NO. 1 To Lease By and Between WESTERN ATLAS INTERNATIONAL INC., as Landlord and CARRINGTON LABORATORIES INC., as Tenant 1. Cancellation Option. Either party hereto may cancel and terminate this lease by giving the other party three hundred and sixty five (365) days written notice thereof; provided, however, that Tenant ray not cancel and terminate this Lease if Tenant is in default hereunder either when the cancellation option is exercised or on the date such cancellation is effective. 2. Parking. Parking facilities are available for the Building in an uncovered parking area in close proximity to the Building on a first-come first-served basis. So long as Tenant is not in default under the terms of this Lease, Tenant shall have the right to use such facilities on a first-come first-served basis for parking by tenant and Tenant's employees, visitors and invitees without charge. Landlord, however, reserves the right at any time during the term of this lease to designate the area which Tenant may use for parking of vehicles, which area shall be larger than an area large enough to park forty-two (42) vehicles, In addition, Landlord in any case will designate six (6) parking spaces in reasonable proximity of the building for the exclusive use of Tenant's executives. RIDER NO. 2 To Lease By and Between WESTERN ATLAS INTERNATIONAL. INC., as Landlord and CARRINGTON LABORATORIES INC., as Tenant Option to Extend Tenant at its option may extend the term of this Lease for an additional three (3) years by serving written notice thereof upon landlord at least six (6) months before the expiration of the initial term hereof, provided that at the time of such notice and at the commencement of such extended term, there shall exist no event of default as defined in this Lease. Upon the service of said notice, this Lease shall be extended without the necessity of the execution of any further instrument or document. Such extended term shall commence upon the expiration date of the initial term of this lease, expire upon the annual anniversary of said date three (3) years thereafter, and be upon the same terms, covenants and conditions as provided in this Lease for the initial term, except that the Minimum Rent payable during the extended term shall be at the prevailing rate as determined by Landlord for comparable space in the Las Colinas Development market area, at the commencement of such extended term, Payment of all additional rent and other charges required to be made by Tenant as provided in this lease for the initial term shall continue to be made during such extended term. Any termination of this lease during the initial term shall terminate all rights of extension hereunder, The terms of this option are personal to the Tenant and will not inure to the benefit of any assignee or subtenant of Tenant. EXHIBIT "A" [FLOOR PLAN APPEARS HERE] EXHIBIT "C" To Lease By and Between WESTERN ATLAS INTERNATIONAL, INC., as Landlord and CARRINGTON LABORATORIES, INC, as Tenant Being all of Las Colinas, Area IV, First Installment Revised Plot, an addition to the City of Irving, Texas according to the Plat thereof recorded in Volume 81119, Page 0383, of the Deed Records of Dallas County, Texas. EXHIBIT "D" To Lease Agreement By and Between WESTERN ATLAS INTERNATIONAL, INC., as Landlord and CARRINGTON LABORATORIES, INC., as Tenant It is understood and agreed that: A. PLANS AND SPECIFICATIONS. Landlord agrees to prepare the initial plans and specifications (the "Initial Plans") for the completion of a dividing wall in the large open area shown generally on Schedule "1" attached hereto and made a part hereof to provide for an office for the medical director and his secretary, which improvements are hereinafter referred to as the "Tenant Finish", and to submit the Initial Plans to Tenant for Tenant's approval as soon as practical after receiving Tenant's construction requirements, which construction requirements shall be submitted to Landlord within ten (10) days after the date of this Lease. Tenant shall, within fifteen (15) days after receipt of such Initial Plans from Landlord, either approve or disapprove the sane: provided, however, that should tenant request any changes in the Initial Plans which vary from Tenant's original requirements, any redrawing of such Initial Plans shall be accomplished at Tenant's sole cost and expense. If Tenant disapproves the same, Tenant shall specify in reasonable detail the reasons for any such disapproval. Any redrawing of the Initial Plans or changes therein occasioned by Tenant necessitated because of objections which are contrary to Tenant's original requirements submitted to Landlord and/or after Tenant's initial approval shall be accomplished at Tenant's sole cost and expense. The cost of such redrawing shall be paid by Tenant as additional rent hereunder within ten (10) days after tenant's receipt of Landlord's written demand therefor. Failure of Tenant to respond within the aforesaid fifteen (15) day period shall be deemed to be approval of such Initial Plans. In the event the Initial Plans have not been approved by Landlord and Tenant within sixty (60) days from the date of this Lease, Landlord shall have the right to cancel and terminate this Lease. The Initial Plans which are approved as aforesaid are hereinafter referred to as the Plans'. B. CONSTRUCTION. Landlord will construct the Tenant Finish in the Leased Premises with reasonable diligence after the Plans are approved pursuant to the terms of Paragraph A hereof. C. OCCUPANCY AND RISK OF LOSS. It Is understood and agreed that Tenant is occupying the Leased Premises under the terms of that certain Lease dated December 4, 1987, as amended (the "Carrington Lease"), which Lease was terminated by Letter dated January 1, l99l effective as of December 31, 1991. The Tenant Finish which Landlord has agreed to perform hereunder will be performed during the term of the Carrington tease. Tenant agrees to cooperate fully with Landlord in the performance of the tenant Finish in the Leased Premises, Tenant agrees that Landlord shall not be liable for any claims, losses or damage caused to persons or property in the Leased Premises during the performance of the Tenant finish unless such clams, losses or damage is caused by the malicious, willful or grossly negligent acts of Landlord or Landlord's employees or agents, Except for the Tenant Finish which landlord has agreed to perform as aforesaid, Tenant has inspected the Leased Premises and accepts the same as-is" without any warranty whatsoever, either express or implied: EX-10.5 8 Exhibit 10.5 FIRST LEASE AMENDMENT STATE OF TEXAS COUNTY OF DALLAS THIS AGREEMENT is entered into as of the 16th day of April, 1992 by and between WESTERN ATLAS INTERNATIONAL INC., hereinafter referred to as "Landlord", and CARRINGTON LABORATORIES INC., hereinafter referred to as "tenant", to be effective on the Effective Date, as hereinafter defined. W I T N E S S E T H: WHEREAS, by Lease dated August 30, 1991 (the "Lease"), Landlord leased to Tenant approximately 21,733 square feet of space in the Building known as the Core Laboratories Building, 1300 East Rochelle Boulevard, Irving, Texas 75062-3963 (the "Building"); and WHEREAS, Landlord has agreed to lease Tenant an additional approximately 1,551 square feet of space located in the Building and described as follows: Room Nos. Approximate Net Rentable Area --------- ----------------------------- A-1060 - Office 261 square feet A-1061 - Office 184 square feet A-1062 - Office 184 square feet A-1065 - Office 193 square feet A-1066 - Office 165 square feet A-1026 - Office 197 square feet ----------------- Sub-Total 1,184 square feet A-1070 - Conference 367 square feet Room ----------------- Total 1,551 square feet all of which space is shown crosshatched on Exhibit "A" attached hereto and made a part hereof for all purposes (the "Additional Space"), which Additional space will effectively increase the aggregate square footage covered by the Lease to approximately 23,284 square feet of space as of the Effective Date. NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the parties hereto do hereby agree that the Lease is amended and modified as follows effective as of the first to occur of (i) the date Landlord notifies Tenant in writing that the Tenant finish has been completed in the Additional Space in accordance with the terms of Exhibit "B" attached hereto and made a part hereof for all purposes; or (ii) on the date Landlord would have completed the Tenant Finish in the Additional Space in accordance with Exhibit "B" hereof except for delays caused by Tenant or by the agents, employees or contractors of Tenant; or (iii) on the date Tenant actually takes possession of all or any part of the Additional Space, or (iv) May 1 1992, the first of which dates is herein referred to as the "Effective Date": 1. Area. The figure 21,733 square feet set out in Paragraph l(a) of the Lease and wherever the figure appears in the Lease is hereby deleted and the figure 23,284 is hereby substituted therefor. 2. Minimum Rent. The Minimum Rent of $18,110.83 per month set out in the first (lst) line of Subparagraph 1(k) of the Lease is increased to $19,403.33 per month, and the $20,374.69 per month set out in the third (3rd) line of Subparagraph 1(k) of the Lease is hereby increased to $21,828.75 per month. Minimum Rent for the calendar month when the Effective Date occurs shall be prorated on the basis of the number of days in that calendar month. 3. Operating Costs. The date "January 1, 1992" contained in the third line of the third grammatical paragraph of Paragraph 8 is hereby deleted and the date "January 1, 1993" is hereby substituted therefor. 4. Construction Landlord shall construct the Tenant Finish in the Additional Space in accordance with the terms of Exhibit "B" hereto. The Lease as hereby amended is hereby ratified and confirmed as being in full force and effect. This Agreement shall be binding on the parties hereto and their respective successors and assigns: subject, however, to the terms of the Lease as hereby amended. EXECUTED as of the date first hereinabove set out. LANDLORD: WESTERN ATLAS INTERNATIONAL, INC. BY: /s/ __________________________ Printed Name: Title: TENANT: CARRINGTON LABORATORIES, INC. BY: /s/ __________________________ Printed Name: Title: EXHIBIT A [ FLOOR PLAN APPEARS HERE ] EXHIBIT "B" to First Lease Amendment (the "Agreement") By and Between WESTERN ATLAS INTERNATIONAL, INC. , as Landlord and CARRINGTON LABORATORIES. INC., as Tenant It is understood and agreed that: A. Landlord agrees at Landlord's sole cost and expense to construct (i) approximately fifteen (l5) linear feet of demising wall, taped, bedded and painted with one (1) coat of a Building standard paint matching the existing walls, and (ii) one (1) Building standard emergency exit door with Building standard hardware to create an exit to the Building lobby and entry to the A-1 level of the Building. The work hereinbefore provided for is referred to in this Agreement as the "Tenant Finish". All other parts of the Additional Space have been inspected by Tenant and are accepted "as-is" without any warranty whatsoever, either express or implied. B. ACCEPTANCE: tenant shall within twenty (20) days after the Effective Date provide Landlord with a so-called punch list of incomplete work and if such work is Landlord's obligation hereunder, such work shall be completed by Landlord with reasonable diligence under the circumstances. Any Tenant Finish not listed on the punch list shall be deemed accepted and completed in accordance with the terms hereof. C. If Landlord shall be delayed in substantially completing the Tenant Finish as a result of: (a) Tenant's failure to promptly and timely furnish any information required by Landlord; or (b) Tenant's request for materials, finishes or installations other than Landlord's Building Standard; or (c) the performance of work by or on behalf of Tenant during the early occupancy period provided for in Paragraph D hereof by a person, firm or corporation employed by Tenant and the completion of said work by said person, firm or corporation (all such persons, firms or corporations being subject to the approval of Landlord); then the Effective Date shall be accelerated by the number of days of such delays. D. Landlord will permit Tenant and its agents to enter the Additional Space prior to the Effective Date in order that Tenant may perform through its own contractors (to be first approved by Landlord) such other work and decorations as Tenant may desire at the same time that Landlord's contractors are working in the Additional Space. The foregoing license to enter prior to the Effective Date, however, is conditioned upon Tenant's workmen and mechanics working in harmony and not interfering with the labor employed by Landlord, Landlord's mechanics or contractors or by any other tenant or their contractors. Such license is further conditioned upon Worker's Compensation and public liability insurance for bodily injury and property damage, all in amounts and with companies and on forms satisfactory to Landlord, being provided and at all times maintained by Tenant's contractors engaged in the performance of the work, and certificates of such insurance being furnished to Landlord prior to proceeding with the work. If at any time such entry shall cause disharmony or interference therewith, this license may be withdrawn by Landlord upon forty-eight (48) hours written notice to Tenant. Such entry conditions shall be deemed to be under all of the terms, covenants, provisions and conditions of the Lease, except as to the covenant to pay the additional Minimum Monthly Rent provided for in Paragraph 2 of this Agreement unless otherwise provided for herein. Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of Tenant's decorations or installations so made prior to the Effective Date, the same being solely at Tenant's risk, and Tenant shall hold Landlord harmless from any claim, demand or action arising from activities of Tenant's contractors, workmen or mechanics. EX-10.6 9 Exhibit 10.6 SECOND LEASE AMENDMENT STATE OF TEXAS COUNTY OF DALLAS THIS AGREEMENT is entered into as of the 23rd day of September, 1993, by and between WESTERN ATLAS INTERNATIONAL, INC., hereinafter referred to as "Landlord", and CARRINGTON LABORATORIES INC., hereinafter referred to as "Tenant", to be effective on the Effective Date, as hereinafter defined. W I T N F S S E T H: WHEREAS, by Lease dated August 30, 1991 (the "Lease Agreement"), Landlord leased to Tenant approximately 21,733 square feet of space in the building known as the Core Laboratories Building, 1300 East Rochelle Boulevard, Irving, Texas 75062-3963 (the "Building") and WHEREAS, by First Lease Amendment, dated April 16, 1992 (the "First Amendment") Landlord leased to Tenant an additional approximately 1,551 square feet of space located in the Building and described in the First Amendment; and WHEREAS, the Lease Agreement and First Amendment are hereinafter collectively referred to as the "Lease"; and WHEREAS, Landlord and Tenant desire to add an additional approximately 862 square feet of space to the Leased Premises (being A-1047, A-l048 and A-1069) which space is shown crosshatched on Exhibit "A" attached hereto and made a part hereof for all purposes (the "Additional Space"), which Additional space will effectively increase the aggregate square footage covered by the Lease to approximately 24,146 square feet of space as of the Effective Date. NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto do hereby agree that the lease is amended and modified as follows effective as of January 1, 1994. 1. Area. The figure 23,284 square feet set out in Paragraph 1(a) of the Lease and wherever the figure appears in the Lease is hereby deleted and the figure 24.146 is hereby substituted therefor. 2. Minimum Rent. The Minimum Rent of $19,403.33 per month set out in the first (1st) line of Subparagraph 1(k) of the Lease is increased to $20,122.33 per month, and the $21,828.75 per month set out in the third (3rd) line of Subparagraph 1(k) of the Lease is hereby increased to $22,637.75 per month. 3. Exhibit "D" and Schedule "1" to the Lease are hereby deleted. 4. Operating Costs. The base year for operating cost increases for the Additional Space only shall be amended to mean Operating Costs for the 1993 calendar year. 5. Acceptance. Tenant has inspected the Additional Space "as-is" without any warranty whatsoever, either express or implied. The Lease as hereby amended is hereby ratified and confirmed as being in full force and effect. This Agreement shall be binding on the parties hereto and their respective successors and assigns; subject, however, to the terms of the Lease as hereby amended. EXECUTED as of the date first hereinabove set out. LANDLORD WESTERN ATLAS INTERNATIONAL, INC. BY: /s/ ------------------------------ Printed Name:_________________ Title: _______________________ TENANT: CARRINGTON LABORATORIES, INC. BY: /s/ ------------------------------ Printed Name:_________________ Title: _______________________ EXHIBIT A [ FLOOR PLAN APPEARS HERE ] EX-10.7 10 Exhibit 10.7 THIRD LEASE AMENDMENT STATE OF TEXAS COUNTY OF DALLAS THIS THIRD LEASE AMENDMENT is entered into as of the 1st day of December, 1994 (the "Amendment Date"), by and between WESTERN ATLAS INTERNATIONAL, INC., hereinafter referred to as "Landlord", and CARRINGION LABORATORIES, INC., hereinafter referred to as "Tenant". W I T N E S S E T H: WHEREAS, by a lease dated August 30, 1991 (the "Lease Agreement"), Landlord leased to Tenant the Leased Premises described in such Lease Agreement; and WHEREAS, the Lease Agreement was amended by a First Lease Amendment, dated as of April 16, 1992 (the "First Amendment"), by and between Landlord and Tenant; and WHEREAS, the Lease Agreement was amended by a Second Lease Amendment, dated as of September 23, 1993 (the "Second Amendment"), by and between Landlord and Tenant; and WHEREAS, the parties here to desire to further amend the Lease Agreement as hereinafter provided for. NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree that the said Lease Agreement is amended and modified as follows: 1. Lease Term. Subparagraph 1(h) of the Lease Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: (h) "Lease Term": The period commencing on the Amendment Date and ending on January 31, 2000, unless sooner terminated as provided in the Lease Agreement. 2. Minimum Rent. Subparagraph 1(k) of the Lease Agreement is here in its entirety and the following is substituted lieu thereof: (k) "Minimum Rent" shall mean the amount per monthly rental per month specified below commencing on the Amendment Date and continuing on or before the first day of each month of the Lease Term hereof: Monthly Annual Months Rental $/Sq. Ft. ------ ------ --------- Dec. 1994 $ -0- -0- Jan. 1995 $ -0- -0- Feb. 1995 - Jan. 1996 $21,631 $ 10.75 Feb. 1996 - Jan. 1997 $21,631 $ 10.75 Feb. 1997 - Jan. 1998 $22,637 $ 11.25 Feb. 1998 - Jan. 1999 $23,643 $ 11.75 Feb. 1999 - Jan. 2000 $23,643 $ 11.75 3. Overtime HVAC Charge. The phrase "$50.00 per hour" in subparagraph 1(m) of the Lease Agreement is hereby amended to read as follows: "$10.00 per hour so long as the building central plant is being operated for another tenant, of the building and if such central plant is not being operated for another such tenant, $25.00 per hour." 4. Supplemental After-Hours Air Conditioning System. Paragraph 5 of the Lease Agreement is hereby amended by adding the following sentence to the end of such Paragraph 5: "Landlord shall on or prior to February 1, 1995, at Landlord's sole cost, install a supplemental after-hours air conditioning system for approximately 1,200 square feet of the Leased Premises, in which case Tenant shall be responsible for metered electrical usage of such air conditioning system)" 5. Base Year. The Base Year defined in Paragraph 8 of the Lease Agreement is hereby amended to delete "1992" (which reference was amended by the Second Lease Amendment to "1993") and substitute in lieu thereof "1994". 6. Audit of Operating Costs. Paragraph 8 of the Lease Agreement is hereby amended by adding the following subparagraph to the end of such Paragraph 8: "Tenant shall have the right to examine and audit Landlord's books and records pertaining to Landlord's determination of Tenant's proportionate share of Excess Operating Costs by giving Landlord written notice within one hundred and twenty (120) days after Tenant's receipt of Landlord's statement to Tenant of Tenant's proportionate share of Excess Operating Expenses for any calendar year pursuant to the provisions of Paragraph B hereof. Any such audit shall be conducted within one hundred and twenty (120) days from the date of Tenant's notice and shall be conducted during normal business hours in such a manner as not to interfere with Landlord's operations. In the event such audit reasonably concludes that Landlord has overstated the actual Tenant's proportionate share of Excess Operating Costs by more than five percent (5%) in any calendar year, Landlord shall reimburse Tenant for the reasonable cost of such audit." 7. Cancellation Option. Paragraph 1 of Rider No, 1 to the Lease Agreement is hereby deleted in its entirety. 8. Option to Extend. The references to "three (3) years" in Rider No. 2 to the Lease Agreement are hereby amended to be "five (5) years". The Lease Agreement as hereby amended is hereby ratified and confirmed by the parties hereto as being in full force and effect. This Third Lease Amendment shall be binding on the parties hereto and their respective successors and assigns; subject, however, to the terms of the Lease Agreement as hereby amended. EXECUTED as of the day first hereinabove set out. LANDLORD TENANT WESTERN ATLAS INTERNATIONAL. INC. CARRINGTON LABORATORIES, INC. By: /s/ By: /s/ ----------------------------- ----------------------------- Name: ___________________________ Name: _______________________ Title: __________________________ Title: ______________________ EX-10.8 11 Exhibit 10.08 FOURTH LEASE AGREEMENT STATE OF TEXAS COUNTY OF DALLAS This Fourth Less. Amendment (this "Amendment") is made and entered into by and WESTERN ATLAS INTERNATIONAL, INC., a Delaware Corporation "Landlord". And CARRINGTON LABORATORIES, INC., a Texas corporation ("Tenant"), effective as of August 31, 1999 (the "Effective Date") Capitalized Terms used herein and not otherwise defined shall have the meanings assigned to such terms In the Lease (hereinafter defined). WITNESSETH: WHEREAS. Landlord and Tenant entered into that certain Lease Agreement dated effective August 30, 1991 (as amended, the "Lease"), pursuant to which Landlord agreed to lease to Tenant and Tenant agreed to Lease from Landlord approximately 21.733 square feet of space (the "Premises") In the building located at 1300 East Rochette Boulevard, Irving, Texas (the "Building"; and WHEREAS the Lease was previously amended by that certain First Lease Amendment between Landlord and Tenant dated April 16, 1992, Increasing the area of the Premises to approximately 23,284 square feet of space; and WHEREAS, the Lease was previously amended by that certain Second Lease Amendment between Landlord and Tenant dated September 23, 1993, increasing the areas of the Premises to approximately 24,146 square feet of space: and WHEREAS, the Lease was previously amended by that Certain Third Lease Amendment between Landlord and Tenant dated December 1, 1994, extending the, term of the Lease to January 31, 2000 and making certain other changes to the original Lease; WHEREAS, the Lease currently contains an option to extend the term for a period of five (5) calendar years from February 1, 2000, though January 31, 2005 which was recently exercised by Tenant and WHEREAS, Landlord and Tenant have agreed to amend the Lease to reduce the length of the renewal term to eighteen (18) months and to set the amount of Minimum Rent applicable during the renewal term, and WHEREA, Landlord and Tenant have agreed to make certain other, changes in the terms and provisions of the Lease as hereafter provided and desire to execute this Amendment to set forth in writing all such changes; NOW, THEREFORE KNOW ALL MEN BY THESE PRESENTS: THAT, for and in consideration of the premises and of Ten and No/100 Dollars ($10.00) and other good and valuable consideration paid by Tenant to Landlord, the receipt and sufficiency of which are hereby acknowledged, Landlord end tenant do hereby covenant and agree as follow.: 1. Notwithstanding anything contained in the Lease or Tenant's. prior election to extend the Lease Term for five (5) years, the Term of the Lease is hereby amended so that the Lease Term shall end on, July 31. 2001. Landlord and Tenant hereby agree that Tenant Shall have no further right to extend the Lease Term beyond July 31, 2001, and Tenant hereby waives any and all such rights. 2. Minimum Rent for the Premises during period from February 1, 2000, through July 31, 2001, shall be Forty Thousand Two Hundred Forty and 33/100 Dollars per month. 3. Commencing February 1, 2000, there shall no longer be a "Base Year" under the Lease and Tenant shall no longer be responsible for payment of Operating Costs. Accordingly, Section 8 of the Lease is hereby deleted in its entirety and the Lease is hereby amended to delete all reference therein to a "Base Year" or "Operating Costs." 4. Section 30 of the Lease is hereby amended by deleting the phrase 15O% of the monthly rent contained in the fifth line, thereof and replacing it with the phrase "300% of the monthly rent." 5. During the remainder of the Term, Tenant agrees to use "best management practices' with respect to the hazardous waste and hazardous materials that it handles in the Premises, as such term is used and prescribed by law U.S. Environmental Protection Agency, the Texas Natural Resources Conservation Commission, the National Fire Protection Association and the U.S. Occupational Safety and Health Administration As hereby expressly amended, the Lease is ratified and confirmed to be in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the date first set forth above. WESTERN ATLAS INTERNATIONAL, INC. By: /s/ ----------------------------- Name: C.S. Finley Title: Vice Presldent CARRINGTON LABORATORIES, INC. By: /s/ ----------------------------- Name: Carlon E. Turner, Ph. D. Title: President & Chief Executive Officer EX-10.9 12 Exhibit 10.9 AS AMENDED THROUGH JUNE 15, 1995 CARRINGTON LABORATORIES, INC. EMPLOYEE STOCK PURCHASE PLAN Section 1. Purpose. It is the purpose of the Plan to promote the interests of the Company and its shareholders by providing a method by which eligible employees may use voluntary payroll deductions to purchase shares of Common Stock at a discount, thereby affording them the opportunity to invest in the Company at a preferential price, and to acquire a proprietary interest in the Company and an increased personal interest in its continued success and progress. The Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code and shall be construed accordingly. Section 2. Definitions. As used herein the following terms have the following meanings: (a) "Affiliate" means any corporation that is a subsidiary corporation of the Company within the meaning of Section 424(f) of the Code and that has been designated by the Committee as an Affiliate for purposes of the Plan. (b) "Board of Directors" means the Board of Directors of the Company. (c) "Code" means the United States Internal Revenue Code of 1986, as from time to time amended. (d) "Committee" means the Committee described in Section 4 hereof. (e) "Common Stock" means the $.01 par value Common Stock of the Company. (f) "Company" means Carrington Laboratories, Inc. (g) "Compensation" means (i) with respect to a salaried employee, the basic annual salary of such employee as of the first day of the Plan Year (except with respect to a salaried employee whose participation in the Plan begins on an Enrollment Date other than January 1, in which case, for the Plan Year in which such participation begins, "Compensation" means that portion of the basic annual salary of such employee, as of the Enrollment Date on which such participation begins, that is payable for the period from such Enrollment Date through the remainder of that Plan Year), and shall not include bonuses, overtime pay, allowances, commissions, deferred compensation payments or any other extraordinary compensation, and (ii) with respect to an hourly compensated employee, the straight-time hourly rate of pay of such employee as of the first day of the Plan Year, multiplied by 2,080 (except with respect to an hourly compensated employee whose participation in the Plan begins on April 1, July 1 or October 1, in which case, for the Plan Year in which such participation begins, "Compensation" means the straight-time hourly rate of pay of such employee as of such April 1, July 1 or October 1, multiplied by 1,560, 1,040 or 520, respectively), and shall not include bonuses, overtime pay, premium pay or other irregular payments. The Compensation of an employee who does not receive salary or wages computed in United States dollars shall be determined by converting such salary or wages into United States dollars in accordance with the Compensation Exchange Rate. (h) "Compensation Exchange Rate" means the New York foreign currency exchange rate as reported in The Wall Street Journal for the last business day in December immediately preceding the first day of the Plan Year. (i) "Eligible Employee" means any employee of the Company or an Affiliate who is eligible to participate in the Plan pursuant to Section 5 hereof. (j) "Enrollment Date" means any January 1, April 1, July 1 or October 1 of any Plan Year. (k) "Fair Market Value" means the closing sale price on the date in question (or, if there was no reported sale on such date, on the last preceding day on which any reported sale occurred) of the Common Stock on the Nasdaq National Market or any national stock exchange or other stock market on which the Common Stock may from time to time be traded. (l) "Option" means any option to purchase shares of Common Stock granted by the Committee pursuant to the provisions of the Plan. (m) "Participant" means an Eligible Employee who elects to participate in the Plan pursuant to Section 6 hereof. (n) "Plan" means this Carrington Laboratories, Inc. Employee Stock Purchase Plan. (o) "Plan Year" means each period beginning on January 1 and ending on the following December 31, commencing January 1, 1993. Section 3. Number of Shares. The aggregate number of shares of Common Stock issued pursuant to Options granted under the Plan shall not exceed a total of 500,000 shares. The maximum number of shares of Common Stock available for sale under the Plan is subject to adjustment as provided in Section 14. The Common Stock to be delivered upon exercise of Options may consist of authorized but unissued shares of Common Stock or shares of Common Stock previously issued and reacquired by the Company. Section 4. Administration of the Plan. The Plan shall be administered by the Committee, which shall consist of three or more employees of the Company. Each member of the Committee shall be appointed by and shall serve at the pleasure of the Board of Directors. The Board of Directors shall have the sole continuing authority to appoint members of the Committee both in substitution for members previously appointed and to fill vacancies however caused. The following provisions shall apply to the administration of the Plan by the Committee: (a) The Committee shall designate one of its members as Chairman and shall hold meetings at such times and places as it may determine. Each member of the Committee shall be notified in writing of the time and place of any meeting of the Committee at least two days prior to such meeting, provided that such notice may be waived by a Committee member. A majority of the members of the Committee shall constitute a quorum and any action taken by a majority of the members of the Committee present at any duly called meeting at which a quorum is present (or action unanimously approved in writing) shall constitute action by the Committee. (b) The Committee may appoint a Secretary (who need not be a member of the Committee) who shall keep minutes of its meetings. The Committee may make such rules and regulations for the conduct of its business as it may determine. (c) The Committee shall have full authority subject to the express provisions of the Plan to interpret the Plan, to provide, modify and rescind rules and regulations relating to it and to make all other determinations and perform such actions as the Committee deems necessary or advisable to administer the Plan. (d) No member of the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. Section 5. Eligible Employees. Each employee of the Company or an Affiliate shall be eligible to participate in the Plan; provided, however, that: (a) An employee shall not be granted an Option if such employee would, immediately after grant of the Option, own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any parent or subsidiary corporation of the Company (within the meaning of Section 424(e) and (f) of the Code). For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under any outstanding options shall be treated as stock owned by the employee; and (b) No employee shall be granted an Option under the Plan which would permit such employee's rights to purchase shares of stock under all employee stock purchase plans of the Company and its parent and subsidiary corporations (within the meaning of Section 424(e) and (f) of the Code) to accrue (within the meaning of Section 423(b)(8) of the Code) at a rate which exceeds U.S. $25,000 of fair market value of such stock (determined at the time such option is granted) for each calendar year during which any such option granted to such employee is outstanding at any time. For purposes of this Section 5, the term "employee" shall not include an employee whose customary employment is 20 hours or less per week or is for not more than five months in any calendar year. Section 6. Method of Participation. Each person who will be an Eligible Employee on any Enrollment Date may elect to participate in the Plan by executing and delivering to the Company, on or before such Enrollment Date, a payroll deduction authorization form as provided in this Section. Such Eligible Employee shall thereby become a Participant on such Enrollment Date and shall remain a Participant until such Eligible Employee's participation is terminated as provided in Section 11 or 12 hereof; provided, however, that if the Company does not receive such payroll deduction authorization form in time to implement the authorized withholding for the payroll period that includes such Enrollment Date, no withholding shall be made on behalf of such Participant pursuant to this Plan until the next succeeding payroll period. The payroll deduction authorization form executed by a Participant shall request withholding, by means of substantially equal payroll deductions over the Plan Year, of an amount which shall be not more than 10% nor less than 1% of such Participant's Compensation for the Plan Year. A Participant may change the withholding rate of his or her payroll deduction authorization within such limits by delivering a new payroll deduction authorization form to the Company; provided, however, that a change pursuant to this sentence may be made by each Participant no more than three times in respect of any Plan Year; and provided further, that if the Company does not receive such new payroll deduction authorization form in time to implement the change for the payroll period during which it receives such form, the change authorized thereby shall not be made until the next succeeding payroll period. All amounts withheld in accordance with a Participant's payroll deduction authorization shall be credited to a withholding account for such Participant. No interest shall be payable on withholding accounts. Section 7. Grant of Options. Each Participant shall be granted an Option on the first day of each Plan Year to purchase shares of Common Stock; provided, however, that a Participant who begins participation on an Enrollment Date other than January 1 in accordance with Section 6 shall be granted an Option on such Enrollment Date and on the first day of each succeeding Plan Year. Each Option shall be exercisable in installments on the last business day of each calendar month during the Plan Year, beginning with the month in which the Option is granted, for the number of whole shares of Common Stock to be determined by dividing (a) the balance in the Participant's withholding account on the last business day of the month by (b) the purchase price per share of the Common Stock as determined under Section 8. In no event shall the number of shares with respect to which an Option is granted to a Participant in a Plan Year exceed that number of shares which has an aggregate Fair Market Value (determined on the date of grant) of U.S. $25,000, and the number of shares actually purchased by a Participant in a Plan Year may not exceed this number. The Company shall reduce, on a substantially proportionate basis, the number of shares of Common Stock receivable by each Participant upon exercise of an Option in any month in the event that the total number of shares then available under the Plan is less than the total number of shares with respect to which all Participants exercise Options in such month. Section 8. Option Price. The purchase price per share of Common Stock under each installment of each Option shall equal the lesser of (a) 85% of the Fair Market Value per share of Common Stock on the date of grant of the Option or (b) 85% of the Fair Market Value per share of Common Stock on the date on which the installment is exercised. Section 9. Exercise of Options. An employee who is a Participant in the Plan on the last business day of a month shall be deemed automatically to have exercised the current installment of the Option granted to him or her for that Plan Year. Upon such exercise, the Company shall apply the entire balance of the Participant's withholding account to the purchase of the maximum number of whole shares of Common Stock as determined under Section 7. For purposes of this Section 9, the balance in the withholding account of a Participant whose salary or wages are not computed in United States dollars shall be converted into United States dollars in accordance with the New York foreign currency exchange rate as reported in The Wall Street Journal for the last business day of the month. Shares of Common Stock purchased for a Participant under the Plan shall be held in custody for the account of such Participant as provided in the following paragraph unless he or she has requested, by written notice to the Company at any time, with respect to any installment of an Option or with respect to all installments, that certificates representing shares purchased for his or her account under the Plan not be held in custody. The Company shall issue and deliver to the Participant certificates representing shares for which such a request has been made as soon as practicable after such shares are purchased, subject to the limitations set forth in the following sentence of this Section 9. Certificates representing shares for which such a request has not previously been made and which are being held in custody shall be issued and delivered to the Participant as soon as practicable after the end of the month in which the Participant makes a written request to the Company therefor; provided, however, that the obligation of the Company to deliver shares of Common Stock shall be postponed for such period of time as may be necessary to register or qualify the purchased shares under the Securities Act of 1933 and any applicable foreign or state securities law; and, provided further, that the Participant shall not be entitled to receive a certificate representing the shares in his or her account under the Plan, other than at the end of a Plan Year or upon withdrawal from the Plan pursuant to Section 11 or 12, unless there are ten or more shares in such account. The Company shall issue or cause to be issued one or more global certificates (collectively, the "Global Certificate"), in the name of an officer or officers of Company designated from time to time by the Committee to serve as Custodian for Participants in the Plan, representing all shares purchased for Participants under the Plan that the Company has not been requested to