-----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, MdioukaDh+S73wH/+nMLQRz6Nx1GjsfZAQa8nr34lOsPfyEj5yxSeOEaxiT8lXx9 Y+HS77bM/Gptzt1NQ0h5rg== 0000926236-98-000022.txt : 19980401 0000926236-98-000022.hdr.sgml : 19980401 ACCESSION NUMBER: 0000926236-98-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 98580351 BUSINESS ADDRESS: STREET 1: 2001 WALNUT HILL LN CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2145181300 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission File Number 0-11997 Carrington Laboratories, Inc. (Exact name of Registrant as specified in its charter) Texas 75-1435663 (State of Incorporation) (IRS Employer ID No.) 2001 Walnut Hill Lane, Irving, Texas 75038 (Address of principal executive offices) Registrant's telephone number, including area code: (972) 518-1300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) Preferred Share Purchase Rights (Title of class) (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common stock held by non- affiliates of the Registrant on March 23, 1998, was $38,038,379. (This figure was computed on the basis of the closing price of such stock on the NASDAQ National Market on March 23, 1998 using the aggregate number of shares held on that date by, or in nominee name for, shareholders who are not officers, directors or record holders of 10% or more of the Registrant's outstanding voting stock. The characterization of such officers, directors and 10% shareholders as affiliates is for purposes of this computation only and should not be construed as an admission for any other purpose that any of such persons are, in fact, affiliates of the Registrant.) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 9,315,236 shares of Common Stock, par value $.01 per share, were outstanding on March 23, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its annual meeting of shareholders to be held on May 14, 1998 are incorporated by reference into Part III hereof, to the extent indicated herein. PART I ITEM 1. BUSINESS. General Carrington Laboratories, Inc. ("Carrington" or the "Company") is a research-based pharmaceutical and medical device company engaged in the development, manufacturing and marketing of naturally derived complex carbohydrate and other natural product therapeutics for the treatment of major illnesses and the dressing and management of wounds. The Company comprises three business divisions. See Note Thirteen to the consolidated financial statements in this Annual Report for financial information about these business divisions. The Company sells, using a network of distributors, nonprescription products through its Wound and Skin Care Division, consumer and bulk products through its consumer products subsidiary, Caraloe, Inc., and veterinary medical devices and pharmaceuticals through its Veterinary M e dical Division, which relies on third party licensees for distribution of its products. The Company's research and product portfolio are based primarily on complex carbohydrate technology derived from the Aloe vera plant. The Company was incorporated in Texas in 1973, as Ava Cosmetics, Inc. In 1986, the Company sold the direct sales business it was then operating and changed its name to Carrington Laboratories, Inc. Wound and Skin Care Division Carrington's Wound and Skin Care Division offers a comprehensive line of wound management products to hospitals, alternative care facilities and the home health care market. The Company's products are designed to maintain a moist wound environment which aids the healing process and to maintain the integrity of contiguous healthy skin. Carrington products are used in a wide range of acute and chronic wound and skin conditions and for incontinence and ostomy care. The Company is committing significant resources to its wound and skin care business. Primary marketing emphasis is directed toward hospitals, managed care organizations, alternate care facilities and home health care providers, with wound and skin care products being promoted primarily to physicians and specialty nurses, e.g., enterostomal therapists. Opportunities in the growing alternate care and home health care markets are also addressed through telemarketing efforts and a National Accounts Coordinator. The Company currently has 56 employees and independent representatives engaged in the sales and marketing of the Company s products. The Company's field sales force currently employs 28 sales representatives, each assigned to a specific geographic area in the United States, five regional sales managers and a representative in Puerto Rico. The Company also uses eight independent sales companies employing 14 sales representatives to sell its products on a commission basis. In addition to this field sales force, the Wound and Skin Care Division employs two telemarketers who focus on alternative care facilities and the home health care market, one person in its National Accounts Department and five employees in customer service and executive management. The Company's products are primarily sold through a network of distributors. Three of the Company's largest distributors in the hospital market are McKesson General ("McKesson"), Owens & Minor and Bergen Brunswig. During fiscal 1995, 1996 and 1997, sales of wound and skin care products to McKesson represented 7%, 9%, and 12%, respectively, of the Company's total net sales. Sales to Owens & Minor represented 14%, 11%, and 11%, respectively, of total net sales during the same periods. Sales to Bergen Brunswig represented 10%, 12%, and 9%, respectively, of total net sales during the same periods. The Company currently has 18 distribution and licensing agreements for the promotion and sale of its products. In November 1995, the Company signed a Sales Distribution Agreement with Laboratorios PiSA S.A. de C.V., a Mexican corporation, for the exclusive distribution rights to sell the Company's wound care products in Mexico, Guatemala, Nicaragua, Panama, El Salvador, and the Dominican Republic for a period of five years. In May 1996, the Company entered into an agreement with Trudell Medical Group ("Trudell") granting Trudell exclusive Canadian distribution rights for the Company's wound care products. In May 1996, the Company granted Ching Hwa Pharmaceutical Company, Ltd. ("CHP"), exclusive distribution rights to market the Company s wound care products in the Republic of China. CHP is required to register the Company's products for sale in Taiwan within a specified time. In September 3, 1996, the Company signed an exclusive contract with Faulding Pharmaceuticals to market the Company's wound care products in Australia and New Zealand. On January 12, 1998, Faulding and Carrington executed Amendment Number One to the existing Distribution Agreement between the parties. This Amendment adds the following countries to the "Territories" covered under that Agreement: Thailand, Vietnam, Singapore, the Philippines, Malaysia and Myanmar. Pursuant to the Amendment, various terms and conditions associated with the launch of products for each country must be agreed upon on or before June 30, 1998. In December 1996, the Company entered into an agreement with Suco International Corp. ("Suco") whereby the Company appointed Suco as exclusive distributor of certain of the Company's products in Haiti, Columbia, Venezuela, Uruguay, Bolivia, Peru, Paraguay, and Ecuador for a five-year term, subject to early termination under certain circumstances. The agreement requires Suco to register the products covered by the agreement in each of those countries. In December 1996, the Company and Darrow Laboratories S/A ("Darrow") entered into a Sales Distribution Agreement whereby the Company appointed Darrow as a marketer and distributor of certain of the Company's wound care products for a term of 10 years (subject to early termination under certain circumstances) in Brazil, with a limited right of first refusal to distribute those products in Argentina, Uruguay, Paraguay, and Chile. The agreement requires Darrow to register in the Company's name such of the Company's products as the Company directs, at the Company's expense, in Brazil and each other country where Darrow is authorized to distribute such products. In December 1996, the Company and its Belgian subsidiary entered into an agreement with Recordati Industria Chimica & Farmaceutica S.P.A. ("Recordati") whereby the Company and its subsidiary jointly granted exclusive distribution rights to Recordati for certain of the Company's products in Italy, Vatican City and San Marino for a term of 10 years, subject to automatic renewal for an additional two years unless either party elects to terminate the agreement at the end of the initial term, and subject to early termination under certain circumstances. In return for the grant of the distribution rights, Recordati made an initial payment to the Company and is obligated to make two additional payments contingent on the occurrence of certain events. Under the agreement, the Company applied for and was granted, in February 1998, the CE mark, a quality certification recognized by members of the European Economic Community and certain other countries. In 1997, sales of the Company related to the above mentioned international agreements were less than $150,000. The Company presently estimates the expected sales associated with these agreements in 1998 to be between $500,000 and $1,000,000. Consumer Health Caraloe, Inc., a subsidiary of the Company ("Caraloe"), markets or licenses consumer products and bulk ingredients utilizing the Company's patented complex carbohydrate technology. Attention has been focused on three goals, the first of which is to sell Caraloe's bulk raw ingredients to manufacturers who desire the highest quality aloe extracts for their finished products. The second goal is to develop the contract manufacturing business by providing high quality products for nutritional and skin care markets, and the third is to expand the Aloe Nutritional brand and establish it as a leading brand in the health food market. In February 1996, Caraloe signed an agreement with Mannatech granting it an exclusive license in the United States for Manapol[R] powder. This agreement, including the grant of the exclusive license, was terminated by Mannatech effective March 31, 1997, and Caraloe began to market Manapol[R] powder to other third parties as well as use it in Caraloe's products. In August 1997, Caraloe signed a new nonexclusive supply agreement with Mannatech, Inc., to supply bulk Manapol[R] powder. This agreement is effective through July 2000 and contains monthly minimum purchase requirements. During 1995, 1996 and 1997, sales of bulk Manapol[R] powder to Mannatech, Inc. represented 10%, 15% and 16%, respectively, of the Company's total consolidated net sales. A supply agreement for bulk Manapol[R] powder was signed in December 1997 with Met-Trim, Inc. The agreement contains minimum quarterly purchase requirements. In October 1996, Caraloe made a $200,000 investment in Aloe Commodities International, Inc. ("ACI"). In February 1997, Caraloe entered into a Supply Agreement with ACI for a term of 10 years (subject to early termination under certain circumstances). The agreement contemplates that ACI will purchase from Caraloe all of certain bulk raw materials that ACI needs for drinks and other consumer products. In December 1997, Caraloe made an additional investment in ACI of $400,000. Carrington owns less than 10% of the total outstanding shares of ACI. In February 1997, Caraloe entered into a Supply Agreement with Light Resources Unlimited ("LRU"), and effective March 1, 1997, Carrington entered into a related Trademark License Agreement with LRU. The terms of the Supply Agreement and the Trademark License Agreement end on May 12, 2002, and May 4, 2002, respectively, and the term of each agreement is subject to early termination under certain circumstances. The Supply Agreement provides that during the first three months of the term, LRU will purchase from Caraloe quantities of bulk AVMP[R][R] Powder and/or bulk Manapol[R] Gold[TM] Powder ("Product") to be mutually agreed upon, and beginning May 12, 1997, LRU will purchase from Caraloe annually at least the minimum quantities of Product specified in the agreement. The Supply Agreement also contemplates that LRU will be Caraloe's sole distributor of Product to natural health care practitioners in the United States and Canada, subject to Caraloe's right to sell "simple purchase bulk Product" to natural health care practitioners in quantities exceeding certain specified limits. The Trademark License Agreement grants LRU a non-exclusive license to use the trademarks AVMP[R][R] Powder and Manapol[R] Gold[TM] Powder in connection with the advertising and sale of Product to the targeted group. Sales to LRU in 1997 under this agreement were $167,000. Veterinary Medical Division The Carrington Veterinary Medical Division ("CVMD") markets "Acemannan Immunostimulant", a vaccine adjuvant, and several wound and skin care products to the veterinary market. Acemannan Immunostimulant was conditionally approved by the United States Department of Agriculture ("USDA") in November 1991, for use as an aid in the treatment of canine and feline fibrosarcoma, a form of soft tissue cancer that affects dogs and cats. A conditional approval means that efficacy and potency tests are required, and the product's label must specify that these studies are in progress. The "conditional" aspect of the approval is renewed on an annual basis and will be removed upon completion and acceptance by the USDA of additional potency testing. However, there can be no assurance that these tests will result in the removal of the conditional restriction on the USDA's approval of Acemannan Immunostimulant. In September 1990, the Company granted Solvay Animal Health, Inc. ("Solvay") an exclusive, worldwide license to use and sell a bulk pharmaceutical mannan adjuvant for poultry disease. In January 1992, Solvay received approval from the USDA to market the bulk pharmaceutical mannan as an adjuvant to a vaccine for Marek's disease, a virus infection that kills chickens or renders them unfit for human consumption. On March 1, 1997, Fort Dodge Animal Health ("Fort Dodge"), a division of American Home Products Corporation, acquired the business and assets of Solvay, including the License Agreement dated September 20, 1990 and an Addendum thereto between Carrington and Solvay granting Solvay an exclusive world-wide field of use license to use and sell acemannan as a component/adjuvant to enhance the performance of poultry vaccines. Fort Dodge notified Carrington in the summer of 1997 that, as successor in interest to Solvay, it intended to terminate the License Agreement. Discussions concerning that termination have been ongoing, and the parties have agreed in principle to terminate the License Agreement in 1998. In March 1996, the Company signed an agreement with Farnam Companies, Inc., a leading veterinary marketing company, to promote and sell the Carravet[R][TM] product line, including Acemannan Immunostimulant. The Carravet[R][TM] product line currently consists of nine products. Research and Development General Carrington has developed a proprietary process for extracting and purifying a material that has been designated as bulk pharmaceutical mannan ("BPM"). This material is a natural product mixture which contains a high percentage of complex carbohydrate. The Company intends to seek approval of the Food and Drug Administration (the "FDA") and other regulatory agencies to sell drugs and medical devices derived from BPM in the United States and in foreign countries: (i) to treat various forms of cancer; (ii) to treat inflammatory bowel diseases, including ulcerative colitis, a widespread, chronic, inflammatory disease of the colon; (iii) to treat non-healing and other wounds; and (iv) for use as an adjuvant to various vaccines. For a more comprehensive listing of the type, indication and status of products currently under development by the Company, see "Research and Development -- Summary" below. The regulatory approval process, both domestically and internationally, can be protracted and expensive, and there is no assurance that the Company will obtain approval to sell its products for any treatment or use (see "Governmental Regulation" below). The Company expended approximately $5,370,000, $5,927,000, and $3,006,000 on research and development in fiscal 1995, 1996, and 1997, respectively. The Company has adopted a focused approach to its research and development efforts. As the result of this keen focus on specific goals, the Company estimates that in fiscal 1998 it will spend essentially the same on preclinical research and development as in 1997. The Company initiated a program in 1996 which continued through 1997 to restructure research and development to meet the challenges and demands for drug development in the 21st century. This entailed establishing a strong nucleus or infrastructure for chemistry, assay development and formulation development with outsourcing capabilities for high thoughput drug screening, and preclinical and clinical drug and device development. This approach allows the Company to maximize its opportunities in a timely and cost effective manner. Currently, the Company's research staff comprises eight full-time employees. Dr. Robert A. Fildes, a director of the Company, has been serving as part-time, interim Executive Vice President, Research and Development since the resignation of Dr. David G. Shand as the Company s permanent, full-time officer in charge of research and development on September 30. 1997. The Company is currently seeking a full-time successor to Dr. Shand to lead the Company's research and development efforts. Preclinical Research The Company's main preclinical research and development objective for 1997 was to assess the viability of the ulcerative colitis program following the reported Phase III trial failure of Aliminase[TM] capsules to demonstrate efficacy. After extensive internal and external audits of the clinical trial and extensive preclinical testing, a series of animal studies were conducted to assess the activity of BPM as the drug substance and the previous formulations used. BPM demonstrated a dose-dependent response in these studies, and based on these results, a new drug product formulation project was initiated for Aliminase[TM]. A decision regarding new clinical trials for ulcerative colitis will be made by mid-1998. Other preclinical studies conducted in the Company's laboratories and in outside laboratories have shown that certain of the Company's complex carbohydrates stimulate macrophages and other white blood cells to produce cytokines, including interleukin-1, interleukin-6 and tumor necrosis factor alpha, which regulate other cells. Interleukin-1 stimulates fibroblasts, which are essential to wound healing. Tumor necrosis factor alpha acts against tumors in the body. In addition, laboratory experiments conducted by the Company have shown that some Aloe vera components have both pro- and anti- inflammatory actions as shown in animal models of wound healing and in inflammation of the lung, colon, joint and ear. The Company believes that its products' pharmacological actions and lack of toxicity make them excellent candidates for further development as therapeutic agents for the treatments and uses for which the Company intends to seek regulatory approvals (see "Research and Development - - General" above). There is no assurance, however, that the Company will be successful in its efforts. The Company sponsors a research and development laboratory at Texas A&M in association with the College of Veterinary Medicine to expand preclinical research in various wound healing applications and mechanisms of action. Pursuant to this arrangement, the Company has access to leading authorities in immunology, as well as facilities and equipment to engage in experimentation and analysis at the basic research level. Filtered BPM, including CarraVex[TM] injectable (formerly CARN 750), are immunomodulating agents that increase circulating levels of interleukin-1 and tumor necrosis factor alpha. A series of animal studies conducted at Texas A&M University in 1988 and 1989 indicated that a single intraperitoneal dose caused significant tumor reduction in a statistically significant percentage of animals with highly malignant tumors. This effect in many instances was dramatic, with complete regression of the tumor and with continuing immunity. Recovered animals were resistant to syngeneic tumor reimplantation for up to six months after initial tumor regression. In 1991, the USDA granted the Company conditional approval to market an injectable form of a complex carbohydrate as an aid to surgery in the treatment of canine and feline fibrosarcoma, a form of soft tissue cancer, under the name Acemannan Immunostimulant. The product was conditionally approved based on safety and efficacy studies. The Company continues to work on developing a suitable cost-effective potency assay that will meet USDA requirements for the purpose of removal of the conditional status. Of course, there can be no assurance as to whether or when the USDA will remove the conditional restriction on its approval of this product. An extensive series of animal studies were initiated in 1997 to assess the direct and adjunct effects of CarraVex[TM] and Acemannan Immunostimulant. The purpose of these studies was to identify a suitable model to evaluate new product formulations (see "Human Studies" below) and to evaluate an in vitro potency test developed to meet USDA requirements. These studies are planned for completion in 1998. Human Studies Evaluation of Aliminase[TM] (formerly CARN 1000) Oral Capsules in the Treatment of Ulcerative Colitis. In late 1996, the Company placed on hold its testing of Aliminase[TM] oral capsules for the treatment of ulcerative colitis, pending an in-depth evaluation of product formulation, dosage form, timing and frequency of dosing, and method of administration. (See "Preclinical Research" above and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below.) Evaluation of CarraVex[TM] injectable (formerly CARN 750) in the Treatment of Solid Tumors in Humans. The Company believes that CarraVex[TM] injectable may be broadly useful in cancer therapy, with potential application in the treatment of major solid tumors, including melanoma, breast carcinoma, prostate carcinoma, colon carcinoma, hypernephroma and soft tissue sarcoma. The Company initiated a Phase I human clinical trial of CarraVex[TM] injectable in certain solid tumor indications. The trial began in the United States in late 1995 and continued until mid-1997. Eighteen patients have completed the study with no safety concerns noted. The product required filtration at the bedside which the Company believes is not the best delivery approach for CarraVex[TM]. A program for improving the formulation has been initiated (see "Preclinical Research" above), and a decision on further clinical trials will be made by the end of 1998. Evaluation of Carrasyn[R] in Wound Healing. In 1993, a study was conducted at M.D. Anderson Cancer Center to determine if Carrasyn[R] Hydrogel was of benefit in treating radiation-induced skin reactions in an animal model. These studies clearly showed that, when compared to controls, Carrasyn[R] Hydrogel could significantly reduce radiation-induced inflammation and tissue damage in animals. As a result of this work, a small clinical trial was performed in 1994, studying the radiation-sparing effects of Carrasyn[R] Hydrogel wound dressing in four oncology patients. These studies led to the development of RadiaCare[TM] Gel for the management of radiation dermatitis. In 1996, a study was begun at the Texas Oncology Center of Dallas to determine if RadiaCare[TM] Gel was of benefit in managing radiation dermatitis in humans. The study was completed in the fall of 1997, and statistical analysis is currently underway. The results of this study should be known by the end of 1998. Evaluation of Carrasyn[R] Freeze-Dried Gel (CarraSorb[TM] M) in Wound Healing. Following the submission of a 510(k) pre-market notification for a preservative-free freeze-dried gel for wound care, the FDA cleared Carrington to market CarraSorb[TM] M, and it was launched in early 1996. The Company is sponsoring a small pilot clinical study at the University of Wales to evaluate the effect of CarraSorb[TM] M on wound macrophages. The results of this study should be known in 1999. Evaluation of RadiaCare[TM] Oral Wound Rinse. In March 1997, the FDA cleared Carrington to market RadiaCare[TM] Oral Wound Rinse for the management and relief of pain associated with all types of oral wounds, including mucositis. The Company is sponsoring individual case studies and co-sponsoring a 50 patient controlled trial in radiation-induced oral ulcers. Results will be known in 1999. Summary. The following table outlines the status of the products and potential indications of the Company's aloe-based products developed, planned or under development. There is no assurance of successful development, completion or regulatory approval of any product not yet on the market. PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED, PLANNED OR UNDER DEVELOPMENT PRODUCT OR POTENTIAL POTENTIAL INDICATION MARKET APPLICATIONS STATUS Topical Dressings Pressure and Vascular Ulcers Marketed Cleansers Wounds Marketed Anti-fungal Candida Marketed Hydrocolloids Wounds Marketed Alginates Wounds Marketed Oral Human Anti-inflammatory Ulcerative Colitis On hold Pain Mucositis Marketed Injectable Human Melanoma, Breast, Prostate, Phase I Anticancer Colon, Hypernephroma, and Clinical Soft Tissue Sarcoma Trial Completed Veterinary Anticancer Fibrosarcoma Marketed Dental Pain reduction Aphthous Ulcers, Oral Wounds Marketed Vaccine Adjuvant-- Veterinary Poultry Vaccines Marek's Disease Marketed Licensing Strategy The Company expects that prescription pharmaceutical products containing certain defined drug substances will require a substantial degree of development effort and expense. Before governmental approval to market of any such product is obtained, the Company may license these products for certain indications to other pharmaceutical companies in the United States or foreign countries and require such licensees to undertake the steps necessary to obtain marketing approval for specific indications or in a particular country or region. Similarly, the Company intends to license third parties to market products containing defined chemical entities for certain human indications when it lacks the expertise or financial resources to market effectively. If the Company is unable to enter into such agreements, it may undertake to market the products itself for such indications. The Company's ability to market these products for specific indications will depend largely on its financial condition at the time and the results of related clinical trials. There is no assurance that the Company will be able to enter into any license agreements with third parties or that, if such license agreements are concluded, they will contribute to the Company's overall profits. Raw Materials and Processing The principal raw material used by the Company in its operations is the leaf of the plant Aloe barbadensis Miller, popularly known as Aloe vera L. Through patented processes, the Company produces bulk pharmaceutical and injectable mannans and freeze-dried aloe extract from the central portion of the Aloe vera L leaf known as the gel. Bulk pharmaceutical mannan, in the form of a hydrogel, is used as an ingredient in certain of the Company's wound and skin care products. Through additional processing, bulk mannans may be produced in both oral and injectable dosage forms. In May 1990, the Company purchased a 405-acre farm in the Guanacaste province of northwest Costa Rica which currently has approximately 210 acres planted with Aloe vera. The Company's current need for leaves exceeds the supply of harvestable leaves from the Company s farm, requiring the purchase of leaves from other sources in Central America at considerably higher prices. Additional quantities of harvestable leaves from the Company's farm will become available in the second quarter of 1998, but will not completely eliminate the Company's dependence on other sources of leaves. Due to economic and political instability in the Central American region, the supply of imported leaves cannot be guaranteed. The Company plans to plant additional acreage or secure local contract production of leaves as the demand for Aloe vera L leaves increases. Manufacturing During the last quarter of 1994 and the first three quarters of 1995, the Company moved its wound- and skin-care product manufacturing operations from a leased facility in Dallas, Texas to the Company s headquarters in Irving, Texas. In connection with this move, the Company upgraded and expanded its manufacturing capacity by installing higher capacity equipment and upgraded its capabilities to produce injectable-grade pharmaceutical products. The Company believes that the plant's capacity will provide sufficient capacity for the present line of products and accommodate new products and sales growth. Final packaging of certain of the Company's wound care products is completed by outside vendors. The Company's calcium alginates, films, hydrocolloids, foam dressings, gel sheets, tablets, capsules, and freeze-dried products are being provided by third parties. All of the Company's bulk pharmaceutical mannans, bulk injectable mannans and freeze-dried Aloe vera L extracts are produced in its processing plant in Costa Rica. This facility has the ability to supply the bulk aloe raw materials requirements of the Company's current product lines and bulk material contracts for the foreseeable future. Finished oral and injectable dosage forms will be produced by outside vendors until in-house production becomes economically justified. Competition Research and Development. The biopharmaceutical field is expected to continue to undergo rapid and significant technological change. Potential competitors in the United States are numerous and include pharmaceutical, chemical and biotechnology companies. Many of these companies have substantially greater capital resources, research and development staffs, facilities and expertise (in areas including research and development, manufacturing, testing, obtaining regulatory approvals and marketing) than the Company. This competition can be expected to become more intense as commercial applications for biotechnology and pharmaceutical products increase. Some of these companies may be better able than the Company to develop, refine, manufacture and market products which have application to the same indications as bulk pharmaceutical mannans and bulk injectable mannans. The Company understands that certain of these competitors are in the process of conducting human clinical trials of, or have filed applications with government agencies for approval to market, certain products that will compete with the Company's products both in its present wound care market and in markets associated with products the Company currently has under development. Wound and Skin Care Division, Caraloe, Inc., and CVMD. The Company competes against many companies that sell products which are competitive with the Company's products, with many of its competitors using very aggressive marketing efforts. Many of the Company's competitors are substantially larger than the Company in terms of sales and distribution networks and have substantially greater financial and other resources. The Company's ability to compete against these companies will depend in part on the expansion of the marketing network for its products. The Company believes that the principal competitive factors in the marketing of its products is their quality, and that they are naturally based and competitively priced. Governmental Regulation The production and marketing of the Company's products, and the Company's research and development activities, are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs for human use are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended, the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. For marketing outside the United States, the Company is subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement may vary widely from country to country. Food and Drug Administration. The contents, labeling and advertising of many of the Company's products are regulated by the FDA. The Company is required to obtain FDA approval before it can study or market any proposed prescription drugs and may be required to obtain such approval for proposed nonprescription products. This procedure involves extensive clinical research, and separate FDA