-----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, S07HE/9IW+so9+iTxVnGvwzXwZMfwmKzxsKrep1sqeolYd1WJ3dwt3+y5cnNvgSY +FlHeZ8FoQDACkM28k0Umg== 0000930661-96-000249.txt : 19960402 0000930661-96-000249.hdr.sgml : 19960402 ACCESSION NUMBER: 0000930661-96-000249 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 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: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11997 FILM NUMBER: 96542572 BUSINESS ADDRESS: STREET 1: 2001 WALNUT HILL LN CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2145181300 MAIL ADDRESS: STREET 1: 2001 WALNUT HILL LANE CITY: IRVING STATE: TX ZIP: 75038 FORMER COMPANY: FORMER CONFORMED NAME: AVACARE INC DATE OF NAME CHANGE: 19860521 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 Commission File Number 0-11997 Carrington Laboratories, Inc. (Exact name of Registrant as specified in its charter) Texas 75-1435663 (State of Incorporation) (IRS Employer ID No.) 2001 Walnut Hill Lane, Irving, Texas 75038 (Address of principal executive offices) Registrant's telephone number, including area code: (214) 518-1300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($.01 par value) NASDAQ National Market Preferred Share Purchase Rights NASDAQ National Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 15, 1996, was $231,721,284. (This figure was computed on the basis of the closing price of such stock on the NASDAQ National Market on March 15, 1996 using the aggregate number of shares held on that date by, or in nominee name for, shareholders who are not officers, directors or record holders of 10% or more of the Registrant's outstanding voting stock. The characterization of such officers, directors and 10% shareholders as affiliates is for purposes of this computation only and should not be construed as an admission for any other purpose that any of such persons are, in fact, affiliates of the Registrant.) Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practicable date: 8,657,421 shares of Common Stock, par value $.01 per share, were outstanding on March 15, 1996. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its annual meeting of shareholders to be held on May 23, 1996 are incorporated by reference into Part III hereof, to the extent indicated herein. PART I ITEM 1. BUSINESS. General Carrington Laboratories, Inc. ("Carrington" or the "Company") is a research-based pharmaceutical and medical device company engaged in the development, manufacturing and marketing of carbohydrate-based therapeutics for the treatment of major illnesses and the dressing and management of wounds. The Company sells, using a network of distributors, nonprescription products through its Wound and Skin Care Division, veterinary medical devices and pharmaceutical through its Veterinary Medical Division and consumer products through its consumer products subsidiary, Caraloe, Inc. The Company's research and product portfolio are based primarily on complex carbohydrate technology derived from the Aloe vera plant. The Company was incorporated in Texas in 1973, as Ava Cosmetics, Inc. In 1986, the Company sold the direct sales business it was then operating and changed its name to Carrington Laboratories, Inc. Wound and Skin Care Division Carrington's Wound and Skin Care Division markets a comprehensive line of wound management products to hospitals, alternative care facilities and the home health care market. The Company's products are designed to maintain a moist wound environment which aids the healing process and to maintain the integrity of contiguous healthy skin. Carrington products are used in a wide range of acute and chronic wound and skin conditions and for incontinence and ostomy care. The Company is committing significant resources to its wound and skin care business. Primary marketing emphasis is directed toward hospitals, managed care organizations, alternate care facilities and home health care providers, with wound and skin care products being promoted primarily to physicians and specialty nurses, e.g. enterostomal therapists. Opportunities in the alternate care and home health care markets are also addressed through a telemarketing sales team and a National Accounts Department. The Company's hospital field sales force currently employs 43 sales representatives, each assigned to a specific geographic area in the United States, five regional sales managers, a representative in Puerto Rico and a managing director of the Wound and Skin Care Division. The Company also uses an independent sales company employing four sales representatives to sell its products on a commission basis and an independent sales representative in Canada. In addition to this field sales force, the Wound and Skin Care Division employs seven telemarketers who focus on alternative care facilities and the home health care market, and three persons in its National Accounts Department. I-1 The Company's products are primarily sold through a network of distributors. Two of the Company's largest distributors in the hospital market for the last several years have been Baxter Healthcare Corporation ("Baxter") and Owens & Minor. During fiscal 1993, 1994 and 1995, sales of wound and skin care products to Baxter represented 10%, 11% and 10%, respectively, of the Company's total net sales. Sales to Owens & Minor represented 8%, 7%, and 14%, respectively, of total net sales over the same period. Consumer Health Caraloe, Inc., a separate subsidiary of the Company, markets or licenses consumer products and bulk ingredients utilizing the Company's patented complex carbohydrate technology. Attention has been focused on three goals, the first of which is to sell Caraloe's