deliver to the Participants. The Company shall maintain complete and accurate records indicating the number of shares purchased for each Participant under the Plan for which certificates have not been issued and delivered to such Participant, and the Company shall, no less frequently than quarterly, deliver reports to such Participants indicating such number of shares and containing such other information as the Company may deem necessary or advisable. A Participant shall possess all of the rights and privileges of a stockholder of the Company with respect to Common Stock purchased under the Plan upon the issuance to or for the benefit of the Participant of a certificate or certificates (including the Global Certificate) representing such shares. The Company shall deliver or cause to be delivered to each Participant for whom shares of Common Stock have been purchased under the Plan and are represented by the Global Certificate all dividends and distributions in respect of such shares and all notices, proxy statements and other communications to the Company's shareholders in accordance with applicable law and the rules and regulations of the Securities and Exchange Commission. No fractional shares shall be issued upon exercise of any installment of an Option. Any balance remaining in a Participant's withholding account following exercise of an installment shall be returned to the Participant, except that any such balance representing a fractional share of Common Stock shall be retained in the withholding account and applied to the purchase of shares in the next month. The cash proceeds received by the Company upon exercise of an Option shall constitute general funds of the Company. To the extent any installment of an Option is exercised with respect to less than all of the shares of Common Stock available for purchase under such installment, the unexercised portion of the installment shall expire and become null and void as of the end of the month for which such installment was exercisable. Any unexercised portion of an Option shall expire and become null and void as of the end of the Plan Year in which such Option was granted. Section 10. Restrictions on Sale of Stock. Shares of Common Stock purchased under the Plan may not be sold, pledged or otherwise transferred within two years after the date of purchase unless such shares are first offered to the Company for purchase at a price equal to the Fair Market Value of the shares on the date on which the Participant delivers written notice of such offer to the Company. The Company must accept or reject the offer no later than 5:00 p.m., Central Time, on the next business day following its receipt of the written notice from the Participant. If the Company rejects or fails to accept the offer, the Participant shall be free to sell, pledge or transfer the shares covered by such offer; provided, however, that shares of Common Stock purchased under the Plan may not be sold, pledged or otherwise transferred under any circumstances prior to the approval of the Plan by the Company's shareholders in accordance with Section 17. Certificates representing shares of Common Stock issued under the Plan shall contain a restrictive legend describing or referring to the restrictions imposed by this Section 10, in accordance with applicable law, until such restrictions have terminated with respect to the shares represented by such certificates. Section 11. Cancellation of Option and Withdrawal From the Plan. A Participant who holds an Option under the Plan may at any time prior to exercise of the final installment thereof pursuant to Section 9 cancel the remaining unexercised portion of such Option by written notice delivered to the Company. Upon such cancellation, the balance in the Participant's withholding account and any shares being held in custody shall be returned to such Participant and he or she shall cease to be a Participant. Partial cancellation shall not be permitted. A Participant may terminate his or her payroll deduction authorization as of any date by written notice delivered to the Company and shall thereby cease to be a Participant as of such date. Partial termination of a payroll deduction authorization shall not be permitted, except to the extent expressly permitted by Section 6 of this Plan. Any Participant who voluntarily terminates his or her payroll deduction authorization prior to the last business day of a month shall be deemed to have cancelled the remaining unexercised portion of his or her Option, including the installment that would have been exercisable on the last business day of such month. A Participant who withdraws from the Plan pursuant to this Section 11 may re-enroll as of any subsequent Enrollment Date on which he or she is an Eligible Employee in accordance with the procedure set forth in Section 6 of this Plan; provided, however, that a Participant shall not be permitted to re-enroll in the Plan until an Enrollment Date that is at least six months after the date of his or her withdrawal. Section 12. Termination of Employment. Upon the termination of a Participant's employment with the Company or an Affiliate for any reason, such person shall cease to be a Participant, the unexercised portion of any Option held by such Participant under the Plan shall be deemed cancelled, the balance of such Participant's withholding account and any shares being held in custody shall be returned to such Participant (or, in the event of the Participant's death, to the executor or administrator of his or her estate) and he or she shall have no further rights under the Plan. All Participants shall have the same rights and privileges under the Plan. Notwithstanding the foregoing, nothing in the Plan shall confer upon any Participant any right to continue in the employ of the Company or an Affiliate or in any way interfere with the right of the Company or an Affiliate to terminate the employment of the Participant at any time, with or without cause. Transfers of employment among the Company and its Affiliates and approved leaves of absence not exceeding 90 days shall not be considered terminations of employment for purposes of this Plan. Section 13. Transferability. An Option granted under the Plan shall not be transferable by the Participant and shall be exercisable only by the Participant. Section 14. Adjustments Upon Changes in Common Stock. In the event the Company shall effect a split of the Common Stock or declare a dividend payable in Common Stock, or in the event the outstanding Common Stock shall be combined into a smaller number of shares, the maximum number of shares as to which Options may be granted under the Plan shall be increased or decreased proportionately, and the Fair Market Value per share of Common Stock as of the date of grant of all outstanding Options shall be adjusted, for purposes of making the determination required by Section 8 of this Plan, in a manner deemed appropriate by the Board of Directors. In the event of a reclassification of Common Stock not covered by the foregoing, or in the event of a liquidation or reorganization of the Company, including a merger, consolidation or sale of assets, the Board of Directors shall make such adjustments, if any, as it may deem appropriate in the number, purchase price and kind of shares that are covered by Options theretofore granted under the Plan or that are otherwise subject to the Plan. The provisions of this Section shall only be applicable if, and only to the extent that, the application thereof does not conflict with any valid governmental statute, regulation or rule. Section 15. Amendment and Termination of the Plan. Subject to the right of the Board of Directors to terminate the Plan prior thereto, the Plan shall terminate when all or substantially all of the Common Stock reserved for purposes of the Plan has been purchased. No Options may be granted after termination of the Plan. The Board of Directors may alter or amend the Plan but may not without the approval of the shareholders of the Company and of any regulatory authorities having jurisdiction make any alteration or amendment thereof which operates (a) to increase the total number of shares of Common Stock which may be issued under the Plan (other than as provided in Section 14), (b) to modify the criteria for determining the employees (or class of employees) eligible to receive Options under the Plan or (c) to materially increase benefits accruing under the Plan to Participants who are subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"). No termination or amendment of the Plan shall adversely affect the rights of a Participant under an outstanding Option, except with the consent of such Participant. Section 16. Requirements of Law. The granting of Options and the issuance of Common Stock upon the exercise of an Option shall be subject to all applicable laws, rules and regulations and to such approval by governmental agencies as may be required. Section 17. Effective Date of the Plan. The Plan shall become effective, as of the date of its adoption by the Board of Directors, if it is duly approved at the 1993 annual meeting of stockholders of the Company. The affirmative vote of the holders of at least a majority of the shares of stock of the Company present and voting on the approval of the Plan at the meeting, provided that the total number of shares voting for the proposal represents more than 50% of the total number of shares of stock entitled to vote at such annual meeting, shall be required to approve the Plan. If the Plan is not so approved, the Plan shall terminate, the unexercised portions of all Options granted hereunder shall be null and void and all shares of Common Stock theretofore issued upon the exercise of Options under the Plan shall be deemed cancelled. Certificates representing shares issued to Participants prior to shareholder approval of the Plan shall bear appropriate legends indicating that the shares have been issued contingent upon shareholder approval and are cancellable in the event such approval is not obtained. Upon such cancellation, Participants shall promptly deliver to the Company all certificates representing cancelled shares and the Company shall promptly return to the Participants, without interest, all funds obtained from such Participants through payroll deductions and used for the purchase of such shares. Section 18. Rule 16b-3 Compliance. Transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors adopted under the Exchange Act, some of which conditions are not set forth herein. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. EX-10.10 13 Exhibit 10.10 NOTICE: THE WARRANTS REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY JURISDICTION. THESE WARRANTS MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO THE EXPRESS PROVISIONS HEREOF. Void after May 9, 2000 CARRINGTON LABORATORIES, INC. Common Stock Purchase Warrant CARRINGTON LABORATORIES, INC. (the "Company") hereby certifies that for valuable consideration, the receipt of which is hereby acknowledged, E. DON LOVELACE is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time after September 14, 1993 and before 5:00 p.m. Dallas, Texas time on May 9, 2000 (the "Expiration Date"), Five Thousand (5,000) fully paid and non-assessable shares of Common Stock of the Company at the price of $13.00 per share (the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. As used herein, the following terms unless the context otherwise requires have the following respective meanings: (a) The term "Common Stock" includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall as a class, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency). (b) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (c) The term "Original Issue Date" means September 15, 1993, the date as of which the Warrants were first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 or otherwise. (e) The term "Purchase Price" shall be the then applicable exercise price for one share of Common Stock hereunder. (f) The term "Securities Acts" means the Securities Act of 1933, as amended, and the securities or blue sky laws of any jurisdiction applicable to any exercise, transfer or surrender for exchange of the Warrants or of Common Stock (or Other Securities) previously issued upon exercise of the Warrants. (g) The term "Warrants" means the warrants represented by this instrument. 1. Sale or Exercise Without Registration. Subject to the provisions of Section 12 hereof, if, at the time of any exercise, transfer or surrender for exchange of a Warrant or of Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrant or Common Stock (or Other Securities) shall not be registered under the Securities Acts, the Company may require, as a condition of allowing such exercise, transfer or exchange, that (i) the holder or transferee of such Warrant or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Acts and (ii) the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company, provided that the disposition thereof shall at all times be within the control of such holder or transferee, as the case may be. The first holder of the Warrants represents to the Company that such holder is acquiring the Warrants for investment and not with a view to the distribution thereof. 2. Exercise of Warrant. 2.1 Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office in Dallas County, Texas, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant (without giving effect to any adjustment therein) by the Purchase Price. 2.2 Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in Subsection 2.1 except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment therein) designated by the holder in the subscription at the end hereof by (b) the Purchase Price. Upon any such partial exercise, the Company will forthwith issue and deliver to the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder in the subscription at the end hereof. No fractional shares of Common Stock may be purchased upon exercise of any Warrants. 3. Delivery of Stock Certificates, etc. on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, the Company will cause to be issued in the name of and delivered to the holder hereof a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share, together with any other stock or Other Securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 4 or otherwise. 4. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or Other Securities or property (other than cash) by way of dividend, or (b) any cash paid or payable (including, without limitation, by way of dividend), except out of earned surplus of the Company, or (c) other or additional (or less) stock or Other Securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 2, shall be entitled to receive the amount of stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) which such holder would hold on the date of such exercise if on the Original Issue Date such holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Section 5 hereof. 5. Reorganization, Consolidation, Merger, etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 2 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and Other Securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4 hereof. 6. Notices of Record Date, etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any Other Securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified. 7. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants. 8. Listing on Securities Exchanges. If, at the time any of the Warrants are exercised, the Company's Common Stock or Other Securities then subject to such Warrants are listed on any national securities exchange and the shares issuable upon exercise of such Warrants have not already been so listed, the Company will, at its expense, promptly file an application to list on such exchange, subject to official notice of issuance, all shares of Common Stock or Other Securities, as the case may be, from time to time issuable upon the exercise of the Warrants, and will use its best efforts to cause such shares to be so listed as promptly as reasonably possible. In the event such a listing application must be filed following the exercise of any Warrants, the Company may postpone the issuance and delivery of the shares issuable in respect thereof until the listing of such shares has been completed. 9. Exchange of Warrants. Subject to the provisions of Section 12 hereof, upon surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its own expense will issue and deliver to the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 10. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Warrant Agent. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in Dallas County, Texas for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 2, exchanging Warrants pursuant to Section 9, and replacing Warrants pursuant to Section 10, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Restriction on Transfer, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) notwithstanding any term or provision hereof to the contrary, this Warrant (and any Warrant for which this Warrant may be exchanged or replaced) may not be transferred or assigned, except by will or pursuant to the laws of descent and distribution; provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 1 hereof; and (b) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding notice to the contrary. 13. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of the State of Texas. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. Dated: September 15, 1993 CARRINGTON LABORATORIES, INC. By: Karl H. Meister, President EX-10.11 14 Exhibit 10.11 NOTICE: THE WARRANTS REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY JURISDICTION. THESE WARRANTS MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO THE EXPRESS PROVISIONS HEREOF. Void after May 9, 2000 CARRINGTON LABORATORIES, INC. Common Stock Purchase Warrant CARRINGTON LABORATORIES, INC. (the "Company") hereby certifies that for valuable consideration, the receipt of which is hereby acknowledged, JERRY L. LOVELACE is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time after September 14, 1993 and before 5:00 p.m. Dallas, Texas time on May 9, 2000 (the "Expiration Date"), Five Thousand (5,000) fully paid and non-assessable shares of Common Stock of the Company at the price of $13.00 per share (the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. As used herein, the following terms unless the context otherwise requires have the following respective meanings: (a) The term "Common Stock" includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall as a class, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency). (b) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (c) The term "Original Issue Date" means September 15, 1993, the date as of which the Warrants were first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 or otherwise. (e) The term "Purchase Price" shall be the then applicable exercise price for one share of Common Stock hereunder. (f) The term "Securities Acts" means the Securities Act of 1933, as amended, and the securities or blue sky laws of any jurisdiction applicable to any exercise, transfer or surrender for exchange of the Warrants or of Common Stock (or Other Securities) previously issued upon exercise of the Warrants. (g) The term "Warrants" means the warrants represented by this instrument. 1. Sale or Exercise Without Registration. Subject to the provisions of Section 12 hereof, if, at the time of any exercise, transfer or surrender for exchange of a Warrant or of Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrant or Common Stock (or Other Securities) shall not be registered under the Securities Acts, the Company may require, as a condition of allowing such exercise, transfer or exchange, that (i) the holder or transferee of such Warrant or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Acts and (ii) the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company, provided that the disposition thereof shall at all times be within the control of such holder or transferee, as the case may be. The first holder of the Warrants represents to the Company that such holder is acquiring the Warrants for investment and not with a view to the distribution thereof. 2. Exercise of Warrant. 2.1 Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office in Dallas County, Texas, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this Warrant (without giving effect to any adjustment therein) by the Purchase Price. 2.2 Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in Subsection 2.1 except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment therein) designated by the holder in the subscription at the end hereof by (b) the Purchase Price. Upon any such partial exercise, the Company will forthwith issue and deliver to the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder in the subscription at the end hereof. No fractional shares of Common Stock may be purchased upon exercise of any Warrants. 3. Delivery of Stock Certificates, etc. on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, the Company will cause to be issued in the name of and delivered to the holder hereof a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share, together with any other stock or Other Securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 4 or otherwise. 4. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or Other Securities or property (other than cash) by way of dividend, or (b) any cash paid or payable (including, without limitation, by way of dividend), except out of earned surplus of the Company, or (c) other or additional (or less) stock or Other Securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 2, shall be entitled to receive the amount of stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) which such holder would hold on the date of such exercise if on the Original Issue Date such holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Section 5 hereof. 5. Reorganization, Consolidation, Merger, etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, upon the exercise hereof as provided in Section 2 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and Other Securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4 hereof. 6. Notices of Record Date, etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any Other Securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified. 7. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants. 8. Listing on Securities Exchanges. If, at the time any of the Warrants are exercised, the Company's Common Stock or Other Securities then subject to such Warrants are listed on any national securities exchange and the shares issuable upon exercise of such Warrants have not already been so listed, the Company will, at its expense, promptly file an application to list on such exchange, subject to official notice of issuance, all shares of Common Stock or Other Securities, as the case may be, from time to time issuable upon the exercise of the Warrants, and will use its best efforts to cause such shares to be so listed as promptly as reasonably possible. In the event such a listing application must be filed following the exercise of any Warrants, the Company may postpone the issuance and delivery of the shares issuable in respect thereof until the listing of such shares has been completed. 9. Exchange of Warrants. Subject to the provisions of Section 12 hereof, upon surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its own expense will issue and deliver to the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 10. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Warrant Agent. The Company may, by written notice to each holder of a Warrant, appoint an agent having an office in Dallas County, Texas for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 2, exchanging Warrants pursuant to Section 9, and replacing Warrants pursuant to Section 10, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Restriction on Transfer, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) notwithstanding any term or provision hereof to the contrary, this Warrant (and any Warrant for which this Warrant may be exchanged or replaced) may not be transferred or assigned, except by will or pursuant to the laws of descent and distribution; provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 1 hereof; and (b) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding notice to the contrary. 13. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of the State of Texas. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. Dated: September 15, 1993 CARRINGTON LABORATORIES, INC. By: __________________________ Karl H. Meister, President EX-10.12 15 Exhibit 10.12 Industrial Lease LEASE AGREEMENT THIS LEASE AGREEMENT is made and entered into by and between DPW Nine, a California limited partnership, hereinafter referred to as Lessor' ,and Carrington Laboratories. Inc., a Texas corporation, hereinafter referred to as Lessee. WITNESSETH: 1. PREMISES AND TERM A. In consideration of the mutual obligations of Lessor and Lessee set forth herein, Lessor leases to Lessee, and Lessee hereby takes from Lessor, the Leased Premises containing approximately 35,050 rentable square feet located at 1909 Hereford Drive, Irving, Texas, situated within the County of Dallas, State of Texas, located on the real property more particularly described on EXHIBIT "A" attached hereto and incorporated herein by reference. (the Leased Premises), together with all rights, privileges, easements, appurtenances, and amenities belonging to or in any way pertaining to the Leased Premises, to have and to hold, subject to the terms, covenants and conditions in this Lease. B. The term of this Lease shall commence on the Commencement Date (herein so called) hereinafter set forth and shall end on the last day of the month that is Eighty Six (86) months after the Commencement Date. C. EXISTING BUILDING If no improvements are to be constructed to the Leased Premises, the Commencement Date shall be August 1, 1994. Lessee acknowledges that: (it has inspected and accepts the Leased Premises, (ii) the buildings and improvements comprising Use same are suitable for the purpose for which the Leased Premises are leased (iii) the Leased Premises are in good and satisfactory condition, and (iv) no representations as to the repair of the Leased Premises, nor promises to alter, remodel or improve the Leased Premises, have been made by Lessor (unless otherwise expressly set forth in this Lease). D. INTENTIONALLY DELETED. E. The occupancy of the Leased Premises by Lessee shall constitute the acknowledgement and agreement of Lessee that Lessee has inspected the Leased Premises, that Lessee is fully familiar with the physical condition of the Leased Premises, that Lessee has received same in good order and condition and that the Leased Premises comply in all respects with the requirements of this Lease arid are specifically suitable to Lessee's purpose. LESSOR AND LESSEE AGREE THAT LESSOR MAKES NO WARRANTIES WHATSOEVER. WHETHER EXPRESS OR IMPLIED, CONCERNING THE REPAIR OR CONDITION OF THE LEASED PREMISES OR THE FITNESS OR SUITABILITY OF THE LEASED PREMISES FOR LESSEE'S INTENDED USE, OTHER THAN AS EXPRESSLY SET FORTH IN THIS LEASE. LESSEE HEREBY EXPRESSLY AND SPECIFICALLY WAIVES ALL SUCH WARRANTIES. 2. BASE RENT, SECURITY DEPOSIT, AND ESCROW PAYMENTS. A. Lessee agrees to pay to Lessor Base Rent for the Leased Premises, in advance, and except as expressly provided herein, without demand, deduction or set off, at the rate of See Exhibit "C" Special Provisions. One such monthly installment, plus the other monthly charges set forth in Paragraph 2C below, shall be due and payable on the date hereof and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the Commencement Date, except that all payments due hereunder for any fractional calendar month shall be prorated. B. In addition, Lessee agrees to deposit with Lessor on the date hereof the sum of Twelve Thousand Five Hundred Dollars ($12,500.00), which shall be held by Lessor, without obligation for interest, as Security for the performance of Lessee's obligations under this Lease. Lessor and Lessee expressly agree that this deposit is not an advance rental deposit or a measure of Lessor's damages in case of Lessees default. Upon each occurrence of an event of default, Lessor may, at its option, use all or part of the deposit to pay past due rent or other payments due Lessor under this Lease, or the cost of any other damage, injury, expense or liability caused by such event of default, without prejudice to any other remedy provided herein or provided by law. On demand, Lessee shall pay Lessor the amount that will restore the security deposit to its original amount. The security deposit shall be deemed the property of Lessor, but any remaining balance of such deposit shall be returned by Lessor to lessee when Lessee's obligations under this Lease have been fulfilled. C. Lessee agrees to pay its Proportionate Share (as defined in Paragraph 23B) of (i) taxes payable by Lessor pursuant to paragraph 3A, (ii) the cost of maintaining insurance pursuant to paragraph 9, and (iii) all common area charges including, without limitation, the cost of repairs pursuant to Paragraph 4, the cost of utilities pursuant to Paragraph S. and the cost of security service pursuant to Paragraph 24, All such charges listed in this subparagraph 2C (iii) are collectively referred to in this Lease, and particularly in this Paragraph 2C, as Common Area Charges. During each month of the term of this Lease, on the same day that rent is due hereunder. Lessee shall escrow with Lessor an amount equal to 1/12 of the estimated annual cost of its Proportionate Share of such items. Lessee authorizes Lessor to use the funds deposited with Lessor under this Paragraph 2C to pay such costs. The initial monthly escrow payments are based upon the estimated amounts for the calendar year in which the Lease commences, and shall be increased or decreased annually to reflect the projected actual cost of all such items. If the Lessee's total escrow payments are less than Lessee's actual Proportionate Share of all such items, Lessee shall pay the difference to Lessor within ten (10) days after demand. If the total escrow payments of Lessee ate more than Lessees actual proportionate share of all such items, Lessor shall retain such excess and credit it against Lessees next annual escrow payments. Upon reasonable request from Lessee, Lessor shall furnish an operating statement for the Leased Premises for the prior year. The amount of the initial monthly rental and the initial escrow payments are collectively denominated in this Lease as "Rent", and is itemized as follows: (1) Base Rent as set forth in Paragraph 2A 59,201.00 (2) Tax Escrow Payment 1,402.00 (3) Insurance Escrow Payment 175.00 (4) Common Area Charges 730.00 (5) Other .00 Total Initial Monthly Rent 11,508.00 3.TAXES. A.Lessor agrees to pay all taxes, assessments and governmental charges of any kind and nature (collectively referred to herein as Taxes) that accrue against the Leased Premises, and/or the land and/or improvements of which the Leased Premises are a part. If at any time during the term of this Lease, there shall be levied, assessed or imposed on lessor a capital levy or other tax directly on the rents received therefrom and/or a franchise tax, assessment, levy or charge measured by or based, in whole or in pan. upon such rents from the Leased Premises, then all such taxes, assessments, Levies or charges, or the pan thereof so measured or based, excluding any federal or state income tax, shall be deemed to be included within the term Taxes for the purposes hereof. The Lessor shall have the right to employ a tax- consulting firm to attempt to assure a fair tax burden on the building and grounds within the applicable taxing jurisdiction. Lessee agrees to pay its Proportionate Share of the cost of such consultant. B. Lessee shall be liable for all taxes levied or assessed against any personal property or fixtures placed in the Leased premises. If any such taxes are levied or assessed against Lessor or Lessor's property and (i) Lessor pays the same or (ii) the assessed value of Lessor's property is increased by inclusion of such personal property and fixtures and Lessor pays the increased taxes, then upon demand, Lessee shall pay to Lessor such taxes. 4. LESSOR'S REPAIRS A. Lessor, at its own cost and expense, shall maintain only the roof, foundation and the structural soundness of the exterior walls of the building of which the Leased Premises are a part in good repair, reasonable Wear and tear excluded. The term "walls" as used herein, shall not include windows, glass or plate glass, doors, special store fronts or office entries. Lessee shall immediately advise Lessor written notice of defect or need for repairs, after which Lessor shall have reasonable opportunity to repair same or cure same. Repairs required to be made by Lessor shall be performed while not unreasonably interfering with Lessee's business operation. B. Lessor reserves the right to perform the paving, common area and landscape replacement and maintenance, exterior painting, common sewage line plumbing and any other items that are otherwise Lessee's obligations under Paragraph SA, in which event, Lessee shall be liable for its Proportionate Share of the cost and expense of such repair, replacement, maintenance and other such items. C. Lessee agrees to pay its Proportionate Share of the cost of i) maintenance and/or landscaping of any property that is a pan of the building and/or project of which the Leased Premises are a part, (ii) maintenance and/or landscaping of any property that is maintained or landscaped by any property owner or community owner association that is named in the restrictive covenants or deed restrictions to which the Leased Premises are subject, and (iii) operating and maintaining any property, facilities or services provided for the common use of Lessee and other lessees of any project or building of which the Leased Premises are a part. 5. LESSEE'S REPAIRS A. Lessee, at its own cost and expense, shall (I) maintain all parts of the Leased Premises, (which Lessor is expressly responsible hereunder) in good condition, (ii) promptly make all necessary repairs and replacements, (iii) keep the parking areas, driveways and alleys surrounding the Leased Premises in a clean and sanitary condition. B. Lessee and its employees, customers and licensees shall have the exclusive rights to use any parking areas on the leased premises. Lessor shall not be responsible for enforcing Lessees parking rights against any third parties. C. Lessee, at its own cost and expense, shall enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor approved by Lessor for servicing all hot water, heating and air conditioning systems and equipment within the Leased Premises. The service contract must include all services suggested by the equipment manufacturer in its operations/maintenance manual and must become effective within thirty (30) days of the date Lessee takes possession of the Leased Premises. Upon Commencement Date, Lessor, at its sole cost and expense, shall have all HVAC systems, plumbing, sprinkler systems and lighting in proper working condition. 6. ALTERATIONS. A. Lessee shall not make any structural alterations, additions or improvements to the Leased Premises without the prior written consent of Lessor. Lessee, at its own cost and expense, may erect such shelves, bins, machinery and trade fixtures as it desires provided that: I) such items do not alter the basic character of the Leased Premises or the building and/or improvements of which the Leased Premises are a part; (II) such items do not overload or damage the same: (iii) such items may be removed without mien to the Leased Premises; and (iv) the construction, erection or installation thereof complies with all applicable governmental laws, ordinances, regulations and with Lessors specifications and requirements. All alterations, additions, improvements and partitions erected by Lessee shall be and remain the property of Lessor. All shelves, bins, machinery and trade fixtures installed by Lessee shall remain the property of Lessee and shall be removed on or before time earlier to occur of the date of termination of this Lease or vacating the Leased Premises, at which time Lessee shall restore the Leased Premises to their original condition. All alterations, installations, removals and restoration shall be performed in a good and workmanlike manner so as not to damage or alter the primary structure or structural qualities or the buildings and other improvements situated on the Leased Premises or of which the Leased Premises are a part. 7.SIGNS. A. Any signage Lessee desires for the Premises shall be subject to written approval of the Las Colinas Association. Lessee shall repair. paint, and/or replace the building facia surface to which its signs are attached upon vacation of the Leased Premises, or the removal or alteration of its signage. Lessee shall not: (I) make any changes to the exterior of the Leased Premises, (ii) install any exterior lights, decorations, balloons, flags, Pennants, banners or painting, or (iii) erect Or install any signs, windows or door lettering, placards, decorations or advertising media at any type which can be viewed from the exterior of the Leased Premises, without Lessor's prior written consent. All signs, decorations, advertising media or bars or other security installations visible from the outside of the Leased Premises shall conform in all respects to the criteria established by the Lessor, 8.UTILITIES A. Lessor agrees to provide normal water, and electricity service to the Leased Premises. Lessee shall pay for all water. gas, heat, light, power, telephone, sewer, sprinkler charges and other utilities and services used on or at the Leased Premises, together with any taxes, penalties, surcharges or the like pertaining to the Lessee's use of the Leased Premises, and any maintenance charges for utilities. Lessor shall have the right to cause any of said services to be separately metered to Lessee, at Lessee's expense. B. No interruption or malfunction of any utility service, or if either the quantity or character of any utility service is changed or is no longer available to or is no longer suitable for Lessee's requirements, unless caused by Lessor's breach of this Lease, shall constitute an eviction or disturbance of Lessee's use or possession of the Leased Premises or a breach by Lessor of any of Lessor's obligations hereunder or render Lessor liable or responsible to Lessee for any damage which Lessee may sustain or incur or entitle Lessee to be relieved from any of Lessee's obligations hereunder, including, without limitation, the obligation to pay Rent, or grant Lessee any right to set-off, abatement, or recoupment. The failure by Lessor to furnish, or any slowdown, stoppage, or interruption of. any utility service resulting from causes beyond the control of Lessor, including without limitation. Lessor's compliance with any voluntary or similar governmental or business guidelines now or hereafter published or any requirements now or hereafter established by any governmental agency, board, or bureau having jurisdiction over the operation of the Building, shall not render Lessor liable in any respect for damages to either persons, property. or business. or be construed as an eviction of Lessee or work an abatement of Rent, nor relieve Lessee of Lessee's obligations for fulfillment of any covenant or agreement hereof. Should any equipment or machinery furnished by Lessor break down or for any cause cease to function properly, Lessor shall use reasonable diligence to repair same promptly, but Lessee shall have no claim for abatement of Rent or damages on account of any interruption of service occasioned thereby or resulting therefrom. 