10-Q 1 cli01q3e.txt QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) ( x ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ To _______________ Commission file number 0-11997 CARRINGTON LABORATORIES, INC. (Exact name of registrant as specified in its charter) Texas 75-1435663 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2001 Walnut Hill Lane, Irving, Texas 75038 ----------------------------------------------------- (Address of principal executive offices and Zip Code) 972-518-1300 ----------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes [ X ] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 9,809,087 shares of Common Stock, $.01 par value, were outstanding at November 9, 2001. INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 2001 (unaudited) and December 31, 2000 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000 (unaudited) 4-5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 5. Other Events 14 Item 6. Exhibits and Reports on Form 8-K 15 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (Dollar amounts in 000's) December 31, September 30, 2000 2001 ------ ------ (unaudited) Assets Cash and cash equivalents $ 3,200 $ 3,214 Accounts receivable, net 2,181 1,053 Inventories 4,723 5,580 Prepaid expenses 183 555 ------ ------ Total current assets 10,287 10,402 Property, plant and equipment, net 10,322 10,224 Other assets 93 193 ------ ------ Total assets $20,702 $20,819 ====== ====== Liabilities and Shareholders' Investment Notes payable $ 763 $ 763 Accounts payable 1,764 657 Accrued liabilities 1,068 1,102 Deferred revenue 417 417 ------ ------ Total current liabilities 4,012 2,939 Deferred revenue, long-term 250 1,000 Shareholders' investment: Common stock 97 97 Capital in excess of par value 52,319 52,396 Deficit (35,976) (35,613) ------ ------ Total shareholders' investment 16,440 16,880 ------ ------ Total liabilities and shareholders' investment $20,702 $20,819 ====== ====== The accompanying notes are an integral part of these statements. Condensed Consolidated Statements of Operations (unaudited) (Dollar amounts and shares in 000's, except per share amounts) Three Months Ended September 30, 2000 2001 ------ ------ Net sales $ 4,997 $ 4,381 Costs and expenses: Cost of sales 3,238 2,341 Selling, general and administrative 2,387 1,368 Research and development 657 611 Other income (34) (3) Interest, net (23) (13) ------ ------ Income (loss) before income taxes (1,228) 77 Provision for income taxes 0 0 ------ ------ Net income (loss) $(1,228) $ 77 ====== ====== Net income (loss) per share- basic and diluted $ (0.13) $ .01 ====== ====== The accompanying notes are an integral part of these statements. Condensed Consolidated Statements of Operations (unaudited) (Dollar amounts and shares in 000's, except per share amounts) Nine Months Ended September 30, 2000 2001 ------ ------ Net sales $17,586 $13,368 Costs and expenses: Cost of sales 9,481 7,462 Selling, general and administrative 7,657 3,802 Research and development 2,164 1,799 Research and development, Aliminase[TM] clinical trial 623 - Charge related to contract with supplier of freeze-dried products 223 - Other income (58) (29) Interest, net (69) (29) ------ ------ Income before income taxes (2,435) 363 Provision for income taxes 0 0 ------ ------ Net income (loss) $(2,435) $ 363 ====== ====== Net income (loss) per share- basic and diluted $ (0.26) $ 0.04 ====== ====== The accompanying notes are an integral part of these statements. Condensed Consolidated Statements of Cash Flows (unaudited) (Dollar amounts in 000's) Nine Months Ended September 30, 2000 2001 ------ ------ Cash flows from operating activities Net loss $(2,435) $ 363 Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 790 772 Provision for inventory obsolescence 135 135 Changes in assets and liabilities: Receivables, net 1,427 1,128 Inventories 495 (992) Prepaid expenses 146 (372) Other assets 208 (100) Accounts payable and accrued liabilities (1,557) (1,073) Deferred revenue - 750 ------ ------ Net cash provided (used) by operating activities (791) 611 Cash flows from investing activities: Purchases of property, plant and equipment (352) (674) ------ ------ Net decrease cash used by investing activities (352) (674) Cash flows from financing activities: Issuances of common stock 377 77 Proceeds of note payable 553 - ------ ------ Net cash provided by financing activities 930 77 ------ ------ Net increase (decrease) in cash and cash equivalents (213) 14 Cash and cash equivalents, beginning of period 2,453 3,200 ------ ------ Cash and cash equivalents, end of period $ 2,240 $ 3,214 ====== ====== Supplemental disclosure of cash flow information Cash paid during the period for interest $ 18 $ 47 Cash paid during the period for federal, state and local income taxes $ 28 $ 18 The accompanying notes are an integral part of these statements. Notes to Condensed Consolidated Financial Statements (unaudited) (1) Condensed Consolidated Financial Statements: The condensed consolidated balance sheet as of September 30, 2001, the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2000 and 2001 and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2000 and 2001 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include all normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows at September 30, 2001 