Aloe Nutritional(TM) brand products through the health food store market. The second goal has been to develop private label aloe products for entrepreneurs seeking a high quality line of aloe products. The third goal has been to become a supplier of bulk AVMP(TM) (Aloe vera mucilaginous polysaccharide) to commercial companies incorporating aloe vera mucilaginous polysaccharides into their established product lines. In May 1994, an agreement was signed with Mannatech, Inc., formerly Emprise International, Inc., to supply it bulk Manapol(R). In February 1996, an agreement was signed with Mannatech granting it an exclusive license in the United States for Manapol(R). During fiscal 1994 and 1995, sales of Manapol(R) to Mannatech represented 4% and 10%, respectively, of the Company's total net sales. Veterinary Medical Division The Carrington Veterinary Medical Division ("CVMD") markets Acemannan Immunostimulant, a vaccine adjuvant, and several wound and skin care products to the veterinary market. Acemannan Immunostimulant was conditionally approved by the United States Department of Agriculture ("USDA") in November 1991, for use as an aid in the treatment of canine and feline fibrosarcoma, a form of soft tissue cancer that affects dogs and cats. A conditional approval means that efficacy and potency tests are required, and the product's label must specify that these studies are in progress. The "conditional" aspect of the approval will be removed upon completion of additional potency testing which is in the final stages of development. The Company expects to complete these tests in 1996. There can be no assurance that these tests will result in the removal of the conditional restriction on the USDA's approval of Acemannan Immunostimulant. In September 1990, the Company granted Solvay Animal Health, Inc. ("Solvay") an exclusive, worldwide license to use and sell a bulk pharmaceutical mannan adjuvant for poultry disease. In January 1992, Solvay received approval from the USDA to market the bulk pharmaceutical mannan as an adjuvant to a vaccine for Marek's disease, a virus infection that kills chickens or renders them unfit for human consumption. Solvay sells the product under the trademark ACM I. In March 1996, the Company signed an agreement with Farnam Companies, Inc., a leading veterinary marketing company, to promote and sell the CarraVet(TM) product line, including Acemannan Immunostimulant. I-2 Research and Development General In 1984, the Company isolated and identified a polymeric compound with a molecular weight between one and two million Daltons from the Aloe vera plant. This compound has been given the generic name "acemannan" by the United States Adopted Names Council. The Company intends to seek approval of the Food and Drug Administration (the "FDA") and other regulatory agencies to sell products based on complex carbohydrates in the United States and in foreign countries: (I) to treat inflammatory bowel diseases, including ulcerative colitis, a widespread, chronic, inflammatory disease of the colon; (ii) to treat various forms of cancer; (iii) for use as an adjuvant to various vaccines; and (iv) to treat non-healing and other wounds. For a more comprehensive listing of the type, indication and status of products currently under development by the Company, see "Research and Development--Summary" below. The regulatory approval process, both domestically and internationally, can be protracted and expensive, and there is no assurance that the Company will obtain approval to sell its products for any treatment or use (see "Governmental Regulation" below). The Company is marketing or developing several products which in the past were given the general name of acemannan, suggesting the products were identical. This is not correct because there are ten products in development or being marketed that are derived from 3 basic extracts of the Aloe vera plant. The basic freeze-dried aloe vera extract is reconstituted to produce Manapol(R) and AVMP(TM) for both food grade and cosmetic grade products. Further refinement produces Bulk Pharmaceutical Mannans that are used to produce hydrogels; the Carrington(TM) Patch, an oral care product; Carra(TM)Sorb M, a freeze-dried wound dressing; adjuvants, ACM I marketed by Solvay, and CARN 500 which is being developed as an adjuvant for various vaccines; and Aliminase(TM) (formerly CARN 1000) capsules which are being developed for ulcerative colitis. Finally, Bulk Injectable Mannans are marketed as Acemannan Immunostimulant (CARN 700), and a product has been developed for the treatment of cancer, Alovex(TM) (formerly CARN 750). The Company expended approximately $5,397,000, $5,334,000, and $5,370,000 on research and development in fiscal, 1993, 1994, and 1995, respectively. The Company estimates that in fiscal 1996 it will spend more on research and development than in 1995. Currently, the Company's research staff comprises 13 full-time employees as compared to 21 full-time employees at the end of 1994. Preclinical Research The Company identified the characteristics of its complex carbohydrates by a series of studies in the Company's laboratories and in several contract laboratories. Based on toxicology tests sponsored by the Company on different animal species with dosages up to 40 times the proposed intravenous human dosage, in vitro and in vivo tests for mutagenicity, dermal sensitization tests, results of a Phase I safety study of an oral product in humans and a Phase I safety study of an intravenously administered preparation in humans, no clinically significant toxicity of the I-3 Company's products has been noted. Further safety studies may be required by the