9. INSURANCE. A. Lessor shall maintain replacement cost broad form fire and extended coverage insurance on the Leased Premises or on the building of which the Leased Premises are a pan in such amount as may be required by Lessor's mortgagee, B. Lessee, at its own expense, shall maintain during the term of this Lease Commercial general liability Insurance, including personal injury and property damage, with contractual liability endorsement, in the amount of One Million Dollars ($1,000,000) for property damage and One Million Dollars ($1,000,000.00) per occurrence for personal injuries or deaths of persons occurring in or about the Leased Premises. Lessee, at its own expense, also shall maintain during the term of this Lease broad form fire and extended coverage insurance covering the replacement cost of: (i) all alterations, additions, partitions and improvements installed or placed on the Leased Premises by Lessee or by Lessor on behalf of Lessee and (ii) be issued by an insurance company which is rated "A" XI or better by Best's Rating Service and, (iii) provide that said insurance shall not be cancelled or modified unless thirty (30) days prior written notice shall have been given to Lessor. Said policy or policies or certificates thereof shall be delivered to Lessor by Lessee upon commencement of the term of the Lease and upon each renewal of said insurance. C. Lessee will not permit the Leased Premises to be used for any purpose, or in ally manner that would (i) void the insurance thereon, (ii) increase the insurance risk or the premiums for insurance, or (iii) cause thc disallowance of any sprinkler credits, including without limitation, use of the Leased Premises for the receipt, storage or handling of any product, material or merchandise that is explosive or highly inflammable with the exception of aerosol products. If any increase in the cost of any insurance on the Leased Premises or the building of which the Leased Premises are a part is fused by Lessee's use of the Leased Premises, or because l.essee vacates the Leased Premises, then Lessee shall pay the amount of such increase to Lessor. 10. FIRE AND CASUALTY DAMAGE A. If the Leased Premises or the building, of which the Leased Premises are a part should be damaged or destroyed by fire or other peril, Lessee immediately shall give written notice to Lessor. If the buildings situated upon the Leased Premises or of which the Leased Premises are a part should be totally destoryed, or if they should be so damaged hereby that, in Lessor's estimation, rebuilding or repairs cannot be completed within one hundred eighty (180) days after the date of such damage, this Leased shall terminate and the Rent shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage. B. If the buildings situated upon the Leased Premises or of which the Leased Premises are a part should be damaged by any peril covered by the insurance to be provided by Lessor under Paragraph 9A above, and in Lessor's estimation, rebuilding or repairs can be subst- antially completed within one hundred eighty (180) days after the date of such damage, this Lease shall not terminate, and Lessor shall restore the Leased Premises to substantially its previous condition, except that Lessor shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements that may have been constructed, erected or installed in, on or about the Leased Premises or for the benefit of, or by or for Lessee. It such repairs and rebuilding have not been substantially completed within one hundred eighty (180) days after the date of such damage, Lessee, as Lessee's exclusive Meridian Point lease Revised 11/18/92 remedy, may terminate this Lease by delivering written notice of termination to Lessor. In which event the rights and obligations hereunder shall cease and terminate effective upon the date of the occurrence of such damage. C. Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Leased Premises requires that the insurance proceeds be applied to such indebtedness, then Lessor shall have the right to terminate this Lease by delivering written notice of termination to Lessee within fifteen (15) days after such requirement is made known by any such holder, whereupon all rights and obligations hereunder shall cease and terminate, effective upon the date of the occurrence of such damage. D. Anything in this Lease to the contrary notwithstanding. INCLUDING NEGLIGENCE, Lessor and Lessee hereby waive and release each other of any from any and all rights of recovery, claim, action or cause of action, against each other, their agents, officers and employees, for any loss or damage that may occur to the Leased Premises, improvements to the building of which the Leased Premises are a part, or personal property (building contents) within the building and/or Leased Premises, for any reason regardless of cause or origin, Each party to this Lease agrees immediately after execution of this Lease to give each insurance company which has issued to it policies of fire and extended coverage insurance, written notice of the terms of the mutual waivers contained in this subparagraph, and if necessary, to have the insurance policies properly endorsed. 11. LIABILITY AND IDEMNIFICATION LESSOR AND LESSEE AGREE THAT THE OBLIGATIONS AND COVENANTS CONTAINED IN THIS PARAGRAPH ARE SPECIFICALLY PART OF THE CONSIDERATION FOR THE LESSOR'S EXECUTION OP THIS LEASE, LESSOR SHALL NOT BE LIABLE TO LESSEE OR LESSEE'S EMPLOYEES. AGENTS, PATRONS OR VISITORS, OR TO ANY OTHER PERSON WHOMSOEVER, FOR ANY INJURY TO PERSON OR DAMAGE TO PROPERTY ON OR ABOUT THE LEASED PREMISES, THE COMMON AREAS OR THE PROPERTY UPON WHICH THE LEASED PREMISES IS LOCATED, RESULTING FROM AND/OR CAUSED IN PART OR WHOLE BY THE ACT, OMISSION, NEGLIGENCE OR MISCONDUCT OF LESSEE, ITS AGENTS, SERVANTS OR EMPLOYEES, OR ANY OTHER PERSON ENTERING UPON THE LEASED PREMISES. OR CAUSED BY THE BUILDING AND/OR IMPROVEMENTS LOCATED ON THE LEASED PREMISES BECOMING OUT OF REPAIR, OR CAUSED BY LEAKAGE OF GAS, OIL, WATER OR STEAM OR BY ELECTRICITY EMANATING FROM THE LEASED PREMISES. OR DUE TO THE CONDUCT OF LESSEE'S BUSINESS AT THE LEASED PREMISES OR DUE TO A DEFAULT BY LESSEE IN ITS OBLIGATIONS HEREUNDER. AND LESSEE HEREBY COVENANTS AND AGREES THAT IT WILL AT ALL TIMES INDEMNIFY AND HOLD SAFE AND HARMLESS THE LEASED PREMISES, THE LESSOR. LESSOR'S AGENTS AND EMPLOYEES. FROM ANY LOSS, LIABILITY, CLAIMS, SUITS. COSTS AND EXPENSES, INCLUDING WITHOUT LIMITATION ATTORNEY'S FEES AND DAMAGES, BOTH REAL AND ALLEGED, ARISING OUT OF ANY SUCH DAMAGE OR INJURY; EXCEPT INJURY TO PERSONS OR DAMAGE TO PROPERTY THE SOLE CAUSE OF WHICH IS THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LESSOR OR THE FAILURE OF LESSOR TO REPAIR ANY PART OF THE LEASED PREMISES WHICH LESSOR IS OBLIGATED TO REPAIR AND MAINTAIN HEREUNDER WITHIN A REASONABLE TIME AFTER THE RECEIPT OP WRITTEN NOTICE FROM LESSEE OF NEEDED REPAIRS. LESSEE ACKNOWLEDGES THAT THIS WAIVER AND INDEMNITY INCLUDE, WITHOUT LIMITATION, INJURY AND/OR DAMAGE WHICH IS THE RESULT OF THE NEGLIGENCE OF LESSOR, AND/OR ITS AGENTS OR EMPLOYEES. THE PROVISIONS OF THIS PARAGRAPH II SHALL SURVIVE THE EXPIRATION OR TERMINATION OF THIS LEASE WITH RESPECT TO ANY CLAIMS OR LIABILITY OCCURRING PRIOR TO SUCH EXPIRATION OR TERMINATION. 12. USE. The Leased Premises shall be used only for the purpose of manufacturing, receiving, storing, shipping and selling (other than retail) products, materials and merchandise made and/or distributed by Lessee and for such other lawful purposes as may be incidental thereto. Any use that would cause the Leased Premises to be deemed a "place of public accommodation" under the Americans with Disabilities Act of 1990 is expressly prohibited. Outside storage, including without limitation, storage of trucks and other vehicles, is prohibited without Lessor's prior written consent. Lessee shall comply with all governmental laws, ordinances and regulations applicable to the use of the Leased Premises, and promptly shall comply with all governmental orders and directives for the correction, prevention and abatement of nuisances in or upon, or connected with, the Leased premises, all at Lessee's sole expense. Lessee shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the Leased Premises, nor take any other action that would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Lessor or any other lessees of the building or project in which the Leased Premises are a part. 13. INSPECTION Lessor and Lessor's agents and representatives shall have the right to enter the Leased Premises at any reasonable time during business hours, to inspect the Leased Premises, with 72 hours notice except in case of emergency, and to make such repairs as may be required or permitted pursuant to this Lease. During the period that is six (6) months prior to the end of the Lease term, upon telephonic notice to Lessee. Lessor and Lessor's representatives may enter the Leased Premises during business hours for the purpose of showing the Leased Premises. In addition, Lessor shall have the right to erect a suitable sign on the Leased Premises stating the Leased Premises are available, Lessee shall notify Lessor in writing at least thirty (30) days prior to vacating the Leased Premises and shall arrange to meet with Lessor for a joint inspection of the Leased Premises prior to vacating. If Lessee fails to give such notice or to arrange for such inspection, then Lessor's inspection of the Leased Premises shall be deemed correct for the purpose of determining Lessee's responsibility for repairs and restoration of the Leased Premises. Lessor, or parties on its behalf, shall be required to execute a confidentiality agreement, prior to inspection, as required by Lessee. 14. ASSIGNMENT AND SUBLETTING A. Except for mergers, consolidations, purchase of its own stock or transferring of stock to an affiliated corporation. Lessee shall not: (0 assign this Lease or ally interest therein; nor (ii) sublease the Leased Premises or any portion (hereof, without the prior written consent. If Lessee is not a natural person, the acquisition of a controlling interest in Lessee shall be deemed an assignment for purposes hereof. As used herein, the phase "controlling interest" shall mean ownership in excess of forty-nine percent (49%) of the voting interest of Lessee. Any attempted assignment or sublease by Lessee in violation of the terms and covenants of this paragraph shall be void. B. If Lessee requests Lessor's consent to an assignment of the Lease or a subletting of all or part of the Leased Premises. Lessor shall either (i) approve such sublease or assignment (but no approval of an assignment or sublease shall relieve Lessee of any liability hereunder), or (ii) negotiate directly with the proposed sublessee or assignee provided that, unless otherwise agreed by Lessee, the terms and conditions of such third party lease agreement are not more or less favorable to such proposed sublessee or assignee than the corresponding terms and conditions of the proposed assignment or sublease between Lessee and such third party) arid (in tile event Lessor is able to reach agreement with such proposed sublessee or assignee) upon execution of a lease with such proposed sublessee or assignee, terminate this Lease (in part or in whole, as appropriate) upon thirty (30) days' notice, or (iii) if Lessor shall fail to notify Lessee in writing of its decision within a thirty (30) day period after Lessor has received notice in writing of the proposed assignment or sublease. Lessor shall be deemed to have refused to consent to such assignment or sublease, and to have elected to keep this Lease in full force and effect. C. All cash or other proceeds of any assignment, sale or sublease of Lessee's interest in the Lease and/or the Leased Premises, whether consented to by Lessor or not, shall be paid to Lessor notwithstanding the fact that such proceeds exceed the Rent called for hereunder, unless Lessor agrees to the contrary in writing, and Lessee hereby assigns all rights it might have or ever acquire in any such proceeds to Lessor, This covenant and assignment shall benefit Lessor and its successors in ownership of the Leased Premises and shall bind Lessee and Lessee's heirs, executors, administrators, personal representatives, successors and assigns. Any assignee, sublessee or purchaser of Lessee's interest in this Lease (all such assignees, sublessees or purchasers being hereinafter referred to as "Successors"), by occupying the Leased Premises and/or assuming Lessee's obligations hereunder, shall be deemed to have assumed liability to Lessor for all amounts paid to persons other than Lessor by such Successor in consideration of any such sale, assignment or subletting, in violation of the provisions hereof. D. No assignment or subletting, whether or not with Lessors consent, shall ever relieve Lessee of any liability hereunder. E. It this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Section 101 ct.seq., (the "Bankruptcy Code"), any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Lessor, shall be and remain the exclusive property of Lessor and shall not constitute property of Lessee or of the estate of Lessee within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Lessor's property under the preceding sentence not paid or delivered to Lessor shall be held in trust for the benefit of Lessor and be promptly paid or delivered to Lessor. The inclusion of this subparagraph in this Lease is not intended as, and shall not be construed as, the Landlord's consent to an assignment and/or assumption of this Lease. F. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or deed, to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Lessor an instrument confirming such assumption. The inclusion of this subparagraph in this Lease is not intended as, and shall not be construed as, the Landlord's consent to an assignment and or assumption of this Lease. G. This Lease is a contract under which applicable law excuses Lessor from accepting performance from (or rendering performance to) any person or entity other than 1essee within the meaning of sections 365(c) and 365(e)(2) of the Bankruptcy Code, II U.S.C Sections 365(c), 365(e)(2), 15. CONDEMNATION If any portion of the Leased Premises are taken for any public or quasi-public use tinder governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking prevents or materially interferes with the use of the Leased Premises for the purpose for which they were leased to Lessee, this Lease shall terminate and the Rent shall be abated during the unexpired portion of this Lease, effective on the date of such, taking, If such taking does not materially interfere with the use of the Leased Premises, this Lease shall not terminate, but the Rent payable hereunder during the unexpired portion of this Lease shall be reduced to such extent as may be fair and reasonable under all of the circumstances, All compensation awarded in connection with or as a result of any of the foregoing proceedings shall be the property of Lessor and Lessee hereby assigns any interest in any such award to Lessor; provided, however, Lessor shall have no interest in any award made to Lessee for loss of business or good will or for the taking of Lessee's fixtures and improvements, if a separate award for such items is made to Lessee. 16. HOLDING OVER. At the termination of this Lease by its expiration or otherwise. Lessee immediately shall deliver possession to Lessor with all repairs and maintenance required herein to be performed by Lessee completed. If, for any reason, Lessee retains possession of the Leased Premises after the expiration or termination of this Lease, unless the parties hereto otherwise agree in writing, such possession shall be subject to termination by either Lessor or Lessee at any time upon not less than ten (10) days advance written notice, and all of the other terms and provisions of this Lease shall be applicable during such period, except that Lessee shall pay Lessor from time to time, without demand, as rental for the period of such possession, an amount equal to one and one half times the rent in effect on the termination date, computed on a daily basis for each day of such period. No holding over by Lessee, whether with or without consent of Lessor, shall operate to extend this Lease except as otherwise expressly provided, The preceding provisions of this Paragraph 16 shall not be construed as consent for Lessee to retain possession of the Leased Premises in the absence of written consent thereto by Lessor, 17. QUIET ENJOYMENT Lessor represents that it has good title to the Leased Premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this Lease, zoning ordinances and other building and tire ordinances and governmental regulations relating to the use of such property, and easements, restrictions and other conditions of record, If this Lease is a sublease, then Lessee agrees to take the Leased Premises subject to the provisions or all prior Leases. Lessor represents that it has the authority to enter into this Lease and that so long as Lessee pays all amounts due hereunder and performs all other covenants and agreements herein set forth, Lessee shall peaceably and quietly have, hold and enjoy the Leased Premises for the term hereof without hindrance or molestation from Lessor, subject to the terms and provisions of his Lease. 18. EVENTS OF DEFAULT The following events shall be deemed to be events of default by Lessee under this Lease: (Lessee shall fall to pay any Rent or other sum of money due hereunder and such failure shall continue for a period of five (5) days after written notice that such sum is due; (ii) Lessee shall fail to comply with any provision of this Lease other than those listed in this paragraph 18. or any other written agreement between Lessor and Lessee, all of which terms, provisions and covenants shall be deemed material, and such failure shall continue for a period of thirty (30) days after written notice of such default is given to Lessee; (iii) the Leased Premises shall be taken on execution or other process of law in any action against Lessee; (iv) Lessee notifies Lessor, at any time prior to the Commencement Date, that Lessee does not intend to take occupancy of the Leased Premises upon the Commencement Date of the Lease term or Lessee shall fail to promptly move into and take possession of the Leased Premises when the Leased Premises are ready for occupancy or shall cease to continuously do business in. vacate or abandon any portion of the Leased Premises; (v) Lessee shall become insolvent or unable to pay its debts as they become due; (vi) Lessee takes any action to file a petition under any section or chapter of the national Bankruptcy Code, as amended from time to time, or under any similar law or statute of the United States or any State thereof; or a petition shall be tiled against Lessee under any such statute; (vii) a receiver or trustee shall be appointed for Lessee's leasehold interest in the Leased Premises or for all or a substantial part of the assets of Lessee. 19. REMEDIES. A. Upon each occurrence of an event of default, Lessor shall have the option to pursue any one or more of the following remedies without notice or demand: 1. Terminate this Lease, with or without re-entering the Leased Premises; and/or 2. Enter upon and take possession of the Leased Premises, with or without terminating this Lease: and/or 3. Alter all locks and other security devices at the leased Premises with or without terminating this Lease, and pursue, at Lessor's option, one or more remedies pursuant to this Lease, Lessee hereby specifically waiving any state or federal law to the contrary; and in any such event Lessee immediately shall surrender the Leased Premises to Lessor, and if Lessee fails so to do, Lessor, without waiving any other remedy it may have, may enter upon and take possession of the Leased Premises and expel or remove Lessee and any other person who may be occupying the Leased Premises or any pan thereof, without being liable for prosecution or any claim of damages therefore. B. If Lessor terminates this Lease, with or without re-entry of the Leased Premises at Lessor's option. Lessee shall be liable for and shall pay to Lessor, the sum of all rental and other payments owed to Lessor hereunder accrued to the date of such termination, plus, as liquidated damages, an amount equal to (I) the present value of the total Rent and other payments owed hereunder for the remaining portion of the Lease term, calculated as if such term expired on the date set forth in Paragraph 1, less (2) the then present fair market rental value of the Leased Premises for such period. C. If Lessor repossesses the Leased Premises, without terminating the Lease, as an alternate measure of damages, at Lessor's option, Lessee shall be liable for and shall pay Lessor on demand all rental and other payments owed to Lessor hereunder, accrued to the date of such repossession, plus all amounts required to be paid by Lessee to Lessor until the date of expiration of die term as stated in Paragraph I, diminished by all amounts received by Lessor through reletting the Leased Premises during such remaining term. Actions to collect amounts due by Lessee to Lessor under this subparagraph may be brought from time to time, on one or more occasions, without the necessity of Lessor's waiting until expiration of the Lease term. D. Upon an event of default, in addition to any sum provided to be paid herein, Lessee also shall be liable for and shall pay to Lessor (I) brokers' fees incurred by Lessor in connection with reletting the whole or any part of the Leased Premises: (ii) the costs of removing and storing Lessee's or other occupant's property; (iii) the costs of repairing, altering, remodeling or otherwise putting the Leased Premises into condition acceptable to a new lessee or lessees; and (iv) all reasonable expenses incurred by Lessor in enforcing or defending Lessor's rights and/or remedies, If either party hereto institutes any action or proceeding to enforce any provision hereof by reason of any alleged breach of ally provision of this Lease, the prevailing party shall he entitled to receive from the losing party all reasonable attorneys' fees and all court costs in connection with such proceeding. E. In the event Lessee fails to make any payment due hereunder when payment is due, to help defray the additional cost to Lessor for processing such late payments. Lessee shall pay to Lessor on demand a late charge in an amount equal to five percent 5%) of such installment: and the failure to pay such amount within ten days) days after demand therefore shall be an additional event of default hereunder. The provision for such late charge shall he in addition to all of Lessor's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Lessor's remedies in any manner. Lessor and Lessee agree that the late charge provided for in this subparagraph is not interest. F. No act or omission of Lessor, or exercise by lessor of any one or more remedies hereunder granted or otherwise available, shall be deemed to be an acceptance of surrender of the Leased Premises by Lessor, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Lessor and Lessee. Lessee and Lessor further agree that forbearance by Lessor to enforce its rights pursuant to the Lease at law or in equity shall not be a waiver of Lessor's right to enforce one or more of its rights in connection with any subsequent default. G. This paragraph shall be enforceable to the maximum extent not prohibited by applicable law, and the unenforceability at any portion thereof shall not thereby render unenforceable any other portion. No re-entry or taking of possession of the Leased Premises by Lessor shall be construed as an election on Lessors pan to terminate this Lease unless a written notice of such termination is given to Lessee. H. Notwithstanding anything in this Lease to the contrary, all amounts payable by Lessee to or on behalf of Lessor under his Lease, whether or not expressly denominated as Rent, shall constitute Rent for the purposes of section 502(b)(7) of the Bankruptcy Code. II U.S.C. Section 502(b)(7). I. Lessor shall be in default hereunder in the event Lessor has not begun and pursued with reasonable diligence the cure of any failure of Lessor to meet its obligations hereunder within thirty (30) days of the receipt by Lessor of written notice from Lessee of the alleged failure to perform. Whether in this Lease or elsewhere, in no event shall Lessee have the right to terminate or rescind this Lease as a result of Lessor's default as to any covenant or agreement contained in this Lease. Lessee hereby waives such remedies of termination and rescission. If Lessor fails to perform any of its obligations hereunder within thirty (30) days after written notice from Lessee specifying such failure, Lessee's remedy shall be an action for damages or Lessee shall have the right to offset against the rent, the reasonable cost of performing Lessor's obligations: provided however, if Lessor's cure of it failure of its obligations hereunder cannot be cured within thirty (30) days after receipt of 1essee's notice of such failure, and Lessor is diligently pursuing such cure to completion, Lessor shall not be in default hereunder and Lessee shall have no right to offset the rent. Unless and until Lessor falls to 50 cure any default after such notice, Lessee shall not have any remedy or cause of action by reason thereof. Lessee hereby covenants that, prior to the exercise of any such remedy, it will give the mortgagee(s) holding mortgages on the Leased Premises or the building in which the Leased Premises are located notice and a reasonable time to cure any default by Lessor. All obligations of Lessor hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Lessor only during the period of its possession of the Leased Premises and not thereafter. The term "Lessor shall mean only the owner, for the time being of the Leased Premises, and in the event of the transfer by such owner of its interest in the Leased Premises, such owner shall thereupon be released and discharged from all covenants and obligations of the Lessor thereafter accruing, but such covenants and obligations shall be binding during the Lease term upon each new owner for the duration of such owner's ownership. Notwithstanding any other provision hereof, Lessor shall not have any personal liability hereunder. in the event of any breach or default by Lessor in any term or provision of this Lease. Lessee agrees to look solely to the equity or interest then owned by Lessor in the Leased Premises or of the building of which the Leased Premises are a part; however, in no event, shall any deficiency judgement or any money judgment of any kind be sought or retained against any Lessor. J. If Lessor repossesses the Leased Premises pursuant to the authority herein granted, then Lessor shall have the right to (i) keep in place and use or (ii) remove and store all of the furniture, fixtures and equipment at the Leased Premises, including that which is owned by or leased to Lessee at all times prior to any foreclosure thereon by Lessor or repossession thereof by any lessor thereof or third party having a lien thereon. Lessor also shall have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person ("Claimant") who presents to Lessor a copy of any instrument represented by Claimant to have been executed by Lessee (or any predecessor Lessee) granting Claimant the right under various circumstances to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of Lessor to inquire into the authenticity or legality of said instrument. The rights of Lessor herein stated shall be in addition to any and all other rights that Lessor has or may hereafter have at law or in equity; and Lessee stipulates and agrees that the rights herein granted Lessor are commercially reasonable. 20. ATTORNEY'S FEES. In the event Lessor/Lessee retains counsel in connection with, or files suit to enforce the performance of or to obtain damages caused by a default concerning any of the terms of this Lease by Lessor/Lessee and obtains a judgement on its behalf. Lessor/Lessee shall be responsible for and shall pay Lessor's/Lessee's reasonable attorneys fees. 21. MORTGAGES. Lessee accepts this Lease subject and subordinate to any mortgages and/or deeds of trust now or at any time hereafter constituting a lien or charge upon the Leased Premises or the improvements situated thereon or the building of which the Leased Premises are a part, provided, however, that if the mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Lessee's interest in this Lease superior to any such instrument, then by notice to Lessee from such mortgagee, trustee or holder, this Lease shall be deemed superior to such lien, whether this Lease was executed before or after said mortgage or deed of trust, Lessee, at any time hereafter on demand, shall execute any instruments, releases or other documents that may be required by any mortgagee for the purpose of subjecting and subordinating this Lease to the lien of any such mortgage. Lessor agrees to use its best efforts to obtain a non- disturbance agreement. 22. MECHANIC'S LIENS. Lessee has no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind the interest of Lessor in the Leased Premises or to charge the Rent payable hereunder or any claim in favor of any person dealing with lessee, including those who may furnish materials or perform labor for any construction or repairs. Lessee covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Leased Premises and that it will save and hold Lessor harmless from any and all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of the Lessor in the Leased Premises or under the terms of this Lease. Lessee agrees to give Lessor Immediate written notice of the placing of any lien or encumbrance against the Leased Premises. Lessee reserves the right to contest disputed claims at its sole cost and expense. 23. MISCELLANEOUS A. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are or convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. B. In the event the Leased Premises constitute a portion of a multiple occupancy building, Lessee's "Proportionate share", as used in this Lease, shall mean a fraction, the numerator of which is the space contained in the Leased Premises and the denominator of which is the entire space contained in the building. C. The terms, provisions, covenants and conditions contained in this Lease shall run with the land and shall apply to. inure to the benefit of, and be binding upon, the parties hereto and upon their respective, heirs, executors, personal representatives, legal representatives, successors and assigns, except as otherwise herein expressly provided. Lessor shall have the right to transfer and assign, in whole or in part, its rights and obligations in the Lease and in the building and property that are the subject of this Lease. each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this Lease. D. Whenever a period of time is herein prescribed for the taking of any action by lessor/Lessee, Lessor/Lessee shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, or any other cause whatsoever beyond the control of Lessor/Lessee. E. Lessee agrees, from time to time, within ten (10) days after request of Lessor, to deliver to Lessor, or Lessor's designee, an estoppel certificate stating that this Lease is in full force and effect, the date to which Rent has been paid, the unexpired term of this Lease and such other factual matters pertaining to this Lease as may be requested by Lessor. F. This Lease constitutes the entire understanding and agreement of the Lessor and Lessee with respect to the subject matter of this Lease, and contains all of the covenants and agreements of Lessor and Lessee with respect thereto, Lessor and Lessee each acknowledge that no representations, warranties, inducements, promises or agreements, oral or written, have been made by Lessor or Lessee, or anyone acting on behalf of Lessor or Lessee, which are not contained herein, and any prior agreements, promises, negotiations, representations or warranties not expressly set forth in this Lease are of no force or effect. This Lease may not be altered, changed or amended except by an instrument in writing signed by both panics hereto. The covenant contained in this paragraph is a material inducement to Lessor and Lessee to execute this Lease. G. All obligations of Lessee hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including without limitation, all payment obligations with respect to taxes and insurance and all obligations concerning the condition and repair of the Leased Premises. Upon the expiration or earlier termination of the term hereof, and prior to Lessee vacating the Leased Premises, Lessee shall pay to Lessor any amount reasonably estimated by Lessor as necessary to put the Leased Premises, including without limitation, all heating and air conditioning systems and equipment therein, in good condition and repair, reasonable wear and tear excluded. Lessee shall also, prior to vacating the Leased Premises, pay to Lessor the amount, as estimated by Lessor, of Lessee's obligation hereunder for real estate taxes and insurance premiums for the year in which the Lease expires or terminates. All such amounts shall be used and held by Lessor for payment of such obligations of Lessee hereunder, with Lessee being liable for any additional costs therefore upon demand by Lessor, or with any excess to be returned to Lessee after all such obligations have been determined and satisfied as the case may be. H. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, Invalid or unenforceable, there be added, as a part of this Lease, a cause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. I. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the State of Texas. This Lease is performable in Dallas County, Texas. J. The voluntary or other surrender of this Lease by Lessee or a mutual cancellation thereof, shall not constitute a merger; and upon such surrender or cancellation of this Lease, Lessor shall have the option, in Lessor's sole discretion, to either (i) terminate all or any existing subleases or subtenancies, or (ii) assume Lessee's interest in any or all subleases or subtenancies. K. All references in this Lease to "the date thereof" or similar references shall he deemed to refer to the last date, in point of time, on which all Parties hereto have executed this Lease. L. Lessee represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction or that no broker, agent or other person brought about his transaction, other than Cawley and Associates, or other than as may be referred in a separate written agreement executed by Lessee, and delivered to Lessor and Lessee agrees to indemnify and hold Lessor harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Lessee with regard to this leasing transaction. M. If and when included within the term "Lessor", as used in this instrument, there is more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of a notice specifying some individual at some specific address for the receipt of notices and payments to Lessor. If and when included within the term "Lessee", as used in this instrument, there it more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of a notice specifying some individual at some specific address within the continental United States for the receipt of notices and payments to Lessee. All parties included within the terms "Lessor" and "Lessee", respectively shall be bound by notices given in accordance with provisions of Paragraph 25 hereof to the same effect as if each had received such notice. 24. SECURITY SERVICE. Lessee agrees to pay its Proportionate Share of the cost of monitoring, repair and maintenance of the water flow detection systems installed on the Leased Premises and/or the building of which the Leased Premises are a pan, including the cost at any license or permit or user charge required for such security systems. Lessor, at its option, may enter into an agreement with third party for the monitoring, maintenance and repair of any such system, Lessor shall not be liable to Lessee for any damages, costs or expense which occur for any reason iii the event such security system is not properly installed, monitored or maintained. 25. NOTICES. Each provision of this instrument or of any applicable governmental laws, ordinances, regulations and other requirements regarding the sending, mailing or delivering of notice or the making of any payment by Lessor to Lessee or regarding the sending, mailing or delivering of any notice or the making of any payment by Lessee to Lessor shall be deemed to be complied with when and if the following steps are taken. a) All Rent and other payments or notices required to be made by Lessee to Lessor hereunder shall be delivered to lessor at the address for Lessor set forth below or at such other address as Lessor may specify from time to time by written notice delivered in accordance herewith. Lessees obligation to pay Rent and any other amounts to Lessor under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Lessor. b) All payments required to be made by Lessor to Lessee hereunder shall be delivered to Lessee at the address set forth below, or at such other address within the continental United States as lessee may specify from time to time by written notice delivered in accordance herewith. c) Any written notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or not when deposited in the United States Mail, postage prepaid, Certified or Registered Mail, addressed to the Parties hereto at the respective addresses as set out below, or at such other address as they have theretofore specified by written notice delivered in accordance herewith. 