approvals are required at various stages of product development. The approval process requires, among other things, presentation of substantial evidence to the FDA, based on clinical studies, as to the safety and efficacy of the proposed product. In order to initiate human clinical trials on a product, extensive basic research and development information must be submitted to the FDA in an investigational new drug ("IND") application. The IND application contains a general investigational plan, a copy of the investigator's brochure (a comprehensive document provided by the drug manufacturer), copies of the initial protocol for the first study, a review of the chemistry, manufacturing and controls information for the drug, pharmacology and toxicology information, any previous human experience with the drug, results of preclinical studies and any other information requested by the FDA. If permission is obtained to proceed to clinical trials based on the IND application, initial trials, usually categorized as Phase I, are instituted. The initial or Phase I trials typically involve the administration of small, increasing doses of the investigational drug to healthy volunteers, and sometimes patients, in order to determine the general overall safety profile of the drug and how it is metabolized. Once the safety of the drug has been established, Phase II efficacy trials are conducted in which the expected therapeutic doses of the drug are administered to patients having the disease for which the drug is indicated, and a therapeutic response is sought as compared to the expected progression of the underlying disease or compared to a competitive product or placebo. Information also is sought on any possible short-term side effects of the drug. If efficacy and safety are observed in the Phase II trials, Phase III trials are undertaken on an expanded group in which the patients receiving the drug are compared to a different group receiving either a placebo or some form of accepted therapy in order to establish the relative safety and efficacy of the new drug compared with the control group. Data are also collected to provide an adequate basis for future physician prescribing information. If Phases I through III are successfully completed, the data from these trials are compiled into a new drug application ("NDA"), which is filed with the FDA in an effort to obtain marketing approval. In general, an NDA will include a summary of the components of the IND application, a clinical data section reviewing in detail the studies from Phases I through III and the proposed description of the benefits, risks and uses, or labeling, of the drug, and how both the drug substance and drug product will be manufactured and controlled. In general, a more comprehensive NDA and a more prolonged review process are required for drugs not previously approved for marketing by the FDA. If a second indication for an already approved product is sought, since many of the components of the review process are the same, a shortened review process generally can be anticipated. However, the FDA gives high priority to novel drugs providing unique therapeutic benefits and a correspondingly lower priority to drugs similar to or providing comparable benefits to others already on the market. In addition to submitting safety and efficacy data derived from clinical trials for FDA approval, NDA approval requires the manufacturer of the drug to demonstrate the identity, potency, quality and purity of the active ingredients of the product involved, the stability of these ingredients and compliance of the manufacturing facilities, processes and quality control with the FDA's current Good Manufacturing Practices regulations. After approval, manufacturers must continue to expend time, money and effort in production and quality control to assure continual compliance with the current Good Manufacturing Practices regulations. Certain of the Company's wound and skin care products are registered with the FDA as "devices" pursuant to the regulations under Section 510(k) of the Federal Food, Drug and Cosmetic Act, as amended. A device is a product used for a particular medical purpose, such as to cover a wound, with respect to which no pharmacological claim can be made. A device which is "substantially equivalent" to another device existing in the market prior to May 1976 can be registered with the FDA under Section 510(k) and marketed without further testing. A device which is not "substantially equivalent" is subject to an FDA approval process similar to that required for a new drug, beginning with an Investigational Device Exemption and culminating in a Premarket Approval. The Company has sought and obtained all its device approvals under Section 510(k). With respect to certain of its wound and skin care products, the Company intends to develop claims for which IDE and PLA submissions will be required. Department of Agriculture. Certain products being developed by the Company for animal health indications must be approved by the USDA. The procedure involves extensive clinical research, and USDA approvals are required at various stages of product development. The approval process requires, among other things, presentation of substantial evidence to the USDA as to the safety and efficacy of the proposed product. Furthermore, even if approval to test a product is obtained, there is no assurance that ultimate approval for marketing the product will be granted. USDA approval procedures can be protracted. Other Regulatory Authorities. The Company's advertising and sales practices are subject to regulation by the Federal Trade Commission, the FDA and state agencies. The Company's processing and manufacturing plants are subject to federal, state and foreign laws and to regulation by the Bureau of Alcohol, Tobacco and Firearms of the Department of the Treasury and by the Environmental Protection Agency as well as the FDA. The Company believes that it is in substantial compliance with all applicable laws and regulations relating to its operations, but there is no assurance that such laws and regulations will not be changed. Any such change may have a material adverse effect on the Company's operations. The manufacturing, processing, formulating, packaging, labeling and advertising of the Company's subsidiary Caraloe, products are also subject to regulation by one or more federal agencies, including the FDA, the Federal Trade Commission (the "FTC"), the United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various agencies of the states, localities and foreign countries to which Caraloe's products are distributed and in which Caraloe's products are sold. The FDA, in particular, regulates the formulation, manufacture and labeling of vitamin and other nutritional supplements. On October 25, 1994, the President signed into law the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). This new law revised the provisions of the Federal Food, Drug, and Cosmetic Act (the "FFDC Act") concerning the composition and labeling of dietary supplements and, in the judgement of the Company, is favorable to the dietary supplement industry. The legislation creates a new statutory class of "dietary supplement." This new class includes vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, and the legislation grandfathers, with certain limitations, dietary ingredients on the market before October 15, 1994. A dietary supplement which contains a new dietary ingredient, one not on market before October 15, 1994, will require evidence of a history of use or other evidence of safety establishing that it will reasonably be expected to be safe. The majority of the products marketed by Caraloe are classified as dietary supplements under the FFDC Act. Both foods and dietary supplements are subject to the Nutrition Labeling and Education Act of 1990 (the "NLEA"), which prohibits the use of any health claim for foods, including dietary supplements, unless the health claim is supported by significant scientific agreement and is either pre-approved by the FDA or the subject of substantial government scientific publications and a notification to the FDA. To date, the FDA has approved the use of only limited health claims for dietary supplements. However, among other things, the DSHEA amends, for dietary supplements, the NLEA by providing that "statements of nutritional support" may be used in labeling for dietary supplements without FDA preapproval if certain requirements, including prominent disclosure on the label of the lack of FDA review of the relevant statement, possession by the marketer of substantiating evidence for the statement and post-use notification to the FDA, are met. Such statements may describe how particular nutritional supplements affect the structure, function or general well-being of the body (e.g. "promotes your cardiovascular health"). The FDA issued final dietary supplement labeling regulations in 1997 that may require Caraloe to revise most of its product labels by 1999. The regulations also currently require Caraloe to submit notification to the FDA of all "statements of nutritional support," a process that Caraloe has not fully completed. Advertising and label claims for dietary supplements and conventional foods have been regulated by state and federal authorities under a number of disparate regulatory schemes. There can be no assurance that a state will not interpret claims presumptively valid under federal law as illegal under that state's regulations, or that future FDA regulations or FTC decisions will not restrict the permissible scope of such claims. Governmental regulations in foreign countries where Caraloe plans to commence or expand sales may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of Caraloe's products. Compliance with such foreign governmental regulations is generally the responsibility of Caraloe's distributors for those countries. These distributors are independent contractors over whom the Company has limited control. As a result of Caraloe's efforts to comply with applicable statutes and regulations, Caraloe has from time to time reformulated, eliminated or relabeled certain of its products and revised certain provisions of its sales and marketing program. Caraloe cannot predict the nature of any future laws, regulations, interpretations or applications, nor can it determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not c a pable of reformulating, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all of such requirements could have a material adverse effect on the Company's results of operations and financial condition. Compliance with the provisions of national, state and local environmental laws and regulations has not had a material adverse effect upon the capital expenditures, earnings, financial position, liquidity or competitive position of the Company. See also "Business -- Legal Matters" and "-- Regulatory Matters." Patents and Proprietary Rights As is industry practice, the Company has a policy of using patent, trademark and trade secret protection with a view to preserving its right to exploit the results of its research and development activities and, to the extent it may be necessary or advisable, to exclude others from appropriating the Company's proprietary technology. The Company's policy is to protect aggressively its proprietary technology by seeking and enforcing patents in a worldwide program. The Company has obtained patents or filed patent applications in the United States and approximately 24 other countries in three series regarding the compositions of acetylated mannan derivatives, the processes by which they are produced and the methods of their use. The first series of patent applications, relating to the compositions of acetylated mannan derivatives and certain basic processes of their production, was filed in a chain of United States patent applications and its counterparts in the other 24 countries. The first United States patent application in this first series, covering the composition claims of acetylated mannan derivatives, matured into United States Patent No. 4,735,935 (the "935 Patent"), which was issued on April 5, 1988. United States Patent No. 4,917,890 (the "890 Patent") was issued on April 17, 1990 from a divisional application to the 935 Patent. This divisional application pertains to most of the remaining claims in the original application not covered by the 935 Patent. The 890 Patent generally relates to the basic processes of producing acetylated mannan derivatives, to certain specific examples of such processes and to certain formulations of acetylated mannan derivatives. Two other divisional applications covering the remaining claims not covered by the 890 Patent matured into patents, the first on September 25, 1990, as United States Patent No. 4,959,214, and the second on October 30, 1990, as United States Patent No. 4,966,892. Foreign patents that are counterparts to the foregoing United States patents have been granted in some of the member states of the European Economic Community and several other countries. The second series of patent applications related to preferred processes for the production of acetylated mannan derivatives. One of them matured into United States Patent No. 4,851,224, which was issued on July 25, 1989. This patent is the subject of a Patent Cooperation Treaty application and national foreign applications in several countries. An additional United States patent based on the second series was issued on September 18, 1990, as United States Patent No. 4,957,907. The third series of patent applications, relating to the uses of acetylated mannan derivatives, was filed subsequent to the second series. Three of them matured into United States Patent Nos. 5,106,616, issued on April 21, 1992, 5,118,673, issued on June 2, 1992, and 5,308,838, issued on May 3, 1994. The Company has filed a number of divisional applications to these patents, each dealing with specific uses of acetylated mannan derivatives. Patent Cooperation Treaty applications based on the parent United States applications have been filed designating a number of foreign countries where the applications are pending. In addition, the Company has also obtained a patent in the United States relating to a wound cleanser, U.S. Patent No. 5,284,833, issued on February 8, 1994. This patent application is the subject of a Patent Cooperation Treaty application designating a number of foreign countries where the applications are pending. The Company has obtained a patent in the United States relating to a therapeutic device made from freeze-dried complex carbohydrate hydrogel (U.S. Patent No. 5,409,703 issued on April 25, 1995). A Patent Treaty application based on the parent United States application has been filed designating a number of foreign countries where the applications are pending. The Company has obtained a patent in Taiwan related to the uses of a denture adhesive containing aloe extract (Taiwan Patent No. 89390 issued on August 21, 1997) and also a patent in the United States relating to methods for the prevention and treatment of infections in animals (U.S. Patent No. 5,703,060 issued on December 30, 1997). The Company intends to file patent applications with respect to subsequent developments and improvements when it believes such protection is in the best interest of the Company. Although the scope of protection which ultimately may be afforded by the patents and patent applications of the Company is difficult to quantify, the Company believes its patents will afford adequate protection to conduct the business operations of the Company. However, there can be no assurance that (i) any additional patents will be issued to the Company in any or all appropriate jurisdictions, (ii) litigation will not be commenced seeking to challenge the Company's patent protection or such challenges will not be successful, (iii) processes or products of the Company do not or will not infringe upon the patents of third parties or (iv) the scope of patents issued to the Company will successfully prevent third parties from developing similar and competitive products. It is not possible to predict how any patent litigation will affect the Company's efforts to develop, manufacture or market its products. The Company also relies upon, and intends to continue to rely upon, trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive position. The Company typically enters into confidentiality agreements with its scientific consultants, and the Company's key employees have entered into agreements with the Company requiring that they forbear from disclosing confidential information of the Company and assign to the Company all rights in any inventions made while in the Company's employ relating to the Company's activities. Accordingly, the Company believes that its valuable trade secrets and unpatented proprietary know-how are adequately protected. The technology applicable to the Company's products is developing rapidly. A substantial number of patents have been issued to other biopharmaceutical companies. In addition, competitors have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights relating to products or processes competitive with those of the Company. To the Company's knowledge, acetylated mannan derivatives do not infringe any valid, enforceable, United States patents. A number of patents have been issued to others with respect to various extracts of the Aloe vera L plant and their uses and formulations, particularly in respect to skin care and cosmetic uses. While the Company is not aware of any existing patents which conflict with its current and planned business activities, there can be no assurance that holders of such other Aloe vera L based patents will not claim that particular formulations and uses of acetylated mannan derivatives in combination with other ingredients or compounds infringe, in some respect, on these other patents. In addition, others may have filed patent applications and may have been issued patents relating to products and technologies potentially useful to the Company or necessary to commercialize its products or achieve their business goals. There is no assurance that the Company will be able to obtain licenses of such patents on acceptable terms. The Company has given the trade name Carrasyn[R] to certain of its products containing acetylated mannans. A selected series of domestic and foreign trademark applications exists for the marks Manapol[R], Carrisyn[R] and Carrasyn[R]. Further, the Company has registered the trademark AVMP[R] and the trade name Carrington[R] in the United States. The Company believes that its trademarks and trade names are valuable assets. Employees As of March 5, 1998, the Company employed 278 persons, of whom 22 were engaged in the operation and maintenance of its Irving processing plant, 160 were employed at the Company's facility in Costa Rica and the remainder were executive, research, quality assurance, manufacturing, administrative, sales, and clerical personnel. Of the total number of employees, 86 were located in Texas, 160 in Costa Rica and one in Puerto Rico. In addition, 31 sales personnel were located in 25 other states. The Company considers relations with its employees to be good. The employees are not represented by a labor union. Financing In November 1997, the Company entered into a financing arrangement with Comerica Bank-Texas ("Comerica"). The agreement was composed of a $3,000,000 line of credit structured as a demand note without expiration with an interest rate equal to the Comerica prime rate. The line of credit is collateralized by the Company's accounts receivable and inventory. As of December 31, 1997 there was no outstanding balance owed to Comerica under the terms of the financing agreement. ITEM 2. PROPERTIES. The Company believes that all its farming property, manufacturing and laboratory facilities, as described below, and material farm, manufacturing and laboratory equipment are in satisfactory condition and are adequate for the purposes for which they are used. Walnut Hill Facility. The Company's corporate headquarters and principal U.S. manufacturing facility occupy all of the 35,000 square foot office and manufacturing building (the "Walnut Hill Facility"), which is situated on an approximately 6.6 acre tract of land located in the Las Colinas area of Irving, Texas. The Company owns the land and the building. The manufacturing operations occupy approximately 19,000 square feet of the facility, and administrative offices occupy approximately 16,000 square feet. Laboratory Facility. The Company leases 24,000 square feet of office, manufacturing and laboratory space (the "Laboratory Facility") in Irving, Texas pursuant to a lease that expires in January 2000. The Company's in-house research and development and quality assurance activities are conducted at the Laboratory Facility for the production of injectable dosage forms of Acemannan Immunostimulant. Costa Rica Facility. The Company owns approximately 405 acres of land in the Guanacaste province of northwest Costa Rica. This land is being used for the farming of Aloe vera plants and for a processing plant to produce bulk pharmaceutical and injectable mannans and freeze-dried Aloe vera extracts used in the Company s operations. Construction of the processing plant was completed during the second quarter of 1993, and the plant became operational in June 1993. Development of this facility was partially financed with borrowings under a five-year, U.S. dollar-denominated loan from Corporacion Privada de Inversiones de CentroAmerica, S.A., a private bank operating in San Jose, Costa Rica. The loan was paid off in May 1995. During the first quarter of 1994, the Company initiated a project in Costa Rica to upgrade the production plant to meet regulatory requirements for the production of bulk pharmaceutical oral and injectable mannans as required for IND s. This project was completed in the fourth quarter of 1994. ITEM 3. LEGAL PROCEEDINGS. On March 2, 1996, Dianna Gold (the "Plaintiff"), a former employee of the Company, filed an action styled Dianna Gold vs. Carrington Laboratories, Inc., and Fireman's Fund Insurance Company with the Workers Compensation Appeals Board for the State of California (Case No. SFO 394660). On March 27, 1996, Plaintiff filed an Application for Discrimination Benefits Pursuant to Labor Code Section 132(a) in that case. On March 3, 1998, the Judge in this matter signed an Order of Nonsuit that dismissed the case with prejudice. On June 26, 1996, Robert W. Brown ("Brown"), a former employee of the Company, filed a lawsuit styled Robert W. Brown vs. Carrington Laboratories, Inc., Cause No. 96-6469-L in the 193rd District Court of Dallas County, Texas, alleging breach of contract, promissory estoppel, fraud, negligent misrepresentation and slander in connection with his employment and the termination of his employment with the Company. Brown sought to recover unspecified common law and statutory damages, punitive damages, interest, attorneys fees and cost of suit. On December 6, 1996, the Judge signed an Order of Nonsuit in Cause No. 96-6469-L that dismissed the suit without prejudice to any party and ordered each party to bear its own costs and attorneys fees. On November 3, 1996, Brown filed a Charge of Discrimination against the Company with the Equal Employment Opportunity Commission ("EEOC") alleging age discrimination. The Company received a notification of this charge dated February 13, 1997 from the EEOC. In a letter dated March 21, 1997, the EEOC Dallas District Office notified the Company that it had terminated its investigation of the Company under the Age Discrimination in Employment Act. On October 8, 1996, Allison Kindt ("Kindt"), a former employee of the Company, filed a Charge of Discrimination against the Company with the EEOC, Charge No. 141970008, alleging sex discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964, as amended. On March 14, 1997 the EEOC, Raleigh NC office, notified the Company that it had terminated its investigation of the Company under the Civil Rights Act of 1964, as amended. On June 12, 1997, Kindt filed a lawsuit styled Allison Kindt v. Carrington Laboratories, Inc., Civil Action No. 5-97-CV-469-BO(1), in the United States District Court for the Eastern District of North Carolina, Western Division, alleging sex discrimination and retaliation and employment action in violation of public policy against sex discrimination in connection with her employment with the Company. Kindt seeks to recover such additional compensation and other benefits of employment and back pay as she would have received had her employment not been terminated. The Company has responded to these allegations and is vigorously defending this action. On February 3, 1997, Megan Kent ("Kent"), a former employee of the Company, filed a civil action styled Megan Kent v. Carrington Laboratories, Inc. (Docket No. DC-681-97) with the Superior Court of New Jersey Law Division, County of Burlington, Special Civil Part alleging certain violations of the New Jersey statutes, 2A:61A-1, et. seq., entitled "Sales Representatives Rights". On March 12, 1997, the Company agreed to settle the matter by means of an $8,000 payment to Kent, and the Judge signed a Stipulation of Settlement and Note of Dismissal with Prejudice. In November 1997, the Company received a letter from the Texas Department of Licensing and Regulation (the "TDLR") alleging that the Company's Walnut Hill Facility in Irving, Texas had been inspected and found in non-compliance with provisions of the Texas Architectural Barriers Act (the "Act") and regulations issued thereunder. The Act and the related regulations contain design requirements to ensure that disabled persons can make use of public facilities. An inspection report describing the alleged deficiencies was enclosed with the letter. The letter stated that the Walnut Hill Facility was required to be brought into compliance and written verification furnished to the TDLR within 30 days, and that the Company should contact the TDLR if compliance could not be accomplished within that time. The letter also stated that failure to respond to the letter would result in the matter being referred to the TDLR's Enforcement Division, which could result in a maximum administrative penalty of $1,000 per violation per day. The Company responded to that letter through the architects that the Company had engaged to design and supervise the work on the Walnut Hill Facility when the Company moved its wound and skin care product manufacturing operations to that location in 1995. The response from the architects to the TDLR proposed that the Company make certain changes, suggested that a number of the claimed deficiencies do not constitute violations of the regulations, and sought variances for certain items. In mid-March 1998, the Company received a letter from the TDLR stating that the matter would be turned over to its Enforcement Division unless the Company either informed the TDLR that the Walnut Hill Facility was in compliance with the Act and related regulations or specified a date by which the Company would comply with a plan of action. In the Company's opinion, this letter indicated that the TDLR did not receive the architects response, so the Company promptly sent another copy of that response to the TDLR. As far as the Company is aware, the TDLR has not turned this matter over to its Enforcement Division or made any claims for penalties to date. Until the Company receives a response to the proposal made by its architects for resolving the alleged deficiencies, the Company is unable to estimate the cost of resolving this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matter to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of the Company is traded on the NASDAQ National Market under the symbol "CARN." The following table sets forth the high and low sales prices of the Common Stock for each of the periods indicated. Fiscal 1996 High Low -------------- ---------- --------- First Quarter $ 34 1/2 $23 1/2 Second Quarter 50 7/8 21 Third Quarter 26 3/4 17 1/2 Fourth Quarter 23 1/4 6 7/8 Fiscal 1997 High Low ----------- ---------- --------- First Quarter $ 8 1/8 $ 5 1/4 Second Quarter 8 3/4 4 11/16 Third Quarter 6 1/2 4 13/16 Fourth Quarter 6 5/16 3 1/2 At March 23, 1998, there were 949 holders of record (including brokerage firms and other nominees) of Common Stock. The Company has not paid any cash dividends on the Common Stock and presently intends to retain all earnings for use in its operations. Any decision by the Board of Directors of the Company to pay cash dividends in the future will depend upon, among other factors, the Company's earnings, financial condition and capital requirements. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The selected consolidated financial data below should be read in conjunction with the consolidated financial statements of the Company and notes thereto and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial information for the five years ended December 31, 1997, is derived from the consolidated financial statements of the Company, of which the years 1993 through 1996, and the month of December 1994, have been audited by Arthur Andersen LLP, independent public accountants, and the year 1997 has been audited by Ernst & Young LLP, independent public accountants. The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements beginning on page F-6. Years Ended November 30, 1993, and 1994, Month Ended December 31, 1994 and Years Ended December 31, 1995, 1996 and 1997 (Dollars and numbers of shares in November 30 December 31 thousands except per share amounts) 1993 1994 1994 1995 1996 1997 Operations Statement Information: Net Sales $21,184 $ 25,430 $ 1,781 $ 24,374 $ 21,286 $ 23,559 Cost and expenses: Cost of sales 5,289 6,415 516 7,944 10,327 9,530 Selling, general and administrative 9,371 11,968 985 12,442 10,771 10,814 Research and development 5,397 5,334 327 5,370 5,927 3,006 Interest expense (income), net 218 133 23 115 (304) (37) Income (loss) before income taxes 909 1,580 (70) (1,497) (5,435) 246 Provision for income taxes 104 159 - 131 88 20 Net income (loss) $ 805 $ 1,421 $ (70) $ (1,628) $(5,523) $ 226 Net income (loss) per common share - basic and diluted (1) $ .09 $ .18 $ (.01) $ (.22) $ (.74) $ .02 Weighted average shares used in per share computations 7,324 7,341 7,344 7,933 8,798 8,953 BALANCE SHEET INFORMATION: Working capital $ 5,292 $ 4,720 $ 4,472 $ 9,095 $ 13,910 $ 9,484 Total assets 16,305 19,797 18,899 27,934 31,202 26,163 Long-term debt, net of current portion 2,168 2,035 1,997 88 46 10 Total shareholders investment $11,041 $ 12,509 $ 12,439 $ 22,399 $ 27,757 $ 22,826 (1) For a description of the calculation of basic and diluted net income (loss) per share, see Note 12 to Consolidated Financial Statements. All net income (loss) per share amounts presented conform to the requirements of Financial Accounting Standards Board Statement No. 128, Earnings Per Share.
ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Background The Company is a research-based pharmaceutical and medical device company engaged in the development, manufacturing and marketing of naturally occurring complex carbohydrate and other natural products for therapeutics in the treatment of major illnesses and the dressing and management of wounds and other skin conditions. The Company sells nonprescription products through its wound and skin care division; veterinary medical devices and pharmaceutical products through its veterinary medical division; and consumer products and bulk ingredients through its consumer products subsidiary, Caraloe, Inc. (see Note Thirteen to the consolidated financial statements for financial information on each of the segments). The Company s research and product portfolio is primarily based on complex carbohydrate technology derived naturally from the Aloe vera plant. Liquidity and Capital Resources At December 31, 1997 and 1996, the Company held cash and cash equivalents of $4,023,000 and $11,406,000, respectively. The decrease in cash of $7,383,000 was largely attributable to the repurchase of 100% of the Series E shares outstanding (see Note Seven to the consolidated financial statements), which totalled $7,785,000. Also contributing to the decrease in cash was the payment of approximately $150,000 in cancellation fees related to the second Phase III clinical study for Aliminase[TM] oral capsules (described below). Additionally, the Company has invested in inventory to support the launch of several new product lines during 1997 (described below) and to support sales of bulk products to Mannatech, Inc., and Aloe Commodities International, Inc. Receivables from these two customers totaled $781,000 and $591,000, respectively, as of December 31, 1997. As of March 13, 1998, $1,107,000 of the above balances has been collected. These decreases in cash were partially offset by private placement of common stock (see Note Eight to the consolidated financial statements) which was completed on June 20, 1997. -Total proceeds, net of issuance costs, were $2,454,000. While wound care sales grew at a rate of 4% to $17,990,000 in 1997, the consumer products and bulk ingredients sales through Caraloe, Inc. grew by 47% to $5,444,000. Much of this growth was the result of the decision to significantly grow the bulk ingredients segment of the business, where sales grew from $3,328,000 in 1996 to $4,683,000 in 1997. This had a direct impact on the utilization of the Costa Rica plant (discussed below) as well as on inventory levels both in Costa Rica and in Irving, Texas, where bulk ingredient inventories grew by $308,000 and $154,000, respectively, during 1997. In addition, finished goods inventory grew $501,000 as initial quantities of products launched in 1997 were produced or brought in from outside manufacturers. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), in the first quarter of 1996. SFAS 121 requires that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. At the time of adoption, there was no impairment of asset values in the Company based on historical production levels and future capacity requirements needed to produce the Company's drug Aliminase[TM], then under initial Phase III clinical trials (see discussion below). In late October 1996, the Company received the results of the initial Phase III clinical trial for the testing of Aliminase[TM] oral capsules, which indicated no statistically significant differences that would support a conclusion that Aliminase[TM] oral capsules provide a therapeutic effect in the treatment of ulcerative colitis. As a result, the Company terminated the second large scale clinical trial and placed further testing of Aliminase[TM] oral capsules on hold. These results triggered a new assessment of the recoverability of the costs of the Costa Rica plant's assets using the methodology provided by SFAS 121 in the fourth quarter of 1996. The net book value of the Costa Rica Plant assets as of December 31, 1996, was $3,958,000. The Company evaluated the value of Costa Rica produced components in its current product mix to determine the amount of net revenues, excluding Manapol[R] powder sales to Mannatech (see discussion of Caraloe sales to Mannatech below), attributable to the Costa Rica plant. Cash inflows for 1997 and future years were estimated using management's current forecast and business plan. All direct costs of the facility, including certain allocations of Company overhead, were considered in the evaluation of cash outflows. Results indicated there was no impairment of value under SFAS 121. In addition, the increase in bulk ingredients sales discussed above prompted the Company to announce in December 1997 that it was increasing production at the Costa Rica plant in 1998 through the installation of a high speed filling line for health maintenance drinks and that it was planning for the acquisition of additional acreage to be used for production of Aloe Vera L. As a result of the increased production levels, the Company believes that the risk of a future impairment of value for the Costa Rica plant under SFAS 121 has been greatly diminished. However, there is no assurance that future changes in product mix or the content of Costa Rica produced components in the current products will generate sufficient revenues to recover the costs of the plant under SFAS 121 methodology. As of March 6, 1998, the Company had no material capital commitments other than its leases and agreements with suppliers. In February 1995, the Company entered into a supply agreement with its supplier of freeze-dried products. The agreement required that the Company establish a letter of credit equal to 60% of the minimum purchase commitment of $2,500,000, but allowed for the amount of the letter of credit to be reduced by 60% of the purchases made under the agreement. In July 1997, the letter of credit was reduced under this provision of the agreement to $1,250,000. The supplier currently produces the CarraSorb[TM] M Freeze Dried Gel and the Carrington[TM] (Aphthous Ulcer) Patch for the Company. Both of these products represent new technology and are still in the early phase of marketing. The Company had approximately $340,000 of CarraSorb[TM] M and Carrington[TM] (Aphthous Ulcer) Patch inventory on hand as of December 31, 1997. The supply agreement also requires the Company to make minimum monthly purchases of $30,000. In February 1998, the supply agreement was amended to allow for unmet monthly minimum purchase amounts to be met by prepayments, to be applied to future purchases under the agreement, which allows the Company to keep inventory at levels appropriate for sales demand. Current sales of both items are lower than the minimum purchase requirement, but the Company believes that as licensing, acceptance and demand for the new technology increases, demand will exceed the aggregate minimum purchase requirement. As of March 6, 1998, the Company has purchased products totaling approximately $515,000 from this supplier. The Company is in full compliance with the agreement and, as of March 6, 1998, has the available resources to meet all future minimum purchase requirements. In November 1995, the Company signed a licensing agreement with a supplier of calcium alginates and other wound care products. Under the agreement, the Company has exclusive marketing rights for ten years to advanced calcium alginate products for North and South America and in the People's Republic of China. Under the agreement, the Company made an up-front payment to the supplier of $500,000 in November 1995, and in July 1997 and October 1997, additional payments of $166,000 and $167,000, respectively, were paid to this supplier upon delivery of the Carrasmart[TM] Hydrocolloid, a new product launched in the third quarter of 1997. These payments resulted in increasing other assets of the Company. As of December 31, 1997, the net book value of this agreement was $710,000. Additional payments totaling $167,000 will be made to the supplier as new products are delivered. The Company began a large scale clinical trial during the third quarter of 1995 for the testing of its Aliminase[TM] oral capsules for the treatment of acute flare-ups of ulcerative colitis. The cost of this clinical trial was approximately $2,300,000. All expenses related to this trial have been recognized and paid. In the third quarter of 1996, the Company began a second large scale clinical trial for the testing of Aliminase[TM] oral capsules for the treatment of ulcerative colitis. The cost of this trial was expected to be approximately $2,500,000, of which approximately $212,000 was required as an initial payment when the research contract was signed on September 19, 1996. The full amount of the initial payment was expensed in the third quarter. In late October 1996, the Company received the results of the initial Phase III clinical trial for the testing of Aliminase[TM] oral capsules, which indicated that no statistically significant differences were found to support a therapeutic effect. As a result, the Company terminated the second large scale clinical trial and placed further testing of Aliminase[TM] oral capsules on hold. Approximately $150,000 in cancellation fees was recorded in relation to this termination. In 1997, the Company began efforts to reformulate Aliminase[TM] into a reconstitutable powder form. The reformulation was completed, and the Company began collecting sufficient data to submit to the FDA for permission to conduct a new Phase III clinical study for Aliminase[TM]. As of March 6, 1998 the Company has not yet met with the FDA on this matter. In late 1995, the Company began an initial Phase I study using CarraVex[TM] injectable (formerly CARN 750) in cancer patients involving six cancer types. The estimated cost of this study is $475,000, of which approximately $295,000 had been expensed as of December 31, 1997. Expenses totaling $94,000 were recorded in 1997. No expenses have been incurred in the first quarter of 1998. In October 1996, the Company completed a $6,600,000 financing involving the private placement of Series E Convertible Preferred Stock (the "Series E Shares"). At that time, plans called for much of the proceeds from this sale to be used to continue Carrington s clinical research programs (see Note Seven to the consolidated financial statements). On October 31, 1996, the Company announced the results of the first Phase III trial of Aliminase[TM] oral capsules. Due to the unfavorable results of the first Phase III trial, the Aliminase[TM] project was placed on hold. Additionally, the Company's management canceled the second Phase III clinical trial then under contract. This event resulted in significant changes in the Company's planned uses of and need for these funds. In addition to the change in the Company's needs, the decline in the market price of the Company's Common Stock had increased the extent of the dilution that would have occurred if all of the Series E Shares then outstanding were converted into Common Stock. For these and other reasons, the Company's Board of Directors concluded that it was in the best interest of the Company and its shareholders that the Company repurchase the Series E Shares (see Note Seven to the consolidated financial statements). On March 4, 1997, the Company completed a repurchase of 50% of the Series E Shares for a premium of 13% over the original purchase. On May 21, 1997 the Company repurchased the remaining Series E Shares from the Series E shareholders for a total cash purchase price of approximately $3,852,000. For both transactions, amounts paid to preferred shareholders in excess of par totaled $70,000 more than the embedded deemed dividend recognized in 1996. This additional deemed dividend was used in the earnings per share calculation in 1997 to reduce net income available to common shareholders. In November 1997, the Company entered into an agreement with Comerica Bank-Texas for a $3,000,000 line of credit, secured by accounts receivable and inventory. This credit facility will be used for operating needs, as required, and to secure the reissuance of the letter of credit described above. This will result in freeing an additional $1,250,000 in operating funds, as the certificate of deposit currently serving as collateral will no longer be required. The Company believes that its available cash resources and expected cash flows from operations will provide the funds necessary to finance its current operations. However, the Company does not expect that its current cash resources will be sufficient to finance the major clinical studies and costs of filing new drug applications necessary to develop its products to their full commercial potential. Additional funds, therefore, may have to be raised through equity offerings, borrowings, licensing arrangements or other means, and there is no assurance that the Company will be able to obtain such funds on satisfactory terms when they are needed. The Company is subject to regulation by numerous governmental authorities in the United States and other countries. Certain of the Company's proposed products will require governmental approval prior to commercial use. The approval process applicable to prescription pharmaceutical products usually takes several years and typically requires substantial expenditures. The Company and any licensees may encounter significant delays or excessive costs in their respective efforts to secure necessary approvals. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of the Company's or any licensees products. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested could delay or preclude the Company or any licensees from marketing their products, or could limit the commercial use of the products, and thereby have a material adverse effect on the Company's liquidity and financial condition. Impact of Inflation The Company does not believe that inflation has had a material impact on its results of operations. Fiscal 1997 Compared to Fiscal 1996 Net sales were $23,559,000 in 1997, compared with $21,286,000 in 1996. This increase of $2,273,000, or 10.7%, resulted from an increase of $1,750,000, or 47.4%, in sales of Caraloe, Inc., the Company's consumer products subsidiary, and an increase of $688,000, or 4.0%, in sales of the Company's wound and skin care products. Total sales of the Company's wound and skin care products in 1997 were $17,990,000 as compared to $17,302,000 in 1996, an increase of $688,000, or 4%. New products introduced in 1997 accounted for $682,000 in wound and skin care sales during 1997. In the past, the Company's wound and skin care products have been marketed primarily to hospitals and select acute care providers. This market has become increasingly competitive as a result of pressures to control health care costs. Hospitals and distributors have reduced their inventory levels and the number of suppliers used. Also, health care providers have formed group purchasing consortiums to leverage their buying power. This environment required the Company to offer greater discounts and allowances to maintain customer accounts. Additionally, in the fourth quarter of 1995, the Medicare/ Medicaid reimbursement rate for hydrogels was significantly reduced (from 1 ounce per day to 3 ounces per month). These changes significantly reduced the demand for hydrogels in the market place. In February 1996, the Company revised its price list to more accurately reflect current market conditions. Overall wound and skin care prices were lowered by a weighted average of 19.1%. In addition to these cost pressures, over the last several years the average hospital stay has decreased over 50%, resulting in more patients being treated at alternative care facilities and at home by home health care providers. This also had a negative impact on sales since the Company's sales force had been primarily focused on the hospital market. To counter the market changes, the sales force is now also aggressively pursuing the alternative and home health care markets. To continue to grow its wound care business, the Company realized that it had to expand from the estimated $38 million hydrogel market in which it competed to a much larger segment of the estimated billion dollar wound care market. To achieve this objective, an aggressive program of new product development and licensing was undertaken in 1995 with the goal of creating a complete line of wound care products to address all stages of wound management. As a result of this program, the Company launched three new wound care product types in 1996 and nine new wound care product types in 1997. Caraloe's sales increased from $3,694,000 to $5,444,000, or 47.4%. Caraloe sales to Mannatech increased from $3,273,000 to $3,547,000. Of the 1997 sales, $4,102,000 was related to the sale of bulk Manapol[R] powder. The supply agreement in effect during 1996 provided Mannatech with an exclusive license for the Manapol[R] trademark worldwide and contained a provision for termination of the agreement upon 90 days advance notice. Caraloe was informed by Mannatech in January 1997 that the supply agreement would be terminated on March 31, 1997. As the supply agreement between Mannatech and Caraloe was terminated, the exclusive license agreement for the Manapol[R] trade mark also terminated on March 31, 1997. Caraloe was then able to sell Manapol[R] powder or license the trademark to other third parties as well as use it in Caraloe s products. In August 1997, Caraloe entered into new licensing and supply agreements with Mannatech granting a non-exclusive license for the use of the Manapol[R] trademark for a three year period. Sales of the Company's veterinary products decreased from $283,000 to $125,000. In March 1996, the Company entered into an agreement with Farnam Companies, Inc., a leading marketer of veterinary products, to promote and sell the Company's veterinary line on a broader scale, including the introduction of the Company's products under Farnam's private label. In 1997, Farnam's sales of the Company's products were negatively impacted by the backorder of Acemannan Immunostimulant. Production should recommence on schedule in 1998. Farnam has increased its sales force to improve the market share of the private labeled products. Cost of sales decreased from $10,327,000 to $9,530,000, or 7.7%. As a percentage of sales, cost of sales decreased from 42.2%, after adjusting for period cost write-offs (discussed below), to 40.5%. The decrease in cost of goods sold is largely attributable to volume- related manufacturing efficiencies realized in Costa Rica due to the increased Caraloe Manapol[R] sales. The benefits of these manufacturing efficiencies were partially offset by the lower profit margins earned on Manapol[R] as compared to wound care products. Cost of goods sold in 1996 included $1,396,000 of additional expenses which consisted of a $630,000 inventory valuation decrease on June 30, 1996, as described below, and period costs of $766,000. The period costs were related to the annual shutdown of the facility in Costa Rica for routine maintenance and inventory reduction programs. As a result of the implementation of programs to reduce operating and production costs, several changes were implemented at the Company s Costa Rica production facility in early 1996. This facility produces all of the Company's freeze-dried Aloe vera raw materials. Among these changes was a restructuring of the work force as well as improvements in efficiencies in the manufacturing process. The implementation of these changes significantly reduced the cost of Costa Rica production in the second quarter of 1996. As a result of these reductions in cost, the actual cost of production under FIFO as of June 30, 1996, was approximately 18% lower than the Company s standard cost, which was equal to the FIFO cost of production at December 31, 1995 and March 31, 1996. The Company determined that the standard cost should be reset to the then current actual cost of production. This reduction in standard FIFO cost decreased inventory valuation by $630,000. This amount represented the change in the accumulated value of all items in inventory as of June 30, 1996 that were produced in Costa Rica as well as those finished goods that contain component items produced in Costa Rica. This decrease in inventory value was expensed in 1996 as a period cost and was included in cost of sales. Selling, general and administrative ("SG&A") expenses increased to $10,814,000 from $10,771,000, or 0.4%. Partially offsetting the increase was approximately $242,000 in one-time charges incurred in 1996 which were not incurred in 1997. These one-time charges included approximately $150,000 in additional costs related to the launch of three new product types and a one-time write-off of approximately $92,000 of bank and legal charges related to the early retirement of all bank debt in 1996. Also contributing to the modest size of the increase in SG&A expenses were the ongoing benefits received from cost reduction programs put in place in 1996 and the restructuring of the sales force, also put in place in 1996, which were continued in 1997. Research and development ("R&D") expenses decreased to $3,006,000 from $5,927,000, or 49.3%. This decrease was the result of discontinuing the Phase III clinical program for the testing of Aliminase[TM] oral capsules for the treatment of acute flare-ups of ulcerative colitis. The first clinical study under this program was initiated in the third quarter of 1995 and was substantially completed in the third quarter of 1996. In September of 1996, the Company initiated the second pivotal Phase III testing of Aliminase[TM] oral capsules. In late October 1996, the Company received the results of the initial phase III clinical trial for the testing of Aliminase[TM] oral capsules, which indicated that no statistically significant differences were found to support a therapeutic effect. As a result, the Company terminated the second large scale clinical trial and placed further testing of the Aliminase[TM] oral formulation on hold. Approximately $317,000 of expenses for this program was incurred in 1997. Net interest income of $36,000 was realized in 1997, versus $304,000 in 1996, due to having less excess cash to invest as well as the repurchase of the remainder of the Series E Preferred Stock issue in May 1997. Net income for 1997 was $226,000, versus a net loss of $5,523,000 for 1996. This change is a result of increased volume in Caraloe, Inc. sales, increased production volumes in Costa Rica resulting in the realization of manufacturing efficiencies and the full absorption of production, and decreased research and development expenditures related to the cancellation of the second Phase III ulcerative colitis study. Assuming dilution, net income per share was $.02 in 1997, compared to a loss per share of $.74 in 1996. Fiscal 1996 Compared to Fiscal 1995 Net sales were $21,286,000 in 1996, compared with $24,374,000 in 1995. This decrease of $3,088,000, or 12.7%, resulted from a decrease of $3,845,000 in sales of the Company's wound and skin care products from $21,147,000 to $17,302,000, or 18.2%. New products introduced in late January accounted for $1,182,000 in wound and skin care sales during 1996. The decrease in wound and skin care sales was partially offset by a $787,000, or 27.1%, increase in sales of Caraloe, Inc., the Company's consumer products subsidiary. Caraloe's sales increased from $2,907,000 to $3,694,000, or 27.1%. Caraloe sales to Mannatech increased from $2,488,000 to $3,273,000. Of the 1996 sales, $3,213,000 was related to the sale of bulk Manapol[R] powder. Sales of the Company's veterinary products decreased from $320,000 to $290,000. In March 1996, the Company entered into an agreement with Farnam Companies, Inc., a leading marketer of veterinary products, to promote and sell the Company s veterinary line on a broader scale. Cost of sales increased from $7,944,000 to $10,327,000, or 30.0%. As a percentage of sales, cost of sales increased from 32.2% to 42.0% after adjusting for a $630,000 inventory valuation decrease on June 30, 1996 and period costs of $104,000 and $766,000 in 1995 and 1996, respectively. The period costs are related to the annual shutdown of the facility in Costa Rica for routine maintenance and inventory reduction programs. The increase in cost of goods sold is largely attributable to the increased sales of bulk Manapol[R] powder, which had a substantially lower profit margin in the first quarter of 1996 as compared to 1995, as a result of decreased production levels in the first quarter of 1996, and as compared to the margins on the Company's wound and skin care products, and the overall 19.1% price decrease which occurred in February of 1996. Additionally, all of the new products introduced in the first half of 1996 are manufactured for the Company by third-party manufacturers and have a lower profit margin than the products manufactured by the Company. To accelerate new product development and reduce overhead, the Company was restructured in 1995. The restructuring included the lay-off of seventeen high level and under-utilized positions in administration, marketing, and research and development, for a net reduction in salaries and benefits of approximately $120,000 per month. Also, the Company relocated its manufacturing operations to its current facility on Walnut Hill in Irving, Texas, and immediately realized a reduction in overhead and production costs, as the new facility is more efficient than the prior location. As the Walnut Hill facility is owned by the Company, rent and other facility expenses related to the former production facility of approximately $25,000 per month were eliminated. Each of these items is expected to reduce future expenses and improve cash flow results. As a result of the restructuring, approximately $1,400,000 of one-time charges were taken during 1995. Of these charges, approximately $147,000 of severance compensation was paid in the first two quarters of 1996. Of this amount, $75,000 was a final payment to a single former high ranking research and development employee. This negotiated payment relieved the Company of $128,000 in future severance compensation liability to this employee. As of June 30, 1996, all liabilities resulting from the restructuring were paid in full or otherwise relieved. SG&A expenses decreased to $10,771,000 from $12,442,000, or 13.4%. This decrease was attributable in part to approximately $900,000 in one-time charges in the first nine months of 1995. These one-time charges were related to severance agreements, legal expenses and settlements and debt refinancing costs. This was partially offset as the Company incurred approximately $150,000 in additional costs related to the launch of three new product types and a one-time write-off of approximately $92,000 of bank and legal charges related to the early retirement of all bank debt in 1996. Also contributing to the reduced SG&A expenses were the benefits received from the cost reduction programs put in place earlier in the year as well as savings generated from the restructuring of the sales force. R&D expenses increased to $5,927,000 from $5,370,000, or 10.4%. This increase was the result of beginning the initial large scale Phase III clinical trial for the testing of Aliminase[TM] oral capsules during the third quarter of 1995. This study was substantially completed in the third quarter of 1996. In September of 1996, the Company initiated the second pivotal Phase III testing of Aliminase[TM] oral capsules. The initial payment of approximately $212,000 was expensed in the third quarter, and approximately $150,000 in cancellation fees were also recorded in the third quarter of 1996 after this clinical trial was canceled. Additional R&D costs related to the ongoing cancer research contributed to the increase in R&D during 1996 as well. These costs were partially offset by a reduction of internal salaries and other operating expenses. Net interest income of $304,000 was realized in 1996, versus net interest costs of $115,000 in 1995, due to having more excess cash to invest as well as the retirement of all bank debt in April 1996. Net loss for 1996 was $5,523,000, versus a net loss of $1,628,000 for 1995. This change is a result of a changing product mix, more products manufactured by third parties, decreased sales which resulted from a change in the Medicare reimbursement rates, and increased R&D expenditures related to the Phase III ulcerative colitis study and the ongoing Phase I cancer study. Loss per share was $.74 in 1996, compared to a loss per share of $.22 in 1995. The loss per share available to common shareholders in 1996 includes the recognition of a $986,000, or $.11 per share, beneficial conversion feature of the Company's Series E convertible preferred stock, accounted for as a preferred dividend in the calculation of loss per share for the year ended December 31, 1996. All statements other than statements of historical fact contained in this report, including but not limited to statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" (and similar statements contained in the Notes to Consolidated Financial Statements) concerning the Company's financial position, liquidity, capital resources and results of operations, its prospects for the future and other matters, are forward-looking statements. Forward-looking statements in this report generally include or are accompanied by words such as "anticipate," "believe," "estimate," "expect," "intend" or words of similar import. Such forward-looking statements include, but are not limited to, statements regarding the Company's plan or ability to recover the cost of the Costa Rica plant, to absorb the plant s operating cost, to achieve growth in demand for or sales of products, to reduce expenses and manufacturing costs and increase gross margin on existing sales, to initiate, continue or complete clinical and other research programs, to vigorously defend the legal proceedings described in this report, to obtain financing when it is needed, to increase the Company's market share in the alternative and home health care markets, to improve its revenues and fund its operations from such revenues and other available cash resources, to enter into licensing agreements, to develop and market new products and increase sales of existing products, to obtain government approval to market new products, to expand its business into a larger segment of the market for wound care products and increase its market share in the alternative care markets, to promote and sell its veterinary products on a broader scale, and various other matters. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include but are not limited to the possibilities that the Company may be unable to obtain the funds needed to carry out large scale clinical trials and other research and development projects, that the results of the Company's clinical trials may not be sufficiently positive to warrant continued development and marketing of the products tested, that new products may not receive required approvals by the appropriate government agencies or may not meet with adequate customer acceptance, that the Company may not be able to obtain financing when needed, that the Company may not be able to obtain appropriate licensing agreements for products that it wishes to market or products that it needs assistance in developing, that demand for the Company's products may not be sufficient to enable it to recover the cost of the Costa Rica plant or to absorb all of that plant's operating costs, and that the Company's efforts to improve its sales and reduce its costs may not be sufficient to enable it to fund its operating costs from revenues and available cash resources, that one or more of the customers that the Company expects to purchase significant quantities of products from the Company or Caraloe may fail to do so, that competitive pressures may require the Company to lower the prices of or increase the discounts on its products, and that the Company may be unable to produce or obtain, or may have to pay excessive prices for, the raw materials or products it needs. All forward-looking statements in this report are expressly qualified in their entirety by the cautionary statements in the two immediately preceding paragraphs. Year 2000 Issues During 1997, the Company began an investigation of computer systems used in the activities of the business to process data and information to determine the exposure the Company has to software problems arising from the year 2000 issue. The Company surveyed its business, scientific and network systems and discovered numerous software programs which had not been updated or corrected to address the year 2000. In all cases, software vendors were contacted and the scope and nature of the problem was discussed. For most of these cases, program fixes or version upgrades were obtained, installed and tested to insure that the matter was remedied. In one case, the Company has experienced some difficulty with a program that has already been updated. In this case, the software vendor has been contacted and is investigating the matter. As of December 31, 1997, there remained two minor programs to be updated. The Company expects that program fixes or version upgrades will be available and implemented by June 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is not required to make the disclosures contemplated by Item 7A in this Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The response to Item 8 is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Effective March 19, 1997, the Company appointed the accounting firm of Ernst & Young LLP as the Company's independent public accountants for fiscal 1997 to replace Arthur Andersen LLP, which resigned on that same date. The Company's Board of Directors approved the selection of Ernst & Young LLP as independent public accountants upon the recommendation of the Board's Audit Committee. During 1995 and 1996 and the period from January 1, 1997 through March 18, 1997, there were no disagreements with Arthur Andersen LLP on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedures or any reportable events. Arthur Andersen LLP's report on the financial statements for the years 1995 and 1996 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. The Company provided Arthur Andersen LLP with a copy of this disclosure and requested that Arthur Andersen LLP furnish it with a letter addressed to the Securities and Exchange Commission (the "Commission") stating whether it agreed with the above statements. A copy of Arthur Andersen LLP's letter to the Commission, dated April 7, 1997, was filed as Exhibit 16.1 to the Company's Form 10-K/A amendment to its Form 10-K Annual Report for the year ended December 31, 1996, which amendment was filed with the Commission on April 7, 1997. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by ITEM 10 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1997. ITEM 11. EXECUTIVE COMPENSATION. The information required by ITEM 11 of Form 10-K is hereby incorporated by reference from the information appearing under the caption "Executive Compensation" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by ITEM 12 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Security Ownership of Management " and "Principal Shareholders" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by ITEM 13 of Form 10-K is hereby incorporated by reference from the information appearing under the caption "Certain Transactions" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements. Reference is made to the index on page F-1 for a list of all financial statements filed as a part of this Annual Report. (2) Financial Statement Schedules. Reference is made to the index on page F-1 for a list of all financial statement schedules filed as a part of this Annual Report. (3) Exhibits. Reference is made to the Index to Exhibits on pages E-1 through E-10 for a list of all exhibits filed as a part of this Annual Report. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the last quarter of its fiscal year ended December 31, 1997. CARRINGTON LABORATORIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Consolidated Financial Statements of the Company: Consolidated Balance Sheets -- December 31, 1996 and 1997 F - 2 Consolidated Statements of Operations -- years ended December 31, 1995, 1996 and 1997 F - 3 Consolidated Statements of Shareholders' Investment -- years ended December 31, 1995, 1996 and 1997 F - 4 Consolidated Statements of Cash Flows -- years ended December 31, 1995, 1996 and 1997 F - 5 Notes to Consolidated Financial Statements F - 6 Financial Statement Schedule Valuation and Qualifying Accounts F - 21 Report of Ernst & Young LLP, Independent Public Accountants F - 22 Report of Arthur Andersen LLP, Independent Public Accountants F - 23 Consolidated Balance Sheets (Dollar amounts in thousands, except share amounts) December 31 December 31 1996 1997 ASSETS Current assets: Cash and cash equivalents $11,406 $ 4,023 Accounts receivable, net of allowance for doubtful accounts of $213 and $478 1996 and 1997, respectively 1,912 3,457 Inventories 3,623 5,003 Prepaid expenses 368 328 Total current assets 17,309 12,811 Property, plant and equipment, net 11,678 10,815 Other assets 2,215 2,537 Total assets $31,202 $26,163 LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Accounts payable $ 1,621 $ 1,143 Accrued liabilities 1,824 2,194 Total current liabilities 3,445 3,337 Commitments and contingencies SHAREHOLDERS' INVESTMENT: Preferred stock, 1,000,000 shares authorized (all series) Series C, $100 par value, No shares issued at December 31, 1996 and 1997 - - Series E Convertible, $100 par value, 660 shares issued at December 31, 1996 66 - Common stock, $.01 par value, 30,000,000 shares authorized, 8,869,819 and 9,306,462 shares issued and outstanding at December 31, 1996 and 1997, respectively 89 93 Capital in excess of par value 56,680 51,585 Deficit (29,078) (28,852) Total shareholders' investment 27,757 22,826 Total liabilities and shareholders'investment $31,202 $26,163 The accompanying notes are an integral part of these balance sheets.