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report to shareholders or Form 10-K for the year ended December 31, 2000. (2) Net Income (Loss) Per Share: Basic net income (loss) per share was computed by dividing net income (loss) by the weighted average number of common shares outstanding. The weighted average numbers of common shares outstanding for the quarters ended September 30, 2000 and 2001 were 9,614,000 and 9,747,000, respectively. The weighted average numbers of common shares outstanding for the nine month periods ended September 30, 2000 and 2001 were 9,538,000 and 9,722,000, respectively. In calculating the diluted net income (loss) per share for the nine month periods ended September 30, 2000 and 2001, no effect was given to options and warrants because the effect would be antidilutive. (3) Reportable Segments: The Company operates in two reportable segments: human and veterinary products sold through its Medical Services Division, and bulk raw materials, consumer beverages, nutritional products and skin care products sold through its consumer products subsidiary, Caraloe, Inc. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. Corporate Losses 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 both segments, and total cash for the Company are included in the Corporate Assets figure. Reportable Segments (in thousands) ---------------------------------------------------------------------------- Quarter Ended Medical Caraloe, September 30, 2000 Services Inc. Corporate Total ---------------------------------------------------------------------------- Sales to unaffiliated customers $2,946 $2,051 $ - $ 4,997 Income (loss) before income taxes (677) 8 (559) (1,228) Identifiable assets 10,983 1,782 7,814 20,579 Capital expenditures 21 - 122 143 Depreciation and amortization 140 - 116 256 ---------------------------------------------------------------------------- Quarter Ended Medical Caraloe, September 30, 2001 Services Inc. Corporate Total ---------------------------------------------------------------------------- Sales to unaffiliated customers $ 2,725 $ 1,656 $ - $ 4,381 Income (loss) before income taxes 382 212 (517) 77 Identifiable assets 11,796 1,221 7,802 20,819 Capital expenditures - - 301 301 Depreciation and amortization 146 - 120 266 ---------------------------------------------------------------------------- Nine Months Ended Medical Caraloe, September 30, 2000 Services Inc. Corporate Total ---------------------------------------------------------------------------- Sales to unaffiliated customers $9,642 $ 7,944 $ - $17,586 Income (loss) before income taxes (1,535) 1,468 (2,368) (2,435) Capital expenditures 59 - 293 352 Depreciation and amortization 443 - 347 790 ---------------------------------------------------------------------------- Nine Months Ended Medical Caraloe, September 30, 2001 Services Inc. Corporate Total ---------------------------------------------------------------------------- Sales to unaffiliated customers $ 7,810 $ 5,558 - $13,368 Income (loss) before income taxes 873 1,017 (1,527) 363 Capital expenditures - - 674 674 Depreciation and amortization 431 - 341 772 (4) Income Taxes: The tax effects of temporary differences including net operating loss carryforwards have given rise to net deferred tax assets. At December 31, 2000, and September 30, 2001, the Company provided a valuation allowance against the entire deferred tax asset due to the uncertainty as to the realization of the asset. At December 31, 2000, the Company had net operating loss carryforwards of approximately $41,400,000 for federal income tax purposes, which expire beginning in 2001, and research and development tax credit carryforwards of approximately $660,000, which expire beginning in 2001, all of which are available to offset federal income taxes due in future periods. The entire income tax provision from the third quarter 2001 was offset by an decrease in the valuation allowance. (5) Contingencies: From time to time in the normal course of business, the Company is party to various matters involving claims or possible litigation. Management believes the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. Item 2. 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 carbohydrate 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 (3) to the condensed 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, 2000 and September 30, 2001, the Company held cash and cash equivalents of $3,200,000 and $3,214,000, respectively. The Company has invested in inventory to support sales of bulk products to a single customer. Receivables from this customer totaled $366,000 as of September 30, 2001. As of October 29, 2001 all of this balance had been collected. As of September 30, 2001, the Company had no material capital commitments. Pursuant to the Distributor and License Agreement with Medline Industries, Inc. ("Medline"), the Company is to receive $12,500,000 in base royalties over a five-year period. The Company received $875,000 under this agreement in its year ended December 31, 2000 and is scheduled to receive $3,375,000, $2,875,000, $2,375,000, $1,875,000 and $1,125,000 during the years ending December 31, 2001-2005, respectively. The Company is recognizing royalty income under this agreement on a straight-line basis. At September 30, 2001, the Company had received $1,417,000 more in royalties than it had recognized in income. 