26. HAZARDOUS SUBSTANCES A. Lessee shall not use. store, dispose, handle, transport, release, discharge or generate any Hazardous Substances (as defined in subparagraph (below), in, on, to,. under, from or about the Leased Premises or Building in violation of Environmental Laws. Lessee warrants and agrees that Lessee's use, storage, disposal, handling, release, discharge, generation or transport shall be conducted in strict accordance with all Environmental Laws (as defined in subparagraph (f) below). Any consent or approval by Lessor of Lessee's use, storage, disposal, transport, handling, discharge, release or generation of Hazardous Substances shall not constitute an assumption of risk respecting the same nor a warranty or certification by Lessor that Lessee's proposed use, storage, disposal, handling, release, discharge, generation or transport of any such Hazardous Substances is safe or reasonable or in compliance with Environmental Laws. Lessee shall maintain current all permits required for its operations, including, without limitation, those for the use, storage, handling, transport, discharge, release, generation, and/or disposal of Hazardous Substances. B. Release or discharge of a detectable amount of Hazardous Substances into the soil or into ground water shall constitute a material default under this Lease, Lessee acknowledges that a Lessee of nonresidential property who knows or has reason to know that a material amount of a hazardous substance has been released on or beneath its premises is to promptly notify the Lessor. Failure to provide such notice to Lessor shall constitute a material default under this Lease. In the event of such default, Lessor shall have the right to (i) terminate this Lease and collect damages, inclusive of the cost of cleanup, required under Environmental Law, of any Hazardous Substances released into the soil or groundwater; or (ii) require the cleanup of contamination, required under Environmental Law, while still enforcing the remaining terms of this Lease. C. Lessee expressly agrees that Lessor shall have the right to enter the Leased Premises to inspect the Leased Premises and/or to perform through a reputable, qualified environmental consulting firm, an environmental investigation and assessment of the Leased Premises (the "Environmental Assessment") upon reasonable notice to Lessee (not less than 72 hours), and that this right of entry shall include the right to test for soil and groundwater contamination. Lessee shall comply or bear the risk of noncompliance, at its sole cost and expense, with all reasonable recommendations contained in any Environmental Assessment delivered to Lessor to Lessee, including. without limitation, any reasonable recommendation with respect to the precautions that should be taken with respect to activities on the Leased Premises or Building or any reasonable recommendations for additional testing and studies to detect the presence of Hazardous Substances. D. Lessee shall indemnify, defend, (by counsel reasonably acceptable to Lessor), protect and hold Lessor, and each of Lessor's officers, directors, shareholders, employees, agents, attorneys, successors and assigns, free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses or expenses (including, without limitation, reasonable attorneys' fees and costs and court costs) or death of Or injury to any person or damage to any property whatsoever, including without limitation (a) personal injury claims, (b) the payment of liens, (c) diminution in the value of the Leased Premises or Building or the property on which they are located, (d) damages for the loss or restriction on use of the Leased Premises or Building, (e) sums paid in settlement of claims, with the approval of Lessee, which shall not be unreasonably withheld, (f) reasonable attorneys' fees and costs, consulting tees and costs and expert fees and costs, (g) the cost of any investigation of site conditions, and (h) the cost of any repair, clean-up, health or other environmental assessments, remedial, closure, removal, or restoration work, decontamination or detoxification if required by any governmental or quasi-governmental agency or body having jurisdiction from or are caused its whole or in part, directly or indirectly, by Lessee's use, storage, handling, transportation, disposal, release, threatened release, discharge or generation of Hazardous Substances to, in, on, under, about or from the Leased Premises or Building, in violation of Environmental Laws, or Lessee's failure otherwise to comply with any Environmental Law. For purposes of the indemnity provisions hereof, any acts or omissions of Lessee, or by employees, agents, assignees, contractors or subcontractors of Lessee or others acting for or on behalf of lessee (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Lessee, The indemnification contained herein shall survive the expiration or earlier termination of this Lease. This indemnification is intended to constitute an indemnity agreement within the meaning of Section 9607(e)(1) of the Comprehensive Environmental Response. Compensation and Liability Act of 1980 (42 USC 9607(e)(l). E. Upon the expiration or earlier termination of this Lease, Lessee shall remove from the Leased Premises any trade fixtures, furnishings and/or equipment, associated with the use, storage, handling, transport, discharge, release, generation or disposal of Hazardous Substances and perform any closure work, investigation and environmental remedial work required by an Environmental Laws or by any other applicable laws, ordinances, regulations, or permits by any governmental authority having jurisdiction. Removal and disposal of any and all such equipment or fixtures shall be performed in strict accordance with all Environmental Laws and all other applicable laws, regulations and government orders. The Lessor has no actual knowledge of the foregoing procedures not being adhered to by prior tenants it the Leased Premises. F. As used in this Lease, the term "Hazardous Substances" shall mean hazardous wastes, hazardous chemicals, radioactive materials, toxic materials or any other waste, chemical, substance or material now or hereafter determined by any federal, state or local governmental agency of authority having jurisdiction to be hazardous to human health or the environment or that is or becomes regulated by such agency or authority by reason of such determination that were released to the environment, including, without limitation, the soil, groundwater and/or air, at the Leased Premises or Building. As used in this Lease, the term "Environmental Laws" shall mean any and all present and future federal, state and local laws (whether under common law, statute, rule, regulation or otherwise) requirements under permits issued with respect thereto, and other requirements of governmental authorities relating to the environment or to any Hazardous Substance (including, without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C 9601, et seq.), as heretofore or hereafter amended from time to time. G. Lessee/Lessor shall immediately advise Lessor/Lessee in writing of, and provide Lessor/Lessee with a copy of: (i) any notices of violation or potential or alleged violation of any Environmental Law that are received by Lessee/Lessor from any governmental agency; (ii) any and all inquiry, investigation, enforcement, clean-up, removal or other governmental or regulatory actions instituted or threatened in writing relating to Lessee/Lessor or the Leased Premises or Building; and (iii) all written claims made or threatened by any third-party against Lessee/Lessor or the Leased Premises or Building relating to any Hazardous Substances. H. with reference to Article 12 Of this Lease, if the proposed assignee's or sublessee's activities in, on or about the Leased Premises or Building involve the use, handling, storage, transport, discharge, release generation or disposal of any Hazardous Substances other than those used by Lessee or in quantities and processes different from Lessee's uses permitted hereunder, it shall be reasonable for Lessor to withhold its consent to such assignment or sublease in light of the risk of contamination posed by such activities unless Lessee established beyond a reasonable doubt that such assignee's or sublessee's activities pose no greater risk of contamination to the Leased Premises and Building than Lessee's permitted activities and use of the Leased Premises and Building in view of the (a) quantities, toxicity and other properties of the Hazardous Substances to be used by such assignee or sublessee, (b) the precautions against a release of Hazardous Substances such assignee or sublessee agrees to implement, (c) such assignee's or sublessee's financial condition as it relates to its ability to pay for the cost to clean up a major release of Hazardous Substances, and (d) such assignee's or sublessee's policy and historical record respecting its willingness to respond to and clean up a release of Hazardous Substances. I. To the actual knowledge of Lessor, the Leased Premises is not impaired by any contamination of Hazardous Substances into or on the soil or ground water. J. With respect to use or discharge of Hazardous Substances on the Leased Premises prior to the Commencement Date, and the same not being caused by Lessee, its employees, agents, assignees, contractors, subcontractors or invitees, Lessor shall indemnify, defend, (by counsel reasonably acceptable to Lessee), protect and hold Lessee, and each of Lessee's officers, directors, shareholders, employees, agents, attorneys, successors and assigns, free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses or expenses (including, without limitation, reasonable attorneys' fees and costs and court costs) or death of or injury to any person or damage to any property whatsoever, including without limitation (a) personal injury claims, (b) the payment of liens, (c) diminution in the value of the Leased Premises or Building or the property on which they are located, (d) damages for the loss or restriction on use of the Leased Premises or Building. (e) sums paid in settlement of claims, with the approval of Lessor, which shall not be unreasonably withheld, (f) reasonable attorneys' fees and costs, consulting fees and costs and expert fees and costs, (g) the cost of any investigation of site conditions, and (h) the cost of any repair, clean-up, health or other environmental assessments, remedial, closure, removal, or restoration work, decontamination or detoxification if required by any governmental Or quasi-governmental agency or body having jurisdiction, from or are caused in whole or in part, directly or indirectly, by Lessor's or prior tenant's of the Leased Premises use, storage, handling, transportation, disposal, release, threatened release, discharge or generation of Hazardous Substances to, in, on, under, about or from the Leased Premises or Building, in violation of Environmental Laws, or Lessor's Or prior tenant's of the Leased Premises failure otherwise to comply with any Environmental Law. For purposes of the indemnity provisions hereof, any acts or omissions of Lessor or prior tenants of the Leased Premises, or by employees, agents, assignees, contractors or subcontractors of Lessor or prior tenants of the Leased Premises or others acting for or on behalf of Lessor or prior tenants of the Leased Premises (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Lessor or prior tenants of the Leased premises. The indemnification contained herein shall survive the expiration of earlier termination of this lease. This indemnification is intended to constitute an indemnity agreement within the meaning of Section 9607(e)(I) of the Comprehensive Environmental Response, Compensation and liability Act of 1980 (42 USC 9607(e)(I). 27. INTENTIONALLY DELETED. 28. EXHIBITS. The following numbered exhibits are attached hereto and incorporated herein and made a part of this Lease for all purposes: Exhibit "A" Legal Description Exhibit "B" Floor Plan Exhibit "C" Special Provisions 29. EFFECT OF DELIVERY OF THIS LEASE. Lessor has delivered a copy of this Lease to Lessee for Lessee's review only, and the delivery hereof to Lessee does not constitute an offer to Lessee or option. This Lease shall not be effective until a copy executed by both Lessor and Lessee is delivered to and accepted by Lessor, and if applicable, this Lease has been approved by Lessor's mortgagee(s). 30. NO IMPLIED WAIVER. The failure of Lessor to insist at any time upon the strict performance of any covenant or agreement herein or to exercise any option, right, power or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof. The failure of Lessor to exercise any right, power or remedy with respect to a default by Lessee as to any term, condition or covenant of this Lease is not intended to be, and shall not operate as. a waiver of any right, power or remedy with respect to that default or as to any other or subsequent default of Lessee's obligations under this Lease. The exercise by Lessor of any certain right, power or remedy with respect to a default by Lessee as to any term, condition or covenant of this Lease is not intended to be and shall not operate as, a waiver of any other right, power or remedy of Lessor contained in this Lease, with respect to that default or as to any other or subsequent default by Lessee of its obligations pursuant to this Lease. No payment by Lessee or receipt by Lessor of a lesser amount than the monthly installment of Rent due under this Lease shall be deemed to be other than on account of the earliest Rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such Rent or pursue any other remedy provided in this Lease. 31. INTENTIONALLY DELETED. EXECUTED BY LESSEE, this 25th EXECUTED BY LESSOR this 15th day of May, 1994 day of June, 1994 LESSEE: LESSOR Carrington Laboratories, Inc., DFW Nine, a Texas corporation a California Limited Partnership By: Meridian Point Properties, Inc.. as Agent By: /S/ By: /S/ ---------------------- ---------------------- Title: ___________________ Title: ___________________ ADDRESS OF LESSSEE: ADDRESS OF LESSOR: Carrington Laboratories c/o Wilcox Realty Group, Inc. 2001 Walnut Hill Lane 1445 Ross Avenue, Suite 4900 Irving, Texas 75038 Dallas. Texas 75202 Meridian Point Lease Revised 11/18/92 Exhibit "A" All that certain tract or parcel of land being a part of Tract D of Las Colinas Walnut Hill Distribution Center in Irving, Texas and being more particularly described as follows: Beginning at a point in the West line of Hereford Drive 667.20 feet South 00 degrees 16'40" East from the South line of Brangus Drive. Thence South 89 degrees 43'20" West 200.0 feet. Thence South 00 degrees 16' 40" East 412.0 feet. Thence North 89 degrees 43'20 East 202.8 feet. Thence in a Northerly direction 54.24 feet with a curve to the right of central angle of 5 degrees 55'24" and a radius of 524.7 feet, Thence North 00 degrees 16'40" West 357.85 feet to the point of beginning. Containing 1.8929 acres of land. EXHIBIT "B" [FLOOR PLAN APPEARS HERE] Exhibit "C" Special Provisions Base Rent Base Rent pursuant to paragraph 2.A shall be paid in accordance with the following schedule: Month 1 $9,201,00/rnonth Months 2-3 $0.000.00/month Months 4-62 $9,201.00/month Months 63-86 $11,041.00/month Tenant Improvements Lessor shall provide an allowance of $35,050 for working drawings, and tenant improvements for the Leased Premises. Construction management shall be handled by Wilcox Realty Group, Inc. If such costs exceed $35,050, Lessee shall pay the excess costs to Lessor and drawing revisions upon demand. Any unused portion of the allowance shall be applied to the Base rent hereunder at a maximum amount of $5,000 per month. During 1994, Lessor, at its sole cost and expense shall repair the parking lot to a reasonably aesthetically acceptable level, repaint the building exterior, repair major cracks in the warehouse area, and provide a ramp from the parking area to the front door. Renewal Option If, at the end of the primary term of this Lease, Lessee is not in default in any of the terms, conditions or covenants of the Lease, Lessee, but not any assignee or subtenant of Lessee, is hereby granted an option to renew this Lease for an additional term of 9j months upon the same terms and conditions contained in this Lease with the following exceptions: A. The renewal option term will contain no further renewal options unless expressly granted by Lessor in writing; and B. The rental for the renewed term shall be based upon the then prevailing rental rates for properties of equivalent quality, size, utility and location, with the length of the lease term and credit standing of the Lessee to be taken into account, If Lessee desires to renew this Lease, Lessee will notify Lessor of its intention to renew no later than six months prior to the expiration date of this Lease; Lessor shall, within the next fifteen days notify Lessee in writing of the proposed renewal rate and the Lessee shall, within the next fifteen days following receipt of the proposed rate, notify the Lessor in writing of its acceptance or rejection of the proposed rental rate, Rejection of the proposed rental rate terminates any renewal option pursuant to this paragraph. See attached. The Lease is contingent upon Lessee's reasonable approval of a Phase One Environmental Report. In the event that the Lessee does not notify the Lessor in writing of an unacceptable Environmental Inspection by June 10, 1994, this Lease shall remain in full force and effect. EX-10.13 16 Exhibit 10.13 [ WILCOX LOGO APPEARS HERE ] August 12 1994 Mr. Robert Brown. CFPIM Director of Materials Management Carrington Laboratories, Inc. 2001 Walnut Hill Lane Irving, TX 75038 Re: Lease Agreement Between DFW Nine, as Lessor, and Carrington Laboratories, Inc., as Lessee, for Leased Premises located at 1909 Hereford Drive, Irving, Texas. Dear Robert: This letter serves to (i) Amend the Commencement Date to August 15, 1994, and (ii) Confirm that the Leased Premises were leased to the Lessee an lessee accepts the Leased Premises "as is" except for those items specifically referenced in the Lease Agreement & Exhibit A attached hereto. Kindly confirm Carrington Laboratories, Inc.'s agreement of the above by having the appropriate party sign below and return four (4) counterparts of this letter to me. I will then present the letter for Lessor's signature and return a fully executed copy to you. Sincerely, WILCOX REALTY GROUP, INC. /S/ James T. Hancock Vice President - Marketing JTH/jks Enclosures AGREED AND ACCEPTED; LESSEE: Carrington Laboratories, Inc. BY: /S/ ----------------------------------- NAME: ________________________________ TITLE:________________________________ DATE: ________________________________ LESSOR:-DFW Nine, a California limited partnership BY: Meridian Point Properties, Inc. BY: /S/ ----------------------------------- NAME: ________________________________ TITLE:________________________________ DATE: ________________________________ EXHIBIT "A" August 10, 1994 Mr. Steve Belken Univera 4250 North Beltline Road Irving, Texas 75038 RE: 1909 Hereford Dear Steve: The following details the estimated costs associated with necessary repairs and maintenance required to be completed as the above referenced property in accordance with your Lease Agreement: Not to Exceed Costs DESCRIPTION (including tax) ----------- --------------- HVAC Repairs & Maintenance per Griffin $9,525.00 Mechanical's attached inspection report dated July 29, 1994. ELECTRICAL Replacement of extinguished light $2,108.00 bulbs, ballasts, and fire exit lamps per Hugh Carrington's notes dated July 25, 1994 and Amber Electric's attached proposal dated August 4, 1994. DOCK DOORS & SHELTER Dock door repairs shown as item (A) $569.00 on attached proposal from Overhead Door Company dated August 2, 1994. Replace one dock shelter shown as item $1,055.00 (C.2) on attached proposal from Overhead Door Company dated August 2, 1994. Dock levellers repairs Unknown WAREHOUSE Water cooler replacement Unknown Floor cleaning (fork lift marks & oil spills) Unknown Chain link fence replacement Unknown CARPETING Bleached place in corner office Unknown Large tear in open office area 2 small offices by lab area (including cove base) WINDOW GLAZING Repair Leaks in the conference room Due to the Landlord's leniency to date on enforcement of this work which should have been completed prior to July 31, 1994, our assistance in obtaining cost estimates for this work which is your firm's responsibility, and the fact that we have not demanded a rental payment for August to date, we respectfully request your cooperation and fairness in regards to the above items for which a repair cost is not known at this time. We currently retain a security deposit in the amount of $6,500 which can be applied towards these repair and maintenance costs. Steve, we certainly intend to be fair and reasonable in terms of the scope of work for remaining items and their associated costs. Please sign below as your acknowledgement and approval for us to proceed with the HVAC, electrical, dock door repairs, and one dock shelter replacement. These costs are Univera's responsibility and Univera agrees to reimburse the Landlord accordingly. I will obtain the needed information on the pending cost estimates and advise you immediately. Please feel free to call if you have any questions. Sincerely, WILCOX REALTY GROUP ACCEPTED: /s/ __________________________________ Louann Davison DATE: Property Manager __________________________________ LD/jh cc: Jim Hancock EX-10.14 17 Exhibit 10.14 This production contract made and entered into as of the 13th day of February, 1995 by and between CARRINGTON LABORATORIES, INC., a Texas corporation, with offices at 2001 Walnut Hill Lane, Irving. Texas, its subsidiaries and successors (hereinafter referred to as "Purchaser") and OREGON FREEZE DRY, INC., an Oregon corporation, with offices at 525 25th Avenue SW, Albany, Oregon, its subsidiaries and successors (hereinafter referred to as "Seller") WITNESSES THAT WHEREAS, Purchaser is a producer and marketer of numerous medical devices and other products; and WHEREAS, Seller is a producer and marketer of numerous food, drug, microbial, chemical, and other products prepared chiefly, but not exclusively, through low-temperature drying processes; and WHEREAS, Purchaser has developed medical devices for wound care which are freeze-dried in their final form for topical or oral use, which are subjects of approved US FDA 510(k) applications or a therapeutical regulatory approval (including material for clinical trials), and for which Seller has developed commercial drying processes and packaging, but specifically excluding diagnostics and cosmetics; and WHEREAS, the parties hereto now wish to enter into a production contract subject to the provisions, terms and conditions hereinafter stated, NOW, THEREFORE, in consideration of the respective representations, warranties, covenants and agreements contained herein, Purchaser and Seller hereby agree as follows: Article One Definitions For the purpose of this production contract, the following definitions will apply: A. "Purchaser" shall mean Carrington Laboratories, Inc., a Texas corporation, with offices at 2001 Walnut Hill Lane, Irving, Texas. B. "Seller" shall mean Oregon Freeze Dry, Inc., an Oregon corporation, with offices at 525 25th Avenue SW, Albany, Oregon. C. "Product" shall mean medical device(s) for wound care which are freeze-dried in their final form for topical or oral use, which are subjects of approved US FDA 510(k) applications or a therapeutical regulatory approval (including material for clinical trials), but specifically excluding diagnostics and cosmetics, described in Exhibit A hereto. D. "Item" shall mean a specific medical device product of the type defined above, identified by a unique product specification which includes formula, process, packaging format and materials, and performance requirements. Prior to production of commercial Product, an Item shall be defined within Exhibit A by such a product specification. E. "Production Contract" shall mean the written contract for the production and supply of Product between the parties hereto, plus all exhibits and contract modifications, if any, which may be agreed to by and between the parties hereto. F. "Commercial production" shall mean Product produced for sale with Quality Assurance release, in accordance with Exhibit A, as mutually agreed-upon and/or periodically amended. G. "Minimum Total Commitment" shall mean the minimum amount of Product Purchaser is required to purchase from Seller during the term of this Production Contract, expressed in sales dollars. Article Two Effective Date The effective date of this contract shall be the date of execution of this contract by both parties hereto. Article Three Product, Quantities, Orders, Scheduling, Raw Materials Revisions to, Expansion of, and Deletions from, Product Line Subsection A. Product and Quantities Subject to the terms and conditions of this Production Contract, Seller shall sell to Purchaser and Purchaser shall purchase from Seller, Product produced in accordance with agreed- upon Item specifications, up to the limits set forth in Exhibit E, which are attached hereto and incorporated into this contract. Exhibit A enumerates Item specifications that shall be finalized by written mutual consent of Purchaser and Seller based on the results of scale-up. Subsection B. Purchase Orders Shipping Schedule, and Lead Time. All shipments will be initiated by a Purchase Order. Product shipment dates will be specified in the Purchase Order. These dates may not be scheduled prior to ninety (90) days after the date the Purchase Order is received and acknowledged in writing by Seller, unless by mutual consent of the parties. Purchase Orders will be non-cancelable, and all Product included in a Purchase Order must be shipped and invoiced within six (6) months of the first scheduled shipping date, Subsection C. Minimum Purchases. From the date Commercial Production first commences, Purchaser is obligated to accept, subject to the provisions of Article Eleven, and Seller is required to make available, during each calendar month of the Production Contract, aggregate shipments of not less than $30,000. Subsection D Late or Partial Shipments. Late or partial shipments against a shipping date scheduled in a Purchase Order will incur liquidated damages of 50% of the purchase order price of the Product not shipped as scheduled, to be credited to Purchaser's account. Seller shall have a two (2) working day grace period (that is, two days after the scheduled shipping date) in which to complete the actual shipment, before said liquidated damages apply. In the context of the aforementioned sentence, the actual shipping date shall be defined as the date on which Product leaves Seller's dock. Liquidated damages shall not apply to late or partial shipments which: 1) are arranged in advance with Purchaser by written consent, or 2) arise due to Force Majeure situations (for example, governmental acts, acts of God, severe weather, fire, flood, explosions, work stoppages, strikes, force majeure situations, impacting major subcontractors and suppliers, unavailability or scarcity of raw materials or ingredients, and acts of the public enemy and war) production by Purchaser pursuant to Article Eight, pursuant to Article Eleven or 4) are rejected by purchaser pursuant to Article Eleven prior to shipment, or 5) arise from delays in Purchaser arranged transportation. These liquidated damages shall constitute Purchaser's sole remedy for late or partial shipments, and Seller shall in no way be liable for any indirect, consequential, or special damages for such shipments, including, but not limited to, loss of use, loss of business opportunities, loss of profits, and other damages. Subsection E. Raw Materials: Ingredients Packaging Materials and Artwork. Purchaser will provide Seller with all raw materials (that is, packaging materials and any required artwork, and ingredients excluding water and production supplies) necessary for the manufacture of Product, in accordance with the agreed upon Item specifications outlined in Exhibit A, as mutually agreed-upon and/or periodically amended, as of the date of the transmittal and acknowledgement in writing of a Purchase Order which requires said raw materials for fulfillment. Purchaser will provide the appropriate Quality Assurance release documentation for all such raw materials it supplies, except packaging. Seller will provide the appropriate Quality Assurance release documentation for packaging, and will notify Purchaser promptly of any deviations from specifications. Package artwork shall be developed by Purchaser, and shall be provided to Seller with proper transmittal documentation indicating Quality Assurance release for the printing of it, Seller will provide to Purchaser the relevant technical costs associated with: and mechanical requirements to which Purchaser's artwork must conform. Purchaser shall be responsible for 1, Any changes in packaging or artwork made at Purchaser's request, or the development of any new packaging or artwork, and/or 2. Changes made to fulfill government regulations or requirements directly associated with Product produced hereunder. Subsection F. Revisions to Existing Items Should Purchaser determine that it wishes to implement improvements or modifications to an existing Item, these shall become effective through mutual written agreement of Seller and Purchaser and amendment of Exhibit A, and of Exhibits D (defined in Article Five below) and E, if necessary, to define a revised product specification, price, and production capacity. Notwithstanding whether written revisions to an existing product specification are required, no changes in process parameters, flow or location, shall be made by Seller without prior written authorization from Purchaser's Director of Quality Assurance. Purchaser will communicate in writing to Seller any change in raw material vendors. Purchaser shall be responsible to reimburse Seller for Seller's (i) finished product inventory of the Item prepared for open Purchase Orders, and up to an additional five percent (5 %) (in units) of the Purchase Order quantity, under the superseded technical specification at prices then in effect, and (ii) product-in-process unique to the superseded technical specification, at Seller's cost, to fill open Purchase Orders. Seller will destroy in a secure manner (e.g., deface, incinerate, or similar) any obsolete labeling, and keep adequate records of same, Notwithstanding any provision to the contrary herein, Seller and Purchaser may mutually agree that Seller develop, to Purchaser's requirements, potential improvements or modifications to existing Items with respect to ingredient(s), shape or size, or packaging materials or format, Purchaser shall reimburse Seller's out-of-pocket expenses for such development activities, together with other reasonable and necessary costs for the use of developmental facilities and personnel for testing and consumer research, as shall be mutually agreed upon by Purchaser and Seller, and authorized in advance by Purchaser's purchase order. Subsection G. Expansion of Product Line. Should Purchaser determine that it wishes to commercialize additional products pursuant to the prior paragraph as new Items, each Item shall become a part of contractual Product through mutual agreement of Seller and Purchaser and amendment of Exhibits A, D, and E, to define the new Item's specifications, price, and production capacity, respectively. Subsection H. Deletions from Product Line Purchaser may delete Items from the Product line set forth in Exhibits A and D, or any amendments thereto, provided that Purchaser shall continue to be obligated to accept Product prepared under open Purchase Orders, and up to an additional five percent (5%) (in units) of the Purchase Order quantity, and to fulfill the Minimum Total Commitment as defined in Article Seven below. Seller will destroy in a secure manner (e.g., deface, incinerate, or similar) any obsolete labeling, and keep adequate records of same, Article Four Modifications to Seller's Facilities Seller shall make such physical changes to its facilities, as described in Exhibit B, as are necessary to reach and comply with the pertinent current Good Manufacturing Practices (cGMPs), as described in Exhibit C. Article Five Price Subsection A. Prices. As compensation for the Product required under this Production Contract, Purchaser shall pay to Seller the prices set forth in Exhibit D as amended, which is attached hereto and incorporated into this contract Prices shall be fixed through the first forty-two (42) months of the Production Contract, and subject to a one-time price increase of up to five percent (5%), effective after the first forty-two (42) months of the Production Contract. The relevant price for a given shipment shall be determined by the price in effect at the date of actual shipment, as actual shipment is defined in Article Three, Subsection D. Subsection B. Adjustments for Regulatory Changes. Should government regulations cause an Increase in Seller's manufacturing costs for the production of Product hereunder, the parties to this Production Contract will meet and attempt to develop viable manufacturing and business strategies to minimize the net cost impact of said regulations on Seller. If such strategies do not fully offset the costs of said regulation, Seller may adjust prices to reflect the net impact of said regulation. Seller will provide appropriate data and analysis to support such price adjustments. Article Six Term and Termination Subsection A Term, The term of this Production Contract shall be a period beginning the effective date of its execution by both parties hereto and automatically ending sixty-six (66) months thereafter, or as extended by written consent of both parties. Subsection B. Termination. This production contract may not he canceled or otherwise terminated by either party except as set forth in this Article. Subsection C. Termination For Convenience of Purchaser. Purchaser shall have the right to unilaterally terminate this Production Contract subject to its performance of the provisions of this Article Six. Subsection C. In order to exercise this right to terminate for convenience Purchaser shall give Seller ninety (90) days written notice of termination for the convenience of Purchaser, expressly citing this subsection of Article Six, Subsection C. and shall within thirty (30) days of termination, pay to Seller any amount applicable under Article Seven. Subsection D. Termination for Default. In the event of a breach of contract or default of performance by either party, the party claiming such breach or default shall give written notice of such breach or default, citing the grounds and providing information supporting such grounds, to the breaching or defaulting party and the latter shall have thirty (30) days from receipt within which to cure such breach or default, or, if cure can not be reasonably completed within such 30-day period, the defaulting party shall, within such 30-day period begin commercially reasonable efforts to cure such default and shall timely continue such efforts after such 30-day period until such default has been cured, provided however, such period of cure may not exceed ninety (90) days after the end of the 30-day period. In the event that the breaching or defaulting party shall refuse or fail to cure such claimed breach or default, within said thirty (30) days, or such longer period if the cure can not be reasonably completed within such 30-day period, but in no event longer than ninety (90) days after the end of the 30-day period, the party claiming breach or default may terminate this Production Contract and seek its remedies at law or in equity against the other. Article Seven Minimum Commitments and Take or Pay Guaranty Subsection A. Minimum Total Commitment As partial inducement for Seller to enter into this Production Contract, Purchaser agrees to take delivery of and pay for Product with a cumulative price, excluding freight-out, of not less than Two Million Five Hundred Thousand Dollars ($2,500,000.00) during the term of this Production Contract. Subsection B. Adjustments to Minimum Total Commitment. In the case of significant changes in manufacturing requirements, particularly (but not exclusively) as they relate to Amendments to Exhibits A and E, requiring significant increases in the rate of total deliveries and/or in the number of Items delivered within limited time periods, to accommodate the manufacture of new Items requiring additional equipment or facilities modifications, or to adapt to substantive changes in the pertinent regulatory environment, the parties to this Production Contract may adjust the Minimum Total Commitment in writing and by common consent of both parties, as partial inducement for Seller to make such changes as may be required to meet these requirements. Subsection C. Take or Pay Guaranty: Minimum Total Commitment. In the event Purchaser takes delivery of and pays for, during the term of this Production Contract, less than the Minimum Total Commitment specified in Subsection A of this Article or as amended under the terms of Subsection B of the Article, or in the event of early termination as provided for in Article Six, Purchaser agrees to pay Seller for Product not taken in accordance with the following formula: Purchaser shall be responsible to pay to Seller within 30 days after the expiration of the original term of this Production Contract or after the date of early termination (whichever is earlier), an amount equal to Sixty Percent (60%) of the Minimum Total Commitment not taken and paid for by Purchaser, in addition to payments made for Product previously taken under the terns of this Production Contract. In the event Purchaser takes delivery of alt pays for, during the term of this Production Contract, less than the monthly Minimum Purchase specified in Subsection C of Article Three except arising from suspension of production by. Purchaser pursuant to Article Eight, Purchaser agrees to pay Seller for Product not taken in accordance with the following formula: Purchaser shall be responsible to pay to Seller within 30 days after the end of the calendar month, an amount equal to Sixty Percent (60%) of the monthly Minimum Purchase not taken and paid for by Purchaser, in addition to payments made for Product previously taken under the terms of this Production Contract. Subsection D. Take or Pay Guaranty: Security. The Take or Pay Guaranty shall be secured within six weeks of the execution of this Production Contract by a confirmed letter of credit, satisfactory to Seller, sufficient to secure 60% of the Minimum Total Commitment. The Purchaser may, upon its initiative and with Seller's prior written concurrence, said concurrence not to be unreasonably withheld, reduce the amount of said letter of credit over time to reflect sales of Product against the Minimum Total Commitment, on a pro rata basis versus the Minimum Total Commitment as amended. This security shall constitute Seller's sole remedy for failure by Purchaser to take and pay for the Minimum Total Commitment. Article Eight Yield Losses of Purchaser-supplied ingredients while on Seller's premises will be reimbursed to Purchaser at Purchaser's direct cost. From the compounding step forward, the initial standard manufacturing yield for a given Item will be set based upon the average yield of the three lots for process validation. Initial yields will subsequently be revised after cumulative production reaches ten lots, becoming the average yield of these ten lots. Seller will report to Purchaser, on a timely basis, the yields achieved against the then-current standard. Should yields fall below ninety percent (90%) of standard, Purchaser may, after consultation with Seller, require that production be suspended until an appropriate course of action is developed by Seller in consultation with Purchaser to bring yields above ninety percent (90%) of standard. Article Nine Product Exclusivity Seller will not produce medical devices for wound care which are freeze-dried in their final form for topical or oral use, which are subjects of approved US FDA 5 10(k) applications or a therapeutical regulatory approval (including material for clinical trials), but specifically excluding diagnostics and cosmetics, for or on behalf of any entity other than Purchaser during the initial tern of this Production Contract, or during such shorter period if this Production Contract is terminated prior to the expiration of the initial term hereof. Seller shall be the exclusive supplier of medical devices for wound care which are freeze-dried in their final form for topical or oral use, which are subjects of approved US FDA 510(k) applications or a therapeutical regulatory approval (including material for clinical trials), but specifically excluding diagnostics and cosmetics, to Purchaser, its subsidiaries and successors, during the initial term of this Production Contract, subject only to Seller's production availability given ordinary and reasonable lead times and appropriate business commitments. These mutual obligations of exclusivity shall pertain to product produced for sale in the US domestic market, Seller shall have right of first offer to provide manufacturing services for Purchaser for product produced for sale in foreign markets. Article Ten Quality Control Seller will maintain methods, facilities and controls in conformance with current Good Manufacturing Practices (cGMPs) as set forth in 21 CFR 820 and 21 CFR 211, as applicable. Seller shall permit Purchaser, or its designee, to inspect and photocopy ingredient and product analyses and batch records prepared in accordance with the technical specifications ("Technical Specifications"), standard operating procedures ("Standard Operating Procedures"), and other pertinent documentation in force at the time of production, and to perform manufacturing audits of Seller's facilities. Article Eleven Product Rejection and Recalls Any given lot of Product may be rejected 1) for failure to meet the specifications outlined in Exhibit A, or 2) by failing to have batch or quality records complete, or 3) due to evidence of cGMP violations which would prevent the lot from being sold in the market, even though all specifications outlined in Exhibit A, as mutually agreed-upon and/or periodically amended, were met, Under these circumstances, Seller will replace the referenced lot(s) and Purchaser will pay only for the replacement lot(s). Purchaser shall notify Seller, in writing, of a potential lot rejection within ten (10) days after receipt of the lot in question, and provide a final decision within thirty (30) days, Should Seller not agree with the results of the tests or the criteria to reject the lot for cGMP violations, Seller at its discretion will conduct tests at its premises or witness the repetition of tests at Purchaser's laboratory, and in the case of alleged cGMP violations, Seller will present to Purchaser sufficient proof that said cGMP violations did not in fact occur. In the event of disagreement between Purchaser and Seller regarding rejection of a given lot, an independent laboratory selected with consensus between Purchaser and Seller will be given samples of the lot(s) in question, together with standard operating procedures for testing agreed-upon by Purchaser and Seller, and will perform testing which will then be considered the reference to resolve the disagreement. In the event that the disagreement arises from alleged cGMP violations, an independent consultant, who is an expert in the pharmaceutical cGMP field will be selected with consensus between Purchaser and Seller, and given the relevant lot records and any other production or quality evidence necessary for evaluation of given cGMP issue, and