Consolidated Statements of Operations (Amounts in thousands, except per share amounts) Years Ended December 31 ---------------------------------- 1995 1996 1997 Net sales $24,374 $21,286 $23,559 Cost and expenses: Cost of sales 7,944 10,327 9,530 Selling, general and administrative 12,442 10,771 10,814 Research and development 5,370 5,927 3,006 Interest expense 251 88 6 Interest income (136) (392) (43) Income (loss) before income taxes (1,497) (5,435) 246 Provision for income taxes 131 88 20 Net income (loss) (1,628) 5,523) 226 Dividends and income attributed to preferred shareholders (140) (1,023) (70) Net income (loss) available to common shareholders $ (1,768) $ (6,546) $ 156 Net income (loss) available to common shareholders per share - basic and diluted $ (.22) $ (.74) $ .02 The accompanying notes are an integral part of these statements.
Consolidated Statements of Shareholders' Investment For the Years Ended December 31, 1995, 1996 and 1997 (Dollar amounts and share amounts in thousands)
Capital in Total Preferred Common Excess of Shareholder's Stock Stock Par Value Deficit Investment Shares Amount Shares Amount Balance, December 31, 1994 11 $1,041 7,344 $ 74 $33,075 $(21,750) $12,440 Sales of common stock net of issuance costs of $41 - - 300 3 2,956 - 2,959 Issuance of common stock upon exercise of stock options and warrants - - 711 7 8,426 - 8,433 Issuance of common stock for management and directors compensation - - 24 - 209 - 209 Dividends on preferred stock 1 126 - - - (140) (14) Net loss - - - - - (1,628) (1,628) - -------------------------------------------------------------------------------------------- Balance, December 31, 1995 12 1,167 8,379 84 44,666 (23,518) 22,399 Issuance of common stock upon exercise of stock options, warrants and employee stock purchase plan - - 316 3 4,604 - 4,607 Dividends on preferred stock - 35 - - - (37) (2) Conversion of preferred to common stock (Series C) (12) (1,202) 175 2 1,200 - - Sales of convertible preferred stock (Series E), $100 Par, net of issuance costs of $324 1 66 - - 6,210 - 6,276 Net loss - - - - - (5,523) (5,523) - -------------------------------------------------------------------------------------------- Balance, December 31, 1996 1 66 8,870 89 56,680 (29,078) 27,757 Issuance of common stock upon exercise of stock options and employee stock purchase plan - - 21 - 153 - 153 Sale of common stock net of issuance costs of $21 - - 415 4 2,471 - 2,475 Re-purchase of convertible preferred stock (Series E), $100 Par (1) (66) - - (7,719) - (7,785) Net income - - - - - 226 226 - -------------------------------------------------------------------------------------------- Balance, December 31, 1997 - $ - 9,306 $ 93 $51,585 $ (28,852) $22,826 The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows (Dollar amounts in thousands) Years ended December 31, --------------------------------- 1995 1996 1997 Cash flows from operating activities: Net income (loss) $ (1628) $(5,523) $ 226 Adjustments to reconcile income (loss) to net cash used by operating activities: Depreciation and amortization 1,277 1,273 1,196 Provision for inventory obsolescence 476 545 523 Changes in assets and liabilities: Accounts receivable, net 658 315 (1,545) Inventories (664) 1,067 (1,903) Prepaid expenses (319) 490 40 Other assets (514) (1,534) (360) Accounts payable and accrued liabilities (545) 949 (76) Net cash used by operating activities (1,259) (2,418) (1,899) Cash flows from investing activities: Purchases of property, plant and equipment (4,206) (242) (295) Net cash used by investing activities (4,206) (242) (295) Cash flows from financing activities: Issuances of common stock 11,393 4,607 2,628 Issuance (retirement) of preferred stock - 6,276 (7,785) Proceeds from short and long-term borrowings 5,742 - - Payments of short and long-term debt (5,848) (2,999) - Principal payments of capital lease obligations (64) (40) (32) Net cash provided (used) by financing activities 11,223 7,844 (5,189) Net increase (decrease) in cash and cash equivalents 5,758 5,184 (7,383) Cash and cash equivalents at beginning of year 464 6,222 11,406 Cash and cash equivalents at end of year $ 6,222 $11,406 $ 4,023 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 281 $ 87 $ 10 Cash paid during the year for income taxes 99 13 - Supplemental Disclosure of Non-Cash Financing Activities: Equipment acquired through capital leases - 39 - Issuances of common stock and warrants 209 - - The accompanying notes are an integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE. BUSINESS Carrington Laboratories, Inc. (The "Company") is a research-based pharmaceutical and medical device company engaged in the development, manufacture and marketing of complex carbohydrate and other natural products derived from the Aloe vera plant. The Company's Wound and Skin Care division offers a comprehensive line of wound management products to hospitals, alternative care facilities and the home health care market. Sales are primarily in the United States through a network of distributors. Caraloe, Inc., a subsidiary, markets or licenses consumer products and bulk ingredients. Principal sales of Caraloe, Inc. are bulk ingredients which are sold to United States manufacturers who include the high quality aloe extracts in their finished products. The Company's Veterinary Medical division markets vaccines and wound and skin care products to the veterinary market through third party licensees principally in the United States. The Company's products are produced at its plants in Irving, Texas and in Costa Rica. A portion of the Aloe vera leaves used for manufacturing the Company's products are grown on a Company-owned farm in Costa Rica. The remaining leaves are purchased from independent producers in Mexico and Central America. NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Carrington Laboratories, Inc. (the "Company"), and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with 1997 presentation. CASH EQUIVALENTS The Company's policy is that all highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents unless otherwise restricted. INVENTORY Inventories are recorded at lower of first-in, first-out cost or market. DEPRECIATION AND AMORTIZATION Land improvements, buildings and improvements, furniture and fixtures and machinery and equipment are depreciated on the straight-line method over their estimated useful lives. Leasehold improvements and equipment under capital leases are depreciated over the terms of the respective leases. LONG-LIVED ASSETS The Company regularly reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Recoverability is based on whether the carrying amount of the asset exceeds the current and anticipated undiscounted cash flows related to the asset. TRANSLATION OF FOREIGN CURRENCIES The functional currency for international operations (primarily Costa Rica) is the U.S. dollar. Accordingly, such foreign entities translate monetary assets and liabilities at year-end exchange rates while non-monetary items are translated at historical rates. Revenue and expense accounts are translated at the average rates in effect during the year, except for depreciation and cost of sales which are translated at historical rates. Translation adjustments and transaction gains or losses are recognized in the consolidated statement of operations in the year of occurrence. REVENUE RECOGNITION The Company recognizes revenue when title to the goods transfers. For the majority of the Company's sales, this occurs at the time of shipment. FEDERAL INCOME TAXES Deferred income taxes reflect the tax effect of temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. These deferred taxes are measured by applying currently enacted tax laws. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Certain laboratory and test equipment determined to have alternative future uses in other research and development activities has been capitalized and is depreciated as research and development expense over the life of the equipment. ADVERTISING Advertising expense is charged to operations in the year in which such costs are incurred. Advertising expense has not been significant for 1995, 1996, or 1997. STOCK BASED COMPENSATION The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" in the primary financial statements and to provide supplementary disclosures required by FASB Statement No. 123, "Accounting for Stock-Based Compensation" (See Note Eight). NET INCOME (LOSS) PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No, 128, Earnings Per Share. Statement 128 replaced the calculation of primary and fully diluted net income (loss) per share with basic and diluted earnings per share. Unlike primary net income (loss) per share, basic net income (loss) per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income (loss) per share is very similar to the previously reported fully diluted earnings per share and includes the dilutive effects of options, warrants and convertible securities using the treasury stock method. No restatement of previously reported net income (loss) available to common shareholders per share for 1995 or 1996 was required to conform to the Statement 128 requirements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OPERATING SEGMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131), which is effective for years beginning after December 15, 1997. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements retroactively in 1998. Management has not completed its review of Statement 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's segments. NOTE THREE. INVENTORIES Inventories are recorded at the lower of first-in, first-out cost or market. The following summarizes the components of inventory at December 31, 1996 and 1997, in thousands: 1996 1997 --------------------------------------------------------------- Raw materials and supplies $ 658 $1,438 Work-in-process 1,197 1,296 Finished goods 1,768 2,269 --------------------------------------------------------------- Total $3,623 $5,003 ---------------------------------------------------------------- The inventory balances above are net of $322,000 and $516,000 of reserves for obsolete and slow moving inventory at December 31,1996 and 1997, respectively. NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31, 1996, and 1997, in thousands: Estimated 1996 1997 Useful Lives - -------------------------------------------------------------------------- Land and improvements $ 1,389 $ 1,389 Buildings and improvements 8,085 8,086 7 to 25 years Furniture and fixtures 880 892 4 to 8 years Machinery and equipment 7,589 7,836 3 to 10 years Leasehold improvements 756 793 1 to 3 years Equipment under capital leases 152 150 4 years - ---------------------------------------------------------------------- Total 18,851 19,146 Less accumulated depreciation and amortization 7,173 8,331 - ---------------------------------------------------------------------- Property, plant and equipment, net $11,678 $10,815 The Company's net investment in property, plant and equipment and other assets in Costa Rica at December 31, 1996 and 1997 were $3,958,000 and $3,738,000, respectively. NOTE FIVE. ACCRUED LIABILITIES The following summarizes significant components of accrued liabilities at December 31, 1996 and 1997, in thousands: 1996 1997 ---------------------------------------------------------------------- Accrued payroll $ 232 $ 232 Accrued sales commissions 187 238 Accrued taxes 512 633 Other 893 1,091 ---------------------------------------------------------------------- Total $1,824 $2,194 ---------------------------------------------------------------------- NOTE SIX. LINE OF CREDIT In November 1997, the Company entered into an agreement with a bank for a $3,000,000 line of credit, collateralized by accounts receivable and inventory. This credit facility will be used for operating needs, as required, and to issue a letter of credit to replace a certificate of deposit of $1,250,000 at December 31, 1997 (included in other assets) collateralizing a supply agreement with its supplier of freeze dried products (See Note Nine). The interest rate on this credit facility is equal to the bank's prime rate. As of December 31, 1997 there was no balance outstanding on the credit line. In 1996, average short-term borrowings on a line of credit with a bank were $991,000 at an average interest rate of 7.7% with the maximum borrowings outstanding during the year of $2,977,000. No such short- term borrowings were outstanding in 1997. NOTE SEVEN. PREFERRED STOCK SERIES C SHARES The Series C Shares were convertible into common stock of the Company at a price of $7.58 per share; were callable by the Company, after January 14, 1996; and provided for dividend payments to be made only through the issuance of additional Series C Shares. Dividends of $140,000 and $37,000 were recorded in 1995 and 1996 on the Series C Shares. In January 1996, all of the outstanding Series C shares were converted to 174,935 shares of the Company's common stock, and related warrants to purchase 55,000 shares of common stock at $15 per share were exercised. SERIES E SHARES In October 1996, the Company sold 660 shares of Series E Convertible Preferred Stock (the "Series E Shares") for $6,600,000 before offering fees and costs of $324,000. The Series E Shares were convertible into shares of the Company's common stock beginning on December 20, 1996, and prior to October 21, 1999 at a conversion price per share equal to the lower of $25.20 (120% of the market price per share of the Company's common stock) or 87% of the market price immediately preceding the conversion date. Each Series E Share was convertible into the number of whole shares of common stock determined by dividing $10,000 by the conversion price. Because the preferred stock is convertible into common stock at a conversion rate that is the lower of a rate fixed at issuance or a fixed discount from the common stock market price at the time of conversion, the discounted amount is considered to be an assured incremental yield to the preferred shareholders which must be recognized as a deemed preferred dividend over the period from issuance to the first date when the preferred stock first becomes convertible. As such, a deemed dividend of $986,000 or $0.11 per share was recognized in the net income (loss) per share calculation for 1996 as a reduction in earnings available to common shareholders. On October 31, 1996, the Company announced the results of the first Phase III trial of Aliminase[TM] oral capsules. Due to the unfavorable results of the first Phase III trial, the Aliminase[TM] project was placed on hold. Additionally, the Company's management canceled the second Phase III clinical trial then under contract. This event resulted in significant changes in the Company's planned uses of and need for these funds. In addition, the decline in the market price of the Company's common stock had increased the extent of the dilution that would have occurred if all of the Series E Shares then outstanding were converted into common stock. For these and other reasons, the Company's Board of Directors concluded that it was in the best interest of the Company and its shareholders that the Company repurchase the Series E Shares. In March 1997 the Company completed a repurchase of 50% of the above Series E Shares for $3,832,000, a premium of 13% over the original purchase price. In May 1997 the Company repurchased the remaining shares of its Series E Shares for a total cash purchase price of $3,852,000. For both transactions, amounts paid to preferred shareholders in excess of par totaled $70,000 more than the embedded deemed dividend recognized in 1996 of $986,000. This additional deemed dividend was used in the net income (loss) per share calculation in 1997 to reduce net income available to common shareholders. NOTE EIGHT. COMMON STOCK PRIVATE PLACEMENT OF COMMON STOCK In April 1995, the Company sold 300,000 shares of common stock at a price of $10.00 per share. Total proceeds, net of issuance costs, were $2,959,000. In June 1997, the Company sold 415,000 shares of common stock at a price of $6.00 per share. Total proceeds, net of issuance costs, were $2,454,000. SHARE PURCHASE RIGHTS PLAN The Company has a share purchase rights plan which provides, among other rights, for the purchase of common stock by certain existing common stockholders at significantly discounted amounts in the event a person or group acquires or announces the intent to acquire 20% or more of the Company's common stock. The rights expire in 2001 and may be redeemed at any time at the option of the Board of Directors for $.01 per right. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan (the "Stock Purchase Plan") under which employees may purchase common stock at a price equal to the lesser of 85% of the market price of the Company's common stock on the last business day preceding the enrollment date (defined as January 1, April 1, July 1 or October 1 of any plan year) or 85% of the market price on the last business day of the month. A maximum of 500,000 shares of common stock was reserved for purchase pursuant to the Stock Purchase Plan. As of December 31, 1997, 93,044 shares had been purchased by employees at prices ranging from $3.67 to $29.54 per share. STOCK OPTIONS The Company has an incentive stock option plan (the "Option Plan") under which incentive stock options and nonqualified stock options may be granted to certain employees as well as non- employee directors. Options are granted at a price no less than the market value of the shares on the date of the grant, except for incentive options to employees who own more than 10% of the total voting power of the Company's common stock, which are granted at a price no less than 110% of the market value. Options granted to employees are excercisable at the rate of 25% per year after the anniversary of the grant. Options granted to directors are exercisable in whole or in part on the date of the grant. Options granted expire four to ten years from the dates of grant. The Company has reserved 1,500,000 shares of common stock for issuance under the Option Plan. As of December 31, 1997, options to purchase 990,550 shares had been granted under the option plan, of which options for 17,200 shares had been exercised. As of December 31, 1997, options covering 752,225 shares were outstanding with exercise prices between $5.31 and $47.75, with a weighted average exercise price of $16.13 and a weighted average contractual life of 9.0 years. Of these options, 181,282 are currently exercisable with a weighted average exercise price of $27.42. The Company's 1985 Stock Option Plan expired in February 1995. The Company had reserved 1,400,000 shares of common stock for issuance under this plan. At the time the plan expired, options to purchase 1,150,440 had been granted, of which options for 863,540 shares have been exercised. As of December 31, 1997, options covering 206,915 shares were outstanding with exercise prices between $6.25 and $29.00, with a weighted average exercise price of $11.72 and a weighted average contractual life of 6.7 years. Of these options, 132,960 are currently exercisable with a weighted average exercise price of $11.93. The following summarizes stock option activity for each of the three years ended December 31, 1995, 1996 and 1997, shares in thousands: Weighted Average Shares Price Per Share Exercise Price - ---------------------------------------------------------------------------- Balance, November 30, 1994 897 $ 6.25 to $29.00 $12.95 Granted 592 $11.12 to $35.25 $20.63 Lapsed or canceled (72) $ 8.62 to $20.12 $11.93 Exercised (581) $ 6.25 to $29.00 $12.45 - ---------------------------------------------------------------------------- Balance, December 31, 1995 836 $ 6.25 to $35.25 $18.82 Granted 141 $24.25 to $47.75 $32.69 Lapsed or canceled (109) $11.25 to $28.75 $23.81 Exercised (201) $ 6.25 to $29.00 $15.33 - ---------------------------------------------------------------------------- Balance, December 31, 1996 667 $ 6.25 to $47.75 $21.99 Granted 470 $ 5.31 to $ 7.50 $ 6.84 Lapsed or canceled (178) $ 7.50 to $47.75 $18.38 - ---------------------------------------------------------------------------- Balance, December 31, 1997 959 $ 5.31 to $47.75 $15.19 - ---------------------------------------------------------------------------- Options exercisable at December 31, 1997 314 $ 7.50 to $47.75 $20.87 - ---------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable ----------------------------------- --------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Prices Shares Remaining Exercise Shares Exercise Contractual Price Price Life ---------------- -------- ----------- --------- -------- -------- $ 5.31 to $13.13 612 8.7 years $ 8.10 131 $10.65 $16.56 to $20.13 74 6.4 $17.92 47 $18.18 $24.25 to $30.25 203 9.1 $27.17 92 $27.41 $35.25 35 8.6 $35.25 25 $35.25 $47.75 35 6.5 $47.75 19 $47.75 ---------------- --------- ----------- --------- -------- --------- $ 5.31 to $47.75 959 8.5 $15.19 314 $20.87 ============== ========= ========== ======== ======== ========= As of January 30, 1998 the Company offered all option holders the option to exchange their outstanding options for new options at $4.81 per share. The new employee options are subject to four year vesting with new director options immediately vested. New options for 673,897 shares were issued in connection with the offer. The Company accounts for employee stock based compensation under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost been determined based on the fair value of options at their grant dates consistent with the method of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net income (loss) and diluted net income (loss) available to common shareholders per share would have been reduced to the following pro forma amounts: - ---------------------------------------------------------------------------- 1995 1996 1997 - ---------------------------------------------------------------------------- Net income(loss) (in thousands): As reported $(1,628) $(5,523) $226 Pro forma (2,656) (8,022) (2,199) Diluted net income(loss) available to common shareholders per share: As reported $ (0.22) $ (0.74) $.02 Pro forma (0.35) (1.03) (.25) - ----------------------------------------------------------------------------- Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost may not be representative of the pro forma cost to be expected in future years. The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1995, 1996, and 1997, respectively: risk-free interest rates of 6.50%, 6.47% and 6.13%, expected volatility of 64.2%, 63.0% and 57.0%. The Company used the following weighted-average assumptions for grants in 1995, 1996 and 1997: expected dividend yields of 0% and expected lives of 5.0 years on options granted to employees and 4.0 years on grants to directors. The weighted average fair value of options granted were $11.86, $18.70 and $6.84 in 1995, 1996, and 1997 respectively. STOCK WARRANTS From time to time, the Company has granted warrants to purchase common stock to the Company's research consultants and certain other persons rendering services to the Company. The exercise price of such warrants was normally the market price or in excess of the market price of the common stock at date of issuance. The following summarizes warrant activity for each of the periods ending December 31, 1995, 1996 and 1997, shares in thousands: Weighted Average Shares Price Per Share Exercise Price - ------------------------------------------------------------------------ Balance, November 30, 1994 299 $ 6.25 to $26.00 $14.27 Granted 20 $16.00 $16.00 Lapsed or canceled (88) $11.25 to $26.00 $17.88 Exercised (102) $ 6.25 to $16.25 $11.88 - ------------------------------------------------------------------------ Balance, December 31, 1995 129 $ 9.75 to $20.13 $13.99 Lapsed or canceled (3) $12.13 $12.13 Exercised (75) $12.75 to $15.00 $13.35 - ------------------------------------------------------------------------ Balance, December 31, 1996 and December 31, 1997 51 $ 9.75 to $20.13 $15.03 - ------------------------------------------------------------------------ Warrants exercisable at December 31, 1997 51 $ 9.75 to $20.13 $15.03 - ------------------------------------------------------------------------ The following table summarizes information about stock warrants outstanding at December 31, 1997, shares in thousands: Warrants Outstanding Warrants Exercisable ------------------------------------ ------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Prices Shares Remaining Exercise Shares Exercise Contractual Price Price Life - ---------------- -------- ----------- --------- -------- --------- $ 9.75 to $13.00 20 2.8 years $11.38 18 $11.38 $16.00 to $20.13 31 2.8 $17.39 31 $17.39 - ---------------- -------- ----------- --------- -------- --------- $ 9.75 to $20.13 51 2.8 $15.03 49 $15.03 ================ ======== =========== ========= ========= ========= COMMON STOCK RESERVED The Company has reserved a toal of 2,096,671 common shares for future issuance relating to the employee stock purchase plan, stock option plans, and stock warrants, disclosed above. NOTE NINE. COMMITMENTS AND CONTINGENCIES The Company conducts a significant portion of its operations from an o f fice/ warehouse/distribution facility and an office/laboratory facility under operating leases that expire over the next five years. In addition, the Company leases certain office equipment under operating leases that expire over the next four years. The Company s commitments under noncancellable operating leases, as of December 31, 1997 are as follows, in thousands: Years Ending December 31, ---------------------------------------------- 1998 $ 440 1999 439 2000 182 2001 131 2002 5 ---------------------------------------------- Total minimum lease payments $1,197 ---------------------------------------------- Total rental expenses under operating leases were $364,000, $451,000 and $465,000 for the years ended December 31, 1995, 1996 and 1997, respectively. In February 1995 the Company entered into a commitment to purchase $2.5 million of freeze dried products from its principal supplier over a 66 month period ending in August 2000. The commitment, which also provides for monthly minimum purchases, is required to be supported to the extent of 60% of the remaining commitment by a letter of credit from a bank or a pledged certificate of deposit (See Note Six). Through December 31, 1997, the Company has purchased $515,000 of products pursuant to this commitment and in February 1998 made prepayments of $115,000 toward future deliveries under the commitment. Although management believes that new products which they began to actively market in late 1997, as well as additional products to be developed, will result in no losses pursuant to this commitment, the Company could incur significant losses if they are not able to meet the minimum purchase commitments. NOTE TEN. INCOME TAXES The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1995, 1996 and 1997 are as follows, in thousands: 1995 1996 1997 - ---------------------------------------------------------------------------- Net operating loss carryforward $ 9,835 $ 12,875 $12,468 Research and development and other credits 839 839 858 Property, plant and equipment 184 184 225 Patents 308 318 318 Inventory 200 249 315 Other, net 411 357 592 Less - Valuation allowance (11,777) (14,822) (14,776) $ - $ - $ - The Company has provided a valuation allowance against the entire deferred tax asset at December 31, 1995, 1996 and 1997 due to the uncertainty as to the realization of the asset. The provisions for federal income taxes for the years ended December 31, 1995, 1996 and 1997 consisted of the following, in thousands: 1995 1996 1997 - ---------------------------------------------------------------------------- Current provision $131 $ 88 $ 20 Deferred provision, net - - - - ---------------------------------------------------------------------------- Total provision $131 $ 88 $ 20 - ---------------------------------------------------------------------------- The differences (expressed as a percentage of pre-tax income or loss) between the statutory and effective federal income tax rates are as follows: 1995 1996 1997 - --------------------------------------------------------------------------- Statutory tax rate (34.0%) (34.0%) 34.0% State Income Taxes 2.8 .5 - Unrecognized deferred tax benefit/change in valuation allowance 34.6 34.9 (20.8) Expenses related to foreign operations 4.1 - - Other 1.3 .2 (4.9) - --------------------------------------------------------------------------- Effective tax rate 8.8% 1.6% 8.3% - --------------------------------------------------------------------------- At December 31, 1997, the Company had net operating loss carryforwards of approximately $36,670,000 for federal income tax purposes, which expire during the period from 1999 to 2011, and research and development tax credit carryforwards of approximately $839,000, which expire during the period from 1999 to 2008, all of which are available to offset federal income taxes due in future periods. NOTE ELEVEN. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's customers are not concentrated in any specific geographic region but are concentrated in the health care industry. Significant sales were made to three customers. McKesson General accounted for 7%, 9% and 12%; Owens & Minor accounted for 14%, 11% and 11%; and Bergen Brunswig, which acquired Durr Medical and Colonial Healthcare in December 1996, accounted for 10%, 12% and 9% of the Company's net sales in 1995, 1996 and 1997, respectively. Sales by Caraloe, Inc., to Mannatech, Inc., , accounted for 10%, 15% and 15% of the Company's net sales in 1995, 1996 and 1997, respectively. Sales by Caraloe, Inc. to Aloe Commodities International, Inc. ("ACI") accounted for 4% of the Company's net sales in 1997. Accounts receivable from Mannatech and ACI represented 20% and 15% of accounts receivable, respectively, at December 31, 1997. The Company also has an investment of $600,000 (less than 10% ownership interest) in common stock of ACI. The Company performs ongoing credit evaluations of its customers' financial condition and establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers and historical trends and other information. NOTE TWELVE. NET INCOME (LOSS) PER SHARE Basic net income (loss) available to common shareholders per share was computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding of 7,933,000, 8,798,000 and 8,953,000 in 1995, 1996, and 1997, respectively. In calculating the diluted net loss available to common shareholders per share for 1995 and 1996, no effect was given to options, warrants or convertible securities because the effect of including these securities would have been antidilutive. In 1997, diluted net income available to common shareholders per share is also based only on the weighted average number of common shares outstanding. There was no additional dilution related to options whose exercise price was below the average market price due to the application of the treasury stock method. Remaining options and warrants to purchase 885,000 shares at an average exercise price of $16.84 per share were excluded because their exercise price exceeded the average market price and were, therefore, antidilutive. NOTE THIRTEEN. BUSINESS SEGMENTS The Company operates in three business segments: Wound Care Products; Caraloe, Inc., a consumer products subsidiary, including bulk ingredients, consumer beverages, nutritional and skin care products; and Veterinary Products, including veterinary wound care and cancer therapy products. Corporate Income Before Income Taxes set forth in the following table includes research and development expenses which were related to the development of pharmaceutical products not associated with the reporting segments. Assets which are used in more than one segment are reported in the segment where the predominant use occurs. The Company's production facility in Costa Rica, which provides bulk ingredients for all segments, and total cash for the Company is included in the Corporate Assets figure. Business Segments (in thousands) Wound Caraloe 1995 Care Inc. Veterinary Corporate Total - ---------------------------------------------------------------------------- Sales to unaffiliated customers $21,147 $2,907 $320 $ - $24,374 Income(loss) before income taxes 2,903 494 (222) (4,672) (1,497) Identifiable assets 16,241 299 116 11,278 27,934 Capital expenditures 4,206 - - - 4,206 Depreciation and amortization 1,262 - 15 - 1,277 - ---------------------------------------------------------------------------- 1996 - ---------------------------------------------------------------------------- Sales to unaffiliated customers $17,302 $3,694 $290 $ - $21,286 Income(loss) before income taxes (641) 375 (9) (5,160) (5,435) Identifiable assets 14,834 231 51 16,086 31,202 Capital expenditures 242 - - - 242 Depreciation and amortization 1,259 - 14 - 1,273 - --------------------------------------------------------------------------- 1997 - --------------------------------------------------------------------------- Sales to unaffiliated customers $17,990 $5,444 $125 $ - $23,559 Income(loss) before income taxes 1,522 1,381 (42) (2,615) 246 Identifiable assets 16,068 1,426 17 8,652 26,163 Capital expenditures 295 - - - 295 Depreciation and amortization 1,191 - 5 - 1,196 - --------------------------------------------------------------------------- NOTE FOURTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA The unaudited selected quarterly financial data below reflect the fiscal years ended December 31, 1996, and 1997 respectively. (Dollar amounts in thousands, except shares and per share amounts) 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------------------------ Net sales $ 5,515 $ 5,438 $ 5,112 $ 5,221 Gross Profit 2,584 2,073 2,967 3,335 Net income (loss) (2,156) (2,545) ( 839) 17 Diluted income (loss) available to common shareholders per share$ (.25) $ (.29) $ (.09) $ (.11) * Weighted average common shares 8,666,177 8,804,567 8,854,533 8,867,575 - ----------------------------------------------------------------------------- 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ----------------------------------------------------------------------------- Net sales $ 6,083 $ 5,121 $ 6,229 $ 6,126 Gross Profit 3,576 3,234 3,653 3,566 Net income (loss) 83 (531) 463 211 Diluted income (loss) available to common shareholders per share $ .00 $ (.05) $ .05 $ .02 Weighted average common shares 8,870,148 8,896,078 9,239,109 9,293,450 - ----------------------------------------------------------------------------- * Net loss per share for the quarter ended December 31, 1996, gives effect to the accounting treatment announced by the staff of the Securities and Exchange Commission relevant to the Company's Series E convertible preferred stock having "beneficial conversion features." The net loss per share includes a $986,000 preferred dividend as a result of this treatment. This treatment reflects the discount in the conversion price as a reduction of net income available to common shareholders between the date of issuance of the preferred stock, October 21, 1996, and the first available conversion date, December 20, 1996, to more closely reflect the evolving accounting literature regarding accounting for beneficial conversion features. Financial Statement Schedule Valuation and Qualifying Accounts (In thousands) Description Additions Balance at Charged to Charged to Deductions Balance at Beginning Costs and Other End of Of Period Expenses Accounts Period - ------------------------------------------------------------------------- 1995 Bad Debt Reserve $205 $107 $ - $ 85 $227 Inventory Reserve 321 476 - 579 218 Rebates 55 90 - 63 82 - ------------------------------------------------------------------------- 1996 Bad Debt Reserve $227 $ 82 $ - $ 96 $213 Inventory Reserve 218 545 - 441 322 Rebates 82 90 - 36 136 - ------------------------------------------------------------------------- 1997 Bad Debt Reserve $213 $280 $ - $ 15 $478 Inventory Reserve 322 523 - 329 516 Rebates 136 331 - 125 342 - ------------------------------------------------------------------------- ----------------------------------------------------------------------- Report of Independent Public Accountants ----------------------------------------------------------------------- Shareholders and Board of Directors Carrington Laboratories, Inc. We have audited the accompanying consolidated balance sheets of Carrington Laboratories, Inc. and subsidiaries as of December 31, 1997 and the related consolidated statements of operations, shareholders' investment and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carrington Laboratories, Inc. and subsidiaries as of December 31, 1997, and the consolidated results of their operations and their cash flows for year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Dallas, Texas February 25, 1998 Report of Independent Public Accountants To the Stockholders and Board of Directors of Carrington Laboratories, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Carrington Laboratories, Inc.(a Texas corporation) and subsidiaries as of December 31, 1996 and the related consolidated statements of operations, shareholders' investment and cash flows for the two years ended December 31, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carrington Laboratories, Inc. and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the two years ended December 31, 1995 and 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule on page F-21 of this form 10-K is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas, February 7, 1997 (except with respect to certain matters discussed in Note 7, as to which the date is April 25, 1997) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CARRINGTON LABORATORIES, INC. Date: March 30, 1998 By: /s/ Carlton E. Turner ----------------------- Carlton E. Turner, Ph.D., President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /s/ Carlton E. Turner President, Chief Executive March 30, 1998 ------------------------- Officer and Director Carlton E. Turner, Ph.D. (principal executive officer) /s/ Robert W. Schnitzius Chief Financial Officer March 30, 1998 ------------------------- (principal financial and Robert W. Schnitzius accounting officer) /s/ R. Dale Bowerman Director March 30, 1998 ----------------------------- R. Dale Bowerman /s/ George DeMott Director March 30, 1998 ----------------------------- George DeMott /s/ Robert A. Fildes, Ph.D. Director March 30, 1998 ----------------------------- Robert A. Fildes, Ph.D. /s/ Thomas J. Marquez Director March 30, 1998 ----------------------------- Thomas J. Marquez /s/ James T. O'Brien Director March 30, 1998 ----------------------------- James T. O'Brien /s/ Selvi Vescovi Director March 30, 1998 ----------------------------- Selvi Vescovi INDEX TO EXHIBITS Exhibit Sequentially Number Exhibit Numbered Page 3.1 Restated Articles of Incorporation of Carrington Laboratories, Inc., (incorporated herein by reference to Exhibit 3.1 to Carrington's 1988 Annual Report on Form 10-K). 3.2 Statement of Cancellation of Redeemable Shares of Carrington Laboratories, Inc., dated June 9, 1989 (incorporated herein by reference to Exhibit 3.2 to Carrington's 1991 Annual Report on Form 10-K). 3.3 Statement of Change of Registered Office and Registered Agent of Carrington Laboratories, Inc., (incorporated herein by reference to Exhibit 3.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended May 31, 1991). 3.4 Statement of Resolution Establishing Series D Preferred Stock of Carrington Laboratories, Inc., (incorporated herein by reference to Exhibit 3.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended August 31, 1991). 3.5 Statement of Resolution Establishing Series E Convertible Preferred Stock of Carrington Laboratories, Inc., (incorporated herein by reference to Exhibit 3.1 to Carrington's Form 8-K Current Report dated October 21, 1996). 3.6* Statement of Cancellation of Treasury Shares, dated July 17, 1997. 3.7* Statement of Resolution Eliminating Four Series of Preferred Stock, dated July 17, 1997. 3.8* By-laws of Carrington Laboratories, Inc., as amended through March 3, 1998 E - 1 Exhibit Sequentially Number Exhibit Numbered Page 4.1 Form of certificate for Common Stock of Carrington Laboratories, Inc., (incorporated herein by reference to Exhibit 4.5 to Carrington's Registration Statement on Form S-3 (No. 33-57360) filed with the Securities and Exchange Commission on January 25, 1993). 4.2 Agreement Regarding Termination of Employment and Full and Final Release dated June 2, 1997, between Carrington Laboratories, Inc., and Sheri L. Pantermuehl (incorporated herein by reference to Exhibit 4.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). E - 2 Exhibit Sequentially Number Exhibit Numbered Page 4.3 Form of Letter Agreement dated May 9, 1997 between the Registrant and each holder of Series E Convertible Preferred Stock (incorporated herein by reference to Exhibit 10.1 to Carrington's Current Report on Form 8-K dated May 21, 1997). 4.4 Form of Second Offer and Agreement of Sale and Purchase dated May 15, 1997 between the Registrant and each holder of Series E Convertible Preferred Stock (incorporated herein by reference to Exhibit 10.2 to Carrington's Current Report on Form 8-K dated May 21, 1997). 4.5 Form of Stock Purchase Agreement dated June 20, 1997 between the Registrant and each purchaser of Common Stock (incorporated herein by reference to Exhibit 10.1 to Carrington's Current Report on Form 8-K dated June 20, 1997). 4.6 Retirement and Consulting Agreement dated August 14, 1997, between Carrington Laboratories, Inc., and David G. Shand (incorporated herein by reference to Exhibit 4.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 4.7 First Amendment to Retirement and Consulting Agreement dated September 30, 1997, between Carrington Laboratories, Inc., and David G. Shand (incorporated herein by reference to Exhibit 4.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 4.23 Rights Agreement dated as of September 19, 1991, between Carrington Laboratories, Inc., and Ameritrust Company National Association (incorporated herein by reference to Exhibit 1 to Carrington's Report on Form 8-K dated September 19, 1991). 10.1 1985 Stock Option Plan of Carrington Laboratories, Inc., as amended through April 28, 1994 (incorporated herein by reference to Exhibit 4.1 to Carrington's Form S-8 Registration Statement (No. 33-64407) filed with the Securities and Exchange Commission on November 17, 1995). E - 3 Exhibit Sequentially Number Exhibit Numbered Page 10.2 Form of Nonqualified Stock Option Agreement for employees, as amended, relating to Carrington's 1985 Stock Option Plan (incorporated herein by reference to Exhibit 4.2 to Carrington's Registration Statement on Form S-8 (No. 33-50430) filed with the Securities and Exchange Commission on August 4, 1992). 10.3 Form of Nonqualified Stock Option Agreement for non-employee directors, as amended, relating to Carrington's 1985 Stock Option Plan (incorporated herein by reference to Exhibit 4.3 to Carrington's Registration Statement on Form S-8 (No. 33-64407) filed with the Securities and Exchange Commission on November 17, 1995). 10.4 License Agreement dated September 20, 1990, between Carrington Laboratories, Inc., and Solvay Animal Health, Inc. (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended August 31, 1990). 10.5 Contract Research Agreement dated as of August 8, 1991, between Carrington Laboratories, Inc., and Texas Agriculture Experimental Station, as agent for the Texas A&M University System (incorporated herein by reference to Exhibit 10.55 to Carrington's 1991 Annual Report on Form 10-K). 10.6 Lease Agreement dated as of August 30, 1991, between Carrington Laboratories, Inc., and Western Atlas International, Inc. (incorporated herein by reference to Exhibit 10.59 to Carrington's 1991 Annual Report on Form 10-K). 10.7 Employee Stock Purchase Plan of Carrington Laboratories, Inc., as amended through June 15, 1995 (incorporated herein by reference to Exhibit 10.29 to Carrington's 1995 Annual Report on Form 10-K). 10.8 Employment Agreement dated July 6, 1993, between Carrington Laboratories, Inc., and Luiz F. Cerqueira (incorporated herein by reference to Exhibit 10.43 to Carrington's 1993 Annual Report on Form 10-K). E - 4 Exhibit Sequentially Number Exhibit Numbered Page 10.9 Common Stock Purchase Warrant dated September 14, 1993, issued by Carrington Laboratories, Inc., to E. Don Lovelace (incorporated herein by reference to Exhibit 10.44 to Carrington's 1993 Annual Report on Form 10-K). 10.10 Common Stock Purchase Warrant dated September 14, 1993, issued by Carrington Laboratories, Inc., to Jerry L. Lovelace (incorporated herein by reference to Exhibit 10.45 to Carrington's 1993 Annual Report on Form 10-K). 10.11 Agreement Regarding Termination of Employment and Full and Final Release dated February 16, 1994, between Carrington Laboratories, Inc., and David A. Hotchkiss (incorporated herein by reference to Exhibit 10.49 to Carrington's 1993 Annual Report on Form 10-K). 10.12 License Agreement dated March 18, 1994, between Carrington Laboratories, Inc., and Societe Europeenne de Biotechnologie (incorporated herein by reference to Exhibit 10.53 to Carrington's 1994 Annual Report on Form 10-K). 10.13 Agreement dated March 28, 1994, between Carrington Laboratories, Inc., and Keun Wha Pharmaceutical Co., Ltd., (incorporated herein by reference to Exhibit 10.54 to Carrington's 1994 Annual Report on Form 10-K). 10.14 Lease Agreement dated June 15, 1994, between DFW Nine, a California limited partnership, and Carrington Laboratories, Inc., (incorporated herein by reference to Exhibit 10.55 to Carrington's 1994 Annual Report on Form 10-K). 10.15 Lease Amendment dated August 23, 1994, amending Lease Agreement listed as Exhibit 10.14 (incorporated herein by reference to Exhibit 10.57 to Carrington's 1994 Annual Report on Form 10-K). 10.16 License Agreement dated September 29, 1994, between Carrington Laboratories, Inc., and Immucell Corporation (incorporated herein by reference to Exhibit 10.58 to Carrington's 1994 Annual Report on Form 10-K). 10.17 Third Lease Amendment dated December 1, 1994, amending Lease Agreement listed as Exhibit 10.6 (incorporated herein by reference to Exhibit 10.60 to Carrington's 1994 Annual Report on Form 10-K). E - 5 Exhibit Sequentially Number Exhibit Numbered Page 10.18 Production Contract dated February 13, 1995, between Carrington Laboratories, Inc., and Oregon Freeze Dry, Inc. (incorporated herein by reference to Exhibit 10.63 to Carrington's 1994 Annual Report on Form 10-K). 10.19 Management Compensation Plan (incorporated herein by reference to Exhibit 10.64 to Carrington's 1994 Annual Report on Form 10-K). 10.20 Research Agreements dated June 24, 1994, September 16, 1994, and February 2, 1995, between Southern Research Institute and Carrington Laboratories, Inc., (incorporated herein by reference to Exhibit 10.65 to Carrington's 1994 Annual Report on Form 10-K). 10.21 Trademark License Agreement between Caraloe, Inc. (Licensor), and Emprise International, Inc. (Licensee), dated March 31, 1995 (incorporated herein by reference to Exhibit 10.2 to Carrington's Second Quarter 1995 Report on Form 10-Q). 10.22 Supply Agreement between Caraloe, Inc. (Seller), and Emprise International, Inc. (Buyer), dated March 31,1995 (incorporated herein by reference to Exhibit 10.3 to Carrington's Second Quarter 1995 Report on Form 10-Q). 10.23 Sales Distribution Agreement between the Chinese Academy of Sciences and Carrington Laboratories, Inc., dated August 16, 1995 (incorporated herein by reference to Exhibit 10.1 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.24 Sales Distribution Agreement between the Chinese Academy of Sciences and Carrington Laboratories, Inc., dated August 16, 1995 (incorporated herein by reference to Exhibit 10.2 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.25 Sales Distribution Agreement between the Chinese Academy of Sciences and Carrington Laboratories, Inc., dated August 16, 1995 (incorporated herein by reference to Exhibit 10.3 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.26 Supply and Distribution Agreement between Medical Polymers, Inc., and Carrington Laboratories, Inc., dated September 15, 1995 (incorporated herein by reference to Exhibit 10.4 to Carrington's Third Quarter 1995 Report on Form 10-Q). E - 6 Exhibit Sequentially Number Exhibit Numbered Page 10.27 Clinical Services Agreement between Pharmaceutical Products Development, Inc., and Carrington Laboratories, Inc., dated July 10, 1995 (incorporated herein by reference to Exhibit 10.5 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.28 Non-exclusive Sales and Distribution Agreement between Innovative Technologies Limited and Carrington Laboratories, Inc., dated August 22, 1995 (incorporated herein by reference to Exhibit 10.6 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.29 Supplemental Agreement to Non-exclusive Sales and Distribution Agreement between Innovative Technologies Limited and Carrington Laboratories, Inc., dated October 16, 1995 (incorporated herein by reference to Exhibit 10.7 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.30 Product Development and Exclusive Distribution Agreement between Innovative Technologies Limited and Carrington Laboratories, Inc., dated November 10, 1995 (incorporated herein by reference to Exhibit 10.8 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.31 Resignation Agreement and Full and Final Release dated February 24, 1995, between Carrington Laboratories, Inc., and Bill H. McAnalley (incorporated herein by reference to Exhibit 10.68 to Carrington's 1995 Annual Report on Form 10-K). 10.32 Revised and Restated Resignation Agreement dated March 14, 1995, between Carrington Laboratories, Inc., and Karl H. Meister (incorporated herein by reference to Exhibit 10.69 to Carrington's 1995 Annual Report on Form 10-K). 10.33 Common Stock Purchase Warrant dated August 4, 1995, issued by Carrington Laboratories, Inc., to Clifford T. Kalista (incorporated herein by reference to Exhibit 10.70 to Carrington's 1995 Annual Report on Form 10-K). 10.34 Form of Stock Purchase Agreement dated April 5, 1995 between Carrington Laboratories, Inc., and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.1 to Carrington s Registration Statement 33-60833 on Form S-3). E - 7 Exhibit Sequentially Number Exhibit Numbered Page 10.35 Form of Registration Rights Agreement dated June 20, 1995 between Carrington Laboratories, Inc., and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.2 to Carrington s Registration Statement 33-60833 on Form S-3). 10.36 Supply and Distribution Agreement between Farnam Companies, Inc., and Carrington Laboratories, Inc., dated March 22, 1996 (incorporated herein by reference to Exhibit 10.76 to Carrington's 1995 Annual Report on Form 10-K). 10.37 Placement Agent Agreement between Carrington Laboratories, Inc., and First Granite Securities, Inc. (incorporated herein by reference to Exhibit 10.1 to Carrington's Current Report on Form 8-K dated October 21, 1996). 10.38 Indemnification Agreement between the Carrington Laboratories, Inc., and First Granite Securities, Inc. (incorporated herein by reference to Exhibit 10.2 to Carrington's Current Report on Form 8-K dated October 21, 1996). 10.39 Joint Escrow Instructions from Carrington Laboratories, Inc., and accepted by Krieger & Prager, Esqs., as escrow agent (incorporated herein by reference to Exhibit 10.3 to Carrington's Current Report on Form 8-K dated October 21, 1996). 10.40 Stock Purchase Agreement between Carrington Laboratories, Inc., and each of the purchasers of shares of the Registrant's Series E Convertible Preferred Stock (incorporated herein by reference to Exhibit 10.4 to Carrington's Current Report on Form 8-K dated October 21, 1996). 10.41 Amendment to the Stock Purchase Agreement between Carrington Laboratories, Inc., and each of the purchasers of shares of Carrington's Series E Convertible Preferred Stock, dated October 15, 1996 (incorporated herein by reference to Exhibit 10.5 to Carrington's Current Report on Form 8-K dated October 21, 1996). 10.42 Registration Rights Agreement between Carrington Laboratories, Inc., and each of the purchasers of shares of Carrington's Series E Convertible Preferred Stock (incorporated herein by reference to Exhibit 10.6 to Carrington's Current Report on Form 8-K dated October 21, 1996). E - 8 Exhibit Sequentially Number Exhibit Numbered Page 10.43 Distribution Agreement between Carrington Laboratories, Inc., and Ching Hwa Pharmaceutical Co., Ltd., dated March 1, 1996 (incorporated herein by reference to Exhibit 10.1 to Carrington's First Quarter 1996 Report on Form 10-Q). 10.44 Fourth Amendment to Credit Agreement and Term Note between Carrington Laboratories, Inc., and NationsBank of Texas, N.A., dated May 1, 1996 (incorporated herein by reference to Exhibit 10.2 to Carrington's First Quarter 1996 Report on Form 10-Q). 10.45 Assignment of Certificate of Deposit to NationsBank of Texas, N.A., dated May 1, 1996 (incorporated herein by reference to Exhibit 10.3 to Carrington's First Quarter 1996 Report on Form 10-Q). 10.46 Release of Liens agreement between Carrington Laboratories, Inc., and NationsBank of Texas, N.A., dated May 1, 1996 (incorporated herein by reference to Exhibit 10.4 to Carrington's First Quarter 1996 Report on Form 10-Q). 10.47 Form of Nonqualified Stock Option Agreement for Employees (incorporated herein by reference to Exhibit 4.1 to Carrington's Second Quarter 1996 Report on Form 10-Q). 10.48 Carrington Laboratories, Inc., 1995 Stock Option Plan, As Amended and Restated Effective March 27, 1996 (incorporated herein by reference to Exhibit 4.2 to Carrington's Second Quarter 1996 Report on Form 10-Q). 10.49 Form of Nonqualified Stock Option Agreement for Nonemployee Directors (incorporated herein by reference to Exhibit 4.3 to Carrington's Second Quarter 1996 Report on Form 10-Q). 10.50 Form of Incentive Stock Option Agreement for Employees (incorporated herein by reference to Exhibit 4.4 to Carrington's Second Quarter 1996 Report on Form 10-Q). 10.51 Sales Distribution Agreement between Faulding Pharmaceuticals Laboratories and Carrington Laboratories, Inc., dated September 30, 1996 (incorporated herein by reference to Exhibit 10.1 to Carrington's Third Quarter 1996 Report on Form 10-Q). E - 9 Exhibit Sequentially Number Exhibit Numbered Page 10.52 Sales Distribution Agreement between Trudell Medical Marketing Limited and Carrington Laboratories, Inc., dated May 15, 1996 (incorporated herein by reference to Exhibit 10.2 to Carrington's Third Quarter 1996 Report on Form 10-Q). 10.53 Clinical Research Agreement between ICON and Carrington Laboratories, Inc., dated July 15, 1996 (incorporated herein by reference to Exhibit 10.3 to Carrington's Third Quarter 1996 Report on Form 10-Q). 10.54 Sales Distribution Agreement between Suco International Corp. and Carrington Laboratories, Inc., dated December 1, 1996 (incorporated by reference to Exhibit 10.54 to Carrington's 1996 Annual Report on Form 10-K). 10.55 Sales Distribution Agreement between Recordati, S.P.A., and Carrington Laboratories, Inc., and Carrington Laboratories Belgium N.V., dated December 20, 1996 (incorporated by reference to Exhibit 10.55 to Carrington's 1996 Annual Report on Form 10-K). 10.56 Nonexclusive Distribution Agreement between Polymedica Industries, Inc., and Carrington Laboratories, Inc., dated November 15, 1996 (incorporated by reference to Exhibit 10.56 to Carrington's 1996 Annual Report on Form 10-K). 10.57 Sales Distribution Agreement between Gamida- Medequip Ltd., and Carrington Laboratories, Inc., dated December 24, 1996 (incorporated by reference to Exhibit 10.57 to Carrington's 1996 Annual Report on Form 10-K). 10.58 Sales Distribution Agreement between Gamida For Life BV, and Carrington Laboratories, Inc., dated December 24, 1996 (incorporated by reference to Exhibit 10.58 to Carrington's 1996 Annual Report on Form 10-K). 10.59 Sales Distribution Agreement between Darrow Laboratorios S/A and Carrington Laboratories, Inc., dated December 4, 1996 (incorporated by reference to Exhibit 10.59 to Carrington's 1996 Annual Report on Form 10-K). E - 10 Exhibit Sequentially Number Exhibit Numbered Page 10.60 Independent Sales Representative Agreement between Vision Medical and Carrington Laboratories, Inc., dated October 1, 1996 (incorporated by reference to Exhibit 10.60 to Carrington's 1996 Annual Report on Form 10-K). 10.61 Independent Sales Representative Agreement between Think Medical, Inc., and Carrington Laboratories, Inc., dated October 1, 1996 (incorporated by reference to Exhibit 10.61 to Carrington's 1996 Annual Report on Form 10-K). 10.62 Independent Sales Representative Agreement between Meares Medical Sales Associates and Carrington Laboratories, Inc., dated October 1, 1996 (incorporated by reference to Exhibit 10.62 to Carrington's 1996 Annual Report on Form 10-K). 10.63 Supply Agreement between Aloe Commodities International, Inc., and Caraloe, Inc., dated February 13, 1997 (incorporated by reference to Exhibit 10.63 to Carrington's 1996 Annual Report on Form 10-K). 10.64 Trademark License Agreement between Light Resources Unlimited and Carrington Laboratories, Inc., dated March 1, 1997 (incorporated by reference to Exhibit 10.64 to Carrington's 1996 Annual Report on Form 10-K). 10.65 Supply Agreement between Light Resources Unlimited and Caraloe, Inc., dated February 13, 1997 (incorporated by reference to Exhibit 10.65 to Carrington's 1996 Annual Report on Form 10-K). 10.66 Sales Distribution Agreement between Penta Farmaceutica, S.A., and Carrington Laboratories, Inc., dated December 27, 1996 (incorporated by reference to Exhibit 10.66 to Carrington's 1996 Annual Report on Form 10-K). 10.67 Stock Subscription Offer of Aloe Commodities, Inc., and Caraloe, Inc., dated October 30, 1996 (incorporated by reference to Exhibit 10.67 to Carrington's 1996 Annual Report on Form 10-K). 10.68 Modification Number Two to the Production Contract dated February 13, 1995, between Carrington laboratories, Inc., and Oregon Freeze Dry, Inc., listed as Exhibit 10.18, dated November 19, 1996 (incorporated by reference to Exhibit 10.68 to Carrington's 1996 Annual Report on Form 10-K). E - 11 Exhibit Sequentially Number Exhibit Numbered Page 10.69 Offer and Agreement of Sale and Purchase of Convertible Preferred Series E Stock between holders of Carrington Laboratories, Inc., Convertible Preferred Series E Stock and Carrington Laboratories, Inc., dated February 26, 1997 (incorporated by reference to Exhibit 10.69 to Carrington's 1996 Annual Report on Form 10-K). 10.70 Sales Distribution Agreement between Laboratories PiSA S.A. DE C.V., and Carrington Laboratories, Inc., dated November 1, 1995 (incorporated by reference to Exhibit 10.70 to Carrington's 1996 Annual Report on Form 10-K). 10.71 Termination Acknowledgment between China Academy of Sciences and Carrington Laboratories, Inc., dated February 12, 1996, regarding the three agreements listed as Exhibits 10.23, 10.24 and 10.25 (incorporated by reference to Exhibit 10.71 to Carrington's 1996 Annual Report on Form 10-K). 10.72 Letter from Immucell Corporation to Carrington Laboratories, Inc., dated February 7, 1996, canceling the License Agreement listed as Exhibit 10.16 (incorporated by reference to Exhibit 10.72 to Carrington's 1996 Annual Report on Form 10-K). 10.73 Trademark License and Product Supply Agreement dated July 22, 1997, between Caraloe, Inc., and Nu Skin International, Inc. (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30 1997). E - 12 Exhibit Sequentially Number Exhibit Numbered Page 10.74 Supply Agreement dated August 14, 1997, between Caraloe Inc., and Mannatech, Inc. (incorporated herein by reference to Exhibit 10.2 to Carrington s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.75 Trademark License Agreement dated August 14, 1997, between Carloe, Inc., and Mannatech, Inc. (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.76*Supply Agreement between Met-Trim, LLC and Caraloe, Inc., dated December 1, 1997. 10.77*Trademark License Agreement between Met-Trim, LLC and Caraloe, Inc., dated December 1, 1997. 10.78*Amendment Number One to Sales Distribution Agreement between Carrington Laboratories, Inc., and Faulding Pharmaceuticals/David Bull Laboratories, dated January 12, 1998. 16.1 Letter dated March 21, 1997 from Arthur Andersen LLP to the Securities and Exchange Commission (incorporated herein by reference to Exhibit 16.1 to Carrington's Form 10-K/A amendment to its Form 10-K Annual Report for the year ended December 31, 1996, which amendment was filed on April 7, 1997). 21.1* Subsidiaries of Carrington. 23.1* Consent of Arthur Andersen LLP 23.2* Consent of Ernst & Young LLP 27.1* Financial Data Schedule * Filed herewith. Management contract or compensatory plan. E - 13 EX-3.6 2 EXHIBIT 3.6 STATEMENT OF CANCELLATION OF TREASURY SHARES OF CARRINGTON LABORATORIES, INC. Pursuant to the provisions of Article 4.11 of the Texas Business Corporation Act, the undersigned corporation (the "corporation") submits the following statement of cancellation by resolution of its Board of Directors of shares of the corporation reacquired by it, other than redeemable shares redeemed or purchased: 1. The name of the corporation is CARRINGTON LABORATORIES, INC. 2. A resolution was duly adopted by the Board of Directors of the corporation on July 17, 1997, authorizing the cancellation of treasury shares, itemized as follows: Class Par Value Number of Shares Series E Convertible Preferred Stock $100 660 The amount of stated capital represented by the shares being cancelled is $66,000. 