FDA prior to the approval of any applications of complex carbohydrates. Other preclinical studies conducted in the Company's laboratories and in outside laboratories have shown that certain of the Company's complex carbohydrates stimulate macrophage and other white blood cells to produce lymphokines, including interleukin-1 and tumor necrosis factor alpha, that regulate other cells. Interleukin-1 stimulates fibroblasts, which are essential to wound healing. Tumor necrosis factor alpha acts against tumors in the body. In addition, laboratory experiments conducted by the Company have shown that some complex carbohydrates have both pro- and anti-inflammatory actions. The Company believes that its products' pharmacological actions and lack of toxicity make them excellent candidates for further development as therapeutic agents for the treatments and uses for which the Company intends to seek regulatory approvals (see "Research and Development --General" above). There is no assurance, however, that the Company will be successful in its efforts. The Company operates a research and development laboratory at the Texas A&M University Research Park to expand preclinical research in various wound healing applications and mechanisms of action. Pursuant to this arrangement, the Company has access to leading authorities in immunology, as well as facilities and equipment to engage in experimentation and analysis at the basic research level. Animal Studies The Company has pursued a strategy of developing products for certain animal indications, clinical testing of which may have application to studies for treatment of human diseases. Animal clinical testing necessary to obtain eventual approval of a product for treatment of human diseases may also provide data sufficient to obtain approval for the related veterinary indication. This approach enables the Company to obtain revenues from its research efforts at an earlier date and also expands data available from actual use of the product in animals. The Company's clinical research efforts to date have focused on the indications described below. Vaccine Adjuvants. An adjuvant is a substance that enhances the antibody response to an antigen. The ability to generate a vigorous immune response to an antigen is critical to the effectiveness of a vaccine. The Company's studies indicate that acetylated mannans, when used as a vaccine adjuvant, produce marked stimulation of the immune system. In 1990, the Company received approval from the USDA to sell an adjuvant to licensed manufacturers for use in combination with animal vaccines. This use as a vaccine adjuvant for certain poultry diseases was licensed to Solvay pursuant to an agreement between Solvay and the Company entered into in September 1990. In January 1992, Solvay received approval from the USDA to market an adjuvant to its vaccine for Marek's disease (see "Veterinary Medical Division" above). I-4 The Company has conducted or sponsored studies of CARN 500 adjuvants with other vaccines for animals. Based on these studies, the Company, either directly or through third party licensees, intends to pursue development of adjuvants for other animal vaccines. In 1993, initiation of a program was begun to develop adjuvants for mammalian vaccines and for vaccines for marine animals under licenses with one European company. There can be no assurance however, that such development will be successful or that the Company will be able to develop, or to enter into any licensing agreements for the development of, any additional adjuvants. Evaluation of Anti-Tumor Activity. Acetylated mannans (CARN 750) are immunomodulating agents that increase circulating levels of interleukin-1 and tumor necrosis factor alpha. A series of studies conducted at Texas A&M University in 1988 and 1989 on mice with highly malignant tumors indicated that a single intraperitoneal dose caused significant tumor reduction in a statistically significant percentage of mice. This effect in many instances was dramatic, with complete regression of the tumor and with continuing immunity. Recovered animals were resistant to syngeneic tumor reimplantation for up to six months after initial tumor regression. In 1991, the USDA granted the Company conditional approval to market an injectable form of a complex carbohydrate as an aid in the treatment of canine and feline fibrosarcoma, a form of soft tissue cancer, under the name Acemannan Immunostimulant. The Company believes that the USDA's remaining requirements to remove the conditional restriction can be completed in 1996 (see "Veterinary Medical Division" above). Of course, there can be no assuarance as to whether or when the USDA will remove the conditional restriction on its approval of this product. Human Studies Evaluation of Aliminase(TM) (formerly CARN 1000) in the Treatment of Inflammatory Bowel Diseases. In October 1991, the Company filed an investigational new drug ("IND") application requesting approval to conduct human clinical trials on the efficacy of Aliminase(TM) in the treatment of ulcerative colitis. In November 1991, the Company received notice that the FDA was withholding approval of the study, pending submission of additional information. Additional studies requested by the FDA were completed, and the results were submitted in October 1992. In December 1992, the Company received authorization from the FDA to commence human clinical trials under the IND application. In early 1993, the Company began a pilot safety and efficacy study with oral Aliminase(TM) in the treatment of ulcerative colitis patients who are experiencing an acute flare-up of the disease. This study was conducted by treating 54 patients