his/her opinion will then be mutually accepted as the resolution of the disagreement. At Purchaser's option, Purchaser may implement (i) any recall or withdrawal required by Purchaser in connection with Product, which has been rejected by Purchaser under this Article, and (ii) any recall ordered by federal, state, or local governmental authorities. Such recall or withdrawal shall be at Seller's sole cost and expense if due to an act or omission of Seller; Seller shall assume a pro-rata portion of such cost and expense if the recall or withdrawal is in part due to an act or omission of Seller: Purchaser shall indemnify and hold Seller harmless from any costs related to any withdrawal or recall that is wholly due to an act or omission of Purchaser, Seller shall cooperate with Purchaser in implementing any recall or withdrawal of Product. Purchaser shall promptly notify Seller of any recall or withdrawal of Product. Notwithstanding anything to the contrary contained in the preceding paragraph of this section, Seller's liability to Purchaser hereunder for the cost and expense of (i) physically picking up recalled and withdrawn Product and (ii) advertising such recall or withdrawal to consumers shall not exceed $1,000,000.00 for each recall or withdrawal. Seller shall, however, remain responsible for all other costs and expenses of the recall or withdrawal to the extent set forth in the preceding paragraph of this section, including but not limited to the cost of rejected Product and freight and disposition costs. Article Twelve Shipment Seller will deliver product FOB Origin to locations designated by Purchaser by Seller's customary surface transportation mode, unless Purchaser specifies other transportation arrangements. Title shall pass from Seller to Purchaser at the time of shipment. Article Thirteen Payment Payment terms are net thirty (30) days from the date of actual shipment. Article Fourteen Cross Non-Disclosure Agreement During the term of this Production Contract, each party hereto shall disclose to the other certain information, which may be proprietary to the disclosing party. Each party hereto agrees to keep in confidence and prevent the disclosure of such proprietary information received hereunder to persons or corporations outside the parties' corporations, affiliates or subsidiaries. Each party shall protect and safeguard the proprietary information of the other in the same manner as it protects and safeguards its own proprietary information. These obligations of confidentiality shall continue for five years beyond the term of this agreement and any extensions, Article Fifteen Indemnification Purchaser shall indemnify and save Seller harmless from any expense, cost, loss, damage or liability arising from consumer claims or administrative actions by federal, state, or local government agencies, including but not limited to legal costs, except to the extent Seller failed to meet the requirements of the product specifications then in force and, in cases where such requirements were not met, failed to receive a waiver in writing from an authorized representative of Purchaser to ship the Product in question to Purchaser or otherwise release it to commerce. In any event, Seller's total liability arising from consumer claims or manufacturing defects of any kind shall be limited to $1,000,000.00 (each occurrence) and $3,000,000.00 (aggregate). Purchaser shall indemnify and save Seller harmless from any expense, cost, loss, damage or liability (including attorney's fees) for infringement or alleged infringement of any patent(s) with respect to Product furnished or otherwise provided by Seller under this Production Contract. Article Sixteen Insurance During the term of this agreement, Seller and Purchaser shall maintain product liability insurance of not less than $1, 000,000.00 (each occurrence) and $3,000,000.00 (aggregate) and shall provide certificate(s) of such insurance to the other party. Article Seventeen Miscellaneous Provisions Subsection A. Entire Agreement: Modification. This written Production Contract, which incorporates the preamble recitals, definitions, and exhibits hereto, constitutes and represents the entire agreement by and between the parties hereto and supersedes all prior and contemporaneous agreements, representations and negotiations, whether oral or written, with respect to the subject matter of this agreement, including the confidential disclosure agreement dated August 29, 1994 and fully executed August 30, 1994, and the Letter of Agreement dated December 16, 1994 and fully executed December 30, 1994, except that confidential information previously disclosed shall remain confidential in accordance with the terms of Article Fourteen of this Agreement. No modification of this agreement shall be binding unless made in writing and executed by both parties hereto, Any and all contract modifications hereto shall be sequentially numbered beginning with Modification Number One to the Production Contract. Subsection B. Non-Assignabilitv. The rights and obligations of this contract may not be assigned by either party without the prior written consent of the other of them. This contract, however, shall inure to the benefit of the parties hereto their respective permitted successors and/or permitted assigns. Subsection C. Governing Law: Unenforceability, This Production Contract is subject to and shall be construed and interpreted in accordance with, and governed by, the law of the State of Oregon. In the event that any provision, term, or condition of this production contract is determined to be unenforceable, invalid or illegal as a matter of law only that term, condition or provision shall be deemed stricken and the balance of the terms, conditions, and provisions of this Production Contract shall be in full force and effect Subsection D. Force Majeure, A delay in performance of this Production Contract by either party shall be excused only when such delay in performance is caused by an act beyond the reasonable control of such party, for example, governmental acts, acts of God, severe weather, fire, flood, explosions, work stoppages, strikes, force majeure situations impacting major subcontractors and suppliers, unavailability or scarcity of raw materials or ingredients, and acts of the public enemy and war, The foregoing provision shall not release either party from using its reasonable best efforts to avoid or diligently remove such circumstances. If performance is excused under this provision, the excused party shall resume performance with utmost dispatch as soon as such circumstances are removed, In order for such excusable delay to be recognized, the requesting party shall promptly give written notice, thereof, to the other party together with evidence and support of such claim for excusable delay Subsection E Compliance By Parties With Law Both Parties hereto agree to comply with all applicable federal, state and local laws. Subsection F Order of Precedence. In the event of an inconsistency or ambiguity in this contract, unless otherwise provided herein, such inconsistency or ambiguity shall be resolved by giving precedence in the following order: the main body of the Production Contracts as modified, Exhibits C, B, A, E, and D as amended. IN WITNESS WHEREOF The undersigned parties have duly executed this agreement on the date first written above. CARRINGTON LABORATORIES, INC. OREGON FREEZE DRY, INC. By: /S/ By: /S/ -------------------------- -------------------- Name: _______________________ Name: __________________ Title: ______________________ Title: _________________ Date: _______________________ Date: __________________ EX-10.15 18 Exhibit 10.15 MODIFICATION NUMBER ONE Pursuant to our Production Contract of February 13, 1995, the requirements of Article Three Subsection C are waived through the last day of March, 1996. The requirements of Article Three Subsection C remain in force for every month from April, 1996 through the completion of the term of the Production Contract, inclusive. IN WITNESS WHEREOF The undersigned parties have duly executed this modification to their agreement on the date last written below. CARRINGTON LABORATORIES, INC. OREGON FREEZE DRY, INC. By: /s/ By: /s/ ----------------------- --------------------- Name: Name: ----------------------- --------------------- Title Title: ----------------------- --------------------- Date: 2/19/96 Date: ----------------------- --------------------- EX-10.16 19 Exhibit 10.16 MODIFICATION NUMBER TWO Pursuant to our Production Contract of February 13, 1995, the requirements of Article Three Subsection C are waived for the months of October, November, and December, 1996. The requirements of Article Three Subsection C remain in force through the remainder of the term of the Production Contract TN WITNESS WHEREOF The undersigned parties have duly executed this modification to their agreement on the date last written below. CARRINGTON LABORATORIES, INC. OREGON FREEZE DRY, INC. By: /s/ By: /s/ ----------------------- --------------------- Name: Name: ----------------------- --------------------- Title Title: ----------------------- --------------------- Date: Date: 11/11/96 ----------------------- ----------------- EX-10.21 20 Exhibit 10.21 January 12, 2000 Carlton Turner, President/CEO Caraloe Incorporated 2001 Walnut Hill Lane Irving, Texas 75038 RE: Letter of Agreement Extending Trademark License Agreement and Supply Agreement Dear Mr. Turner: This will confirm our understanding in principle related to the extension of the respective Agreements as attached hereto as Exhibit "A" - "Supply Agreement" and Exhibit "B" - "Trademark License Agreement", (collectively the "Agreements") executed by and between Mannatech[TM] Incorporated ("Mannatech") and Caraloe, Incorporated ("Caraloe") on August 14 1997, (hereinafter collectively, the "Parties") both Agreements to be incorporated by reference as part of this Agreement. It is the intent of the Parties hereto that the Agreements shall remain in full force and effect with the exception of that which the Parties desire to incorporate as additional terms and conditions ("Terms and Conditions") as outlined herein. The term of the Agreements shall be extended for a two (2) year period, commencing August 14, 2000 and ending August 14, 2002. Mannatech agrees to purchase from Caraloe, and Caraloe agrees to manufacture and sell to Mannatech, Manapol[R] not less than 600 kilograms per month, but in any event not more than as indicated on the attached Exhibits as attached hereto, Exhibit "C" - "2000 Manapol Usage Forecast" and Exhibit "D" - "2001 Manapol Usage Forecast" (collectively the "Forecasts") unless Mannatech shall notify Caraloe to the contrary in accordance with the requirements of the Agreement set forth in Exhibit B. In the event Mannatech anticipates or requires more Manapol[R] than as specified in the Forecasts, Mannatech shall afford Caraloe ninety (90) days written notice thereof. The Parties further agree that Exhibit A as attached to the Trademark Licensing Agreement shall be amended to include Argentina, Brazil and Chile and other countries as anticipated as indicated and attached hereto as "Exhibit "E" - "Amended Exhibit A". If the foregoing terms and conditions are agreeable to you, please execute and return a duplicate of the original of the letter, such to constitute the agreement between us. Very Truly Yours, MANNATECH INCORPORATED /s/ Charles E. Fioretti ----------------------- Chief Executive Officer ACCEPTED AND AGREED: Caraloe Incorporated By: /s/ Carlton Turner -------------------- Its: President and Chief Executive Officer EX-10.41 21 Exhibit 10.41 INDEPENDENT SALES REPRESENTATIVE AGREEMENT This Agreement, entered into as of June 1, 1998, by and between MEARES MEDICAL SALES ASSOCIATES (the "Independent Sales Representative"), and CARRINGTON LABORATORIES, INC., a Texas corporation (the "Company"). WITNESSETH: WHEREAS, the Company is engaged in the business of manufacturing and selling various medical products and supplies; and WHEREAS, the Company desires to engage the Independent Sales Representative to promote the sale of and solicit orders for the Company's products, and the Independent Sales Representative desires to be so engaged; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereby agree as follows: 1. Engagement. The Company hereby appoints and engages the Independent Sales Representative, and the Independent Sales Representative hereby accepts such appointment and engagement, to promote the sale of and solicit orders for the Company's products in accordance with the terms and conditions of this Agreement. 2. Duties of Independent Sales Representative. The Independent Sales Representative shall use its best efforts to promote the sale of the Company's products, to solicit orders therefor and to perform such other functions of a manufacturer's Independent Sales Representative as the Company shall from time to time request. The Independent Sales Representative shall keep the Company informed at all times of the Independent Sales Representative's progress and of any problems relating to or affecting the Company's business, products or customers. The Independent Sales Representative shall visit existing and prospective customers in person as often as necessary to carry out its duties in order to meet its sales goals hereunder in a legal and ethical manner and in accordance with normal and accepted business and regulatory practices. The Independent Sales Representative shall bear all expenses incurred by it in carrying out its duties and responsibilities under this Agreement. 3. Sole Area of Responsibility. The geographic area in which the Independent Sales Representative shall devote its sole efforts and for which it shall have sole responsibility under this Agreement shall be all of the zip codes in the State(s) of Alabama and Georgia and the mutually agreeable zip codes in Northern Florida and Tennessee, as listed and described on Exhibit B attached hereto and made a part hereof (the "Sole Area of Responsibility"). Sales outside the Sole Area of Responsibility shall not be subject to a commission. 4. Term and Termination. The term of this Agreement shall commence on the date hereof and shall expire two (2) years after June 1, 1998, unless earlier terminated in accordance with any of the following provisions: (a) This Agreement may be terminated at any time by written agreement of the parties hereto. (b) This Agreement may be terminated by the Company at any time by written notice given to the Independent Sales Representative (i) if the Independent Sales Representative, his employees or agents commit a material breach of this Agreement, such a material breach being defined as non-compliance with the confidentiality provisions herein or non-compliance with FDA rules or regulations, (ii) if the Independent Sales Representative or any of its agents or employees commits any act of fraud or dishonesty with respect to the Company or any of its customers, is convicted of any crime (other than minor traffic violations), or engages in any conduct which tends to hold the Company up to ridicule by others or is otherwise detrimental to the best interest of the Company and Independent Sales Representative fails to take immediate action, agreeable to the Company to correct the situation, and (iii) if Kirk Meares shall die, shall become totally and permanently disabled, or shall suffer any physical or mental impairment which exists for sixty (60) days or more (whether or not consecutive) and which, in the opinion of the Company, adversely affects the ability of the Independent Sales Representative to carry out its duties and responsibilities under this Agreement. (c) This Agreement may be terminated by the Independent Sales Representative at any time by written notice given to the Company if the Company commits a material breach of this Agreement. (d) This Agreement may also be terminated by thirty (30) days written notice if Independent Sales Representative fails to increase territory. After 6/1/2000 the renewal of this Agreement shall be upon the mutually agreeable terms. The expiration or termination of this Agreement shall not terminate, limit or otherwise affect any rights or obligations of the parties hereto which shall have arisen hereunder at or prior to the time of such expiration or termination. 5. Commissions. (a) In consideration of the services performed by the Independent Sales Representative hereunder, the Company shall pay the Independent Sales Representative commissions, at the applicable rates specified in Schedule A attached hereto and made a part hereof, on all products specified in Schedule A which the Company sells during the term of this Agreement to customers located and doing business in the Sole Area of Responsibility. Such commissions shall be deemed earned when the products are shipped and billed by the Company. The amount of the commissions payable hereunder shall be determined on the basis of the invoice prices of the products sold (which shall be the prices charged by the Company to its distributors), net of returns, allowances, discounts and adjustments, and exclusive of freight, insurance and other shipping and handling charges, taxes, interest, late fees, service or carrying charges and other similar charges. The Company shall have the right to delete product or otherwise change the list of products specified on Schedule A at any time, provided the Company gives written notice of such changes to the Independent Sales Representative not less that sixty (60) days prior to the date such changes are to become effective. (b) Within fifteen (15) days after the end of each calendar month during the term of this Agreement: (i) The Company shall furnish to the Independent Sales Representative a statement showing all products shipped to, products returned by, and allowances, discounts and adjustments granted to customers in the Sole Area of Responsibility, and all debits and credits to the Independent Sales Representative's commission account, during such month; and (ii) The Company shall pay to the Independent Sales Representative all commissions earned during such month, net of any deductions due to products returned by or allowances, discounts and adjustments granted to customers in the Sole Area of Responsibility during such month. (c) The Company shall be entitled to recover from the Independent Sales Representative an amount equal to all commissions paid by the Company to the Independent Sales Representative in respect of products which are subsequently returned by the customer or with respect to which the Company subsequently grants an allowance, discount or adjustment to the customer. The Company may recover such amount either by requiring the Independent Sales Representative to make payment thereof to the Company or by deducting such amount from future commissions earned by the Independent Sales Representative, whichever the Company shall elect. (d) Notwithstanding anything to the contrary in this Agreement, the Company may from time to time designate one or more customers as national accounts or house accounts, and no commissions shall be payable under this Agreement on products for which the Company receives orders more than ten (10) days after it has given written notice of such designation to the Independent Sales Representative. 6. Orders. All orders solicited or obtained by the Independent Sales Representative are subject to approval and acceptance by the Company at its offices in Dallas County, Texas. The Independent Sales Representative is not authorized and shall not purport to accept any orders for the Company's products. The Company shall have the right, in its sole discretion, to accept or reject each order for its products; to determine whether and when to ship any products; to grant or refuse credit to any customer and to determine the terms thereof; to accept or reject any customer's request or attempt to return any products; to grant any allowances, discounts or adjustments; and to change the prices it charges its distributors for the products listed on Schedule A hereto (provided that the Company shall give the Independent Sales Representative written notice of any such price change not less than sixty (60) days before such change becomes effective). 7. Duties of the Company. The Company shall use its reasonable best efforts to maintain a sufficient inventory of the products listed on Schedule A to enable it to ship the products ordered by customers in the Sole Area of Responsibility on a reasonably prompt basis. 8. Status of Independent Sales Representative and Its Personnel. The Independent Sales Representative is and shall at all times remain an independent contractor, and nothing in this Agreement is intended or shall be construed to constitute the Independent Sales Representative an employee, agent or partner of the Company. As an independent contractor, the Independent Sales Representative shall be entitled to employ such personnel as it shall desire, on such terms as it shall deem appropriate, and to utilize such personnel in carrying out its obligations under this Agreement. Such personnel shall at all times and for all purposes constitute employees or agents of the Independent Sales Representative, and nothing in this Agreement is intended or shall be construed to constitute such personnel employees or agents of the Company. 9. FDA Compliance Independent Sales Representative and its employees agrees to strictly comply with all applicable rules and regulations of the Federal Food and Drug Administration (FDA) and all other applicable laws, rules and regulations, including but not limited to FDA requirements relating to the sale of 510(k) regulated products. 10. Compliance by Third Parties Independent Sales Representative agrees to take all steps reasonably necessary to ensure that its representatives comply with all applicable rules and regulations of the FDA and all other applicable laws, rules and regulations, including but not limited to FDA requirements relating to the sale of 510(k) regulated products. 11. Competitive Products Independent Sales Representative agrees to refrain from marketing competitive products during the term of this Agreement. 12. Confidentiality Independent Sales Representative and any employees or agents thereof shall hold in trust and strictest confidence for Carrington all Carrington Confidential Information and shall not disclose to any person or use such information for any purpose other than in connection with the performance of Independent Sales Representative duties and responsibilities during the term of this Agreement. Confidential Information shall mean, but not limited to, prices, sales, customer or distribution information or lists as well as any related product planning or research information. The provisions of this Agreement shall survive and continue after expiration or termination of this Agreement and any and all Confidential Information and copies thereof shall be promptly returned to Company upon its request. Independent Sales Representative shall certify to Company that it and all its employees have returned all Confidential Information and copies thereof. 13. Notices. All notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been given when delivered in person or when mailed by certified or registered United States mail, postage paid, addressed to the appropriate party at the address shown for such party below: If to the Company, to: President Carrington Laboratories, Inc. P.O. Box 168128 Irving, TX 75016-8128 If to the Independent Sales Representative, to: Kirk Meares Meares Medical Sales Associates 7400 Native Oak Irving, Texas 75063 Either party may change its address for notices hereunder by giving notice of such change to the other party in the manner set forth above. 14. Waiver. No delay on the part of either party in exercising any right, power or remedy which it may have in connection herewith shall operate as a waiver thereof, nor shall any waiver thereof or any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or remedy. No waiver of any provision of this Agreement, and no consent to any departure therefrom, shall be effective unless such waiver or consent is in writing and signed by the party against whom it is sought to be enforced, and no such waiver or consent shall be effective except with respect to the particular case and purpose for which it is given. 15. Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. 16. Entirety and Modification. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, between such parties relating to such subject matter. No modification, alteration, amendment or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced. 17. Severability. If any provision of this Agreement is held to be unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be deemed inoperative to the extent it is unenforceable, and (c) in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. 18. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns; provided, however, that neither of the parties shall, without the consent of the other, assign or transfer this agreement or any interest herein, and any such assignment or transfer attempted without the consent of the other party hereto shall be void and of no effect whatsoever. Notwithstanding the foregoing, in the event of a merger, consolidation or transfer or sale of all or substantially all of the assets of the Company, this Agreement may be transferred to the successor to the Company's business and assets without the consent of the Independent Sales Representative. 19. Captions. The captions of the various sections of this Agreement have been inserted for convenient reference only and shall not be construed to enlarge, diminish or otherwise change the express provisions hereof. 20. Gender. Words of any gender used in this Agreement shall be construed to include each gender. 21. Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original and all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. CARRINGTON LABORATORIES, INC. By: /s/Carlton E. Turner -------------------- Carlton E. Turner, Ph.D. President and CEO By: /s/ Kirk Meares --------------- Name: Kirk Meares Title: Owner EX-10.78 22 Exhibit 10.78 SALES DISTRIBUTION AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of the Effective Date (as defined below) by and between CARRINGTON LABORATORIES, INC., a Texas corporation and E-WHA INTERNATIONAL, INC., a Korean corporation ("E-Wha"). W I T N E S S E T H : WHEREAS, Carrington is engaged in the business of developing, manufacturing, selling and distributing certain pharmaceutical products and medical devices and is desirous of establishing a competent and exclusive distribution source for sales of such products in Korea (defined in Article 1 hereof as the Territory); and WHEREAS, E-Wha is desirous of distributing such products in the Territory, represents that it has experience in obtaining registration of pharmaceutical preparations or products and medical devices in the Territory, is well introduced on the market, is willing and able to provide a competent distribution organization in the Territory, and E-Wha desires to be Carrington's sales distributor for such products in the Territory; NOW, THEREFORE, the Parties hereto, in consideration of the premises and mutual covenants and undertakings herein contained, agree as follows: Article 1. Definitions 1.1 As used in this Agreement, the following terms shall have the meanings specified in this Article 1.1: (a) "Effective Date" shall mean the date of last signature of the Parties hereto. (b) "Know-how" shall mean secret and substantial technical and scientific information regarding the Products, which may be necessary, useful or advisable to enable E-Wha to obtain the Registration of, promote, market and sell the Products in the Territory, and as is or will be specified in the documentation which Carrington has delivered or will deliver to E-Wha after the Effective Date and during the term of this Agreement. (c) "Parties" shall mean Carrington and E-Wha and "Party" shall mean either of them as the context indicates. (d) "Products" shall mean the wound and skin care products manufactured by or for Carrington set forth on Exhibit A hereto. Carrington will provide a ninety (90) day notice to E-Wha on its intent to add or discontinue Products to Exhibit A. (e) "Registration" shall mean any official approval, or authorization, or licensing regarding the Products by the appropriate and competent authorities in the Territory, including, if applicable, the Products' selling prices and social security approvals, allowing the lawful marketing of the Products. (f) "Territory" shall mean the following countries: Korea. (g) "Trademarks" shall mean all Trademarks, trade names, service marks, logos and derivatives thereof relating to the Products. Article 2. Appointment 2.1 Subject to the terms and conditions of this Agreement, Carrington hereby appoints E-Wha as Carrington's sales distributor in the Territory for the sale of Products, and E-Wha hereby accepts such appointment. As sales distributor in the Territory, E-Wha shall, subject to the terms and conditions of this Agreement, have the right to obtain the Registration of, promote, distribute and sell Products in the Territory, but shall have no right to take any such action outside the Territory. 2.2 In a manner reasonably satisfactory to Carrington, and at E-Wha's sole expense, E-Wha agrees to (a) make and maintain all declarations, filings, and Registrations with, and obtain all approvals and authorizations from, governmental and regulatory authorities required to be made or obtained in connection with the promotion, marketing, sale or distribution of the Products in the Territory, (b) devote its best efforts to the diligent promotion, marketing, sale and distribution of the Products in the Territory, (c) provide and maintain a competent and aggressive organization for the promotion, marketing, sale and distribution of the Products in the Territory, (d) assure competent and prompt handling of inquiries, orders, shipments, billings and collections, and returns of or with respect to the Products and careful attention to customers' requirements for all Products, and (e) promptly assign back to Carrington any product Registrations in the Territory upon termination of Agreement. 2.3 During the term of this Agreement, E-Wha shall be considered an independent contractor and shall not be considered a partner, employee, agent or servant of Carrington. As such, E-Wha has no authority of any nature whatsoever to bind Carrington or incur any liability for or on behalf of Carrington or to represent itself as anything other than a sales distributor and independent contractor. E-Wha agrees to make clear in all dealings with customers or prospective customers that it is acting as a distributor of the Products and not as an agent of Carrington. 2.4 Nothing in this Agreement shall be construed as giving E-Wha any right to use or otherwise deal with the Know-how for purposes other than those expressly provided for in this Agreement. 2.5 E-Wha shall promptly inform Carrington of any misappropriation of the Know-how which comes to its attention. After having discussed such situation with E-Wha, Carrington shall have sole and absolute discretion to take such action as it deems appropriate and E-Wha, at its own cost, shall assist Carrington in taking legal action, if deemed necessary, against such misappropriation. 2.6 All costs and expenses connected with E-Wha's activities or performance under this Agreement are to be borne solely by E-Wha. Article 3. Certain Performance Requirements 3.1 E-Wha agrees to promote, market, sell and distribute the Products only to customers and potential customers within the Territory for ultimate use within the Territory. E-Wha will not, under any circumstances, either directly or indirectly through third parties, promote, market, sell, or distribute Products within or to, or for ultimate use within, the United States or any place outside the Territory. 3.2 In order to assure Carrington that E-Wha is in compliance with Article 3.1, E-Wha agrees that: (a) E-Wha will send to Carrington quarterly sales reports which set forth the number of units and sizes of each Product sold, the net sales, the number of units of free medical samples distributed, and to whom such Products were sold and/or distributed during such quarter; (b) E-Wha will send to Carrington quarterly inventory reports of the Products; and (c) Carrington may mark for identification all Products sold by Carrington to E-Wha hereunder. 3.3 E-Wha shall promptly provide Carrington with written reports of any importation or sale of any of the Products in the Territory of which E-Wha has knowledge from any source other than Carrington, as well as with any other information which Carrington may reasonably request in order to be updated on the market conditions in the Territory. 3.4 E-Wha shall maintain a sufficient inventory of Products to assure an adequate supply of Products to serve all its market segments. E-Wha shall maintain all its inventory of Products clearly segregated and meeting all storage and other standards required by applicable governmental authorities. All such inventory and E-Wha's facilities shall be subject to inspection by Carrington or its agents upon 72 hours written notice. 3.5 E-Wha shall be responsible for and shall collect all governmental and regulatory sales and other taxes, charges and fees that may be due and owing upon sales by E-Wha of Products. Upon written request from E-Wha, Carrington shall provide E-Wha with such certificates or other documents as may be reasonably required to establish any applicable exemptions from the collection of such taxes, charges and fees. 3.6 All Products shall be packaged and delivered by Carrington to E-Wha. All Products shall be labeled, advertised, marketed, sold and distributed by E-Wha in compliance with the rules and regulations, as amended from time to time, of (i) all applicable governmental authorities within the Territory in which the Products are marketed, and (ii) all other applicable laws, rules and regulations. E-Wha shall pay all expenses associated with (i) any alterations to the packaging and labeling of the Products which deviate from Carrington's standard packaging materials, designs, methods and/or procedures, (ii) any language modifications to the packaging or labeling and/or (iii) any additions to inserts in the general packaging. The Parties shall agree on minimum production runs for such custom labels. 3.7 E-Wha shall not make any alterations or permit any alterations to be made to the Products without Carrington's written consent. 3.8 E-Wha shall assume all responsibility for and comply with all applicable laws, regulations and requirements concerning the Registration, inventory, use, promotion, distribution and sale of the Products in the Territory and correspondingly for any damage, claim, liability, loss or expense which Carrington may suffer or incur by reason of said Registration, inventory, use, promotion, distribution and sale and shall hold Carrington harmless from any claim resulting therefrom being directed against Carrington or E-Wha by any third party. 3.9 E-Wha agrees not to make, or permit any of its employees, agents or representatives to make, any claims of any properties or results relating to any Product, unless such claims have received written approval from Carrington or from the applicable governmental authorities. 3.10 E-Wha shall not use any label, advertisement or marketing material on or with respect to or relating to any Product unless such label, advertisement or marketing material has first been submitted to and approved by Carrington in writing. 3.11 E-Wha will actively and aggressively promote, develop demand for and maximize the sale of the Products to all customers and potential customers within the Territory. E-Wha agrees not to manufacture, promote, market, sell or distribute to any customers or potential customers in the Territory without ninety (90) days written notice to and approval from Carrington, any competitive wound care, skin care, or incontinence care product. 3.12 E-Wha represents that its books, records and accounts pertaining to all its operations hereunder are complete and accurate in all material respects and have been maintained in accordance with sound and generally accepted accounting principles. E-Wha's auditor shall deliver to Carrington, in accordance with Article 14, at the end of each 12-month period during the term of the Agreement, a declaration that the accounts rendered are correct. Carrington shall have the right to have such books, records, and accounts examined, at its expense, by a qualified accountant nominated by Carrington. Article 4 Registration of Products 4.1 It being understood that Registration is a prerequisite to the lawful sale of the Products in the Territory, Carrington hereby agrees to supply E-Wha, promptly after the execution of this Agreement, with any Know-how or relevant documentation necessary for preparing the Registration dossier to be submitted to the applicable governmental authorities of the Territory. 4.2 It shall be the responsibility of E-Wha, at its sole expense to apply for, obtain and maintain in force the Registration of the Products. Subject to having obtained the prior approval of Carrington, the application shall be submitted to all applicable governmental authorities, including the health authorities of the Territory and said application shall be in the name of Carrington, with E-Wha being named as Products distributor in the Territory. E-Wha expressly acknowledges and agrees that the absolute and exclusive ownership of the Registration and all rights originating out of or from the same shall at all times belong only and exclusively to Carrington. 4.3 As soon as E-Wha has received Know-how from Carrington, E-Wha shall prepare, at its sole expense, the Registration dossier and submission and any translation which may be required by the applicable authorities of the Territory. E-Wha shall promptly supply Carrington with a copy of the said Registration dossier and submission and Carrington shall be entitled to a free and unrestrained use of the same. 4.4 Subject to having obtained Carrington's written approval of all such documentation and any subsequent amendments thereto, E-Wha shall, as soon as possible and in any case within sixty (60) days of Carrington's approval, submit the Registration application to the appropriate authorities of the Territory. 4.5 E-Wha shall use its best endeavors to obtain the Registration within six (6) months from the relevant submission. E-Wha shall notify Carrington in writing at least 3 (three) months before the expiration of said term of any need for an extension in time to obtain Registration. The notification shall specify the duration of, and the reason for, any proposed extension. Carrington shall consider any such request, evaluating the objective situation and E-Wha's fulfilment of its obligations in this respect. It is, however, understood that E-Wha's deadline to obtain Registration is one year from the date of filing. 4.6 E-Wha shall copy and keep Carrington fully and timely informed, throughout the term of this Agreement, of all communications sent to or received from all applicable governmental authorities, including the health authorities, of the Territory concerning the Products. 4.7 Carrington makes no warranty that the supplied Know-how will necessarily result in the grant of the Registration and E-Wha shall have no claim against Carrington arising out of any delay or refusal by the authorities to issue the Registration. Article 5. Sale of Products by Carrington to E-Wha 5.1 Subject to the terms and conditions of this Agreement, including specifically Article 5.7 hereof, Carrington shall sell to E-Wha the Products at a specified price for each Product (the "Contract Price"). For orders placed by E-Wha during the first 12-month period of the term of this Agreement, the Contract Prices for the Products listed on Exhibit A are set forth on such exhibit opposite each Product. At least ninety (90) days prior to the end of each 12-month period of the term of this Agreement, (a) E-Wha shall provide in writing to Carrington both a sales forecast and a purchase forecast for the following 12-month period, and (b) the Parties shall commence good faith negotiations to determine and agree upon the Contract Prices for Products for the next 12-month period of the term. During any twelve (12) month period Carrington reserves the right to change its Contract Price for each Product. 