3. The aggregate number of issued shares of the corporation, itemized by classes and par value, after giving effect to such cancellation is 9,308,521, itemized as follows: Class Par Value Number of Shares Common Stock $0.01 9,308,521 4. The amount of stated capital of the corporation after giving effect to such cancellation is $93,085.21. IN WITNESS WHEREOF, the corporation has executed this instrument as of July 17, 1997. CARRINGTON LABORATORIES, INC. By:__________________________________________ Carlton E. Turner, Ph.D., D.Sc. President and Chief Executive Officer 13653 07404 CORP 158804.1 EX-3.7 3 EXHIBIT 3.7 STATEMENT OF RESOLUTION ELIMINATING FOUR SERIES OF PREFERRED STOCK OF CARRINGTON LABORATORIES, INC. To the Secretary of State of Texas: Pursuant to the provisions of Article 2.13 of the Texas Business Corporation Act, the undersigned corporation (the "corporation") submits the following statement for the purpose of eliminating four series of its Preferred Stock, par value $100 per share, and all references thereto from its Articles of Incorporation: 1. The name of the corporation is Carrington Laboratories, Inc. 2. Attached hereto as Exhibit A is a true and correct copy of the resolution eliminating the Series A Cumulative Convertible Preferred Stock, the Series B Cumulative Convertible Preferred Stock, the Series C Cumulative Convertible Preferred Stock and the Series E Convertible Preferred Stock, and all references to each of such series, from the articles of incorporation of the corporation. 3. Such resolution was duly adopted by the Board of Directors of the corporation on July 17, 1997, to be effective on the first business day following the filing with the Secretary of State of Texas of a Statement of Cancellation of Treasury Shares cancelling 660 treasury shares of Series E Convertible Preferred Stock of the corporation. 4. Such resolution was duly adopted by all necessary action on the part of the corporation. Dated: July 17, 1997. CARRINGTON LABORATORIES, INC. By: Carlton E. Turner, Ph.D., D.Sc. President and Chief Executive Officer 13653 07404 CORP 158796.1 EXHIBIT A CARRINGTON LABORATORIES, INC. RESOLUTION OF BOARD OF DIRECTORS WHEREAS, the Board of Directors of Carrington Laboratories, Inc. (the "Company") has previously established five series of Preferred Stock, par value $100 per share, of the Company, and no shares of any of such series are currently outstanding; and WHEREAS, this Board of Directors has authorized the cancellation of 660 shares of the Company's Series E Convertible Preferred Stock (the "Series E Shares"), which are the only shares of Preferred Stock currently held by the Company as treasury shares; and WHEREAS, this Board of Directors is of the opinion that the Company will have no reason to issue any shares of four of such series of Preferred Stock in the future and that those four series should therefore be eliminated from the Company's articles of incorporation in the manner provided by the Texas Business Corporation Act, as promptly as practicable after the filing with the Secretary of State of Texas of a Statement of Cancellation of Treasury Shares cancelling the Series E Shares; NOW, THEREFORE, BE IT RESOLVED, effective as of the first business day immediately following the date of filing with the Secretary of State of Texas of a Statement of Cancellation of Treasury Shares cancelling the Series E Shares, that, pursuant to Article 2.13 of the Texas Business Corporation Act, the Company's Series A Cumulative Convertible Preferred Stock, Series B Cumulative Convertible Preferred Stock, Series C Cumulative Convertible Preferred Stock and Series E Convertible Preferred Stock, and all references to each of such four series, shall be eliminated from the Company's articles of incorporation; and the President or any Vice President of the Company is hereby authorized to prepare or cause to be prepared, to execute and to file or cause to be filed with the Secretary of State of Texas, in the name and on behalf of the Company, an appropriate Statement of Resolution effecting the elimination of the Company's Series A Cumulative Convertible Preferred Stock, Series B Cumulative Convertible Preferred Stock, Series C Cumulative Convertible Preferred Stock and Series E Convertible Preferred Stock, and all references thereto, from the Company's articles of incorporation. 13653 07404 CORP 158796.1 EX-3.8 4 EXHIBIT 3.8 AS AMENDED THROUGH MARCH 3, 1998 BYLAWS OF CARRINGTON LABORATORIES, INC. ARTICLE ONE OFFICES The Corporation may have, in addition to its registered office in the State of Texas, such other offices and places of business at such locations, both within and without the State of Texas, as the Board of Directors may from time to time determine or the business and affairs of the Corporation may require. ARTICLE TWO SHAREHOLDERS' MEETINGS Section 1. Annual Meetings. An annual meeting of the shareholders, commencing with the year 1989, shall be held at such time and place, and on such date during the month of March, April or May of each year, as shall be determined by or in the manner authorized by the Board of Directors. At each annual meeting, the shareholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. Section 2. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, the Articles of Incorporation or these Bylaws, may be called by the Chairman of the Board, the President, the Board of Directors or the holders of at least ten (10) percent of all the shares entitled to vote at the proposed special meeting, unless the Articles of Incorporation provide for a number of shares greater than or less than ten (10) percent, but not greater than fifty (50) percent, in which event special meetings of the shareholders may be called by the holders of at least the percentage of shares so specified in the Articles of Incorporation. Only business within the purpose or purposes described in the notice of special meeting of shareholders may be conducted at the meeting. Section 3. Place of Meetings. Meetings of shareholders shall be held at such places, within or without the State of Texas, as may from time to time be fixed by the Board of Directors or as shall be specified or fixed in the respective notices or waivers of notice thereof. Section 4. Voting List. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office or principal place of business of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Section 5. Notice of Meetings. Written or printed notice stating the place, day and hour of each meeting of the shareholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the President, the Secretary or the body, officer or person calling the meeting, to each shareholder of record entitled to vote at the meeting. Section 6. Quorum and Act of Shareholders. With respect to any meeting of shareholders, a quorum shall be present for any matter to be presented at that meeting if the holders of a majority of the shares entitled to vote at the meeting are represented at the meeting in person or by proxy, unless otherwise provided in the Articles of Incorporation in accordance with applicable law. Unless otherwise provided in the Articles of Incorporation or these Bylaws, the shareholders represented in person or by proxy at a meeting of shareholders at which a quorum is not present may adjourn the meeting until such time and to such place as may be determined by a vote of the holders of a majority of the shares represented in person or by proxy at that meeting. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally convened. With respect to any matter, other than the election of directors or a matter for which the affirmative vote of the holders of a specified portion of the shares entitled to vote is required by statute, the Articles of Incorporation or these Bylaws, the act of the shareholders shall be the affirmative vote of the holders of a majority of the shares entitled to vote on, and voted for or against, that matter at a meeting of shareholders at which a quorum is present. Unless otherwise provided in the Articles of Incorporation or these Bylaws, once a quorum is present at a meeting of shareholders the shareholders represented in person or by proxy at the meeting may conduct such business as may be properly brought before the meeting until it is adjourned, and the subsequent withdrawal from the meeting of any shareholder or the refusal of any shareholder represented in person or by proxy to vote shall not affect the presence of a quorum at the meeting. Section 7. Voting of Shares. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except as and to the extent otherwise provided by statute or by the Articles of Incorporation. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote either in person or by proxy executed in writing by such shareholder. A telegram, telex, cablegram or similar transmission by the shareholder, or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the shareholder, shall be treated as an execution in writing for purposes of this Section. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. Proxies coupled with an interest include the appointment as proxy of: (1) a pledgee; (2) a person who purchased or agreed to purchase, or owns or holds an option to purchase, the shares; (3) a creditor of the Corporation who extended it credit under terms requiring the appointment; (4) an employee of the Corporation whose employment contract requires the appointment; or (5) a party to a voting agreement created under Section B, Article 2.30 of the Texas Business Corporation Act. Each proxy shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. Section 8. Action Without a Meeting. Any action required to be taken at any annual or special meeting of shareholders of the Corporation, or any action which may be taken at any annual or special meeting of such shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all the shareholders entitled to vote with respect to the subject matter thereof. Section 9. Telephone Meetings. Subject to the provisions of applicable law and these Bylaws regarding notice of meetings, shareholders may, unless otherwise restricted by the Articles of Incorporation or these Bylaws, participate in and hold a meeting by using conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting, except when a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting was not lawfully called or convened. Section 10. Notice of Shareholder Business. At a meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must (a) be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or by or at the direction of the shareholders calling the meeting pursuant to Section 2 of this Article Two, (b) otherwise be properly brought before the meeting by or at the direction of the Board of Directors or (c) otherwise (i) be properly requested to be brought before the meeting by a shareholder of record entitled to vote in the election of directors generally, and (ii) constitute a proper subject to be brought before such meeting. Any shareholder who intends to bring any matter (other than the election of directors) before a meeting of shareholders and is entitled to vote on such matter must deliver written notice of such shareholder's intent to bring such matter before the meeting of shareholders, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation. Such notice must be received by the Secretary not later than the following dates: (A) with respect to an annual meeting of shareholders, 60 days in advance of such meeting if such meeting is to be held on a day which is within 30 days preceding the anniversary of the previous year's annual meeting, or 90 days in advance of such meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting; and (B) with respect to any other meeting of shareholders, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting of shareholders (1) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (2) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (3) the class and number of shares of the Corporation which are owned by the shareholder and (4) any material interest of the shareholder in such business. No business shall be conducted at a meeting of shareholders except in accordance with the procedures set forth in this Section 10. If any business proposed to be brought before a meeting is not a proper subject for the meeting or was not properly brought before the meeting in accordance with the provisions of this Section 10, the chairman of the meeting shall so declare to the meeting, and such business shall not be conducted. ARTICLE THREE BOARD OF DIRECTORS Section 1. Management of the Corporation. The powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Articles of Incorporation or these Bylaws directed or required to be exercised or done by the shareholders. Section 2. Number; Qualifications; Chairman. The Board of Directors shall consist of not less than five (5) and not more than nine (9) directors, and the exact number of directors which shall constitute the Board of Directors shall be fixed from time to time by resolution of the Board; provided, however, that no decrease in the number of directors constituting the Board shall have the effect of shortening the term of any incumbent director. None of the directors need be shareholders of the Corporation or residents of the State of Texas. The directors, other than those who may be elected by the holders of shares of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation pursuant to the terms of any resolution or resolutions providing for the issuance of such stock adopted by the Board, shall be classified, with respect to the time for which they severally hold office, into three classes with, as nearly as possible, an equal number of directors in each class. If at any time the number of directors constituting the Board of Directors, as fixed by resolution of the Board, is not evenly divisible by three, then, subject to the requirements of the immediately preceding sentence, the Board shall determine the number of directors that each class of directors shall comprise; provided, however, that this sentence shall not empower the Board of Directors to change the term of any incumbent director. At the 1992 annual meeting of shareholders, the shareholders shall elect that number of directors constituting the entire Board, divided into three classes with terms expiring, respectively, at the 1993, 1994 and 1995 annual meetings of shareholders. At the 1993 annual meeting of shareholders, and at each annual meeting of shareholders thereafter, the shareholders shall elect the successors of the class of directors whose term expires at such meeting, to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. In each election of directors, the persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed elected. Each director elected shall hold office for the term for which he is elected and until his successor is elected and qualified or until his earlier death, resignation, disqualification or removal from office. At its first meeting following each annual meeting of shareholders, the Board of Directors shall elect one of its members as the Chairman of the Board. The person so elected shall serve as chairman of the Board of Directors and shall preside when present at meetings of the shareholders and of the Board of Directors. In addition to the powers and duties prescribed by these Bylaws, the Chairman of the Board shall have such other powers and perform such other duties as are delegated or assigned to him from time to time by the Board of Directors or the Executive Committee. The Chairman of the Board shall not be deemed to be an officer of the Corporation. Section 3. Notification of Nominations. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of directors. Any shareholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such shareholder's intent to make such nominations is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 90 days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the written consent of each nominee to serve as a director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 4. Removal; Filling of Vacancies. Any or all of the directors may be removed, but only for cause, at any meeting of shareholders called expressly for that purpose, by the affirmative vote, in person or by proxy, of the holders of a majority of the shares then entitled to vote at an election of directors. Any vacancy occurring in the Board of Directors, resulting from the death, resignation, retirement, disqualification or removal from office of any director, or otherwise than as the result of an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or may be filled by election at any annual or special meeting of the shareholders called for that purpose. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. A directorship to be filled by reason of any increase in the number of directors may be filled by the Board of Directors for a term of office continuing only until the next election of one (1) or more directors by the shareholders, or may be filled by election at any annual or special meeting of the shareholders called for that purpose; provided that the Board of Directors may not fill more than two (2) such directorships during the period between any two (2) successive annual meetings of shareholders. Section 5. Place of Meetings. Meetings of the Board of Directors, annual, regular or special, may be held either within or without the State of Texas. Section 6. Annual Meetings. The first meeting of each newly elected Board of Directors shall be held for the purpose of organization and the transaction of any other business, without notice, immediately following the annual meeting of shareholders, and at the same place, unless by unanimous consent of the directors then elected and serving such time or place shall be changed. Section 7. Regular Meetings. Regular meetings of the Board of Directors, of which no notice shall be necessary, shall be held at such times and places as may be fixed from time to time by resolution adopted by the Board and communicated to all directors. Except as otherwise provided by statute, the Articles of Incorporation or these Bylaws, any and all business may be transacted at any regular meeting. Section 8. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President on twenty-four (24) hours' notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of two (2) directors. Except as may be otherwise expressly provided by statute or by the Articles of Incorporation or by these Bylaws, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 9. Quorum and Manner of Acting. At all meetings of the Board of Directors the presence of a majority of the number of directors fixed by or in the manner provided in these Bylaws shall be necessary and sufficient to constitute a quorum for the transaction of business except as otherwise provided by statute, the Articles of Incorporation or these Bylaws. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the act of a greater number is required by statute, the Articles of Incorporation or these Bylaws, in which case the act of such greater number shall be requisite to constitute the act of the Board. If a quorum shall not be present at any meeting of the directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At any such adjourned meeting any business may be transacted that might have been transacted at the meeting as originally convened. Section 10. Action Without a Meeting. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 11. Telephone Meetings. Subject to the provisions of applicable law and these Bylaws regarding notice of meetings, members of the Board of Directors or members of any committee designated by such Board may, unless otherwise restricted by the Articles of Incorporation or these Bylaws, participate in and hold a meeting of such Board of Directors or committee by using conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting, except when a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting was not lawfully called or convened. Section 12. Interested Directors and Officers. An otherwise valid contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other domestic or foreign corporation or other entity in which one or more of the Corporation s directors or officers are directors or officers or have a financial interest, shall be valid notwithstanding whether the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, and notwithstanding whether his vote is counted for such purpose, if any one of the following is satisfied: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the c o n tract or transaction are disclosed or are known to the s h a reholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 13. Directors' Compensation. The Board of Directors shall have authority to determine, from time to time, the amount of compensation, if any, which shall be paid to its members for their services as directors and as members of standing or special committees. The Board of Directors shall also have power in its discretion to provide for and to pay to directors rendering services to the Corporation not ordinarily rendered by directors as such, special compensation appropriate to the value of such services as determined by the Board of Directors from time to time. Nothing herein contained shall be construed to preclude any director from s e rving the Corporation in any other capacity and receiving compensation therefor. Section 14. Advisory Directors. The Board of Directors may appoint such number of advisory directors as it shall from time to time determine. Each advisory director appointed shall hold office for the term for which he is elected or until his earlier death, resignation, retirement or removal by the Board of Directors. The advisory directors shall attend and be present at the meetings of the Board of Directors, although a meeting of the Board of Directors may be held without notice to the advisory directors and the advisory directors shall not be considered in determining whether a quorum of the Board of Directors is present. The advisory directors shall advise and counsel the Board of Directors on the business and operations of the Corporation as requested by the Board of Directors; however, the advisory directors shall not be entitled to vote on any matter presented to the Board of Directors. ARTICLE FOUR NOTICES Section 1. Manner of Giving Notice. Whenever under the provisions of the statutes, the Articles of Incorporation or these Bylaws, notice is required to be given to any committee member, director or shareholder of the Corporation, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing by mail, postage prepaid, addressed to such member, director or shareholder at his address as it appears on the records or (in the case of a shareholder) the stock transfer books of the Corporation. Any notice required or permitted to be given by mail shall be deemed to be delivered when the same shall be thus deposited in the United States mail, as aforesaid. Section 2. Waiver of Notice. Whenever any notice is required to be given to any committee member, director or shareholder of the Corporation under the provisions of the statutes, the Articles of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance of a director at a meeting of the Board of Directors shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 3. When Notice Not Required. Any notice required to be given to any shareholder under any provision of the statutes, the Articles of Incorporation or these Bylaws need not be given to the shareholder if: (1) notice of two (2) consecutive annual meetings and all notices of meetings held during the period between those annual meetings, if any, or (2) all (but in no event less than two (2)) payments (if sent by first class mail) of distributions or interest on securities during a twelve (12)-month period have been mailed to that person, addressed at his address as shown on the records of the Corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given and, if the action taken by the Corporation is reflected in any articles or document filed with the Secretary of State, those articles or that document may state that notice was duly given to all persons to whom notice was required to be given. If such a person delivers to the Corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated. ARTICLE FIVE EXECUTIVE COMMITTEE Section 1. Constitution and Powers. The Board of Directors, by resolution adopted by affirmative vote of a majority of the number of directors fixed by or in the manner provided in these Bylaws, may designate one (1) or more directors (with such alternates, if any, as may be deemed desirable) to constitute an Executive Committee, which Executive Committee shall have and may exercise, when the Board of Directors is not in session, all the authority and powers of the Board of Directors in the business and affairs of the Corporation, even though such authority and powers be herein provided or directed to be exercised by a designated officer of the Corporation; provided, however, that the Executive Committee shall not have the authority of the Board of Directors (a) to amend the Articles of Incorporation, except that the Executive Committee may, to the extent provided in the resolution designating that committee or in the Articles of Incorporation or these Bylaws, exercise the authority of the Board of Directors vested in it in accordance with Article 2.13 of the Texas Business Corporation Act relating to the issuance of certain shares; (b) to propose a reduction of the stated capital of the Corporation; (c) to approve a plan of merger or share exchange of the Corporation; (d) to recommend to the shareholders the sale, lease, or exchange of all or substantially all of the property and assets of the Corporation otherwise than in the usual and regular course of its business; (e) to recommend to the shareholders a voluntary dissolution of the Corporation or revocation thereof; (f) to amend, alter or repeal the Bylaws of the Corporation or adopt new Bylaws of the Corporation; (g) to fill vacancies in the Board of Directors; (h) to fill vacancies in or designate alternate members of the Executive Committee; (i) to fill any directorship to be filled by reason of an increase in the number of directors; (j) to elect or remove officers of the Corporation or members or alternate members of the Executive Committee; (k) to fix the compensation of any member or alternate member of the Executive Committee; (l) to alter or repeal any resolution of the Board of Directors that by its terms provides that it shall not be so amendable or repealable; or (m) unless the resolution designating the Executive Committee, the Articles of Incorporation or these Bylaws expressly so provide, to authorize a distribution or the issuance of shares of the Corporation. T h e designation of the Executive Committee and the delegation thereto of authority shall not operate to relieve the Board of Directors or any member thereof of any responsibility imposed upon it or him by law. So far as practicable, members of the Executive Committee and their alternates (if any) shall be appointed by the Board of Directors at its first meeting after each annual meeting of shareholders and, unless sooner discharged by affirmative vote of a majority of the number of directors fixed by or in the manner provided in these Bylaws, shall hold office until their respective successors are appointed and qualify or until their earlier respective deaths, resignations, retirements or disqualifications. Section 2. Meetings. Regular meetings of the Executive Committee, of which no notice shall be necessary, shall be held at such times and places as may be fixed from time to time by resolution adopted by affirmative vote of a majority of the whole Committee and communicated to all the members thereof. Special meetings of the Executive Committee may be called by the Chairman of the Board, the President or any two (2) members thereof at any time on twenty-four (24) hours' notice to each member, either personally or by mail or telegram. Except as may be otherwise expressly provided by statute, the Articles of Incorporation or these Bylaws, neither the business to be transacted at, nor the purpose of, any meeting of the Executive Committee need be specified in the notice or waiver of notice of such meeting. A majority of the Executive Committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of the Executive Committee. The members of the Executive Committee shall act only as a committee, and the individual members shall have no power as such. The Committee, at each meeting thereof, may designate one of its members to act as chairman and preside at the meeting or, in its discretion, may appoint a chairman from among its members to preside at all its meetings held during such period as the Committee may specify. Section 3. Records. The Executive Committee shall keep a record of its acts and proceedings and shall report the same, from time to time, to the Board of Directors. The Secretary of the Corporation, or, in his absence, an Assistant Secretary, shall act as secretary of the Executive Committee, or the Committee may, in its discretion, appoint its own secretary. Section 4. Vacancies. Any vacancy in the Executive Committee may be filled by affirmative vote of a majority of the number of directors fixed by or in the manner provided in these Bylaws. ARTICLE SIX OTHER COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors may, by resolution adopted by affirmative vote of a majority of the number of directors fixed by or in the manner provided in these Bylaws, designate one or more directors (with such alternates, if any, as may be deemed desirable) to constitute another committee or committees for any purpose. Any such committee, to the extent so provided in such resolution or in the Articles of Incorporation or these Bylaws, shall have and may exercise the authority of the Board of Directors, subject to any limitations imposed by statute, the Articles of Incorporation, or these Bylaws. Any such committee that is not granted the power to exercise any authority of the Board of Directors shall have and may exercise only the power of recommending action to the Board of Directors (and/or the Executive Committee, if any) and of carrying out and implementing any instructions or any policies, plans and programs theretofore approved, authorized and adopted by the Board of Directors or the Executive Committee. ARTICLE SEVEN OFFICERS, EMPLOYEES AND AGENTS; POWERS AND DUTIES Section 1. Elected Officers. The elected officers of the Corporation shall be a President, such number of Vice Presidents as may be determined from time to time by the Board (and in the case of each such Vice President, with such descriptive title, if any, as the Board of Directors shall deem appropriate), a Secretary and a Treasurer. None of the elected officers need be a member of the Board of Directors. Section 2. Election. So far as is practicable, all elected officers shall be elected by the Board of Directors at its first meeting after each annual meeting of shareholders. Section 3. Appointive Officers. The Board of Directors may also appoint one or more Assistant Secretaries and Assistant Treasurers and such other officers and assistant officers and agents (none of whom need be a member of the Board) as it shall from time to time deem necessary, who shall exercise such powers and perform such duties as shall be set forth in these Bylaws or determined from time to time by the Board or by the Executive Committee. Section 4. Two or More Offices. Any two (2) or more offices may be held by the same person. Section 5. Compensation. The compensation of all officers of the Corporation shall be fixed from time to time by the Board of Directors or the Executive Committee. The Board of Directors or the Executive Committee may from time to time delegate to the President the authority to fix the compensation of any or all of the other officers of the Corporation. Section 6. Term of Office; Removal; Filling of Vacancies. Each elected officer of the Corporation shall hold office until his successor is chosen and qualified in his stead or until his earlier death, resignation, retirement, disqualification or removal from office. Each appointive officer shall hold office at the pleasure of the Board of Directors without the necessity of periodic reappointment. Any officer or agent elected or appointed by the Board of Directors may be removed at any time by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Section 7. President. The President shall be the chief executive officer of the Corporation and, subject to the provisions of these Bylaws, shall have general supervision of the affairs of the Corporation and shall have general and active control of all its business. In the event of the absence or disability of the Chairman of the Board, the President shall preside when present at meetings of the shareholders and of the Board of Directors. He shall have power and general authority to execute bonds, deeds and