with 400 or 800 milligram doses twice daily for two or four weeks. After four weeks, the disease activity index and the signs and symptoms of the disease were significantly improved, and the safety of the oral product continued to be confirmed. A large controlled trial of Aliminase(TM) in patients with ulcerative colitis began in September 1995. A total of 288 patients will be enrolled in four groups comparing a placebo with three doses of Aliminase(TM) (150, 300 and 600 mg dosage levels, administered twice daily for six weeks). Results are expected in 1996. Evaluation of Alovex(TM) (formerly CARN 750) in the Treatment of Solid Tumors in Humans. The Company believes that this intravenous product may be broadly useful in cancer therapy, with potential application in the treatment of major solid tumors, including melanoma, breast carcinoma, I-5 prostate carcinoma, colon carcinoma, hypernephroma and soft tissue sarcoma. The Company initiated a Phase I human clinical trial of injectable Alovex(TM) in certain solid tumor indications. The trial began in the United States in late 1995. As a result of the success of Acemannan Immunostimulant in dogs and cats, the Company has reason to believe that injectable Alovex(TM) may play a significant role in the treatment of cancer in humans. Evaluation of Carrington(TM) Patch in the Treatment of Aphthous Ulcers. Carrington's efforts to broaden the claims for wound care products containing Carrasyn(R) Hydrogel were expanded to include an application within the oral health care field. Two studies were conducted at Baylor College of Dentistry to examine the efficacy and safety of two formulations of Carrasyn(R) Hydrogel wound dressing in the treatment of oral aphthous ulcers (canker sores). The first study involved Carrasyn(R) Hydrogel wound dressing modified for intraoral use versus a leading product. The second trial involved the modified oral formulation of Carrasyn(R) Hydrogel that had been freeze-dried. This product, Carrington(TM) Patch, reduced the pain of these ulcers. A 510(k) was submitted to the FDA for permission to market the freeze-dried formulation for the management of oral aphthous ulcers. This was granted by the FDA, and the product will be marketed as Carrington(TM) Patch for the reduction of pain due to aphthous ulcers. Evaluation of Carrasyn(R) in Wound Healing. In 1993, a study was conducted at M.D. Anderson Cancer Center to determine if Carrasyn(R) Hydrogel was of benefit in treating radiation-induced skin reactions of mice. These studies clearly showed that, when compared to controls, Carrasyn(R) Hydrogel could significantly reduce radiation-induced inflammation and tissue damage in animals. As a result of this work, a small clinical trial was performed in 1994, studying the radiation-sparing effects of Carrasyn(R) Hydrogel wound dressing in four oncology patients. Further trials will continue in 1996. Four new indications (post-surgical incisions, sunburn, diabetic ulcers and radiation dermatitis) for Carrasyn(R) were added in 1995. Evaluation of Carrasyn(R) Freeze-Dried Gel (Carra(TM)Sorb M) in Wound Healing. Following the submission of a 510(k) for a preservative-free freeze-dried gel for wound care, the FDA allowed Carrington to market this product, and it was launched in early 1996. I-6 Summary. The following table outlines the status of the products and potential indications of the Company's complex carbohydrates developed, planned or under development. There is no assurance of successful development, completion or regulatory approval of any product not yet on the market. PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED, PLANNED OR UNDER DEVELOPMENT
PRODUCT OR POTENTIAL INDICATION POTENTIAL MARKET APPLICATIONS STATUS - -------------------- ----------------------------- ------ Topical Dressings Pressure and Vascular Ulcers Marketed Cleansers Wounds Marketed Antifungal Candida Marketed Oral Human Anti-inflammatory Ulcerative Colitis Phase III Clinical Trial Injectable Human Anticancer Melanoma, Breast, Prostate, Colon, Phase I Hypernephroma, and Soft Tissue Clinical Trial Sarcoma Veterinary Anticancer Fibrosarcoma Marketed Dental Pain reduction Aphthous Ulcers Marketed Vaccine Adjuvant Veterinary Poultry Vaccines Marek's Disease Marketed Livestock Cattle, Sheep Clinical Trials Marine (water treatment) Trout, Shrimp Clinical Trials
I-7 Licensing Strategy The Company expects that prescription pharmaceutical products containing certain defined mannans will require a substantial degree of development effort and expense. Before governmental approval to market any such product is obtained, the Company may license these mannans for certain indications to other pharmaceutical companies in the United States or foreign countries and require such licensees to undertake the steps necessary to obtain marketing approval for specific indications or in a particular country. Similarly, the Company intends to license third parties to market products containing defined mannans for certain human indications when it lacks the expertise or financial resources to market effectively. If the Company is unable to enter into such agreements, it may undertake to market the products itself for such indications. The Company's ability to market these mannans for specific indications will depend largely on its financial condition at the time and the results of related clinical trials. There is no assurance that the Company will be able to enter into any license agreements with third parties or that, if such license agreements are concluded, they will contribute to the Company's overall profits. In November 1995, the Company signed a licensing agreement with a supplier