5.2 As consideration for its appointment as a sales distributor entitled to a Product discount, E-Wha agrees to purchase from Carrington, during each 12-month period of the term of this Agreement, commencing with the 12-month period beginning December 1, 1999 through November 30, 2000, at the Contract Price, a specified minimum aggregate dollar amount (based on the Contract Price) of the Products (the "Specified Minimum Purchase Amount"). For the first 12-month period of the term of this Agreement, there will be no Specified Minimum Purchase Amount. The Specified Minimum Purchase Amounts for each subsequent 12- month period shall be determined by mutual agreement of the Parties no later than thirty (30) days prior to the beginning of such period based on E-Wha's reasonable, good faith projections of future sales growth and such other factors as the Parties may deem relevant. 5.3 E-Wha shall order Products by submitting a purchase order to Carrington describing the type and quantity of the Products to be purchased. All orders are subject to acceptance by Carrington. All purchases shall be spaced in a reasonable manner. If Carrington accepts the order, Carrington will invoice E-Wha upon shipment of the Products. Unless otherwise agreed, E-Wha shall pay all invoices in full within ninety (90) days of the date of invoice. E-Wha shall be solely responsible for all costs in connection with affecting payments. All sales and payments shall be made, and all orders shall be accepted, in the State of Texas. 5.4 Carrington shall not be obligated to ship Products to E-Wha at any time when payment of an amount owed by E-Wha is overdue or when E-Wha is otherwise in breach of this Agreement. 5.5. All shipments shall be initiated by a Purchase Order. Product shipment dates will be specified in the Purchase Order. These dates may not be scheduled prior to ninety (90) days after the dated the Purchase Order is received and acknowledged in writing by Seller, unless by mutual consent of the parties Purchase Orders will be non- cancellable. E-Wha will issue to Carrington on a monthly basis, a twelve (12) month rolling forecast so that Carrington may incorporate said forecasts into its planning system. The triggering document for production activities is, however, the purchase order, as stated above. Carrington will guarantee delivery dates for Product quantities that vary up to 20% above the last monthly rolling forecast issued prior to the purchase order placed by E-Wha. Variation above 20% shall be discussed between the Parties and Carrington will use its best efforts to maintain delivery dates requested by E-Wha. 5.6 All shipments of Products to E-Wha will be packaged in accordance with Carrington's standard packaging procedures and shipped per Carrington's existing distribution policy. All Contract Prices are F.O.B., (invoice price includes seller's expense for delivery to the named destination) Carrington's facility, Irving, Texas. Ownership of and title to Products and all risks of loss with respect thereto shall pass to E-Wha upon delivery of such Products by Carrington to the carrier at the designated delivery (F.O.B.) point. Deliveries of Products shall be made by Carrington under normal trade conditions in the usual and customary manner being utilized by Carrington at the time and location of the particular delivery. 5.7 Carrington shall use its reasonable best efforts to ensure availability of all Products ordered by E-Wha under this Agreement. However, if necessary in the best judgment of Carrington, Carrington may allocate its available supply of Products among all its customers, distributors or other purchasers, including E-Wha, on such basis as it shall deem reasonable, practicable and equitable, without liability for any failure of performance or lost sales which may result from such allocations. 5.8 Carrington accepts liability for defective Products and agrees to replace such defective Products should they occur with new Products. Except as may be expressly stated by Carrington on the Product or on Carrington's packaging, or in Carrington's information accompanying the Product, at the time of shipment to E-Wha hereunder, CARRINGTON MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WITH RESPECT TO THE PRODUCTS, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. CARRINGTON NEITHER ASSUMES NOR AUTHORIZES ANYONE TO ASSUME FOR IT ANY OBLIGATION OR LIABILITY IN CONNECTION WITH THE PRODUCTS. E-Wha shall not make any representation or warranty with respect to the Products that is more extensive than, or inconsistent with, the limited warranty set forth in this Article 5.8 or that is inconsistent with the policies or publications of Carrington relating to the Products. E-Wha'S EXCLUSIVE REMEDY FOR BREACH OF ANY WARRANTY HEREUNDER IS THE DELIVERY BY CARRINGTON OF ADDITIONAL QUANTITIES OF THE PRODUCTS IN REPLACEMENT OF THE NON-CONFORMING PRODUCTS OR THE REFUND OF THE CONTRACT PRICE FOR THE PRODUCTS THAT ARE COVERED BY THE WARRANTY, AT E-WHA'S OPTION. CARRINGTON SHALL HAVE NO OTHER OBLIGATION OR LIABILITY FOR DAMAGES TO E-Wha OR ANY OTHER PERSON OF ANY TYPE, INCLUDING, BUT NOT LIMITED TO, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, LOSS OF PROFITS OR OTHER COMMERCIAL OR ECONOMIC LOSS, OR ANY OTHER LOSS, DAMAGE OR EXPENSE, ARISING OUT OF OR IN CONNECTION WITH THE SALE, USE, LOSS OF USE, NONPERFORMANCE OR REPLACEMENT OF THE PRODUCTS. E-WHA SHALL DEFEND, INDEMNIFY AND HOLD HARMLESS CARRINGTON AND CARRINGTON'S AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS, FROM AND AGAINST ALL CLAIMS, LIABILITIES, DEMANDS, DAMAGES, EXPENSES AND LOSSES (INCLUDING REASONABLE ATTORNEYS' FEES AND EXPENSES) ARISING OUT OF OR CONNECTED WITH (i) ANY USE, SALE OR OTHER DISPOSITION OF PRODUCTS, KNOW-HOW OR TRADEMARKS BY E-Wha OR ANY OTHER PARTY, (ii) ANY BREACH BY E-WHA OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR COVENANTS UNDER THIS AGREEMENT OR (iii) ANY ACTS OR OMISSIONS ON THE PART OF E-Wha OR ITS AGENTS, SERVANTS OR EMPLOYEES WHICH ARE OUTSIDE OR BEYOND E-WHA'S AUTHORIZATION GRANTED HEREIN. 5.9 Credits for defective Products to E-Wha shall include importation and shipment expenses and will be calculated by Carrington based on the original Contract Price of the items returned, whether identified by lot number or another method. Carrington shall provide E-Wha with a copy of its liability Insurance Certificate and shall include E-Wha thereunder. Article 6. Term and Termination 6.1 The term of this Agreement shall be for a period of three (3) years from the effective date of this Agreement. After such term, this Agreement shall be automatically terminated unless the parties mutually agree in writing to extend the term hereof. Notwithstanding the foregoing, this Agreement may be terminated earlier in accordance with the provisions of this Article 6 or as expressly provided elsewhere in this Agreement. 6.2 Carrington shall have the absolute right to terminate this Agreement if E-Wha fails to perform or breaches, in any material respect, any of the terms or provisions of this Agreement. Without limiting the events which shall be deemed to constitute a breach or material breach of this Agreement by E-Wha, E-Wha understands and agrees that it shall be in material breach of this Agreement, and Carrington shall have the right to terminate this Agreement under this Article 6.2, if: (i) E-Wha fails or refuses to pay to Carrington any sum when due; (ii) E-Wha breaches any provision of Article 2.2, 3.4, 4, 5.3, 5.8, 7 or 8; or, (iii) E-Wha fails to purchase the Specified Minimum Purchase Amounts of Product for any required period. 6.3 Each Party shall have the absolute right to terminate this Agreement in the event the other Party shall become insolvent, or if there is instituted by or against the other Party procedures in bankruptcy, or under insolvency laws or for reorganization, receivership or dissolution, or if the other Party loses any franchise or license to operate its business as presently conducted in any part of the Territory. 6.4 This Agreement shall automatically terminate effective at the end of any 12-month period of the term of this Agreement referred to in Articles 5.1 and 5.2 hereof if the Parties are unable to agree upon the Contract Prices or the Specified Minimum Amounts for the next 12-month period of the term. 6.5 During the one-year period following termination of this Agreement, any inventory of Products held by E-Wha at the termination of this Agreement may be sold by E-Wha to customers in the Territory in the ordinary course; provided, however, that for the period required to liquidate such inventory, all of the provisions contained herein governing E-Wha's performance obligations and Carrington's rights shall remain in effect. In order to accelerate the liquidation of any such inventory, Carrington shall have the option, but not the obligation, to purchase all or any part of such remaining inventory at the price at which the inventory was originally sold by Carrington to E-Wha, including importation and shipping. 6.6 The termination of this Agreement shall not impair the rights or obligations of either Party hereto which shall have accrued hereunder prior to such termination. The provisions of Articles 5.8, 6.5, 7, 8 and 15 and the rights and obligations of the Parties thereunder shall survive the termination of this Agreement for a period of one (1) year. Article 7. Trademarks 7.1 All Carrington Trademarks, trade names, service marks, logos and derivatives thereof relating to the Products (the "Trademarks"), and all patents, technology and other intellectual property (also known as "Know-how") relating to the Products and of the goodwill associated therewith, are the sole and exclusive property of Carrington and/or its affiliates. The Products shall be promoted, sold and distributed only under the Trademarks. Carrington hereby grants E-Wha permission to use the Trademarks for the limited purpose of performing its obligations under this Agreement. Carrington may, in its sole discretion after consultation with E-Wha, modify or discontinue the use of any Trademark and/or use one or more additional or substitute marks or names, and E-Wha shall be obligated to do the same. 7.2 Carrington's Trademarks shall appear on all Product packaging, labels, and inserts and other materials which E-Wha uses for the marketing of the Products in such form and manner as Carrington shall reasonably require. Carrington retains the right to review and approve all intended uses of the Trademark in any packaging, inserts, labels, or promotional or other materials relating to the Products prior to E-Wha's actual use thereof. 7.3 It shall be the sole responsibility of E-Wha, at its sole expense, to keep in force and maintain the Trademarks in the Territory by paying all necessary fees throughout the term of this Agreement. E-Wha agrees to use the Trademarks in full compliance with the rules prescribed from time to time by Carrington. The Trademarks shall always be used together with the sign "[R]" or the sign "[TM]". E-Wha may not use any Trademark as part of any corporate name or with any prefix, suffix or other modifying word, term, design or symbol. In addition, E-Wha may not use any Trademark in connection with the sale of any unauthorized product or service or in any other manner not explicitly authorized in writing by Carrington. 7.4 In the event of any infringement of, or threatened or presumed infringement of, or challenge to E-Wha's use of any Trademark or of any E-Wha trademark, E-Wha is obligated to notify Carrington immediately. E-Wha shall investigate any alleged violation and, if necessary, shall take the appropriate legal action to resolve the issue and to prevent other competitors from infringing on said intellectual property rights within the Territory. Carrington shall have sole and absolute discretion to take such action as it deems appropriate. 7.5 In the event of the termination of this Agreement for any reason, E-Wha's right to use the Trademarks shall cease, and E-Wha shall cease using such Trademarks at such time as E-Wha's inventory of Products has been sold. E-Wha shall, as soon as it is reasonably possible, remove all Trademarks which appear on or about the premises of the office(s) of E-Wha and any of the advertising of E-Wha used in connection with the Products. 7.6 In the event of a breach or threatened breach by E-Wha of the provisions of this Article 7, Carrington shall be entitled to an injunction or injunctions to prevent such breaches. Nothing herein shall be construed as prohibiting Carrington from pursuing other remedies available to it for such breach or threatened breach of this Article 7, including the recovery of damages from E-Wha. 7.7 Should for some reason the Trademark be prevented from being used in any part or whole of the Territory, the Parties shall consult as to a suitable other trademark (which trademark shall be also defined as "Trademark" for purposes of this Agreement) owned by Carrington or to be transferred from E-Wha to Carrington for use in connection with the marketing and sale of the Products; it being agreed, however, that Carrington retains the right to ultimately determine what such alternative Trademark shall be used, provided it is not confusingly similar to a Trademark owned by E-Wha in the Territory. 7.8 Nothing contained in this Agreement shall be construed as giving E-Wha the right to use the Trademark outside the Territory or for any other product than the Products. Article 8. Confidential Information 8.1 E-Wha recognizes and acknowledges that E-Wha will have access to confidential information and trade secrets, including "Know-how", of Carrington and other entities doing business with Carrington relating to research, development, manufacturing, marketing, financial and other business-related activities ("Confidential Information"). Such Confidential Information constitutes valuable, special and unique property of Carrington and/or other entities doing business with Carrington. Other than as is necessary to perform the terms of this Agreement, E-Wha shall not, during and after the term of this Agreement, make any use of such Confidential Information, or disclose any of such Confidential Information to any person or firm, corporation, association or other entity, for any reason or purpose whatsoever, except as specifically allowed in writing by an authorized representative of Carrington. In the event of a breach or threatened breach by E-Wha of the provisions of this Article 8, Carrington shall be entitled to an injunction restraining E-Wha from disclosing and/or using, in whole or in part, such Confidential Information. Nothing herein shall be construed as prohibiting Carrington from pursuing other remedies available to it for such breach or threatened breach of this Article 8, including the recovery of damages from E-Wha. The above does not apply to information or material that was known to the public or generally available to the public prior to the date it was received by E-Wha. 8.2 E-Wha shall not disclose any of the terms of this Agreement without the prior written consent of Carrington. Article 9. Force Majeure 9.1 Neither E-Wha nor Carrington shall have any liability hereunder if either is prevented from performing any of its obligations hereunder by reason of any factor beyond its control, including, without limitation, fire, explosion, accident, riot, flood, drought, storm, earthquake, lightning, frost, civil commotion, sabotage, vandalism, smoke, hail, embargo, act of God or the public enemy, other casualty, strike or lockout, or interference, prohibition or restriction imposed by any government or any officer or agent thereof ("Force Majeure"), nor shall E-Wha's or Carrington's obligations, except as may be necessary, be suspended during the period of such Force Majeure, nor shall either Party's obligations be cancelled with respect to such Products as would have been sold hereunder but for such suspension. Such affected Party shall give to the other Party prompt notice of any such Force Majeure, the date of commencement thereof and its probable duration and shall give a further notice in like manner upon the termination thereof. Each Party hereto shall endeavor with due diligence to resume compliance with its obligations hereunder at the earliest date and shall do all that it reasonably can to overcome or mitigate the effects of any such Force Majeure upon both Party's obligations under this Agreement. Should the Force Majeure continue for more than six (6) months, then the other Party shall have the right to cancel this Agreement and the Parties shall seek an equitable agreement on the Parties' reward of interests. 9.2 The Parties agree that any obligation to pay money is never excused by Force Majeure. Article 10. Amendment 10.1 No oral explanation or oral information by either Party hereto shall alter the meaning or interpretation of this Agreement. No modification, alteration, addition or change in the terms hereof shall be binding on either Party hereto unless reduced to writing and executed by the duly authorized representative of each Party. Article 11. Entire Agreement 11.1 This Agreement represents the entire Agreement between the Parties and shall supersede any and all prior agreements, understandings, arrangements, promises, representations, warranties, and/or any contracts of any form or nature whatsoever, whether oral or in writing and whether explicit or implicit, which may have been entered into prior to the execution hereof between the Parties, their officers, directors or employees as to the subject matter hereof. Neither of the Parties hereto has relied upon any oral representation or oral information given to it by any representative of the other Party. 11.2 Should any provision of this Agreement be rendered invalid or unenforceable, it shall not affect the validity or enforceability of the remainder. Article 12. Assignment 12.1 Neither this Agreement nor any of the rights or obligations of E-Wha hereunder shall be transferred or assigned by E-Wha without the prior written consent of Carrington, executed by a duly authorized officer of Carrington. Article 13. Governing Law 13.1 It is expressly agreed that the validity, performance and construction of this Agreement shall be governed by the laws and jurisdiction of Texas. Article 14. Notices 14.1 Any notice required or permitted to be given under this Agreement by one of the Parties to the other shall be given for all purposes by delivery in person, registered air-mail, commercial courier services, postage prepaid, return receipt requested, or by fax addressed to: (a) Carrington at: Carrington Laboratories, Inc., 2001 Walnut Hill Lane, Irving, Texas 75038; Attention: President, or at such other address as Carrington shall have theretofore furnished in writing to E-Wha. (Fax No. 214-518-1020) (b) E-Wha at: Shin-a Annex B/D, Suite 201, 1-28, Chung-Dong, Jung-Ku, Seoul, Korea, Attention: President, or at such other address as E-Wha shall have theretofore furnished in writing to Carrington. (Fax No. 011-822-773-2024) Article 15. Waiver 15.1 Neither E-Wha's nor Carrington's failure to enforce at any time any of the provisions of this Agreement or any right with respect thereto, shall be considered a waiver of such provisions or rights or in any way affect the validity of same. Neither E-Wha's nor Carrington's exercise of any of its rights shall preclude or prejudice either Party thereafter from exercising the same or any other right it may have, irrespective of any previous action by either Party. Article 16. Arbitration 16.1 Except as expressly provided otherwise herein, any dispute, controversy or claim arising out of or in relation to or in connection with this Agreement, the operations carried out under this Agreement or the relationship of the Parties created under this Agreement, shall be exclusively and finally settled by confidential arbitration, and any Party may submit such a dispute, controversy or claim to arbitration. The arbitration proceeding shall be held at the location of the non- instituting Party in the English language and shall be governed by the rules of the International Chamber of Commerce (the "ICC") as amended from time to time. Any procedural rule not determined under the rules of the ICC shall be determined by the laws of Texas, other than those laws that would refer the matter to another jurisdiction. A single arbitrator shall be appointed by unanimous consent of the Parties. If the Parties cannot reach agreement on an arbitrator within forty-five (45) days of the submission of a notice of arbitration, the appointing authority for the implementation of such procedure shall be the ICC, who shall appoint an independent arbitrator who does not have any financial or conflicting interest in the dispute, controversy or claim. If the ICC is unable to appoint, or fails to appoint, an arbitrator within ninety (90) days of being requested to do so, then the arbitration shall be heard by three arbitrators, one selected by each Party within the thirty (30) days of being required to do so, and the third promptly selected by the two arbitrators selected by the Parties. The arbitrators shall announce the award and the reasons therefor in writing within six months after the conclusion of the presentation of evidence and oral or written argument, or within such longer period as the Parties may agree upon in writing. The decision of the arbitrators shall be final and binding upon the Parties. Judgment upon the award rendered may be entered in any court having jurisdiction over the person or the assets of the Party owing the judgment or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. Unless otherwise determined by the arbitrator, each Party involved in the arbitration shall bear the expense of its own counsel, experts and presentation of proof, and the expense of the arbitrator and the ICC (if any) shall be divided equally among the Parties to the arbitration. Article 17 Interpretation 17.1 The language of this Agreement is English. No translation into any other language shall be taken into account in the interpretation of the Agreement itself. 17.2 The headings in this Agreement are inserted for convenience only and shall not affect its construction. 17.3 Where appropriate, the terms defined in Article 1 and denoting a singular number only shall include the plural and vice versa. 17.4 References to any law, regulation, statute or statutory provision includes a reference to the law, regulation, statute or statutory provision as from time to time amended, extended or re- enacted. Article 18. Exhibits 18.1 Any and all exhibits referred to herein shall be considered an integral part of this Agreement. Article 19. No Inconsistent Actions 19.1 Each Party hereto agrees that it will not voluntarily undertake any action or course of action inconsistent with the provisions or intent of this Agreement and, subject to the provisions of Articles 5.7 and 9 hereof, will promptly perform all acts and take all measures as may be appropriate to comply with the terms, conditions and provisions of this Agreement. Article 20. Currency of Account 20.1 This Agreement evidences a transaction for the sale of goods in which the specification of U.S. dollars is of the essence, and U.S. dollars shall be the currency of account in all events. All payments to be made by E-Wha to Carrington hereunder shall be made either (i) in immediately available funds by confirmed wire transfer to a bank account to be designated by Carrington or (ii) in the form of a bank cashier's check payable to the order of Carrington. Article 21. Binding Effect 21.1 This Agreement shall inure to the benefit of and be binding upon the respective successors of the Parties. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the day and year as written below. CARRINGTON LABORATORIES, INC. By: /s/ Carlton E. Turner --------------------- Name: Carlton E. Turner Title: President and CEO Date: October 15, 1999 E-WHA INTERNATIONAL, INC. By: /s/ Yong Nyun, Kim ------------------ Name: Yong Nyun Kim Title: President Date: October 26, 1999 EX-10.79 23 Exhibit 10.79 Amendment Number Two To That Certain Agreement by and between Carrington Laboratories, Inc., and Carrington Laboratories Belgium, N.V. and CSC Pharmaceuticals HandelsGmbhH., Vienna, Austria This attachment amends and revises that certain Sales Distribution Agreement dated April 17, 1998, by and between Carrington Laboratories, Inc., and Carrington Laboratories Belgium N.V. (together hereinafter referred to as "Carrington") and CSC Pharmaceuticals HandelsGmbH., Vienna, Austria ("CSC"). Article 7. Trademarks 7.5.a. In the event Carrington in the five- (5-) year period after the termination of this Agreement distributes the Products in the Territory under the Trademarks registered by CSC (RADIADERMA AND DIABDERMA), directly or through an Affiliate Company or a Distributor other than CSC, Carrington shall pay CSC, as consideration for the goodwill created by CSC, a sum corresponding to the average of the invoiced amount of the Products made by CSC in the Territory during the three- (3-) year period before the termination of this Agreement. 7.5.b. In the event CSC, during the term of this contract or subsequent renewals of this contract, breaches the contract and replaces Carrington as the developer and manufacturer of the finished products sold under the trademarks Radiaderma and Diabderma and registered by CSC, CSC shall pay Carrington as consideration for the research, composition of matter development and clinical efforts to support the original products, a sum corresponding to the average of the invoiced amount of the products sold by CSC in the territory during the three (3) year period before the replacement of Carrington produced products. This Amendment shall become effective upon its execution by both parties. All other terms and conditions of the Agreement remain unchanged. AGREED AND ACCEPTED BY: CARRINGTON LABORATORIES, INC. CARRINGTON LABORATORIES BELGIUM N.V. /s/ Carlton E. Turner /s/ Carlton E. Turner --------------------- --------------------- Name: Carlton E. Turner, Ph.D., D.Sc. Name: Carlton E. Turner, Ph.D., D.Sc. Title: President & CEO Title: President & CEO CSC PHARMACEUTICALS, HANDELSGMBH DATE: February 14, 2000 /s/ Dr. Yervant Zarmanian ------------------------- Name: Dr. Yervant Zarmanian Title: CEO EX-10.80 24 Exhibit 10.80 For Purchases Through an Authorized Distributor Subject to Competitive Bid Process SUPPLIER AGREEMENT Between NOVATION, LLC and Carrington ---------- MS91022 ------- NOVATION, LLC SUPPLIER AGREEMENT 1. Introduction a. Purchasing opportunities for Members. Novation, LLC ("Novation") is engaged in providing purchasing opportunities with respect to high quality products and services to participating health care providers ("Members"). Members are entitled to participate in Novation's programs through their membership or other participatory status in any of the following client organizations: VHA Inc., University HealthSystem Consortium, and HealthCare Purchasing Partners International, LLC (collectively, "Clients"). Novation is acting as the exclusive agent for each of the Clients and certain of each Client's subsidiaries and affiliates, respectively (and not collectively), with respect to this Agreement A current listing of Members is maintained by Novation in the electronic database described in the Guidebook referred to in Subsection 7,c below ("Novation Database"). A provider will become a "Member" for purposes of this Agreement at the time Novation adds the provider to the Novation Database and will cease to be a "Member" for such purposes at the time Novation deletes the provider from the Novation Database. b. Authorized Distributors. Novation and/or the Clients have entered into arrangements with certain distributors ("Authorized Distributors") that have agreed to distribute the Products to Members. A current listing of Authorized Distributors is maintained by Novation in the Novation Database. A distributor will become an "Authorized Distributor" for purposes of this Agreement at the time Novation adds the distributor to the Novation Database and will cease to be an "Authorized Distributor" for such purposes at the time Novation deletes the distributor from the Novation Database. Any limitations on the scope of an Authorized Distributor's authority will also be set forth in the Novation Database. By reason of requirements of law, regulation or internal policy of certain Members, from time to time Novation may identify underutilized businesses as Authorized Distributors, c. Supplier. Supplier is the manufacturer of products listed on Exhibit A, the provider of installation, training and maintenance services for such products, and the provider of any other services listed on Exhibit A (such products and/or services are collectively referred to herein as "Products"), d. Bid. Supplier has responded to Novation's Invitation to Bid by submitting its written offer ("Bid") to Novation consisting of this Agreement, the listing of Products and pricing therefor ("Award Prices") attached hereto as Exhibit A, the other specifications attached hereto as Exhibit B ("Non-Price Specifications"), the Terms of Supplier's Participation in Committed Programs attached hereto as Exhibit C, and any other materials required to be submitted in accordance with the Bid Instructions. 2. CONTRACT AWARD. a. Letter of Award, By executing and delivering the Letter of Award attached hereto as Exhibit D ("Award Letter") to Supplier, Novation will have accepted the Bid, and Novation and Supplier therefore agree that Supplier will make the Products available for purchase by the Authorized Distributors at the Award Prices for resale to the Members in accordance with the terms of this Agreement; provided, however, that Novation's award of this Agreement to Supplier will not constitute a Commitment by any person to purchase any of the Products, No obligations of Novation set forth in this Agreement will be valid or enforceable against Novation unless and until the Award Letter has been duly executed by Novation and attached as an exhibit hereto. Supplier acknowledges that, in making its award to Supplier, Novation has materially relied on all representations, Warranties and agreements made by Supplier as part of the Bid and that all such representations, warranties and agreements will survive acceptance of the Bid. b. Optional Purchasing Arrangement, Novation and Supplier agree that each Member will have the option of purchasing the Products tinder the terms of this Agreement or under the terms of any other purchasing or pricing arrangement that may exist between such Member and Supplier at any time during the Term; provided, however, that, regardless of the arrangement, Supplier will comply with Sections 7 and 9 below. If any Member uses any other purchasing or pricing arrangement with Supplier when ordering products covered by any contract between Supplier and Novation, Supplier will notify such Member of the pricing and other significant terms of the applicable Novation contract. c. Market Competitive Terms. Supplier agrees that the prices, quality, value and technology of all Products purchased under this Agreement will remain market competitive at all times during the Term. Supplier agrees to provide prompt written notice to Novation of all offers for the sale of the Products made by Supplier during the Term on terms that are more favorable to the offeree than the terms of this Agreement. Supplier will lower the Award Prices or increase arty discount' applicable to the purchase of the Products as necessary to assure market competitiveness. If at any time during the Term Novation receives information from any source suggesting that Supplier's prices, quality, value or technology are not market competitive, Novation may provide written notice of such information to Supplier, and Supplier will, within live (5) business days for Novation's private label Products and within ten (10) business days for all other Products, advise Novation in writing of and fully implement all adjustments necessary to assure market competitiveness. d. Changes in Award Prices. Unless otherwise expressly agreed in any exhibit to this Agreement, the Award Prices will not be increased and any discount will not be eliminated or reduced during the Term. In addition to any changes made to assure market competitiveness, Supplier may lower the Award Prices or increase any discount applicable to the purchase of the Products at any time. e. Notification of Changes in Pricing Terms. Supplier will provide not less than sixty (60) days' prior written notice to Novation and not less than forty-five (45) days' prior written notice to all Authorized Distributors of any change in pricing terms permitted or required by this Agreement. For purposes of the foregoing notification requirements, a change in pricing terms will mean any change that affects the delivered price to the Member, including, without limitation, changes in list prices, discounts or pricing tiers or schedules. Such prior written notice will be provided in such format and in such detail as they be required by Novation from time to time, and will include, at a minimum, sufficient information to determine line item pricing of the Products for all affected Members. f. Underutilized Businesses. Certain Members may be required by law, regulation and/or internal policy to do business with underutilized businesses such as Minority Business Enterprises (MBE), Disadvantaged Business Enterprises (ORE), Small Business Enterprises (SEE), Historically Underutilized Businesses (HUB) and/or Women-owned Business Enterprises (WBE). To assist Novation in helping Members meet these requirements, Supplier will comply with all Novation policies and programs with respect to such businesses and will provide, on request, Novation or any Member with statistical or other information with respect to Supplier's utilization of such businesses as a vendor, distributor, contractor or subcontractor. 3. TERM AND TERMINATION. a. Term. This Agreement will be effective as of the effective date set forth in the Award Letter ("Effective Date"), and, unless sooner terminated, will continue in full force and effect for the initial term as set forth in the Non-Price Specifications and for any renewal terms set forth in the Non-Price Specifications by Novation's delivery of written notice of renewal to Supplier not less than ten (10) days prior to the end of the initial term or any renewal tern, as applicable. The initial term, together with the renewal terms if any, are collectively referred to herein as the "Term." b. Termination by Novation. Novation may terminate this Agreement at any time for any reason whatsoever by delivering not less than ninety (90) days' prior written notice thereof to Supplier, In addition, Novation may terminate this Agreement immediately by delivering written notice thereof to Supplier upon the occurrence of either of the following events: (1) Supplier breaches this Agreement; or (2) Supplier becomes bankrupt or insolvent or makes an unauthorized assignment or goes into liquidation or proceedings are initiated for the purpose of having a receiving order or winding up order made against Supplier or Supplier applies to the courts for protection from its creditors. Novation's right to terminate this Agreement due to Supplier's breach in accordance with this Subsection is in addition to any other rights and remedies Novation, the Clients, the Members or the Authorized Distributors may have resulting from such breach, including, but not limited to, Novation's and the Clients' right to recover all loss of Marketing Fees resulting from such breach through the date of termination and for one hundred eighty (180) days thereafter. c. Termination by Supplier. Supplier may terminate this Agreement at any time for any reason whatsoever by delivering not less than one hundred eighty (180) days' prior written notice thereof to Novation. 4. PRODUCT SUPPLY. a. Delivery and Invoicing. On and after the Effective Date, Supplier agrees to deliver Products ordered by the Authorized Distributors on behalf of Members to the Authorized Distributors, FOB destination, and will direct its invoices to the Authorized Distributors in accordance with this Agreement. Supplier agrees to prepay and absorb charges, if any, for transporting Products to the Authorized Distributors. Payment terms are 2%-30, Net 31 days. Supplier will make whatever arrangements are reasonably necessary with the Authorized Distributors to implement the terms of this Agreement; provided, however, Supplier will not impose any purchasing commitment on any Member or Authorized Distributor as a condition to the Member's or Authorized Distributor's purchase of any Products pursuant to this Agreement. b. Product Fill Rates: Confirmation and Delivery Times. Supplier agrees to provide product till rates to the Authorized Distributors of greater than ninety-five percent (95%), calculated as line item orders. Supplier will provide confirmation of orders from the Authorized Distributors via the electronic data interchange described in the Guidebook referred to in Subsection 7.c below within two (2) business days after placement of the order and will deliver the Products to the Authorized Distributors within ten (10) business days after placement of the order. c. Bundled Terms. Supplier agrees to give Novation prior written notice of any offer Supplier makes to any Member or Authorized Distributor to sell products that are not covered by this Agreement in conjunction with Products covered by this Agreement under circumstances where the Member or Authorized Distributor has no real economic choice other than to accept such bundled terms, d. Discontinuation of Products: Changes in Packaging. Supplier will have no unilateral right to discontinue any of the Products or to make any changes in packaging which render any of the Products substantially different in use, function or distribution. Supplier may request Novation in writing to agree to a proposed discontinuation of any Products or a proposed change in packaging for any Products at least ninety (90) days prior to the proposed implementation of the discontinuation or change. Under no circumstances will any Product discontinuation or packaging changes be permitted under this Agreement without Novation's agreement to the discontinuation or change. In the event Supplier implements such proposed discontinuation or change without Novation's agreement thereto in writing, in addition to any other rights and remedies Novation or the Members may have by reason of such discontinuation or change, (i) Novation will have the right to terminate any or all of the Product(s) subject to such discontinuation or change or to terminate this Agreement in its entirety immediately upon becoming aware of the discontinuation or change or any time thereafter by delivering written notice thereof to Supplier; (ii) the' Members may purchase products equivalent to the discontinued or changed Products from other sources and Supplier will be liable to the Members for all reasonable costs in excess of the Award Prices plus any other damages which they may incur; and (iii) Supplier will be liable to Novation and the Clients for any loss of Marketing Fees resulting from such unacceptable discontinuation or change plus any other damages which they may incur. e. Replacement or New Products. Supplier will have no unilateral right to replace any of the Products listed in Exhibit A with other products or to add new products to this Agreement. Supplier may request Novation in writing to agree to a replacement of any of the Products or the addition of a new product that is closely related by function or use to an existing Product at least sixty (60) days prior to the proposed implementation of the replacement or to the new product introduction. Under no circumstances will any Product replacement or new product addition to this Agreement be permitted without Novation's agreement to the replacement or new product. f. Member Services. Supplier will consult with each Member to identify the Member's policies relating to access to facilities and personnel. Supplier will comply with such policies and will establish a specific timetable for sales calls by sales representatives to satisfy the needs of the Member. Supplier will promptly respond to Members' reasonable requests for verification of purchase history. If requested by Novation or any Members. Supplier will provide, at Supplier's cost, on-site inservice training to Members' personnel for pertinent Products. g. Product Deletion. Notwithstanding anything to the contrary contained in this Agreement, Novation may delete any one or more of the Products from this Agreement at any time, at will and without cause, upon not less than sixty (60) days' prior written notice to Supplier. h. Return of Products. Any Member or Authorized Distributor, in addition to and not in limitation of any other rights and remedies, will have the right to return Products to Supplier under any of the following circumstances; (1) the Product is ordered or shipped in error; (2) the Product is no longer needed by the Member due to deletion from its standard supply list or changes in usage patterns, provided the Product is returned at least six (6) months prior to its expiration date and is in a re-salable condition; (3) the Product is received outdated or is otherwise unusable; (4) the Product is received damaged, or is defective or nonconforming; (5) the Product is one which a product manufacturer or supplier specifically authorizes for return through a distributor; and (6) the Product is recalled. Supplier agrees to accept the return of Products under these circumstances without charge and for full credit. i. Failure to Supply, In the event of Supplier's failure to perform its supply obligations in accordance with the terms of this Section 4, the Member or the Authorized Distributor may purchase products equivalent to the Products from other sources and Supplier will be liable to the Member or the Authorized Distributor for all reasonable costs in excess of the Award Prices plus any other damages which they may incur. In such event, Supplier will also be liable to Novation and the Clients for any loss of Marketing Fees resulting from such failure plus any other damages which they may incur. The remedies set forth in this Subsection are in addition to any other rights and remedies Novation, the Clients, the Members or the Authorized Distributors may have resulting from such failure. 