contracts in the name of the Corporation and to affix the corporate seal thereto; to sign stock certificates; to cause the employment or appointment of such employees and agents of the Corporation as the proper conduct of operations may require and to fix their compensation, subject to the provisions of these Bylaws; to remove or suspend any employee or agent who shall have been employed or appointed under his authority or under authority of an officer subordinate to him; to suspend for cause, pending final action by the authority which shall have elected or appointed him, any officer subordinate to the President; and in general to exercise all the powers usually appertaining to the office of president of a corporation, except as otherwise provided by statute, the Articles of Incorporation or these Bylaws. In the event of the absence or disability of the President, his duties shall be performed and his powers may be exercised by the Vice Presidents in the order of their seniority, unless otherwise determined by the President, the Executive Committee or the Board of Directors. Section 8. Vice Presidents. Each Vice President shall generally assist the President and shall have such powers and perform such duties and services as shall from time to time be prescribed or delegated to him by the President, the Executive Committee or the Board of Directors. Section 9. Secretary. The Secretary shall see that notice is given of all meetings of the shareholders and special meetings of the Board of Directors and shall keep and attest true records of all proceedings at all meetings thereof. He shall have charge of the corporate seal and have authority to attest any and all instruments or writings to which the same may be affixed. He shall keep and account for all books, documents, papers and records of the Corporation except those for which some other officer or agent is properly accountable. He shall have authority to sign stock certificates and shall generally perform all duties usually appertaining to the office of secretary of a corporation. In the event of the absence or disability of the Secretary, his duties shall be performed and his powers may be exercised by the Assistant Secretaries in the order of their seniority, unless otherwise determined by the Secretary, the President, the Executive Committee or the Board of Directors. Section 10. Assistant Secretaries. Each Assistant Secretary shall generally assist the Secretary and shall have such powers and perform such duties and services as shall from time to time be prescribed or delegated to him by the Secretary, the President, the Executive Committee or the Board of Directors. Section 11. Treasurer. The Treasurer shall be the chief accounting and financial officer of the Corporation and shall have active control of and shall be responsible for all matters pertaining to the accounts and finances of the Corporation. He shall audit all payrolls and vouchers of the Corporation and shall direct the manner of certifying the same; shall supervise the manner of keeping all vouchers for payments by the Corporation and all other documents relating to such payments; shall receive, audit and consolidate all operating and financial statements of the Corporation and its various departments; shall have supervision of the books of account of the Corporation, their arrangement and classification; shall supervise the accounting and auditing practices of the Corporation and shall have charge of all matters relating to taxation. The Treasurer shall have the care and custody of all monies, funds and securities of the Corporation; shall deposit or cause to be deposited all such funds in and with such depositories as the Board of Directors or the Executive Committee shall from time to time direct or as shall be selected in accordance with procedures established by the Board of Directors or the Executive Committee; shall advise upon all terms of credit granted by the Corporation; shall be responsible for the collection of all its accounts and shall cause to be kept full and accurate accounts of all receipts and disbursements of the Corporation. He shall have the power to endorse for deposit or collection or otherwise all checks, drafts, notes, bills of exchange and other commercial paper payable to the Corporation and to give proper receipts or discharges for all payments to the Corporation. The Treasurer shall generally perform all duties usually appertaining to the office of treasurer of a corporation. In the event of the absence or disability of the Treasurer, his duties shall be performed and his powers may be exercised by the Assistant Treasurers in the order of their seniority, unless otherwise determined by the Treasurer, the President, the Executive Committee or the Board of Directors. Section 12. Assistant Treasurers. Each Assistant Treasurer shall generally assist the Treasurer and shall have such powers and perform such duties and services as shall from time to time be prescribed or delegated to him by the Treasurer, the President, the Executive Committee or the Board of Directors. Section 13. Additional Powers and Duties. In addition to the foregoing especially enumerated duties, services and powers, the several elected and appointed officers of the Corporation shall perform such other duties and services and exercise such further powers as may be provided by statute, the Articles of Incorporation or these Bylaws, or as the Board of Directors or the Executive Committee may from time to time determine or as may be assigned to them by any competent superior officer. Section 14. Titles of Non-Officer Employees. The President of the Corporation shall have the power and authority to determine the titles to be used by employees who are not officers of the Corporation. Such titles may include, but shall not be limited to, titles such as "Vice President" and "Assistant Vice President" (with or without additional descriptive terms in each case). The employees using such titles shall not be considered officers of the Corporation for any purpose, notwithstanding the fact that there may be duly elected or appointed officers of the Corporation whose titles are similar to those of such employees. It is the intent of these Bylaws that the only persons who are and shall be considered officers of the Corporation are the persons elected or appointed as officers by the Board pursuant to Section 1 or Section 3 of this Article Seven. ARTICLE EIGHT SHARES AND TRANSFERS OF SHARES Section 1. Certificates Representing Shares. Certificates in such form as may be determined by the Board of Directors and as shall conform to the requirements of the statutes, the Articles of Incorporation and these Bylaws shall be delivered representing all shares to which shareholders are entitled. Such certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof that the Corporation is organized under the laws of Texas, the holder's name, the number and class of shares, and the par value of such shares or a statement that such shares are without par value. Each certificate shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of such officers may be facsimiles. Section 2. Lost Certificates. The Board of Directors, the Executive Committee, the President or such other officer or officers or any agent of the Corporation as the Board of Directors may from time to time designate, in its or his discretion, may direct a new certificate representing shares to be issued in place of any certificate theretofore issued by the Corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors, the Executive Committee, the President or any such other officer or agent in its or his discretion and as a condition precedent to the issuance thereof may require the owner of s u c h lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it or he shall require and/or give the Corporation a bond in such form, in such sum, and with such surety or sureties as it or he may direct, as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 3. Transfers of Shares. Shares of the Corporation shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney. If a certificate representing shares is presented to the Corporation or the transfer agent of the Corporation with a request to register transfer, it shall be the duty of the Corporation or the transfer agent of the Corporation to register the transfer, cancel the old certificate and issue a new certificate if: (a) the certificate is duly endorsed; (b) reasonable assurance is given that those endorsements are genuine and effective; (c) the Corporation has no duty as to adverse claims or has discharged the duty; (d) any applicable law relating to the collection of taxes has been complied with; and (e) the transfer is in fact rightful or is to a bona fide purchaser. Section 4. Registered Shareholders. (a) Unless otherwise provided in the Texas Business Corporation Act or other applicable law, (1) the Corporation may regard the person in whose name any shares issued by the Corporation are registered in the stock transfer books of the Corporation at any particular time as the owner of those shares at that time for purposes of voting or giving proxies with respect to those shares, receiving distributions thereon or notices in respect thereof, transferring those shares, exercising rights of dissent, exercising or waiving any preemptive right or entering into any agreements with respect to those shares, and (2) neither the Corporation nor any of its directors, officers, employees or agents shall be liable for regarding that person as the owner of those shares at that time for those purposes, regardless of whether that person does not possess a certificate for those shares. (b) When shares are registered in the stock transfer books of the Corporation in the names of two or more persons as joint owners with the right of survivorship, after the death of a joint owner and before the time that the Corporation receives actual written notice that a party or parties other than the surviving joint owner or owners claim an interest in the shares or any distributions thereon, the Corporation may record on its books and otherwise effect the transfer of those shares to any person, firm or corporation (including the surviving joint owner or owners individually) and pay any distributions made in respect of those shares, in each case as if the surviving joint owner or owners were the absolute owners of the shares. ARTICLE NINE INDEMNIFICATION Section 1. Indemnification of Directors. The Corporation shall indemnify a person who was, is, or is threatened to be made, a named defendant or respondent in a proceeding because the person is or was a director against any judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by the person in connection with the proceeding if it is determined, in the manner described below, that the person (a) conducted himself in good faith, (b) reasonably believed, in the case of conduct in his official capacity as a director of the Corporation, that his conduct was in the Corporation's best interests, and in all other cases, that his conduct was at least not opposed to the Corporation's best interests and (c) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful; provided that if the person is found liable to the Corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification (i) shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding and (ii) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the Corporation. The determinations required above that the person has satisfied the prescribed conduct and belief standards must be made (1) by a majority vote of a quorum consisting of directors who at the time of the vote are not named defendants or respondents in the proceeding, (2) if such a quorum cannot be obtained, by a majority vote of a committee of the Board of Directors, designated to act in the matter by a majority vote of all directors, consisting solely of two (2) or more directors who at the time of the vote are not named defendants or respondents in the proceeding, (3) by special legal counsel selected by the Board of Directors or a committee of the Board by vote as set forth in clause (1) or (2) of this sentence, or, if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors, or (4) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the proceeding. The determination as to reasonableness of expenses must be made in the same manner as the determination that the person has satisfied the prescribed conduct and belief standards, except that if the determination that the person has satisfied the prescribed conduct and belief standards is made by special legal counsel, the determination as to reasonableness of expenses must be made by the Board of Directors or a committee of the Board by vote as set forth in clause (1) or (2) of the immediately preceding sentence or, if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors. The termination of a proceeding by judgment, order, settlement or conviction, or on a plea of nolo contendere or its equivalent is not of itself determinative that the person did not meet the requirements for indemnification set forth above. A person shall be deemed to have been found liable in respect of any claim, issue or matter only after the person shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. Notwithstanding any other provision of these Bylaws, the Corporation shall pay or reimburse expenses incurred by a director in connection with his appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding. Section 2. Advancement of Expenses to Directors. Reasonable expenses incurred by a director who was, is, or is threatened to be made, a named defendant or respondent in a proceeding shall be paid or reimbursed by the Corporation, in advance of the final disposition of the proceeding and without any of the determinations specified in Section 1 of this Article, after the Corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under Section 1 of this Article and a written undertaking by or on behalf of such director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by law. The written undertaking described in the immediately preceding sentence to repay the amount paid or reimbursed to the director by the Corporation must be an unlimited general obligation of the director but need not be secured and it may be accepted without reference to financial ability to make repayment. Section 3. Officers. The Corporation shall indemnify and advance expenses to an officer of the Corporation to the same extent that it is required to indemnify and advance expenses to directors under these Bylaws or by statute. In addition, the Corporation may indemnify and advance expenses to an officer of the Corporation to such further extent, consistent with law, as may be provided by the Articles of Incorporation, these Bylaws, general or specific action of the Board of Directors, or contract or as permitted or required by common law. Section 4. Others. The Corporation may indemnify and advance expenses to an employee or agent of the Corporation to the same extent that it is required to indemnify and advance expenses to directors under these Bylaws or by statute. The Corporation may indemnify and advance expenses to persons who are not or were not officers, employees or agents of the Corporation but who are or were serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation for profit subject to the provisions of the Texas Business Corporation Act, corporation for profit organized under laws other than the laws of Texas, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise to the same extent that it is required to indemnify and advance expenses to directors under this Article or by statute. The Corporation may indemnify and advance expenses to an employee, agent or other person serving at the request of the Corporation (as described above in this Section 4) who is not a director to such further extent, consistent with law, as may be provided by the Articles of Incorporation, these Bylaws, general or specific action of the Board of Directors, or contract or as permitted or required by common law. Section 5. Insurance and Other Arrangements. The Corporation may purchase and maintain insurance or establish and maintain another arrangement on behalf of any person who is or was a director, officer, employee or agent of the Corporation or who is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation for profit subject to the provisions of the Texas Business Corporation Act, corporation for p r o fit organized under laws other than the laws of Texas, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against or in respect of any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the Corporation would have the power to indemnify him against that liability under these Bylaws or by statute. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the Corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the Corporation. Without limiting the power of the Corporation to purchase, procure, establish or maintain any kind of insurance or other arrangement, the Corporation may, for the benefit of persons indemnified by the Corporation, (1) create a trust fund; (2) establish any form of self-insurance; (3) secure its indemnity obligation by grant of a security interest or other lien on the assets of the Corporation; or (4) establish a letter of credit, guaranty or surety arrangement. The insurance or other arrangement may be purchased, procured, maintained or established within the Corporation or with any insurer or other person deemed appropriate by the Board of Directors regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or part by the Corporation. In the absence of fraud, the judgment of the Board of Directors as to the terms and conditions of the insurance or other arrangement and the identity of the insurer or other person participating in an arrangement shall be conclusive and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to l i a b i lity, on any ground, regardless of whether directors participating in the approval are beneficiaries of the insurance or arrangement. Section 6. Report to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this Article or the provisions of any statute shall be reported in writing to the shareholders with or before the notice or waiver of notice of the next shareholders' meeting or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the 12-month period immediately following the date of the indemnification or advance. Section 7. Entitlement. These indemnification provisions shall inure to each of the directors, officers, employees and agents of the Corporation, and other persons serving at the request of the Corporation (as provided in this Article), whether or not the claim asserted against him is based on matters that antedate the adoption of this Article, and in the event of his death shall extend to his legal representatives; but such rights shall not be exclusive of any other rights to which he may be entitled. Section 8. Definitions. For purposes of this Article: (a) The term "expenses" includes court costs and attorneys fees; (b) The term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding; (c) The term "director" means any person who is or was a director of the Corporation and any person who, while a director of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation for profit subject to the provisions of the Texas Business Corporation Act, corporation for profit organized under laws other than the laws of Texas, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise; (d) The term "corporation" includes any domestic or foreign predecessor entity of the corporation in a merger, consolidation or other transaction in which the liabilities of the predecessor are transferred to the corporation by operation of law and in any other transaction in which the corporation assumes the liabilities of the predecessor but does not specifically exclude liabilities that are the subject matter of this Article; (e) The term "official capacity" means, when used with respect to a director, the office of director in the corporation and, when used with respect to a person other than a director, the elective or appointive office in the corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation, but does not include service for any other corporation for profit subject to the provisions of the Texas Business Corporation Act or corporation for profit organized under laws other than the laws of Texas or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise; and (f) The Corporation is deemed to have requested a director to serve an employee benefit plan whenever the performance by him of his duties to the Corporation also imposes duties on or otherwise involves services by him to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a director with respect to an employee benefit plan pursuant to applicable law are deemed fines. Action taken or omitted to be taken by a director with respect to an employee benefit plan in the performance of his duties for a purpose reasonably believed by him to be in the interest of the participants and beneficiaries of the plan is deemed to be for a purpose which is not opposed to the best interests of the Corporation. Section 9. Severability. The provisions of this Article are intended to comply with Articles 2.02A(16) and 2.02-1 of the Texas Business Corporation Act. To the extent that any provision of this Article authorizes or requires indemnification or the advancement of expenses contrary to such statutes or the Articles of Incorporation, the Corporation's power to indemnify or advance expenses under such provision shall be limited to that permitted by such statutes and the Articles of Incorporation and any limitation required by such statutes or the Articles of Incorporation shall not affect the validity of any other provision of this Article. ARTICLE TEN MISCELLANEOUS Section 1. Distributions and Share Dividends. Distributions in the form of dividends and share dividends on the outstanding shares of the Corporation, subject to any restrictions in the Articles of Incorporation and to the limitations imposed by the statutes, may be declared by the Board of Directors at any regular or special meeting. Distributions in the form of dividends may be declared and paid in cash, in property, or in evidences of the Corporation's indebtedness, or in any combination thereof, and may be declared and paid in combination with share dividends. Distributions of cash or property (tangible or intangible) made or payable by the Corporation, whether in liquidation or from earnings, profits, assets or capital, including all distributions that were payable but not paid to the registered owner of the shares, his heirs, successors or assigns but that are now being held in suspense by the Corporation or that were paid or delivered by it into an escrow account or to a trustee or custodian, shall be payable by the Corporation, escrow agent, trustee or custodian to the person registered as owner of the shares in the Corporation's stock transfer books as of the record date determined for the distribution, his heirs, successors or assigns. The person in whose name the shares are or were registered in the stock transfer books of the Corporation as of the record date shall be deemed to be the owner of the shares registered in his name at that time. Section 2. Reserves. The Corporation may, by resolution of the Board of Directors, create a reserve or reserves out of its surplus or designate or allocate any part or all of its surplus in any manner for any proper purpose or purposes, and may increase, decrease or abolish any such reserve, designation or allocation in the same manner. Section 3. Signature of Negotiable Instruments. All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officer, officers, agent or agents, and in such manner, as are permitted by these Bylaws and as from time to time may be prescribed by resolution (whether general or special) of the Board of Directors or the Executive Committee. Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 5. Seal. The seal of the Corporation shall be in such form as shall be adopted and approved from time to time by the Board of Directors. The seal may be used by causing it, or a facsimile thereof, to be impressed, affixed, imprinted or in any manner reproduced. Section 6. Loans and Guaranties. The Corporation may lend money to, guaranty obligations of and otherwise assist its directors, officers and employees if the Board of Directors determines that such a loan, guaranty or assistance reasonably may be expected to benefit, directly or indirectly, the Corporation. Section 7. Closing of Transfer Books and Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive a distribution by the Corporation (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purpose (other than determining shareholders entitled to consent to action by shareholders proposed to be taken without a meeting of shareholders, in which case the record date for such purpose shall be determined pursuant to the provisions of Article 2.26C of the Texas Business Corporation Act), the Board of Directors may provide that the stock transfer books of the Corporation shall be closed for a stated period but not to exceed, in any case, sixty (60) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case not to be more than sixty (60) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or entitled to receive a distribution (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. The record date for determining shareholders entitled to call a special meeting is the date the first shareholder signs the notice of that meeting. When a determination of shareholders entitled to vote at any meeting has been made as provided in this Section, such determination shall apply to any adjournment thereof except where the determination has been made through the closing of the stock transfer books and the stated period of closing has expired. Section 8. Surety Bonds. Such officers and agents of the Corporation (if any) as the Board of Directors may direct from time to time shall be bonded for the faithful performance of their duties and for the restoration to the Corporation, in case of their death, resignation, retirement, disqualification or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the Corporation, in such amounts and by such surety companies as the Board of Directors may determine. The premiums on such bonds shall be paid by the Corporation, and the bonds so furnished shall be in the custody of the Secretary. Section 9. Gender. Words of any gender used in these Bylaws shall be construed to include each other gender, unless the context requires otherwise. ARTICLE ELEVEN AMENDMENTS These Bylaws may be amended or repealed, or new bylaws may be adopted, exclusively by the affirmative vote of a majority of the directors present at any meeting of the Board of Directors at which a quorum is present or by unanimous written consent of the directors. 13653 07404 CORP 183925 EX-10.76 5 EXHIBIT 10.76 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT (this Agreement) effective as of December 1, 1997, is by and between CARALOE, INC., a Texas corporation (Seller), and MET-TRIM, a Texas LLC (Buyer), WITNESSETH: WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, bulk aloe vera mucilaginous polysaccharide (hereinafter referred to under the product name of MANAPOL powder) in the quantities, at the price, and upon the terms and conditions hereinafter set forth; and NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Term. The term of this Agreement shall commence on December 1, 1997, and shall end at midnight on December 31, 2000, unless further extended or sooner terminated as provided herein (such term, as extended, herein called the Term). The Term (including each one- year extension of the Term) shall be extended automatically for an additional one-year period, provided that, at least thirty (30) days prior to the end of the Term, Seller and Buyer mutually agree in writing on the quantity and price of MANAPOL to be sold by Seller and purchased by Buyer hereunder during such additional one-year period. At least sixty (60) days prior to the end of the Term, Seller and Buyer shall commence good faith negotiations to determine and agree upon such quantity and price for such additional one-year period. If the parties are unable to so agree on such quantity and price, this Agreement shall terminate effective at the end of the current Term. Nothing contained in this Paragraph 1 shall be deemed to (i) obligate the parties to agree upon such quantity and price, (ii) obligate a party to negotiate with the other party regarding such quantity and price if such other party is then in breach of or in default under this Agreement or (iii) limit the rights to the parties under Paragraph 8 hereof. 2. Territory. Buyer is permitted to market agreed upon products containing Manapol in the United States, Mexico, Canada, Australia, New Zealand and any other mutually agreed upon territories. The use of the Manapol trademark is, however, covered by the separate Trademark licensing agreement entered into by the parties hereto. 3. Sale and Purchase License. (a) Subject to the terms and conditions of this Agreement, beginning in December 1997 Seller shall sell to Buyer, and Buyer shall purchase from Seller, not less than 60 kilograms of Manapol powder or other mutually agreed upon product per quarter. (b) Buyer agrees that all MANAPOL powder purchased by it hereunder shall be used only (i) as an additive in human or animal health food products (in capsule form) manufactured by or for Buyer that are intended for sale to the ultimate consumer in the United States or other mutually agreed upon countries or territories. Such food products are herein called Buyer Products. 4. Quality. Seller warrants to Buyer that all MANAPOL powder sold by Seller pursuant to this Agreement will conform to the quality specifications set forth in Exhibit A to this Agreement. EXCEPT AS PROVIDED IN THIS PARAGRAPH 4, THERE ARE NO WARRANTIES OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A PARTICULAR PURPOSE, MADE WITH RESPECT TO THE MANAPOL POWDER TO BE SOLD HEREUNDER, AND NONE SHALL BE IMPLIED BY LAW. 5. Deliveries. Buyer shall instruct Seller from time to time during the Term, by placing a purchase order with Seller reasonably in advance of the date Buyer desires MANAPOL powder to be delivered to it hereunder, (i) as to the quantities of MANAPOL powder to be delivered to Buyer, (ii) as to the specific date of delivery, (iii) as to the specific location of delivery and (iv) as to the carrier or particular type of carrier for such delivery. During the Term, Buyer shall provide Seller (a) on a yearly basis a nonbinding forecast of Buyer's minimum and maximum aggregate delivery requirements for MANAPOL powder for such period, and (b) on a quarterly basis a forecast acceptable to Seller (which shall be binding on Buyer) of Buyer's minimum and maximum delivery requirements for MANAPOL powder for each month of the next three (3) month period. The quantities of MANAPOL powder ordered by Buyer pursuant to this Agreement from time to time shall be spaced in a reasonable manner, and Buyer shall order such quantities in accordance with Buyer's binding forecasts. In no event shall Seller be required to deliver to Buyer in any three-month period a quantity of MANAPOL powder in excess of 150% of the maximum delivery requirement for such period set forth in the binding forecast for such period accepted by Seller. Deliveries of MANAPOL powder shall be made by Seller under normal trade conditions in the usual and customary manner being utilized by Seller at the time and location of the particular delivery. The MANAPOL powder delivered to Buyer hereunder shall be packaged in suitable containers to be determined by the Seller. All deliveries of MANAPOL powder to Buyer hereunder shall be made by Seller F.O.B. at the facilities of Seller or its affiliates. 6. Price. All MANAPOL powder to be purchased by Buyer under this Agreement shall be purchased by it, during the first year of the Term, at a price as outlined in Attachment B, and during each year (if any) of the Term, at the price per kilogram agreed upon by the parties for such additional year pursuant to the provisions of Paragraph 1 hereof. Buyer shall bear all freight, insurance and similar costs, and all sales taxes, with respect to such purchases. The purchase price of MANAPOL powder, together with all related freight, insurance and similar costs, and sales taxes, shall be paid by Buyer to Seller within thirty (30) days after the date of invoice. 