of calcium alginates and other wound care products. Under the agreement, the Company has exclusive marketing rights to advanced calcium alginates products for North and South America and the People's Republic of China. The Company will continue to seek opportunities to license products from third parties that will enhance its product portfolio. Raw Materials and Processing The principal raw material used by the Company in its operations is the leaf of the plant Aloe barbadensis Miller, popularly known as aloe vera. Through a patented process, the Company produces bulk pharmaceutical and injectable mannans and freeze-dried aloe vera extract from the central portion of the aloe vera leaf known as the gel. Bulk pharmaceutical mannan, in the form of a hydrogel, is used as an ingredient in certain of the Company's wound and skin care products. Through additional processing, bulk mannans may be produced in oral and injectable dosage forms. In May 1990, the Company purchased a 405-acre farm in the Guanacaste province of northwest Costa Rica which currently has approximately 125 acres planted with aloe vera. The Company plans to plant additional acreage as demand for aloe vera leaves increases. The Company believes that the Costa Rica farm will be capable of providing substantially all of the aloe vera leaves required to meet the Company's presently anticipated needs (see "Properties--Costa Rica Facility" below). I-8 Manufacturing Prior to the second quarter of 1995, the Company produced substantially all its wound and skin care products in a leased facility in Dallas, Texas. During the first quarter of 1994, the Company completed an evaluation of the production requirements that would be needed to meet all federal regulatory requirements as a fully integrated pharmaceutical manufacturer, as well as the production capacity that would be required to meet continued growth in the Company's wound and skin care business. The Company decided to move its wound and skin care manufacturing operation from its present location to an unused portion of the Company's headquarters facility in Irving, Texas, and expand the facility through higher capacity equipment. The moving, upgrading and expansion of the manufacturing operation began in the fourth quarter of 1994, and the project was completed and production began during the third quarter of 1995. At the same location, the Company has upgraded its capabilities to produce injectable grade pharmaceutical products. The Company believes that the new plant's capacity will provide sufficient capacity for the present line of products, and accommodate new products and sales growth. Final packaging of certain of the Company's wound care products is completed by outside vendors. The Company's calcium alginates, films and freeze-dried products are being provided by third parties. All of the Company's bulk pharmaceutical mannans, bulk injectable mannans and freeze-dried aloe vera extracts are produced in its aloe vera processing plant in Costa Rica. This facility has the ability to supply the bulk aloe vera raw materials requirements of the Company's current product lines for the foreseeable future. During the first quarter of 1994, the Company initiated a project in Costa Rica to upgrade the production plant to meet regulatory requirements for the production of bulk pharmaceutical oral and injectable mannans as required for IND's. This project was completed in the fourth quarter of 1994. Finished oral and injectable dosage forms will be produced by outside vendors until in-house production becomes economically justified. The production capacity of the Costa Rica plant is larger than the Company's current usage level. Management believes, however, that the cost of the Costa Rica facility will eventually be recovered through operations. The larger production capacity will be required to conduct large scale clinical trials with bulk pharmaceutical and injectable mannans. Competition Research and Development. The biopharmaceutical field is expected to continue to undergo rapid and significant technological change. Potential competitors in the United States are numerous and include pharmaceutical, chemical and biotechnology companies. Many of these companies have substantially greater capital resources, research and development staffs, facilities and expertise (including in research and development, manufacturing, testing, obtaining regulatory approvals and marketing) than the Company. This competition can be expected to become more intense as commercial applications for biotechnology and pharmaceutical products increase. Some of these companies may be better able than the Company to develop, refine, manufacture and market products which have application to the same indications as bulk pharmaceutical mannans and bulk injectable mannans. The Company understands that certain of these competitors are in the process I-9 of conducting human clinical trials of, or have filed applications with government agencies for approval to market, certain products that will compete with the Company's products. Wound and Skin Care Division, Caraloe, Inc., and CVMD. The Company competes against many companies that sell products which are competitive with the Company's products, with many of its competitors using very aggressive marketing efforts. Many of the Company's competitors are substantially larger than the Company in terms of sales and distribution networks and have substantially greater financial and other resources. The Company's ability to compete against these companies will depend in part on the continued expansion of the marketing network for its products. The Company believes that the principal