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. As of September 30, 2001, there was $763,000 outstanding under this credit facility. This credit facility is also used to secure an $800,000 letter of credit to guarantee rental payments on a lease signed in January 2001. As a result of the current level of sales of raw materials produced at the Company's processing facility in Costa Rica, the Company's demand for Aloe vera L. leaves has exceeded and continues to exceed both the current and the normal production capacity of its farm. It has therefore been necessary for the Company to purchase Aloe vera L. leaves from other sources. Since March 1998, the Company has been an investor in Aloe and Herbs International, Inc., a Panamanian corporation ("Aloe & Herbs"), the owner of Rancho Aloe (C.R.), S.A., a Costa Rican corporation, which produces Aloe vera L. leaves and sells them to the Company at competitive, local market rates. This allows 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. The Company loaned $487,000 to Aloe & Herbs during 1998. The Company reserved all of its loans to Aloe & Herbs at December 31, 1998, due to uncertainty regarding Aloe & Herbs' ability to meet significant mortgage obligations in 1999 and 2000. In April 2000, Aloe & Herbs refinanced its mortgage, removing the financial uncertainty. Therefore, the Company will recognize as other income all principal payments collected from Aloe & Herbs relating to this debt. During the quarter ended September 30, 2001, the Company collected $3,000 from Aloe & Herbs as payment on the debt. On October 22, 2001, the Company caused a new subsidiary named DelSite Biotechnologies, Inc. ("DelSite") to be incorporated in Delaware. DelSite will operate independently from the Company's research and development program and will be responsible for the research, development and marketing of the Company's new, patented drug delivery technology. This technology is based on the natural polymer CR1013, which is being developed to deliver a variety of drug candidates for injectable, oral or topical application through its proprietary controlled release formulations. The Company is currently in the process of completing the organization of DelSite and is studying various alternatives for obtaining the funds that will be needed to finance its activities. 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 its current cash resources to be sufficient to finance the costs of research, product development, major clinical studies and new drug applications necessary to develop its and DelSite's products to their full commercial potential. Additional funds, therefore, may have to be raised through equity offerings, borrowings, licensing arrangements or other means, and there is no assurance that the Company or DelSite will be able to obtain such funds on satisfactory terms when they are needed. In March 2001, the Board of Directors authorized the Company to repurchase up to one million shares of its outstanding Common Stock. As of October 29, 2001, the Company had not repurchased any shares of its Common Stock under this program. The Company believes it has the financial resources necessary to repurchase shares from time to time pursuant to the Board's repurchase authorization. Regulation The Company is subject to regulation by numerous governmental authorities in the United States and other countries. Some 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. Third Quarter of 2001 Compared With Third Quarter of 2000 Net sales were $4,381,000 in the third quarter of 2001, a decrease of $616,000, or 12.3%, compared with $4,997,000 in the third quarter of 2000. Sales of the Company's wound and skin care products decreased 7.5%, due primarily to the impact of discounted pricing in the Distributor and License Agreement with Medline. While total revenues in the quarter ended September 30, 2001 from the Company's wound and skin care products declined to $2,725,000 from $2,946,000 in 2000, unit volume was stable, remaining unchanged from the prior years level. Sales of Caraloe, Inc., the Company's consumer products subsidiary, decreased $395,000 to $1,656,000. Caraloe sales to a single customer, which are primarily Manapol[R] powder, decreased from $1,721,000 in the third quarter of 2000 to $1,098,000 in the third quarter of 2001. This decrease in sales was partially offset by a $228,000 increase in consumer sales and contract manufacturing. Cost of sales decreased from $3,238,000 to $2,241,000, or 27.7%. As a percentage of sales, cost of sales decreased from 64.8% in the third quarter of 2000 to 53.4% in the third quarter of 2001. This resulted from the reduction of costs at the Company's Costa Rican facility due to lower volumes, as well as increased efficiency at the U.S. operations. Selling, general and administrative expenses decreased from $2,387,000 in the third quarter of 2000 to $1,368,000 in 2001. The decrease was primarily a result of Medline's assuming all costs of marketing the Company's wound and skin care products in Medline's areas of responsibility, as well as reductions in expenses associated with streamlining all departments within the Company. Research and development expenses decreased to $611,000 from $657,000, or 