7. Confidentiality. In the performance of Seller's obligations pursuant to this Agreement, Buyer may acquire from Seller or its affiliates technical, commercial, operating or other proprietary information relative to the business or operations of Seller or its affiliates (the Confidential Information). Buyer shall maintain the confidentiality, and take all necessary precautions to safeguard the secrecy, of any and all Confidential Information it may acquire from Seller or its affiliates. Buyer shall not use any of such Confidential Information for its own benefit or for the benefit of anyone else. Buyer shall not publicly disclose the existence of this Agreement or the terms hereof without the prior written consent of Seller. 8. Force Majeure. Seller shall not have any liability hereunder if it shall be 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), and Seller's obligations, so far as may be necessary, shall be suspended during the period of such Force Majeure and shall be cancelled in respect of such quantities of MANAPOL powder as would have been sold hereunder but for such suspension. Seller shall give to Buyer 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 its obligations under this Agreement. 9. Rights Upon Default. (a) Seller's Rights Upon Default. If Buyer (i) fails to purchase the quantities of MANAPOL powder specified for purchase by Buyer hereunder, (ii) fails to make a payment hereunder when due or (iii) otherwise breaches any term of this Agreement, and such failure or breach is not cured to Seller's reasonable satisfaction within five (5) days (in the case of a failure to make a payment) or thirty (30) days (in any other case) after receipt of notice thereof by Buyer, or if Buyer fails to perform or observe any covenant or condition on its part to be performed when required to be performed or observed, and such failure continues after the applicable grace period, if any, specified in the Agreement, Seller may refuse to make further deliveries hereunder and may terminate this Agreement upon notice to Buyer and, in addition, shall have such other rights and remedies, including the right to recover damages, as are available to Seller under applicable law or otherwise. If Buyer becomes bankrupt or insolvent, or if a petition in bankruptcy is filed by or against it, or if a receiver is appointed for it or its properties, Seller may refuse to make further deliveries hereunder and may terminate this Agreement upon notice to Buyer, without prejudice to any rights of Seller existing hereunder or under applicable law or otherwise. Any subsequent shipment of MANAPOL powder by Seller after a failure by Buyer to make any payment hereunder, or after any other default by Buyer hereunder, shall not constitute a waiver of any rights of Seller arising out of such prior default; nor shall Seller's failure to insist upon strict performance of any provision of this Agreement be deemed a waiver by Seller of any of its rights or remedies hereunder or under applicable law or a waiver by Seller of any subsequent default by Buyer in the performance of or compliance with any of the terms of this Agreement. (b) Buyer's Rights Upon Default. If Seller fails in any material respect to perform its obligations hereunder, and such failure is not cured to Buyer's reasonable satisfaction within 30 days after receipt of notice thereof by Seller, Buyer shall have the right to refuse to accept further deliveries hereunder and to terminate this Agreement upon notice to Seller and, in addition, shall have such other rights and remedies, including the right to recover damages, as are available to Buyer under applicable law or otherwise. Any subsequent acceptance of delivery of MANAPOL powder by Buyer after any default by Seller under this Agreement shall not constitute a waiver of any rights of Buyer arising out of such prior default; nor shall Buyer's failure to insist upon strict performance of any provision of this Agreement be deemed a waiver by Buyer of any of its rights or remedies hereunder or under applicable law or a waiver by Buyer of any subsequent default by Seller in the performance of or compliance with any of the terms of this Agreement. 10. Disclaimer and Indemnity. Buyer shall assume all financial and other obligations for Buyer Products, and Seller shall not incur any liability or responsibility to Buyer or to third parties arising out of or connected in any manner with Buyer Products. In no event shall Seller be liable for lost profits, special damages, consequential damages or contingent liabilities arising out of or connected in any manner with this Agreement or Buyer Products. Buyer shall defend, indemnify and hold harmless Seller and its affiliates, and their respective 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 manufacture, use, sale or other disposition of Buyer Products, or any other products of Buyer, by Buyer or any other party and (ii) any breach by Buyer of any of its obligations under this Agreement. 11. Equitable Relief. A breach by Buyer of the provisions of Paragraph 3(b) shall cause Seller to suffer irreparable harm and, in such event, Seller shall be entitled, as a matter of right, to a restraining order and other injunctive relief from any court of competent jurisdiction, restraining any further violation thereof by Buyer, its officers, agents, servants, employees and those persons in active concert or participation with them. The right to a restraining order or other injunctive relief shall be supplemental to any other right or remedy Seller may have, including, without limitation, the recovery of damages for the breach of such provisions or of any other provisions of this Agreement. 12. Survival. The expiration or termination of the Term shall not impair the rights or obligations of either party hereto which shall have accrued hereunder prior to such expiration or termination. The provisions of Paragraphs 3(b), 7, 9, 10 and 11 hereof, and the rights and obligations of the parties thereunder, shall survive the expiration or termination of the Term. 13. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas. 14. Succession. Neither party hereto may assign or otherwise transfer this Agreement or any of its rights or obligations hereunder (including, without limitation, by merger or consolidation) without the prior written consent of the other party; provided, however, that Seller may assign any of its rights or obligations hereunder to any affiliate of Seller. Subject to the immediately preceding sentence, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 15. Entire Agreement. This Agreement constitute the entire agreement between the parties hereto relating to the matters covered hereby The terms of this Agreement shall prevail over any inconsistent terms contained in any purchase order issued by Buyer and acknowledgment or acceptance thereof issued by Seller. No modification, waiver or discharge of this Agreement or any of its terms shall be binding unless in writing and signed by the party against which the modification, waiver or discharge is sought to be enforced. This Agreement is separate from and unrelated to any other agreement between the parties hereto and has been entered into for separate and independent consideration, the sufficiency of which is hereby acknowledged by the parties. 16. Notices. All notices and other communications with respect to this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or when duly deposited in the mails, first class mail, postage prepaid, to the address set forth below, or such other address hereafter specified in like manner by one party to the other: If to Seller: Caraloe, Inc. 2001 Walnut Hill Lane Irving, Texas 75038 Attention: President If to Buyer: Met-Trim 17250 Dallas Parkway Dallas, Texas 75248 Attention: President 17. Interpretation. In the event that any provision of this Agreement is illegal, invalid or unenforceable as written but may be rendered legal, valid and enforceable by limitation thereof, then such provision shall be deemed to be legal, valid and enforceable to the maximum extent permitted by applicable law. The illegality, invalidity or unenforceability in its entirety of any provision hereof will not affect the legality, validity or enforceability of the remaining provisions of this Agreement. 18. No Inconsistent Actions. 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 Paragraph 8 hereof, will promptly do all acts and take all measures as may be appropriate to comply with the terms, conditions and provisions of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. CARALOE, INC. By: _____________________________ Name:___________________________ Title:____________________________ MET-TRIM By:_____________________________ Name:___________________________ Title:____________________________ EXHIBIT A MANAPOL POWDER PRODUCT SPECIFICATION Source: Freeze dried powder produced from inner gel of Aloe vera L. Processing: Patented: U.S. and other patents. Product Specifications: Appearance Fine white to beige powder Complex carbohydrates > = 30% of soluble fraction Moisture < = 14% Residue on ignition < = 16% Microbiological purity Meets U.S.P. specifications Gel Points approximately 240 mg/oz Viscosity (cP) @ 4 mg/ml approximately 40 Total acid value (as malic acid) approximately 0.7% by AOAC method Fiber content (>5 m) < = 60% EXHIBIT B Price per Kilogram = $1,400.00 Volume Discount: Price per kilogram, minimum order of 100 kilograms or more = $1,300.00 per kilogram Other discounts available based on minimum quarterly or yearly commitments to be mutually agreed upon and treated as an attachment to the Agreement. EX-10.77 6 EXHIBIT 10.77 TRADEMARK LICENSE AGREEMENT THIS TRADEMARK LICENSE AGREEMENT ("Agreement"), effective as of December 1, 1997, is made by and between CARALOE, INC. ("Licensor"), a Texas corporation, having its principal place of business at 2001 Walnut Hill Lane, Irving, Texas 75038, and MET-TRIM, ("Licensee"), a Texas LLC, having its principal place of business at 17250 Dallas Parkway, Dallas, Texas 75248. W I T N E S S E T H: WHEREAS, simultaneously with the execution of this Agreement, Licensor and Licensee are entering into an non-exclusive Supply Agreement of even date herewith (the "Supply Agreement") for the sale by Licensor and purchase by Licensee of bulk aloe vera mucilaginous polysaccharide (hereinafter referred to under the product name of "MANAPOL[R] powder") to be used in products manufactured by Licensee in capsule (the "Manufactured Products"); WHEREAS, Carrington Laboratories, Inc., a Texas corporation ("Carrington"), claims the ownership of the trademark MANAPOL[R] (the "Mark") and has granted to Licensor a license to use the Mark and to license others to use it on an exclusive and/or a non- exclusive basis; WHEREAS, Licensee is desirous of obtaining from Licensor, and Licensor is willing to grant to Licensee, a license to use the product name MANAPOL[R] (the "Mark") in connection with the advertising and sale of the Manufactured Products subject to the terms, conditions and restrictions set forth herein; and WHEREAS, Licensor and Licensee are mutually desirous of insuring the consistent quality of all products sold in connection with the Mark; NOW, THEREFORE, in consideration of premises, the mutual covenants, promises and agreement set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby covenant, promise and agree as follows: Article 1 LICENSE 1.1 Terms and Conditions. Licensor hereby grants to Licensee the non-transferable right and license to use the Mark in connection with the labeling, advertising and sale of Manufactured Products manufactured and sold by Licensee during the term of this Agreement. During the term of this Agreement, Licensee shall have (a) the non- exclusive right to use the Mark in connection with Manufactured Products containing MANAPOL[R] powder that are intended for sale to the ultimate consumer in the United States, Canada, Mexico, Australia, and New Zealand, and (b) the non-exclusive right to use the Mark in connection with Manufactured Products containing MANAPOL[R] powder that are intended for sale to the ultimate consumer in places other than the referenced countries, that are specifically and mutually agreed upon from time to time and listed in Exhibit A hereto. The countries in Exhibit A may be removed by Caraloe upon written notice to Met-Trim that an exclusive Trademark License Agreement has been executed for that country. In that event, Met-Trim shall no longer be allowed to use the Manapol[R] Trademark within the country removed by Caraloe after its existing supplies have been exhausted. 1.2 License Coterminous With Supply Agreement. The license granted by this Agreement shall run coterminously with the Supply Agreement, and any actions or events which shall operate to extend or t e rminate the Supply Agreement shall automatically extend or terminate this Agreement simultaneously. 1.3 Sublicenses. Licensee shall not have the right to grant sublicenses without the written permission of Licensor with respect to the license granted herein; however, Licensee may engage a third party or parties to make and affix labels for the Manufactured Products in compliance with Articles 2,3, and 4 hereof, and/or to distribute and sell the Manufactured Products in compliance with the terms and conditions of this Agreement. Licensee shall be expressly obligated to ensure full compliance with all terms and conditions of this Agreement. Article 2 CERTAIN OBLIGATIONS OF LICENSEE AND LICENSOR 2.1 Representations by Licensee. Licensee shall not represent in any manner that it owns any right, title or interest in or to the Mark. Licensee acknowledges that its use of the Mark shall inure to the benefit of Licensor and shall not create in Licensee's favor any right, title or interest in or to the Mark. 2.2 Discontinuation of Use of Mark. Upon the expiration or termination of this Agreement, Licensee will cease and desist from all use of the Mark in any manner and will not adopt or use, without Licensor's prior written consent, any word or mark which is confusingly or deceptively similar to the Mark, except that Licensee may continue to use the Mark under the terms and conditions of this Agreement in connection with any remaining supplies of MANAPOL[R] powder purchased by Licensee from Licensor until such supplies are exhausted. 2.3 FDA Compliance of Products. All products on which the Mark is used by Licensee shall be manufactured, packaged, labeled, advertised, marketed and sold in compliance with (i) the Federal Food, Drug and Cosmetic Act and the rules and regulations promulgated thereunder, as amended from time to time if sold for use within the United States, and (ii) all other applicable laws, rules and regulations if sold for use outside of the United States. 2.4 Inspection. Upon reasonable notice, Licensor reserves the right to inspect Licensee's products bearing the Mark and Licensee's manufacturing facilities at all reasonable times to insure Licensee's compliance with this Agreement. 2.5 Use of Trademark. Licensee shall not use the Mark except as specifically set forth herein. Without limiting the generality of the preceding sentence, Licensee shall not use the Mark in connection with the sale or advertising of any products other than the Manufactured Products. Any use of the trademark, "Manapol[R]" pursuant to this agreement is non-exclusive. Whenever the Licensee uses the trademark, "Manapol[R]", it shall also indicate that such name is the registered trademark of Licensor and shall take all reasonable measures to assure that there is no confusion of ownership of the mark or the substance which it identifies, the same being the proprietary property of the Licensee. 2.6 Trademark Registration. At Licensor's request and expense and, except as otherwise provided herein at Licensor's sole discretion and option, Licensee shall take whatever action is reasonably necessary to assist Carrington or its assigns in registering the Mark with the U.S. Patent and Trademark Office ("USPTO") and/or in perfecting, protecting or enforcing Carrington's and Licensor's rights in and to the Mark. Licensee understands that Carrington or its assigns may rely solely on Licensee's use of the Mark to obtain or maintain registration with the USPTO. Article 3 MANUFACTURING AND SALE 3.1 M a nufacturing Facilities. All manufacturing of the Manufactured Products shall be done in the Licensee's own facilities or qualified contract manufacturing facilities. 3.2 Combination With Other Products. Licensee shall not combine MANAPOL[R] powder with any product or substance in any manner which would violate any laws, rules or regulations of any state, federal or other governmental body. Licensee shall not combine MANAPOL[R] powder with any other substance in a Manufactured Product that is to be advertised or sold for use or consumption by humans or animals if the approval of the U.S. Food and Drug Administration (the "FDA") or the U.S. Department of Agriculture ("USDA") for such use or consumption is required and has not been obtained. 3.3 Compliance by Third Parties. Licensee shall take all steps reasonably necessary to ensure that its distributors and any other parties to whom it sells any of the Manufactured Products for resale do not relabel, repackage, advertise, sell or attempt to sell MANAPOL[R] powder or any of the Manufactured Products in a manner that would violate this Agreement if done by Licensee. 3.4 Manapol[R] Content. The amount of Manapol[R] powder to be contained in each of the Met-Trim Manufactured Products shall be no less than fifteen milligrams (15mgs) per capsule or compressed tablet. The parties shall meet once each year to determine and agree upon the Manapol[R] powder content for existing and proposed Met-Trim Manufactured Products. Article 4 LABELS AND ADVERTISING 4.1 FDA Compliance of Labels and Advertising. All labels and a d vertising relating to the Manufactured Products offered in connection with the Mark must strictly comply with all applicable rules and regulations of the FDA if sold for use within the United States, and all other applicable laws, rules and regulations wherever sold. Information regarding the ingredients of MANAPOL[R] powder shall be furnished to Licensee by Licensor from time to time. 4.2 Mandatory Requirements. Licensee shall cause all labels, packaging, advertising and promotional materials used by it in advertising, marketing and selling any product manufactured by or on behalf of Licensee that contains MANAPOL[R] to contain (i) the Mark, (ii) a statement setting forth the concentration of MANAPOL[R] powder contained in such product, and (iii) the following legend: MANAPOL[R] is a registered trademark of Caraloe, Inc. 4.3 Claims by Licensee. Licensee hereby agrees not to make, or permit any of its employees, agents or distributors to make, any claims of any properties or results relating to MANAPOL[R] powder or any Manufactured Product which would violate any applicable law. 4.4 FDA or USDA Approval of Claims. If Licensee desires to seek FDA or USDA approval as to any specific claims with respect to MANAPOL[R] powder or any Manufactured Product, Licensee hereby agrees to (i) notify Licensor of the claims and the application prior to filing and (ii) to keep Licensor informed as to the progress of the application, including but not limited to sending Licensor copies of all communications or notices to or from the FDA or USDA, as applicable. 4.5 Right to Approve Labels, etc. If Licensor so requests, Licensee shall not use any label, advertisement or marketing material that contains the Mark unless such label, advertisement or marketing material has first been submitted to and approved by Licensor. Licensor shall not unreasonably withhold its approval of any such label, advertisement or marketing material. Article 5 ROYALTY 5.1 Licensee agrees to pay to Licensor a royalty of $100.00 for the first contract year for the use of the Trademark. Thereafter, the Parties shall meet and mutually agree upon the royalty for the next contract year or for the remainder of the term of the Agreement. 5.2 All payments hereunder are to be paid in U.S. currency at the address set forth at the beginning of the Agreement. Article 6 NEGATION OF WARRANTIES, DISCLAIMER AND INDEMNITY 6.1 Negation of Warranties, etc. Nothing in this Agreement shall be construed or interpreted as: (a) a warranty or representation by Licensor that any product made, used, sold or otherwise disposed of under the license granted in this Agreement is or will be free of infringement or the like of the rights of third parties; or (b) an obligation by Licensor to bring or prosecute actions or suits against third parties for infringement or the like of the Mark or of any registration that may subsequently be granted for such Mark; or (c) granting by implication, estoppel or otherwise any licenses or rights other than those expressly granted hereunder. 6.2 Disclaimer. LICENSOR MAKES NO REPRESENTATIONS, EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A PARTICULAR PURPOSE, AND ASSUMES NO RESPONSIBILITIES WHATSOEVER WITH RESPECT TO THE USE, SALE OR OTHER DISPOSITION BY LICENSEE OR ITS CUSTOMERS, VENDEES OR OTHER TRANSFEREES, WITH RESPECT TO THE MARK OR ANY PRODUCTS MADE OR SOLD BY LICENSEE. THE FOREGOING NOTWITHSTANDING, SELLER DOES REPRESENT THAT THE MANAPOL[R] POWDER DOES MEET THE SPECIFICATIONS OUTLINED ON EXHIBIT A AND THAT IT IS A FOOD SUPPLEMENT UNDER THE FDA RULES AND REGULATIONS. 6.3 Liability of Licensee for Products. Licensee shall assume all financial and other obligations for the products made and sold by it under this Agreement and Licensor shall not incur any liability or responsibility to Licensee or to third parties arising out of or connected in any manner with Licensee's products made or sold pursuant to this Agreement. In no event shall Licensor be liable for lost profits, special damages, consequential damages or contingent liabilities arising out of or connected in any manner with this Agreement or the products made or sold by Licensee under this Agreement. 6.4 I n demnity of Licensor. Licensee agrees to defend, indemnify and hold Licensor, its officers, directors, employees and agents, harmless against all claims, liabilities, demands, damages, expenses or losses arising out of or connected with (a) the wrongful or negligent use by Licensee of the Mark or (b) any use, sale or other disposition of Licensee's products by Licensee or by any other party. 6.5 Negation of Trademark Warranty. Licensee acknowledges that Licensor makes no warranty, express or implied, with respect to its ownership of any rights relating to the Mark. Article 7 TERM AND TERMINATION 7.1 Term. Unless terminated earlier as provided for herein, this Agreement shall remain in full force and effect for a five (5)- year period ending at midnight on August 14, 2001. This Agreement may be extended or renewed as provided in Section 1.2, or otherwise by the written agreement of the parties. 7.2 Breach of Agreement. Except as provided otherwise in Section 7.3, if either party breaches any material provision of this Agreement and fails to cure the breach within thirty (30) days after receipt of written notice from the nonbreaching party specifying the breach, then the nonbreaching party may terminate this Agreement upon written notice to the breaching party, which right of termination shall be in addition to, and not in lieu of, all other rights and remedies the nonbreaching party may have against the breaching party under this Agreement, at law or in equity. Failure by Licensor to give notice of termination with respect to any such failure shall not be deemed a waiver of its right at a later date to give such notice if such failure continues or again occurs, or if another failure occurs. A breach by either party of a material provision of the Supply Agreement shall be deemed a breach by such party of a material provision of this Agreement. 7.3 Immediate Termination. Licensor may immediately terminate this Agreement, upon written notice to Licensee, upon the occurrence of any one or more of the following events: (i) Licensee breaches any provision of Articles 2, 3, or 4; (ii) Licensee fails to purchase and/or to pay for the quantities of MANAPOL[R] powder that it is obligated to purchase and pay for under the Supply Agreement in accordance with the terms thereof; (iii) Licensee voluntarily seeks protection under any federal or state bankruptcy or insolvency laws; (iv) a petition for bankruptcy or the appointment of a receiver is filed against Licensee and is not dismissed within thirty (30) days thereafter; (v) Licensee makes any assignment for the benefit of its creditors; or (vi) Licensee ceases doing business. 7.4 Survival of Provisions. In the event of termination, cancellation or expiration of this Agreement for any reason, Sections 2.2, 6.1, 6.2, 6.3, 6.4, 6.5 and 8.1 hereof shall survive such termination, cancellation or expiration and remain in full force and effect. Article 7 MISCELLANEOUS 8.1 Equitable Relief. A breach or default by Licensee of any of the provisions of Articles 2, 3 and 4 hereof shall cause Licensor to suffer irreparable harm and, in such event, Licensor shall be entitled, as a matter of right, to a restraining order and other i n j unctive relief from any court of competent jurisdiction, restraining any further violation thereof by Licensee, its officers, agents, servants, employees and those persons in active concert or participation with them. The right to a restraining order or other injunctive relief shall be supplemental to any other right or remedy Licensor may have, including, without limitation, the recovery of damages for the breach or default of any of the terms of this Agreement. 8.2 Amendment. This Agreement may be changed, modified, or amended only by an instrument in writing duly executed by each of the parties hereto. 8.3 Entire Agreement. This Agreement constitutes the full and complete agreement of the parties hereto and supersedes any and all prior understandings, whether written or oral, with respect to the subject matter hereof. 8.4 No Waiver. The failure of either party to insist upon strict performance of any obligation hereunder by the other party, irrespective of the length of time for which such failure continues, shall not be a waiver of its right to demand strict compliance in the future. No consent or waiver, express or implied, by either party to or of any breach or default in the performance of any obligation hereunder by the other party shall constitute a consent or waiver to or of any other breach or default in the performance of the same or any other obligation hereunder. 8.5 Notices. All notices required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered as properly given or made when personally delivered or when duly deposited in the mails, first class mail, postage prepaid, or when transmitted by prepaid telegram, and addressed to the applicable address first above written or to such other address as the addressee shall have theretofore specified in a written notice to the notifying party. 8.6 Assignment. This Agreement or any of the rights or obligations created herein may be assigned, in whole or in part, by Licensor. However, this Agreement is personal to Licensee, and Licensee may not assign this Agreement or any of its rights, duties or obligations under this Agreement to any third party without Licensor's prior written consent, and any attempted assignment by Licensee not in accordance with this Section 8.6 shall be void. 8.7 Relationship of Parties. Nothing contained herein shall be construed to create or constitute any employment, agency, partnership or joint venture arrangement by and between the parties, and neither of them has the power or authority, express or implied, to obligate or bind the other in any manner whatsoever. 8.8 Remedies Cumulative. Unless otherwise expressly provided herein, the rights and remedies hereunder are in addition to, and not in limitation of, any other rights and remedies, at law or in equity, and the exercise or one right or remedy will not be deemed a waiver of any other right or remedy. 8.9 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, provided, however, that the foregoing shall not be deemed to expand or otherwise affect the limitations on assignment and delegation set forth in Section 8.6 hereof, and except as otherwise expressly provided in this Agreement, no other person or business entity is intended to or shall have any right or interest under this Agreement. 8.10 Governing Law. This Agreement shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of Texas, excluding, however, any conflicts of law rules that would require the application of the laws of any other state or country. 8.11 Headings. The headings used in this Agreement are for convenience of reference only and shall not be used to interpret this Agreement. 8.12 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which will constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. CARALOE, INC. By: Name: Title: MET-TRIM By: Name: Title: EXHIBIT A To that certain Trademark License and Supply Agreement dated December 1, 1997 by and between Caraloe, Inc. and Met-Trim United States Mexico Canada Australia New Zealand EX-10.78 7 EXHIBIT 10.78 Amendment Number One dated January 12, 1998 This attachment amends and revises that certain Agreement dated September 3, 1996, by and between Carrington Laboratories and Faulding Pharmaceuticals/David Bull Laboratories, ("the Agreement") to now include F.H. Faulding & Co. Limited ACN 007 870 984 trading as Faulding Pharmaceuticals/David Bull Laboratories. The parties to the above Agreement desire to expand the Territories under the Agreement to include: Thailand, Vietnam, Singapore, the Philippines, Malaysia and Myanmar. This Amendment shall become effective upon its execution by both parties subject to specific agreement on launch dates, pricing revisions, if any, packaging and minimum purchases for each country. It is the intent of the parties to agree upon these operational details by no later than June 30, 1998, provided however, country specifics can be extended if mutually agreed upon. All other terms and conditions of the Agreement remain unchanged. AGREED AND ACCEPTED BY: F.H. FAULDING & CO. LIMITED ACN 007 870 984 TRADING AS FAULDING PHARMACEUTICALS/DAVID BULL LABORATORIES _________________________________ Name: Bruce Hewett Title: General Manager, Pharma ANZ CARRINGTON LABORATORIES, INC. _________________________________ Name: Carlton E. Turner Title: President & CEO EX-21.1 8 Exhibit 21.1 SUBSIDIARIES OF CARRINGTON Name of Subsidiary Jurisdiction of 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 9 Exhibit 23.1 Consent Of Independent Public Accountants As independent public accountants, we hereby consent to the incorportion of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8 (Nos. 33-22849, 33-36041, 33-42002, 33-50430, and 33-64407) and the Registration Statements on Form S-3 (Nos. 33-60833 and 33-17177). It should be noted that we have not audited any financial statements of Carrington Laboratories, Inc. subsequent to December 31, 1996, or performed any audit procedures subsequent to the date of our report, February 7, 1997 (except with respect to certain matters discussed in Note 7, as to which the date is April 25, 1997). Arthur Andersen LLP Dallas Texas, March 27, 1998 EX-23.2 10 Exhibit 23.2 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 33-17177) pertaining to the 1995 and 1997 private placements of common stock of Carrington Laboratories, Inc., respectively, of our report dated February 25, 1998, with respect to the consolidated financial statements of Carrington Laboratories, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1997 filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Dallas, Texas March 27, 1998 EX-27.1 11 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 FINANCIAL DATA SCHEDULE RESTATED. THIS SCHEDULE CONTAINS A RESTATEMENT OF EPS DATA TO REFLECT THE ADOPTION OF FAS 128 EARNINGS PER SHARE FOR THE LATEST THREE FISCAL YEARS YEAR YEAR YEAR DEC-31-1995 DEC-31-1996 DEC-31-1997 JAN-01-1995 JAN-01-1996 JAN-01-1997 DEC-31-1995 DEC-31-1996 DEC-31-1997 6,222,008 11,406,091 4,023,272 0 0 0 2,453,535 2,124,618 3,934,060 (226,884) ( 213,145) (477,700) 5,103,988 3,622,804 5,003,177 14,411,153 17,308,821 12,811,206 18,932,959 18,850,954 19,145,751 (6,222,309) (7,172,918) (8,330,506) 27,934,097 31,201,529 26,162,962 3,464,223 3,399,525 3,327,423 0 45,714 0 0 0 0 1,167,434 66,000 0 83,790 88,698 93,065 21,147,900 23,410,408 22,732,711 27,399,124 31,201,529 26,162,962 24,374,090 21,286,492 23,559,053 24,374,090 21,286,492 23,559,053 7,944,271 10,327,167 9,530,049 12,441,972 10,857,097 10,833,476 5,370,109 5,929,498 3,005,850 0 0 0 250,751 (323,597) (36,471) (1,496,917) (5,522,672) 246,149 131,350 88,000 20,000 (1,628,267) (5,522,672) 226,149 0 0 0 0 0 0 0 0 0 ( 1,628,267) (5,522,672) 226,149 (0.22) (0.74) 0.02 (0.22) (0.74) 0.02
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