5. PRODUCT QUALITY. a. Free From Defects. Supplier warrants the Products against defects in material, workmanship, design and manufacturing. Supplier will make all necessary arrangements to assign such warranty to the Members. Supplier further represents and warrants that the Products will conform to the specifications, drawings, and samples furnished by Supplier or contained in the Non-price Specifications and will be safe for their intended use. If any Products are defective and a claim is made by a Member or an Authorized Distributor on account of such defect, Supplier will, at the option of the Member or the Authorized Distributor, either replace the defective Products or credit the Member or the Authorized Distributor. Supplier will bear all costs of returning and replacing the defective Products, as well as all risk of loss or damage to the defective Products from and after the time they leave the physical possession of the Member or the Authorized Distributor. The warranties contained in this Subsection will survive any inspection, delivery, acceptance or payment by a Member or an Authorized Distributor. In addition, if there is at any time wide- spread failure of the Products, the Member or the Authorized Distributor may return all said Products for credit or replacement, at its option. This Subsection and the obligations contained herein will survive the expiration or earlier termination of this Agreement. The remedies set forth in this Subsection are in addition to and not a limitation on any other rights or remedies that may be available against Supplier. b. Product Compliance. Supplier represents and warrants to Novation, the Clients, the Authorized Distributors and the Members that the Products are, if required, registered, and will not be distributed, sold or priced by Supplier in violation of any federal, state or local law. Supplier represents and warrants that as of the date of delivery to the Authorized Distributors all Products will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act and will not violate or cause a violation of any applicable law, ordinance, rule, regulation or order, Supplier agrees it will comply with all applicable Good Manufacturing Practices and Standards contained in 21 C.F.R- Parts 210, 211, 225, 226, 600, 606, 610, 640, 660, 680 and 820. Supplier represents and warrants that it will provide adequate warnings and instructions to inform users of the Products of the risks, if any, associated with the use of the Products. Supplier's representations; warranties and agreements in this Subsection will survive the expiration or earlier termination of this Agreement. c. Patent Infringement. Supplier represents and warrants that sale or use of the Products will not infringe any United States patent Supplier will, at its own expense, defend every suit which will be brought against Novation, a Member or an Authorized Distributor for any alleged infringement of any patent by reason of the sale or use of the Products and will pay all costs, damages and profits recoverable in arty such suit. This Subsection and the obligations contained herein will survive the expiration or earlier termination of this Agreement. The remedies set forth in this Subsection are in addition to and not a limitation on any other rights or remedies that may be available against Supplier d. Product Condition. Unless otherwise stated in the Non- Price Specifications or unless agreed upon by a Member in connection with Products it may order, all Products will be new. Products which are demonstrators, used, obsolete, seconds, or which have been discontinued are unacceptable unless otherwise specified in the Non- Price Specifications or the Member accepts delivery after receiving notice of the condition of the Products. e. Recall of Products. Supplier will reimburse Authorized Distributors and Members for any cost associated with any Product corrective action, withdrawal or recall requested by Supplier or required by any governmental entity. In the event a product recall or a court action impacting supply occurs, Supplier will notify Novation in writing within twenty-four (24) hours of any such recall or action. Supplier's obligations in this Subsection will survive the expiration or earlier termination of this Agreement. f. Shelf Life. Sterile Products arid other Products with a limited shelf life sold under this Agreement will have the longest possible shelf life and the latest possible expiration dates. Unless required by stability considerations, there will not be less than an eighteen (18) month interval between a Product's date of delivery by Supplier to the Authorized Distributor and its expiration date. 6. CENTURY COMPLIANCE a. Definitions. For purposes of this Section, the following terms have the respective meanings given below: (1) "Systems" means any of the Products, systems of distribution for Products and Product manufacturing systems that consist of or include any computer software, computer firmware, computer hardware (whether general or special purpose), documentation, data, and other similar or related items of the automated, computerized, and/or software systems that are provided by or through Supplier or utilized to manufacture or distribute the Products provided by or through Supplier pursuant to this Agreement, or any component part thereof, and any services provided by or through Supplier in connection therewith. (2) "Calendar-Related" refers to date values based on the "Gregorian calendar" (as defined in the Encyclopedia Britannica, 15th edition. 1982, page 602) and to all uses in any manner of those date values, including without limitation manipulations, calculations, conversions, comparisons, and presentations. (3) "Century Noncompliance" means any aspects of the Systems that fail to satisfy the requirements set forth in Subsection 6.b below. b. Representations. Supplier warrants, represents and agrees that the Systems satisfy the following requirements: (1) In connection with the use and processing of Calendar- Related data, the Systems will not malfunction, will not cease to function, will not generate incorrect data, and will not produce incorrect results. (2) In connection with providing Calendar-Related data to and accepting Calendar-Related data from other automated, computerized, and/or software systems and users via user interfaces, electronic interfaces, and data storage, the Systems represent dates without ambiguity as to century. (3) The year component of Calendar-Related data that is provided by the Systems to or that is accepted by the Systems from other automated, computerized, and/or software systems and user interfaces, electronic interfaces, and data storage is represented in a four-digit CCYY format, where CC represents the two digits expressing the century and YY represents the two digits expressing the year within that century (e.g, 1996 or 2003). (4) Supplier has verified through testing that the Systems satisfy the requirements of this Subsection including, without limitation, testing of each of the following specific dates and the transition to and from each such date: September 9,1999; September 10, 1999; December 31, 1999; January 1, 2000; February 28, 2000;February 29, 2000; March 1, 2000; December 31, 2000; January 1, 2001; December 31,2004; and January 1, 2005. c. Remedies. In the event of any Century Noncompliance in the Systems in any respect, in addition to any other remedies that may be available to Novation or the Members, Supplier will, at no cost to the Members, promptly under the circumstances (but, in all cases, within thirty (30) days after receipt of a written request from any Member, unless otherwise agreed by the Member in writing) eliminate the Century Noncompliance from the Systems. d. Noncompliance Notice. In the event Supplier becomes aware of (i) any possible or actual Century Noncompliance in the Systems or (ii) any international, governmental, industrial, or other standard (proposed or adopted) regarding Calendar.Related data and/or processing, or Supplier begins any significant effort to conform the Systems to any such standard, Supplier will promptly provide the Members with all relevant information in writing and will timely provide the Members with updates to such information. Supplier will respond promptly and fully to inquiries by the Members, and timely provide updates to any responses provided to the Members, with respect to (i) any possible or actual Century Noncompliance in the Systems or (ii) any international, governmental, industrial, or other standards. in the foregoing, the use of "timely" means promptly after the relevant information becomes known to or is developed by or for Supplier. e. Survival. Supplier's representations, warranties and agreements in this Section will continue in effect throughout the Term and will survive the expiration or earlier termination of this Agreement 7. REPORTS AND OTHER INFORMATION REQUIREMENTS. a. Report Content. Within twenty (20) days after the end of each full and partial month during the Term ("Reporting Month"), Supplier will submit to Novation a report in the form of a diskette containing the following information, in form and content reasonably satisfactory to Novation: (1) the name of Supplier, the Reporting Month and year and the Agreement number (as provided to Supplier by Novation); (2) with respect to each Member (described by LIC number (as provided to Supplier by Novation), health industry number (if applicable), full name, street address, city, state, zip code and, if applicable, tier and committed status), the number of units sold and the amount of net sales for each Product on a line item basis, and the sum of net sales and the associated Marketing Fees for all Products purchased by such Member directly or indirectly from Supplier during the Reporting Month, whether under the pricing and other terms of this Agreement or under the terms of any other purchasing or pricing arrangements that may exist between the Member and Supplier; (3) the sum of the net sales and the associated Marketing Fees for all Products sold to all Members during the Reporting Month; and (4) such additional information as Novation may reasonably request from time to time b. Report Format and Delivery. The reports required by this Section will be submitted electronically in Excel Version 7 or Access Version 7 and in accordance with other specifications established by Novation from time to time and will be delivered to: Novation Attn: SRIS Operations 220 East Las Colinas Boulevard Irving, TX 75039 c. Other Information Requirements In addition to the reporting requirements set forth in Subsections 7.a and 7.b above, the parties agree to facilitate the administration of this Agreement by transmitting and receiving information electronically and by complying with the information requirements set forth in Exhibit E attached hereto Supplier further agrees that, except to the extent of any inconsistency with the provisions of this Agreement, it will comply with all information requirements set forth in the Novation Information Requirements Guidebook ("Guidebook"). On or about the Effective Date, Novation will provide Supplier with a current copy of the Guidebook and will thereafter provide Supplier with updates and/or revisions to the Guidebook from time to time. 8. OBLIGATIONS OF NOVATION. a. Information to Members and Authorized Distributors. After issuing the Award Letter, Novation, in conjunction with the Clients, will deliver a summary of the purchasing arrangements covered by this Agreement to each Member and each Authorized Distributor and will, from time to time, at the request of Supplier, deliver to each Member and each Authorized Distributor reasonable and appropriate amounts and types of materials supplied by Supplier to Novation which relate to the purchase of the Products. b. Marketing Services. Novation, in conjunction with the Clients, will market the purchasing arrangements covered by this Agreement to the Members. Such promotional services may include, as appropriate, the use of direct mail, contact by Novation's field service delivery team, member support services, and regional and national meetings and conferences As appropriate, Novation, in conjunction with the Clients, will involve Supplier in these promotional activities by inviting Supplier to participate in meetings and other reasonable networking activities with Members. 9. MARKETING FEES. a. Calculation. Supplier will pay to Novation, as the authorized collection agent for each of the Clients and certain of each Client's subsidiaries and affiliates, respectively (and not collectively), marketing lees ("Marketing Fees") belonging to any of the Clients om certain of their subsidiaries or affiliates equal to the Agreed Percentage of the aggregate gross charges of all net sales of the Products to the Members directly or indirectly from Supplier, whether under the pricing and other terms of this Agreement or under the terms of any other purchasing or pricing arrangements that may exist between the Members and Supplier. Such gross charges will be determined without any deduction for uncollected accounts or for costs incurred in the manufacture, provision, sale or distribution of the Products, and will include, but not be limited to, charges for the sale of products, the provision of installation, training and maintenance services, and the provision of any other services listed on Exhibit A. The "Agreed Percentage" will be defined in the Award Letter. b. Payment. On or about the Effective Date, Novation will advise Supplier in writing of the amount determined by Novation to be Supplier's monthly estimated Marketing Fees. Thereafter, Supplier's monthly estimated Marketing Fees may be adjusted from time to time upon written notice from Novation based on actual purchase data. No later than the tenth (10th) day of each month, Supplier will remit the monthly estimated Marketing Fees for such month to Novation. Such payment will be adjusted to reflect the reconciliation between the actual Marketing Fees payable for the second month prior to such month with the estimated Marketing Fees actually paid during such prior month. Supplier will pay all estimated and adjusted Marketing Fees by check made payable to "Novation, LL.C." All checks should reference the Agreement number, Supplier will include with its check the reconciliation calculation used by Supplier to determine the payment adjustment, with separate amounts shown for each Client's component thereof. Checks sent by first class mail will be mailed to the following address: Novation 75 Remittance Dr., Suite 1420 Chicago, IL 60675-1420 Checks sent by courier (Federal Express, United Parcel Service or messenger) will be addressed as follows: The Northern Trust Company 801 S. Canal St. 4th Floor Receipt & Dispatch Chicago, IL 60607 Attn: Novation, Suite 1420 Telephone: (312) 630-8100, #9 10. ADMINISTRATIVE DAMAGES. Novation and Supplier agree that Novation would incur additional administrative costs if Supplier fails to provide notice of change in pricing terms as required in Subsection 2.e above, fails to provide reports as required in Section 7 above, or fails to pay Marketing Fees as required in Section 9 above, in each case within the time and manner required by this Agreement. Novation and Supplier further agree that the additional administrative costs incurred by Novation by reason of any such failure to Supplier is uncertain, and they therefore agree that the following schedule of administrative damages constitutes a reasonable estimation of such costs and were determined according to the principles of just compensation: 1st failure written warning 2nd failure: $ 500.00 3rd failure: $ 1,000.00 4th failure: $ 2,500.00 5th failure: $ 5,000.00 6th & each subsequent failure: $10,000.00 Novation's right to recover administrative damages in accordance with this Section is in addition to any other rights and remedies Novation or the Clients may have by reason of Supplier's failure to pay the Marketing Fees or provide the reports or notices within the time and manner required by this Agreement. 11. NONPAYMENT OR INSOLVENCY OF AN AUTHORIZED DISTRIBUTOR If an Authorized Distributor fails to pay Supplier for Products, or if an Authorized Distributor becomes bankrupt or insolvent or makes an assignment for the benefit of creditors or goes into liquidation, or if proceedings are initiated for the purpose of having a receiving order or winding up order made against an Authorized Distributor, or if an Authorized Distributor applies to the court for protection from its creditors, then, in any such case, this Agreement will not terminate, but Supplier will have the right, upon prior written notice to Novation and the Members, to discontinue providing Products through that Authorized Distributor, and Supplier will thereafter provide Products to the Members directly Or through another Authorized Distributor, as directed by Novation. 12. INSURANCE. a. Policy Requirements. Supplier will maintain and keep in force during the Term product liability, general public liability and property damage insurance against any insurable claim or claims which might or could arise regarding Products purchased from Supplier. Such insurance will contain a minimum combined single limit of liability for bodily injury and property damage in the amounts of not less than $2,000,000 per occurrence and $10,000,000 in the aggregate; will name Novation, the Clients, the Members and the Authorized Distributors, as their interests may appear, as additional insureds, and will contain an endorsement providing that the carrier will provide directly to all named insured copies of all notices and endorsements. Supplier will provide to Novation in its Bid and thereafter within fifteen (15) days after Novation's request, an insurance certificate indicating the foregoing coverage, issued by an insurance company licensed to do business in the relevant states and signed by an authorized agent, b. Self-Insurance. Notwithstanding anything to the contrary in Subsection 12-a above, Supplier may maintain a self-insurance program for all or any part of the foregoing liability risks, provided such self-insurance policy in all material respects complies with the requirements applicable to the product liability, general public liability and property damage insurance set forth in Subsection 12.a. Supplier will provide Novation in its Bid, and thereafter within fifteen (15) days after Novation's request: (1) the self-insurance policy; (2) the name of the company managing the self-insurance program and providing reinsurance, if any; (3) the most recent annual reports on claims and reserves for the program; and (4) the most recent annual actuarial report on such program. c. Amendments, Notices and Endorsements. Supplier will not amend, in any material respect that affects the interests of Novation, the Clients, the Members or the Authorized Distributors, or terminate said liability insurance or self-insurance program except after thirty (30) days' prior written notice to Novation and will provide to Novation copies all notices and endorsements as soon as practicable after it receives or gives them. 13. COMPLIANCE WITH LAW AND GOVERNMENT PROGRAM PARTICIPATION. Compliance With Law. Supplier represents and warrants that to the best of its knowledge, after due inquiry, it is in compliance with all federal, state and local statutes, laws, ordinances and regulations applicable to it ("Legal Requirements") which are material to the operation of its business and the conduct of its affairs, including Legal Requirements pertaining to the safety of the Products, occupational health and safety, environmental protection, nondiscrimination, antitrust, and equal employment opportunity. During the Term, Supplier will: (1) promptly notify Novation of any lawsuits, claims, administrative actions or other proceedings asserted or commenced against it which assert in whole or in part that Supplier is in noncompliance with any Legal Requirement which is material] to the operation of its business and the conduct of its affairs and (2) promptly provide Novation With true and correct copies of all written notices of adverse findings from the U.S. Food and Drug Administration ("FDA") and all written results of FDA inspections which pertain to the Products, b. Government Program Participation. Supplier represents and warrants that it is not excluded from participation, and is not otherwise ineligible to participate, in a "Federal health care program" as defined in 42 U.S.C S l320a-7b(l) or in any other government payment program, In the event Supplier is excluded from participation, or becomes otherwise ineligible to participate in any such program during the Term, Supplier will notify Novation in writing within three (3) days after such event, and upon the occurrence of such event, whether or not such notice is given to t4ovation, Novation may immediately terminate this Agreement upon written notice to Supplier. 14 . RELEASE AND INDEMNITY, SUPPLIER WILL RELEASE, INDEMNITY HOLD HARM- LESS, AND, IF REQUESTED, DEFEND NOYATION, THE CLIENTS, THE MEMBERS AND THE AUTHORIZED DISTRIBUTORS, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, REGENTS, AGENTS, SUBSIDIARIES, AFFILIATES AND EMPLOYEES (COLLECTIVELY, THE "INDEMNITEES"), FROM AND AGAINST ANY CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE Al LORNEYS' FEES, EXPERT FEES AND COURT COSTS) OF ANY KIND OR NATURE, WHETHER AT LAW OR IN EQUITY, INCLUDING CLAIMS ASSERTING STRICT LIABILITY, ARISING FROM OR CAUSED IN ANY PART BY (1) THE BREACH OF ANY REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT OF SUPPLIER CONTAINED IN THIS AGREEMENT OR IN THE BID; (2) TUE CONDITION OF ANY PRODUCT, INCLUDING A DEFECT IN MATERIAL, WORICMANSHIP, DESIGN OR MANUFACTURING; OR (3) THE WARNINGS AND INSTRUCTIONS ASSOCIATED WITH ANY PRODUCT. SUCH OBLIGATION TO RELEASE, INDEMNIFY, HOLD HARMLESS AND DEFEND WILL APPLY EVEN IN THE CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES ARE CAUSED BY THE NEGLIGENCE, GROSS NEGLIGENCE OR OTHER CULPABLE CONDUCT OF INDEMNITEES; PROVIDED, HOWEVER, THAT SUCH INDEMNIFICATION, HOLD HARMLESS AND RIGHT TO DEFENSE WILL NOT SE APPLICABLE WHERE THE CLAIM, LIABILITY, DAMAGE, ACTION, COST OR EXPENSE ARISES SOLELY AS A RESULT OF AN ACT OR FAILURE To ACT OF INDEMNITEES. THIS SECTION AND THE OBLIGATIONS CONTAINED HEREIN WILL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS AGREEMENT. THE REMEDIES SET FORTH IN THIS SECTION ARE IN ADDITION TO AND NOT A LIMITATION ON ANY OTHER RIGHTS OR REMEDIES THAT MAY BE AVAILABLE AGAINST SUPPLIER. 15. BOOKS AND RECORDS; FACILITIES INSPECTIONS. Supplier agrees to keep, maintain and preserve complete, current and accurate books, records and accounts of the transactions contemplated by this Agreement and such additional books, records and accounts as are necessary to establish and verify Supplier's compliance with this Agreement. All such books, records and accounts will be available for inspection and audit by Novation representatives at any time during the Term and for two (2) years thereafter, but only during reasonable business hours and upon reasonable notice. Novation agrees that its routine audits will not be conducted more frequently than twice in any consecutive twelve (12) month period, subject to Novation's right to conduct special audits whenever it deems it to be necessary, in addition, Supplier will make its manufacturing and packaging facilities available for inspection from time to time during the Term by Novation representatives, but only during reasonable business hours and upon reasonable notice. The exercise by Novation of the right to inspect and audit is without prejudice to any other or additional rights or remedies of either party, 16. USE OF NAMES, ETC. Supplier agrees that it will not use in any way in its promotional, informational or marketing activities or materials (i) the names, trademarks, logos, symbols or a description of the business or activities of Novation or any Client, Authorized Distributor or Member without in each instance obtaining the prior written consent of the person owning the rights thereto; or (ii) the award or the content of this Agreement without in each instance obtaining the prior written consent of Novation. 17. CONFIDENTIAL INFORMATION. a. Nondisclosure. Supplier agrees that it will: (1) keep strictly confidential and hold in trust all Confidential Information, as defined in Subsection l7.b below, of Novation, the Clients, the Authorized Distributors and the Members; (2) not use the Confidential Information for any purpose other than the performance of its obligations under this Agreement, without the prior written consent of Novation; (3) not disclose the Confidential Information to any third party (unless required by law) without the prior written consent of Novation; and (4) not later than thirty (30) days after the expiration or earlier termination of this Agreement, return to Novation, the Client, the Authorized Distributor or the Member, as the case may be, the Confidential Information. b. Definition, "Confidential Information," as used in Subsection 17.a above, will consist of all information relating to the prices and usage of the Products (including all information contained in the reports produced by Supplier pursuant to Section 7 above) and all documents and other materials of Novation, the Clients, the Authorized Distributors and the Members containing information relating to the programs of Novation, the Clients, the Authorized Distributors or the Members of a proprietary or sensitive nature not readily available through sources in the public domain. In no event will Supplier provide to any person any information relating to the prices it charges the Authorized Distributors for Products ordered pursuant to this Agreement without the prior written consent of Novation. 18. MISCELLANEOUS a. Choice of Law. This Agreement will be governed by and construed in accordance with the internal substantive laws of the State of Texas and the Texas courts will have jurisdiction over all matters relating to this Agreement; provided, however, the terms of any agreement between Supplier and an Authorized distributor or between Supplier and a Member will be governed by and construed in accordance with the choice of law and venue provisions set forth in such agreement. b. Not Responsible. Novation and the Clients and their subsidiaries and affiliates will not be responsible or liable for any Authorized Distributor's breach of any purchasing commitment or for any other actions of any Authorized Distributor or Member. In addition, none of the Clients will be responsible or liable for the obligations of another Client or its subsidiaries or affiliates or the obligations of Novation or Supplier under this Agreement. c. Third Party Beneficiaries. All Clients, Authorized Distributors and Members are intended third party beneficiaries of this Agreement. All terms and conditions of this Agreement which are applicable to the Clients will inure, to the benefit of and be enforceable by the Clients and their respective successors and assigns. All terms and conditions of this Agreement which are applicable to the Authorized Distributors will inure to the benefit of and be enforceable by the Authorized Distributors and their respective successors and assigns. All terms and conditions of this Agreement which are applicable to the Members will inure to the benefit of and be enforceable by the Members and their respective successors and assigns. d. Notices. Except as otherwise expressly provided herein, all notices or other communications required or permitted under this Agreement will be in writing and will be deemed sufficient when mailed by United States mail, or delivered in person to the party to which it is to be given, at the address of such party set forth below: If to Supplier: To the address set forth by Supplier in the Bid If to Novation: Novation Attn: General Counsel 220 East Las Colinas Blvd. Irving, TX 75039 or such other address as the party will have furnished in writing in accordance with the provisions of this Subsection. e. No Assignment. No assignment of all or any part of this Agreement may be made without the prior written consent of the other party; except that Novation may assign its rights and obligations to any affiliate of Novation. Any assignment of all or any part of this Agreement by either party will not relieve that party of the responsibility of performing its obligations hereunder to the extent that such obligations are not satisfied in flail by the assignee. This Agreement will be binding upon and inure to the benefit of the parties' respective successors and assigns. f. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a mariner as to be effective and valid tinder applicable law, but if any provision of this Agreement will be prohibited by or invalid under applicable law, such provision will be ineffective to the extent of' such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement- Each party will, at its own expense, take such action as is reasonably necessary to defend the validity and enforceability of this Agreement and will cooperate with the other party as is reasonably necessary in such defense. g. Entire Agreement. This Agreement, together with the exhibits listed below, will constitute the entire agreement between Novation arid Supplier. This Agreement, together with the exhibits listed below and each Authorized Distributor's purchase order will constitute the entire agreement between each Authorized Distributor and Supplier. In the event of any inconsistency between this Agreement and an Authorized Distributor's purchase order, the terms of this Agreement will control, except that the Authorized Distributor's purchase order will supersede Sections 4 and 5 of this Agreement in the event of any inconsistency with such Sections. No other terms and conditions in any document, acceptance, or acknowledgment will be effective or binding unless expressly agreed to in writing. The following exhibits are incorporated by reference in this Agreement: Exhibit A Product and Service Description and Pricing Exhibit B Non-Price Specifications Exhibit C Terms of Supplier's Participation in Committed Programs Exhibit D Award Letter Exhibit E Other Information Requirements [Other Exhibits Listed, if any SUPPLIER: Carrington Laboratories, Inc. ADDRESS: 2001 Walnut Hill Lane trying, TX 75038 SIGNATURE: /s/ ---------------------------- TITLE: President and CEO DATE: August 6, 1999 EX-10.81 25 Exhibit 10.81 For Purchases Through an Authorized Distributor Subject to Competitive Bid Process SUPPLIER AGREEMENT Between NOVATION, LLC and Carrington ---------- MS91032 ------- NOVATION, LLC SUPPLIER AGREEMENT 1. Introduction a. Purchasing opportunities for Members. Novation, LLC ("Novation") is engaged in providing purchasing opportunities with respect to high quality products and services to participating health care providers ("Members"). Members are entitled to participate in Novation's programs through their membership or other participatory status in any of the following client organizations: VHA Inc., University HealthSystem Consortium, and HealthCare Purchasing Partners International, LLC (collectively, "Clients"). Novation is acting as the exclusive agent for each of the Clients and certain of each Client's subsidiaries and affiliates, respectively (and not collectively), with respect to this Agreement A current listing of Members is maintained by Novation in the electronic database described in the Guidebook referred to in Subsection 7,c below ("Novation Database"). A provider will become a "Member" for purposes of this Agreement at the time Novation adds the provider to the Novation Database and will cease to be a "Member" for such purposes at the time Novation deletes the provider from the Novation Database. b. Authorized Distributors. Novation and/or the Clients have entered into arrangements with certain distributors ("Authorized Distributors") that have agreed to distribute the Products to Members. A current listing of Authorized Distributors is maintained by Novation in the Novation Database. A distributor will become an "Authorized Distributor" for purposes of this Agreement at the time Novation adds the distributor to the Novation Database and will cease to be an "Authorized Distributor" for such purposes at the time Novation deletes the distributor from the Novation Database. Any limitations on the scope of an Authorized Distributor's authority will also be set forth in the Novation Database. By reason of requirements of law, regulation or internal policy of certain Members, from time to time Novation may identify underutilized businesses as Authorized Distributors, c. Supplier. Supplier is the manufacturer of products listed on Exhibit A, the provider of installation, training and maintenance services for such products, and the provider of any other services listed on Exhibit A (such products and/or services are collectively referred to herein as "Products"), d. Bid. Supplier has responded to Novation's Invitation to Bid by submitting its written offer ("Bid") to Novation consisting of this Agreement, the listing of Products and pricing therefor ("Award Prices") attached hereto as Exhibit A, the other specifications attached hereto as Exhibit B ("Non-Price Specifications"), the Terms of Supplier's Participation in Committed Programs attached hereto as Exhibit C, and any other materials required to be submitted in accordance with the Bid Instructions. 2. CONTRACT AWARD. a. Letter of Award, By executing and delivering the Letter of Award attached hereto as Exhibit D ("Award Letter") to Supplier, Novation will have accepted the Bid, and Novation and Supplier therefore agree that Supplier will make the Products available for purchase by the Authorized Distributors at the Award Prices for resale to the Members in accordance with the terms of this Agreement; provided, however, that Novation's award of this Agreement to Supplier will not constitute a Commitment by any person to purchase any of the Products, No obligations of Novation set forth in this Agreement will be valid or enforceable against Novation unless and until the Award Letter has been duly executed by Novation and attached as an exhibit hereto. Supplier acknowledges that, in making its award to Supplier, Novation has materially relied on all representations, Warranties and agreements made by Supplier as part of the Bid and that all such representations, warranties and agreements will survive acceptance of the Bid. b. Optional Purchasing Arrangement, Novation and Supplier agree that each Member will have the option of purchasing the Products tinder the terms of this Agreement or under the terms of any other purchasing or pricing arrangement that may exist between such Member and Supplier at any time during the Term; provided, however, that, regardless of the arrangement, Supplier will comply with Sections 7 and 9 below. If any Member uses any other purchasing or pricing arrangement with Supplier when ordering products covered by any contract between Supplier and Novation, Supplier will notify such Member of the pricing and other significant terms of the applicable Novation contract. c. Market Competitive Terms. Supplier agrees that the prices, quality, value and technology of all Products purchased under this Agreement will remain market competitive at all times during the Term. Supplier agrees to provide prompt written notice to Novation of all offers for the sale of the Products made by Supplier during the Term on terms that are more favorable to the offeree than the terms of this Agreement. Supplier will lower the Award Prices or increase arty discount' applicable to the purchase of the Products as necessary to assure market competitiveness. If at any time during the Term Novation receives information from any source suggesting that Supplier's prices, quality, value or technology are not market competitive, Novation may provide written notice of such information to Supplier, and Supplier will, within live (5) business days for Novation's private label Products and within ten (10) business days for all other Products, advise Novation in writing of and fully implement all adjustments necessary to assure market competitiveness. d. Changes in Award Prices. Unless otherwise expressly agreed in any exhibit to this Agreement, the Award Prices will not be increased and any discount will not be eliminated or reduced during the Term. In addition to any changes made to assure market competitiveness, Supplier may lower the Award Prices or increase any discount applicable to the purchase of the Products at any time. e. Notification of Changes in Pricing Terms. Supplier will provide not less than sixty (60) days' prior written notice to Novation and not less than forty-five (45) days' prior written notice to all Authorized Distributors of any change in pricing terms permitted or required by this Agreement. For purposes of the foregoing notification requirements, a change in pricing terms will mean any change that affects the delivered price to the Member, including, without limitation, changes in list prices, discounts or pricing tiers or schedules. Such prior written notice will be provided in such format and in such detail as they be required by Novation from time to time, and will include, at a minimum, sufficient information to determine line item pricing of the Products for all affected Members. f. Underutilized Businesses. Certain Members may be required by law, regulation and/or internal policy to do business with underutilized businesses such as Minority Business Enterprises (MBE), Disadvantaged Business Enterprises (ORE), Small Business Enterprises (SEE), Historically Underutilized Businesses (HUB) and/or Women-owned Business Enterprises (WBE). To assist Novation in helping Members meet these requirements, Supplier will comply with all Novation policies and programs with respect to such businesses and will provide, on request, Novation or any Member with statistical or other information with respect to Supplier's utilization of such businesses as a vendor, distributor, contractor or subcontractor. 