7.0%. This was due to the impact of refocusing and prioritizing research projects. Other income of $3,000 in the third quarter 2001 was due to collection of amounts associated with debts from Aloe & Herbs as previously discussed and collections on debts from Aloe Commodities, Inc., also previously written off. Net interest income was $13,000 in the third quarter of 2001 as compared to $23,000 in the third quarter of 2000. The reduced investment income was primarily due to lower cash balances invested and significantly lower interest rates. Net income for the third quarter of 2001 was $77,000, compared with a net loss of $1,228,000 during the third quarter of 2000. The net income for the third quarter of 2001 was $0.01 per share, compared to the net loss of $0.13 per share for the same quarter of 2000. First Nine Months of 2001 Compared With First Nine Months of 2000 Net sales were $13,368,000 in the first nine months of 2001, compared with $17,586,000 in the first nine months of 2000. This decrease of $4,218,000, or 23.9%, resulted from a decrease of $2,396,000 in sales of Caraloe, Inc., the Company's consumer products subsidiary, and a decrease of $1,832,000 in wound care sales. Caraloe's sales to a single customer, which were primarily Manapol[R] powder, decreased from $6,798,000 to $4,152,000, or 38.9%, in 2001. While net wound care sales decreased from $9,642,000 in 2001 to $7,810,000 in 2001, or 19.0%, unit volume increased 8.5% in the nine months ended September 30, 2001 over the same period in 2000. Decreased wound care sales were primarily due to the impact of discounted pricing in the Distributor and License Agreement with Medline. Cost of sales decreased from $9,481,000 to $7,462,000, or 21.3%. As a percentage of sales, cost of sales increased from 53.9% in the first nine months of 2000 to 55.8% in the first nine months of 2001. This was due primarily to discounted pricing on wound care products as discussed above, offset by increased efficiencies at the Company's U.S. operations and cost cutting at the Costa Rican facility associated with lower volume. Selling, general and administrative expenses decreased to $3,802,000 from $7,657,000 in 2001. The decrease was primarily a result of Medline's assuming all costs of marketing the Company's wound and skin care products in Medline's areas of responsibility, as well as reductions in expenses associated with streamlining all departments within the Company. Research and development expenses decreased to $1,799,000 in 2001 from $2,787,000 in 2000, or 35.5%. This decrease was primarily due to the cessation of the clinical trial of Aliminase[TM] in the first quarter of 2000 and refocusing and prioritizing research projects in 2001. Net interest income of $29,000 was realized in the first nine months of 2001, versus net interest income of $69,000 in the first nine months of 2000. The lower investment income was primarily due to lower cash balances invested and significantly lower interest rates in 2001. Net income for the first nine months of 2001 was $362,000, compared with a net loss of $2,435,000 for the first nine months of 2000. The net income for the first nine months of 2001 was $0.04 per share, compared to the net loss of $0.26 per share for the same period in 2000. During the first quarter of 2001, the Company's Board of Directors authorized a repurchase of up to 1,000,000 shares of the Company's Common Stock. See "Liquidity and Capital Resources". 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 Condensed Consolidated Financial Statements) concerning the Company's financial position, liquidity, capital resources and results of operations, its prospects for the future and other matters, and also including statements made in Part II of this report, are forward-looking statements. Forward-looking statements in this report generally include or are accompanied by words such as "anticipate", "believe", "estimate", "expect", "intend", "will", "would", "should" or words of similar import. Such forward-looking statements include, but are not limited to, statements regarding the Company's ability to save approximately 50% on the per-kilogram cost of Aloe vera L. leaves by purchasing them from Rancho Aloe; the ability of Aloe & Herbs to repay the debt that it owes to the Company; the Company's belief that the claims of the Plaintiff identified under Item 1 of Part II of this report are without merit, and the Company's intention to vigorously defend itself against those claims; the ability of the Company and/or DelSite to obtain sufficient funds to finance DelSite's proposed activities; the ability of DelSite to successfully exploit the Company's new drug delivery technology; the adequacy of the Company's cash resources and cash flow from operations to finance its current operations; and the Company's intention, plan or ability to repurchase shares of its outstanding Common Stock. 