3. TERM AND TERMINATION. a. Term. This Agreement will be effective as of the effective date set forth in the Award Letter ("Effective Date"), and, unless sooner terminated, will continue in full force and effect for the initial term as set forth in the Non-Price Specifications and for any renewal terms set forth in the Non-Price Specifications by Novation's delivery of written notice of renewal to Supplier not less than ten (10) days prior to the end of the initial term or any renewal tern, as applicable. The initial term, together with the renewal terms if any, are collectively referred to herein as the "Term." b. Termination by Novation. Novation may terminate this Agreement at any time for any reason whatsoever by delivering not less than ninety (90) days' prior written notice thereof to Supplier, In addition, Novation may terminate this Agreement immediately by delivering written notice thereof to Supplier upon the occurrence of either of the following events: (1) Supplier breaches this Agreement; or (2) Supplier becomes bankrupt or insolvent or makes an unauthorized assignment or goes into liquidation or proceedings are initiated for the purpose of having a receiving order or winding up order made against Supplier or Supplier applies to the courts for protection from its creditors. Novation's right to terminate this Agreement due to Supplier's breach in accordance with this Subsection is in addition to any other rights and remedies Novation, the Clients, the Members or the Authorized Distributors may have resulting from such breach, including, but not limited to, Novation's and the Clients' right to recover all loss of Marketing Fees resulting from such breach through the date of termination and for one hundred eighty (180) days thereafter. c. Termination by Supplier. Supplier may terminate this Agreement at any time for any reason whatsoever by delivering not less than one hundred eighty (180) days' prior written notice thereof to Novation. 4. PRODUCT SUPPLY. a. Delivery and Invoicing. On and after the Effective Date, Supplier agrees to deliver Products ordered by the Authorized Distributors on behalf of Members to the Authorized Distributors, FOB destination, and will direct its invoices to the Authorized Distributors in accordance with this Agreement. Supplier agrees to prepay and absorb charges, if any, for transporting Products to the Authorized Distributors. Payment terms are 2%-30, Net 31 days. Supplier will make whatever arrangements are reasonably necessary with the Authorized Distributors to implement the terms of this Agreement; provided, however, Supplier will not impose any purchasing commitment on any Member or Authorized Distributor as a condition to the Member's or Authorized Distributor's purchase of any Products pursuant to this Agreement. b. Product Fill Rates: Confirmation and Delivery Times. Supplier agrees to provide product till rates to the Authorized Distributors of greater than ninety-five percent (95%), calculated as line item orders. Supplier will provide confirmation of orders from the Authorized Distributors via the electronic data interchange described in the Guidebook referred to in Subsection 7.c below within two (2) business days after placement of the order and will deliver the Products to the Authorized Distributors within ten (10) business days after placement of the order. c. Bundled Terms. Supplier agrees to give Novation prior written notice of any offer Supplier makes to any Member or Authorized Distributor to sell products that are not covered by this Agreement in conjunction with Products covered by this Agreement under circumstances where the Member or Authorized Distributor has no real economic choice other than to accept such bundled terms, d. Discontinuation of Products: Changes in Packaging. Supplier will have no unilateral right to discontinue any of the Products or to make any changes in packaging which render any of the Products substantially different in use, function or distribution. Supplier may request Novation in writing to agree to a proposed discontinuation of any Products or a proposed change in packaging for any Products at least ninety (90) days prior to the proposed implementation of the discontinuation or change. Under no circumstances will any Product discontinuation or packaging changes be permitted under this Agreement without Novation's agreement to the discontinuation or change. In the event Supplier implements such proposed discontinuation or change without Novation's agreement thereto in writing, in addition to any other rights and remedies Novation or the Members may have by reason of such discontinuation or change, (i) Novation will have the right to terminate any or all of the Product(s) subject to such discontinuation or change or to terminate this Agreement in its entirety immediately upon becoming aware of the discontinuation or change or any time thereafter by delivering written notice thereof to Supplier; (ii) the' Members may purchase products equivalent to the discontinued or changed Products from other sources and Supplier will be liable to the Members for all reasonable costs in excess of the Award Prices plus any other damages which they may incur; and (iii) Supplier will be liable to Novation and the Clients for any loss of Marketing Fees resulting from such unacceptable discontinuation or change plus any other damages which they may incur. e. Replacement or New Products. Supplier will have no unilateral right to replace any of the Products listed in Exhibit A with other products or to add new products to this Agreement. Supplier may request Novation in writing to agree to a replacement of any of the Products or the addition of a new product that is closely related by function or use to an existing Product at least sixty (60) days prior to the proposed implementation of the replacement or to the new product introduction. Under no circumstances will any Product replacement or new product addition to this Agreement be permitted without Novation's agreement to the replacement or new product. f. Member Services. Supplier will consult with each Member to identify the Member's policies relating to access to facilities and personnel. Supplier will comply with such policies and will establish a specific timetable for sales calls by sales representatives to satisfy the needs of the Member. Supplier will promptly respond to Members' reasonable requests for verification of purchase history. If requested by Novation or any Members. Supplier will provide, at Supplier's cost, on-site inservice training to Members' personnel for pertinent Products. g. Product Deletion. Notwithstanding anything to the contrary contained in this Agreement, Novation may delete any one or more of the Products from this Agreement at any time, at will and without cause, upon not less than sixty (60) days' prior written notice to Supplier. h. Return of Products. Any Member or Authorized Distributor, in addition to and not in limitation of any other rights and remedies, will have the right to return Products to Supplier under any of the following circumstances; (1) the Product is ordered or shipped in error; (2) the Product is no longer needed by the Member due to deletion from its standard supply list or changes in usage patterns, provided the Product is returned at least six (6) months prior to its expiration date and is in a re-salable condition; (3) the Product is received outdated or is otherwise unusable; (4) the Product is received damaged, or is defective or nonconforming; (5) the Product is one which a product manufacturer or supplier specifically authorizes for return through a distributor; and (6) the Product is recalled. Supplier agrees to accept the return of Products under these circumstances without charge and for full credit. i. Failure to Supply, In the event of Supplier's failure to perform its supply obligations in accordance with the terms of this Section 4, the Member or the Authorized Distributor may purchase products equivalent to the Products from other sources and Supplier will be liable to the Member or the Authorized Distributor for all reasonable costs in excess of the Award Prices plus any other damages which they may incur. In such event, Supplier will also be liable to Novation and the Clients for any loss of Marketing Fees resulting from such failure plus any other damages which they may incur. The remedies set forth in this Subsection are in addition to any other rights and remedies Novation, the Clients, the Members or the Authorized Distributors may have resulting from such failure. 5. PRODUCT QUALITY. a. Free From Defects. Supplier warrants the Products against defects in material, workmanship, design and manufacturing. Supplier will make all necessary arrangements to assign such warranty to the Members. Supplier further represents and warrants that the Products will conform to the specifications, drawings, and samples furnished by Supplier or contained in the Non-price Specifications and will be safe for their intended use. If any Products are defective and a claim is made by a Member or an Authorized Distributor on account of such defect, Supplier will, at the option of the Member or the Authorized Distributor, either replace the defective Products or credit the Member or the Authorized Distributor. Supplier will bear all costs of returning and replacing the defective Products, as well as all risk of loss or damage to the defective Products from and after the time they leave the physical possession of the Member or the Authorized Distributor. The warranties contained in this Subsection will survive any inspection, delivery, acceptance or payment by a Member or an Authorized Distributor. In addition, if there is at any time wide- spread failure of the Products, the Member or the Authorized Distributor may return all said Products for credit or replacement, at its option. This Subsection and the obligations contained herein will survive the expiration or earlier termination of this Agreement. The remedies set forth in this Subsection are in addition to and not a limitation on any other rights or remedies that may be available against Supplier. b. Product Compliance. Supplier represents and warrants to Novation, the Clients, the Authorized Distributors and the Members that the Products are, if required, registered, and will not be distributed, sold or priced by Supplier in violation of any federal, state or local law. Supplier represents and warrants that as of the date of delivery to the Authorized Distributors all Products will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act and will not violate or cause a violation of any applicable law, ordinance, rule, regulation or order, Supplier agrees it will comply with all applicable Good Manufacturing Practices and Standards contained in 21 C.F.R- Parts 210, 211, 225, 226, 600, 606, 610, 640, 660, 680 and 820. Supplier represents and warrants that it will provide adequate warnings and instructions to inform users of the Products of the risks, if any, associated with the use of the Products. Supplier's representations; warranties and agreements in this Subsection will survive the expiration or earlier termination of this Agreement. c. Patent Infringement. Supplier represents and warrants that sale or use of the Products will not infringe any United States patent Supplier will, at its own expense, defend every suit which will be brought against Novation, a Member or an Authorized Distributor for any alleged infringement of any patent by reason of the sale or use of the Products and will pay all costs, damages and profits recoverable in arty such suit. This Subsection and the obligations contained herein will survive the expiration or earlier termination of this Agreement. The remedies set forth in this Subsection are in addition to and not a limitation on any other rights or remedies that may be available against Supplier d. Product Condition. Unless otherwise stated in the Non- Price Specifications or unless agreed upon by a Member in connection with Products it may order, all Products will be new. Products which are demonstrators, used, obsolete, seconds, or which have been discontinued are unacceptable unless otherwise specified in the Non- Price Specifications or the Member accepts delivery after receiving notice of the condition of the Products. e. Recall of Products. Supplier will reimburse Authorized Distributors and Members for any cost associated with any Product corrective action, withdrawal or recall requested by Supplier or required by any governmental entity. In the event a product recall or a court action impacting supply occurs, Supplier will notify Novation in writing within twenty-four (24) hours of any such recall or action. Supplier's obligations in this Subsection will survive the expiration or earlier termination of this Agreement. f. Shelf Life. Sterile Products arid other Products with a limited shelf life sold under this Agreement will have the longest possible shelf life and the latest possible expiration dates. Unless required by stability considerations, there will not be less than an eighteen (18) month interval between a Product's date of delivery by Supplier to the Authorized Distributor and its expiration date. 6. CENTURY COMPLIANCE a. Definitions. For purposes of this Section, the following terms have the respective meanings given below: (1) "Systems" means any of the Products, systems of distribution for Products and Product manufacturing systems that consist of or include any computer software, computer firmware, computer hardware (whether general or special purpose), documentation, data, and other similar or related items of the automated, computerized, and/or software systems that are provided by or through Supplier or utilized to manufacture or distribute the Products provided by or through Supplier pursuant to this Agreement, or any component part thereof, and any services provided by or through Supplier in connection therewith. (2) "Calendar-Related" refers to date values based on the "Gregorian calendar" (as defined in the Encyclopedia Britannica, 15th edition. 1982, page 602) and to all uses in any manner of those date values, including without limitation manipulations, calculations, conversions, comparisons, and presentations. (3) "Century Noncompliance" means any aspects of the Systems that fail to satisfy the requirements set forth in Subsection 6.b below. b. Representations. Supplier warrants, represents and agrees that the Systems satisfy the following requirements: (1) In connection with the use and processing of Calendar- Related data, the Systems will not malfunction, will not cease to function, will not generate incorrect data, and will not produce incorrect results. (2) In connection with providing Calendar-Related data to and accepting Calendar-Related data from other automated, computerized, and/or software systems and users via user interfaces, electronic interfaces, and data storage, the Systems represent dates without ambiguity as to century. (3) The year component of Calendar-Related data that is provided by the Systems to or that is accepted by the Systems from other automated, computerized, and/or software systems and user interfaces, electronic interfaces, and data storage is represented in a four-digit CCYY format, where CC represents the two digits expressing the century and YY represents the two digits expressing the year within that century (e.g, 1996 or 2003). (4) Supplier has verified through testing that the Systems satisfy the requirements of this Subsection including, without limitation, testing of each of the following specific dates and the transition to and from each such date: September 9,1999; September 10, 1999; December 31, 1999; January 1, 2000; February 28, 2000;February 29, 2000; March 1, 2000; December 31, 2000; January 1, 2001; December 31,2004; and January 1, 2005. c. Remedies. In the event of any Century Noncompliance in the Systems in any respect, in addition to any other remedies that may be available to Novation or the Members, Supplier will, at no cost to the Members, promptly under the circumstances (but, in all cases, within thirty (30) days after receipt of a written request from any Member, unless otherwise agreed by the Member in writing) eliminate the Century Noncompliance from the Systems. d. Noncompliance Notice. In the event Supplier becomes aware of (i) any possible or actual Century Noncompliance in the Systems or (ii) any international, governmental, industrial, or other standard (proposed or adopted) regarding Calendar.Related data and/or processing, or Supplier begins any significant effort to conform the Systems to any such standard, Supplier will promptly provide the Members with all relevant information in writing and will timely provide the Members with updates to such information. Supplier will respond promptly and fully to inquiries by the Members, and timely provide updates to any responses provided to the Members, with respect to (i) any possible or actual Century Noncompliance in the Systems or (ii) any international, governmental, industrial, or other standards. in the foregoing, the use of "timely" means promptly after the relevant information becomes known to or is developed by or for Supplier. e. Survival. Supplier's representations, warranties and agreements in this Section will continue in effect throughout the Term and will survive the expiration or earlier termination of this Agreement 7. REPORTS AND OTHER INFORMATION REQUIREMENTS. a. Report Content. Within twenty (20) days after the end of each full and partial month during the Term ("Reporting Month"), Supplier will submit to Novation a report in the form of a diskette containing the following information, in form and content reasonably satisfactory to Novation: (1) the name of Supplier, the Reporting Month and year and the Agreement number (as provided to Supplier by Novation); (2) with respect to each Member (described by LIC number (as provided to Supplier by Novation), health industry number (if applicable), full name, street address, city, state, zip code and, if applicable, tier and committed status), the number of units sold and the amount of net sales for each Product on a line item basis, and the sum of net sales and the associated Marketing Fees for all Products purchased by such Member directly or indirectly from Supplier during the Reporting Month, whether under the pricing and other terms of this Agreement or under the terms of any other purchasing or pricing arrangements that may exist between the Member and Supplier; (3) the sum of the net sales and the associated Marketing Fees for all Products sold to all Members during the Reporting Month; and (4) such additional information as Novation may reasonably request from time to time b. Report Format and Delivery. The reports required by this Section will be submitted electronically in Excel Version 7 or Access Version 7 and in accordance with other specifications established by Novation from time to time and will be delivered to: Novation Attn: SRIS Operations 220 East Las Colinas Boulevard Irving, TX 75039 c. Other Information Requirements In addition to the reporting requirements set forth in Subsections 7.a and 7.b above, the parties agree to facilitate the administration of this Agreement by transmitting and receiving information electronically and by complying with the information requirements set forth in Exhibit E attached hereto Supplier further agrees that, except to the extent of any inconsistency with the provisions of this Agreement, it will comply with all information requirements set forth in the Novation Information Requirements Guidebook ("Guidebook"). On or about the Effective Date, Novation will provide Supplier with a current copy of the Guidebook and will thereafter provide Supplier with updates and/or revisions to the Guidebook from time to time. 8. OBLIGATIONS OF NOVATION. a. Information to Members and Authorized Distributors. After issuing the Award Letter, Novation, in conjunction with the Clients, will deliver a summary of the purchasing arrangements covered by this Agreement to each Member and each Authorized Distributor and will, from time to time, at the request of Supplier, deliver to each Member and each Authorized Distributor reasonable and appropriate amounts and types of materials supplied by Supplier to Novation which relate to the purchase of the Products. b. Marketing Services. Novation, in conjunction with the Clients, will market the purchasing arrangements covered by this Agreement to the Members. Such promotional services may include, as appropriate, the use of direct mail, contact by Novation's field service delivery team, member support services, and regional and national meetings and conferences As appropriate, Novation, in conjunction with the Clients, will involve Supplier in these promotional activities by inviting Supplier to participate in meetings and other reasonable networking activities with Members. 9. MARKETING FEES. a. Calculation. Supplier will pay to Novation, as the authorized collection agent for each of the Clients and certain of each Client's subsidiaries and affiliates, respectively (and not collectively), marketing lees ("Marketing Fees") belonging to any of the Clients om certain of their subsidiaries or affiliates equal to the Agreed Percentage of the aggregate gross charges of all net sales of the Products to the Members directly or indirectly from Supplier, whether under the pricing and other terms of this Agreement or under the terms of any other purchasing or pricing arrangements that may exist between the Members and Supplier. Such gross charges will be determined without any deduction for uncollected accounts or for costs incurred in the manufacture, provision, sale or distribution of the Products, and will include, but not be limited to, charges for the sale of products, the provision of installation, training and maintenance services, and the provision of any other services listed on Exhibit A. The "Agreed Percentage" will be defined in the Award Letter. b. Payment. On or about the Effective Date, Novation will advise Supplier in writing of the amount determined by Novation to be Supplier's monthly estimated Marketing Fees. Thereafter, Supplier's monthly estimated Marketing Fees may be adjusted from time to time upon written notice from Novation based on actual purchase data. No later than the tenth (10th) day of each month, Supplier will remit the monthly estimated Marketing Fees for such month to Novation. Such payment will be adjusted to reflect the reconciliation between the actual Marketing Fees payable for the second month prior to such month with the estimated Marketing Fees actually paid during such prior month. Supplier will pay all estimated and adjusted Marketing Fees by check made payable to "Novation, LLC." All checks should reference the Agreement number, Supplier will include with its check the reconciliation calculation used by Supplier to determine the payment adjustment, with separate amounts shown for each Client's component thereof. Checks sent by first class mail will be mailed to the following address: Novation 75 Remittance Dr., Suite 1420 Chicago, IL 60675-1420 Checks sent by courier (Federal Express, United Parcel Service or messenger) will be addressed as follows: The Northern Trust Company 801 S. Canal St. 4th Floor Receipt & Dispatch Chicago, IL 60607 Attn: Novation, Suite 1420 Telephone: (312) 630-8100, #9 10. ADMINISTRATIVE DAMAGES. Novation and Supplier agree that Novation would incur additional administrative costs if Supplier fails to provide notice of change in pricing terms as required in Subsection 2.e above, fails to provide reports as required in Section 7 above, or fails to pay Marketing Fees as required in Section 9 above, in each case within the time and manner required by this Agreement. Novation and Supplier further agree that the additional administrative costs incurred by Novation by reason of any such failure to Supplier is uncertain, and they therefore agree that the following schedule of administrative damages constitutes a reasonable estimation of such costs and were determined according to the principles of just compensation: 1st failure written warning 2nd failure: $ 500.00 3rd failure: $ 1,000.00 4th failure: $ 2,500.00 5th failure: $ 5,000.00 6th & each subsequent failure: $10,000.00 Novation's right to recover administrative damages in accordance with this Section is in addition to any other rights and remedies Novation or the Clients may have by reason of Supplier's failure to pay the Marketing Fees or provide the reports or notices within the time and manner required by this Agreement. 11. NONPAYMENT OR INSOLVENCY OF AN AUTHORIZED DISTRIBUTOR If an Authorized Distributor fails to pay Supplier for Products, or if an Authorized Distributor becomes bankrupt or insolvent or makes an assignment for the benefit of creditors or goes into liquidation, or if proceedings are initiated for the purpose of having a receiving order or winding up order made against an Authorized Distributor, or if an Authorized Distributor applies to the court for protection from its creditors, then, in any such case, this Agreement will not terminate, but Supplier will have the right, upon prior written notice to Novation and the Members, to discontinue providing Products through that Authorized Distributor, and Supplier will thereafter provide Products to the Members directly Or through another Authorized Distributor, as directed by Novation. 12. INSURANCE. a. Policy Requirements. Supplier will maintain and keep in force during the Term product liability, general public liability and property damage insurance against any insurable claim or claims which might or could arise regarding Products purchased from Supplier. Such insurance will contain a minimum combined single limit of liability for bodily injury and property damage in the amounts of not less than $2,000,000 per occurrence and $10,000,000 in the aggregate; will name Novation, the Clients, the Members and the Authorized Distributors, as their interests may appear, as additional insureds, and will contain an endorsement providing that the carrier will provide directly to all named insured copies of all notices and endorsements. Supplier will provide to Novation in its Bid and thereafter within fifteen (15) days after Novation's request, an insurance certificate indicating the foregoing coverage, issued by an insurance company licensed to do business in the relevant states and signed by an authorized agent, b. Self-Insurance. Notwithstanding anything to the contrary in Subsection 12-a above, Supplier may maintain a self-insurance program for all or any part of the foregoing liability risks, provided such self-insurance policy in all material respects complies with the requirements applicable to the product liability, general public liability and property damage insurance set forth in Subsection 12.a. Supplier will provide Novation in its Bid, and thereafter within fifteen (15) days after Novation's request: (1) the self-insurance policy; (2) the name of the company managing the self-insurance program and providing reinsurance, if any; (3) the most recent annual reports on claims and reserves for the program; and (4) the most recent annual actuarial report on such program. c. Amendments, Notices and Endorsements. Supplier will not amend, in any material respect that affects the interests of Novation, the Clients, the Members or the Authorized Distributors, or terminate said liability insurance or self-insurance program except after thirty (30) days' prior written notice to Novation and will provide to Novation copies all notices and endorsements as soon as practicable after it receives or gives them. 13. COMPLIANCE WITH LAW AND GOVERNMENT PROGRAM PARTICIPATION. Compliance With Law. Supplier represents and warrants that to the best of its knowledge, after due inquiry, it is in compliance with all federal, state and local statutes, laws, ordinances and regulations applicable to it ("Legal Requirements") which are material to the operation of its business and the conduct of its affairs, including Legal Requirements pertaining to the safety of the Products, occupational health and safety, environmental protection, nondiscrimination, antitrust, and equal employment opportunity. During the Term, Supplier will: (1) promptly notify Novation of any lawsuits, claims, administrative actions or other proceedings asserted or commenced against it which assert in whole or in part that Supplier is in noncompliance with any Legal Requirement which is material] to the operation of its business and the conduct of its affairs and (2) promptly provide Novation With true and correct copies of all written notices of adverse findings from the U.S. Food and Drug Administration ("FDA") and all written results of FDA inspections which pertain to the Products, b. Government Program Participation. Supplier represents and warrants that it is not excluded from participation, and is not otherwise ineligible to participate, in a "Federal health care program" as defined in 42 U.S.C S l320a-7b(l) or in any other government payment program, In the event Supplier is excluded from participation, or becomes otherwise ineligible to participate in any such program during the Term, Supplier will notify Novation in writing within three (3) days after such event, and upon the occurrence of such event, whether or not such notice is given to t4ovation, Novation may immediately terminate this Agreement upon written notice to Supplier. 14 . RELEASE AND INDEMNITY, SUPPLIER WILL RELEASE, INDEMNITY HOLD HARM- LESS, AND, IF REQUESTED, DEFEND NOYATION, THE CLIENTS, THE MEMBERS AND THE AUTHORIZED DISTRIBUTORS, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, REGENTS, AGENTS, SUBSIDIARIES, AFFILIATES AND EMPLOYEES (COLLECTIVELY, THE "INDEMNITEES"), FROM AND AGAINST ANY CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE Al LORNEYS' FEES, EXPERT FEES AND COURT COSTS) OF ANY KIND OR NATURE, WHETHER AT LAW OR IN EQUITY, INCLUDING CLAIMS ASSERTING STRICT LIABILITY, ARISING FROM OR CAUSED IN ANY PART BY (1) THE BREACH OF ANY REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT OF SUPPLIER CONTAINED IN THIS AGREEMENT OR IN THE BID; (2) TUE CONDITION OF ANY PRODUCT, INCLUDING A DEFECT IN MATERIAL, WORICMANSHIP, DESIGN OR MANUFACTURING; OR (3) THE WARNINGS AND INSTRUCTIONS ASSOCIATED WITH ANY PRODUCT. SUCH OBLIGATION TO RELEASE, INDEMNIFY, HOLD HARMLESS AND DEFEND WILL APPLY EVEN IN THE CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES ARE CAUSED BY THE NEGLIGENCE, GROSS NEGLIGENCE OR OTHER CULPABLE CONDUCT OF INDEMNITEES; PROVIDED, HOWEVER, THAT SUCH INDEMNIFICATION, HOLD HARMLESS AND RIGHT TO DEFENSE WILL NOT SE APPLICABLE WHERE THE CLAIM, LIABILITY, DAMAGE, ACTION, COST OR EXPENSE ARISES SOLELY AS A RESULT OF AN ACT OR FAILURE To ACT OF INDEMNITEES. THIS SECTION AND THE OBLIGATIONS CONTAINED HEREIN WILL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS AGREEMENT. THE REMEDIES SET FORTH IN THIS SECTION ARE IN ADDITION TO AND NOT A LIMITATION ON ANY OTHER RIGHTS OR REMEDIES THAT MAY BE AVAILABLE AGAINST SUPPLIER. 15. BOOKS AND RECORDS; FACILITIES INSPECTIONS. Supplier agrees to keep, maintain and preserve complete, current and accurate books, records and accounts of the transactions contemplated by this Agreement and such additional books, records and accounts as are necessary to establish and verify Supplier's compliance with this Agreement. All such books, records and accounts will be available for inspection and audit by Novation representatives at any time during the Term and for two (2) years thereafter, but only during reasonable business hours and upon reasonable notice. Novation agrees that its routine audits will not be conducted more frequently than twice in any consecutive twelve (12) month period, subject to Novation's right to conduct special audits whenever it deems it to be necessary, in addition, Supplier will make its manufacturing and packaging facilities available for inspection from time to time during the Term by Novation representatives, but only during reasonable business hours and upon reasonable notice. The exercise by Novation of the right to inspect and audit is without prejudice to any other or additional rights or remedies of either party, 16. USE OF NAMES, ETC. Supplier agrees that it will not use in any way in its promotional, informational or marketing activities or materials (i) the names, trademarks, logos, symbols or a description of the business or activities of Novation or any Client, Authorized Distributor or Member without in each instance obtaining the prior written consent of the person owning the rights thereto; or (ii) the award or the content of this Agreement without in each instance obtaining the prior written consent of Novation. 17. CONFIDENTIAL INFORMATION. a. Nondisclosure. Supplier agrees that it will: (1) keep strictly confidential and hold in trust all Confidential Information, as defined in Subsection l7.b below, of Novation, the Clients, the Authorized Distributors and the Members; (2) not use the Confidential Information for any purpose other than the performance of its obligations under this Agreement, without the prior written consent of Novation; (3) not disclose the Confidential Information to any third party (unless required by law) without the prior written consent of Novation; and (4) not later than thirty (30) days after the expiration or earlier termination of this Agreement, return to Novation, the Client, the Authorized Distributor or the Member, as the case may be, the Confidential Information. b. Definition, "Confidential Information," as used in Subsection 17.a above, will consist of all information relating to the prices and usage of the Products (including all information contained in the reports produced by Supplier pursuant to Section 7 above) and all documents and other materials of Novation, the Clients, the Authorized Distributors arid the Members containing information relating to the programs of Novation, the Clients, the Authorized Distributors or the Members of a proprietary or sensitive nature not readily available through sources in the public domain. In no event will Supplier provide to any person any information relating to the prices it charges the Authorized Distributors for Products ordered pursuant to this Agreement without the prior written consent of Novation. 18. MISCELLANEOUS a. Choice of Law. This Agreement will be governed by and construed in accordance with the internal substantive laws of the State of Texas and the Texas courts will have jurisdiction over all matters relating to this Agreement; provided, however, the terms of any agreement between Supplier and an Authorized distributor or between Supplier and a Member will be governed by and construed in accordance with the choice of law and venue provisions set forth in such agreement. b. Not Responsible. Novation and the Clients and their subsidiaries and affiliates will not be responsible or liable for any Authorized Distributor's breach of any purchasing commitment or for any other actions of any Authorized Distributor or Member. In addition, none of the Clients will be responsible or liable for the obligations of another Client or its subsidiaries or affiliates or the obligations of Novation or Supplier under this Agreement. c. Third Party Beneficiaries. All Clients, Authorized Distributors and Members are intended third party beneficiaries of this Agreement. All terms and conditions of tills Agreement which are applicable to the Clients will inure, to the benefit of and be enforceable by the Clients and their respective successors and assigns. All terms and conditions of this Agreement which are applicable to the Authorized Distributors will inure to the benefit of and be enforceable by the Authorized Distributors and their respective successors and assigns. All terms and conditions of this Agreement which are applicable to the Members will inure to the benefit of and be enforceable by the Members and their respective successors and assigns. d. Notices. Except as otherwise expressly provided herein, all notices or other communications required or permitted under this Agreement will be in writing and will be deemed sufficient when mailed by United States mail, or delivered in person to the party to which it is to be given, at the address of such party set forth below: If to Supplier: To the address set forth by Supplier in the Bid If to Novation: Novation Attn: General Counsel 220 East Las Colinas Blvd. Irving, TX 75039 or such other address as the party will have furnished in writing in accordance with the provisions of this Subsection. e. No Assignment, No assignment of all or any part of this Agreement may be made without the prior written consent of the other party; except that Novation may assign its rights and obligations to any affiliate of Novation. Any assignment of all or any part of this Agreement by either party will not relieve that party of the responsibility of performing its obligations hereunder to the extent that such obligations are not satisfied in flail by the assignee. This Agreement will be binding upon and inure to the benefit of the parties' respective successors and assigns. f. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a mariner as to be effective and valid tinder applicable law, but if any provision of this Agreement will be prohibited by or invalid under applicable law, such provision will be ineffective to the extent of' such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement- Each party will, at its own expense, take such action as is reasonably necessary to defend the validity and enforceability of this Agreement and will cooperate with the other party as is reasonably necessary in such defense. g. Entire Agreement. This Agreement, together with the exhibits listed below, will constitute the entire agreement between Novation arid Supplier. This Agreement, together with the exhibits listed below and each Authorized Distributor's purchase order will constitute the entire agreement between each Authorized Distributor and Supplier. In the event of any inconsistency between this Agreement and an Authorized Distributor's purchase order, the terms of this Agreement will control, except that the Authorized Distributor's purchase order will supersede Sections 4 and 5 of this Agreement in the event of any inconsistency with such Sections. No other terms and conditions in any document, acceptance, or acknowledgment will be effective or binding unless expressly agreed to in writing. The following exhibits are incorporated by reference in this Agreement: Exhibit A Product and Service Description and Pricing Exhibit B Non-Price Specifications Exhibit C Terms of Supplier's Participation in Committed Programs Exhibit D Award Letter Exhibit E Other Information Requirements [Other Exhibits Listed, if any SUPPLIER: Carrington Laboratories, Inc. ADDRESS: 2001 Walnut Hill Lane trying, TX 75038 SIGNATURE: /s/ ---------------------------- TITLE: President and CEO DATE: August 6, 1999 EX-21.1 26 Exhibit 21.1 SUBSIDIARIES OF CARRINGTON Jurisdiction of Name of Subsidiary Organization ------------------ ------------ Carrington Laboratories, Belgium, N.V. Belgium Finca Savila, S.A. Costa Rica Carrington Laboratories International, Inc. Texas Hilcoa Corporation California Caraloe, Inc. Texas Carrington Laboratories of Canada, Ltd. Canada Sabila Industrial, S.A. Costa Rica EX-23.1 27 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statements (Form S-8 No.s 33-22849, 33-36041, 33-42002, 33-50430 and 33-64407) pertaining to the 1985 Stock Option Plan of Carrington Laboratories, Inc., Registration Statements (Form S-8 No.s 33-64403, 33-64405, and 33-55920) pertaining to the 1995 Management Compensation Plan of Carrington Laboratories, Inc., the 1995 Stock Option Plan of Carrington Laboratories, Inc., and the Employee Stock Purchase Plan of Carrington Laboratories, Inc., respectively, the Registration Statements (Form S-3 No.s 33-60833 and 333-17177) pertaining to the 1995 and 1997 private placements of common stock of Carrington Laboratories, Inc., respectively, of our report dated February 21, 2000, with respect to the consolidated financial statements and schedule of Carrington Laboratories, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1999 filed with the Securities and Exchange Commission. Ernst & Young LLP Dallas, Texas March 24, 2000 EX-27.1 28
5 This schedule contains summary financial information extracted from (1) Statements of Balance Sheets, (2) Statements of Operations and (3) Statements of Cash Flows, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1999 DEC-31-1999 2,435 0 3,994 304 5,184 11,900 20,958 9,973 23,493 3,989 0 0 0 94 19,410 23,493 28,128 28,128 13,640 13,212 5,300 0 (105) (2,033) 0 (2,033) 0 0 0 (2,033) (.22) (.22)
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