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 indicated by such forward-looking statements include but are not limited to the possibilities that the Company may be unable to obtain the quantity or quality of Aloe vera L. leaves it needs from Rancho Aloe at savings of approximately 50% of the per-kilogram cost charged by some other suppliers, that Aloe & Herbs may not be able to pay its debts to the Company, that the claims of parties with whom the Company is involved in litigation may not be without merit and the Company may be unable to resolve its disputes with third parties in a satisfactory manner, that the Company's cash resources and cash flow from operations may not be adequate to finance its current operations, that the Company and or DelSite 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 and or DelSite may not be able to obtain financing when needed, that the Company and or DelSite 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 may not be able 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 other parties who owe the Company substantial amounts of money may be unable to pay what they owe the Company, that the Company's patents may not provide the Company with adequate protection, that the Company's manufacturing facilities may be inadequate to meet demand, that the Company's distributors may be unable to market the Company's products successfully, that the Company may be unable to reach satisfactory agreements with its important suppliers, that the Company may not be able to use its tax loss carryforwards before they expire, that the Company may not have sufficient financial resources necessary to repurchase shares of its outstanding Common Stock when it is desirable to do so, or 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 3. Quantitative and Qualitative Disclosures About Market Risk. The Company's exposure to market risk from changes in foreign currency exchange rates and the supply and prices of Aloe vera L. leaves has not changed materially from its exposure at December 31, 2000, as described in the Company's Form 10-K Annual Report for the year then ended. Part II OTHER INFORMATION Item 1 Legal Proceedings: As reported in the Company's Form 10-Q Quarterly Report for the quarter ended March 31, 2001, on April 3, 2001, Arthur Singer, a former employee of the Company (the "Plaintiff"), filed a lawsuit entitled Arthur Singer vs. Carrington Laboratories, Inc. and Carlton Turner, No. CV-01-2084 in the United States District Court for the Eastern District of New York, Long Island Division. The suit alleges multiple causes of action against the Company and its chief executive officer (the "Defendants") and seeks to recover damages in excess of $4,000,000, plus legal fees and expenses. The Plaintiff, who was formerly employed by the Company as a sales representative, alleges among other things that the Company failed to pay the full amount of commissions owed to him; that the Defendants breached an alleged contract of employment with him; that the Company deprived him of the opportunity to exercise some vested stock options, prevented some of his unvested stock options from vesting and caused all of his options to expire earlier than they otherwise would have; and that the Defendants misrepresented that the Company intended to retain him as an employee, fraudulently induced him to remain in its employ and breached an implied covenant of fair dealing. On May 31, 2001, the Defendants filed a motion seeking to have the complaint dismissed or to have the case transferred to Texas. On August 28, 2001, the Defendants' motion to transfer was granted, and the case was transferred to the United States District Court for the Northern District of Texas, Dallas Division, as Case No. 01-CV-1776. The Company believes that the Plaintiff's claims are without merit and intends to defend the lawsuit vigorously. Item 5. Other Events Dr. Robert A. Fildes, a member of the Board of Directors of the Company since 1991, resigned his position on the Board effective October 2, 2001. Dr. Fildes expressed interest in devoting his energies on behalf of the Company to the formation and activities of the Company's new subsidiary, DelSite Biotechnologies, Inc., and the continued development of the Company's drug delivery technology product, CR1013, which will be developed by DelSite. Dr. Fildes will continue to serve the Company as an independent consultant on the Company's drug delivery technology product, CR1013, which will be developed by the Company's new subsidiary, DelSite Biotechnologies, Inc. As of the date of this report, no one has been named to succeed Dr. Fildes as a director of the Company. See "Liquidity and Capital Resources" under Item 2 of this report for more information concerning DelSite. Item 6. Exhibits and Reports on Form 8-K a. Exhibits: None b. Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended September 30, 2001. However, on October 15, 2001, the Company filed a report on Form 8-K in which it reported, under Item 5 (Other Events), that the Company had renewed, extended, amended and restated its shareholder rights agreement by entering into an Amended and Restated Rights Agreement with American Stock Transfer & Trust Company, as Rights Agent, effective as of October 15, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARRINGTON LABORATORIES, INC. (Registrant) Date: November 12, 2001 By: /s/ Carlton E. Turner ---------------------------- Carlton E. Turner, President and C.E.O. (principal executive officer) Date: November 12, 2001 By: /s/ Robert W. Schnitzius ---------------------------- Robert W. Schnitzius, Chief Financial Officer (principal financial and accounting officer) INDEX TO EXHIBITS Item Description No. ---- ----------- No Exhibits