competitive factors in the marketing of its products is their quality, and that they are naturally based and competitively priced. Governmental Regulation The production and marketing of the Company's products, and the Company's research and development activities, are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs for human use are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended, the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. For marketing outside the United States, the Company is subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement may vary widely from country to country. Food and Drug Administration. The contents, labeling and advertising of many of the Company's products are regulated by the FDA. The Company is required to obtain FDA approval before it can study or market any proposed prescription drugs and may be required to obtain such approval for proposed nonprescription products. This procedure involves extensive clinical research, and separate FDA approvals are required at various stages of product development. The approval process requires, among other things, presentation of substantial evidence to the FDA, based on clinical studies, as to the safety and efficacy of the proposed product. In order to initiate human clinical trials on a product, extensive basic research and development information must be submitted to the FDA in an investigational new drug ("IND") application. The IND application contains a general investigational plan, a copy of the investigator's brochure (a comprehensive document provided by the drug manufacturer), copies of the initial protocol for the first study, a review of the chemistry, manufacturing and controls information for the drug, pharmacology and toxicology information, any previous human experience with the drug, results of preclinical studies and any other information requested by the FDA. If permission is obtained to proceed to clinical trials based on the IND application, initial trials, usually categorized as Phase I, are instituted. The initial or Phase I trials typically involve the I-10 administration of small, increasing doses of the investigational drug to healthy volunteers, and sometimes patients, in order to determine the general overall safety profile of the drug and how it is metabolized. Once the safety of the drug has been established, Phase II efficacy trials are conducted in which the expected therapeutic doses of the drug are administered to patients having the disease for which the drug is indicated, and a therapeutic response is sought as compared to the expected progression of the underlying disease or compared to a competitive product or placebo. Information also is sought on any possible short-term side effects of the drug. If efficacy and safety are observed in the Phase II trials, Phase III trials are undertaken on an expanded group in which the patients receiving the drug are compared to a different group receiving either a placebo or some form of accepted therapy in order to establish the relative safety and efficacy of the new drug compared with the control group. Data are also collected to provide an adequate basis for future physician prescribing information. If Phases I through III are successfully completed, the data from these trials are compiled into a new drug application ("NDA"), which is filed with the FDA in an effort to obtain marketing approval. In general, an NDA will include a summary of the components of the IND application, a clinical data section reviewing in detail the studies from Phases I through III and the proposed description of the benefits, risks and uses, or labeling, of the drug. In general, a more comprehensive NDA and a more prolonged review process are required for drugs not previously approved for marketing by the FDA. If a second indication for an already approved product is sought, since many of the components of the review process are the same, a shortened review process generally can be anticipated. However, the FDA gives high priority to novel drugs providing unique therapeutic benefits and a correspondingly lower priority to drugs similar to or providing comparable benefits to others already on the market. In addition to submitting safety and efficacy data derived from clinical trials for FDA approval, NDA approval requires the manufacturer of the drug to demonstrate the identity, potency, quality and purity of the active ingredients of the product involved, the stability of these ingredients and compliance of the manufacturing facilities, processes and quality control with the FDA's current Good Manufacturing Practices regulations. After approval, manufacturers must continue to expend time, money and effort in production and quality control to assure continual compliance with the current Good Manufacturing Practices regulations. Certain of the Company's wound and skin care products are registered with the FDA as "devices" pursuant to the regulations under Section 510(k) of the Federal Food, Drug and Cosmetic Act, as amended. A device is a product used for a particular medical purpose, such as to cover a wound, with respect to which no pharmacological claim can be made. A device which is "substantially equivalent" to another device existing in the market prior to May 1976 can be registered with the FDA under Section 510(k) and marketed without further testing. A device which is not "substantially equivalent" is subject to an FDA approval process similar to that required for a new drug, beginning with an Investigational Device Exemption and culminating in a Premarket Approval. The Company has sought and obtained all its device approvals under Section 510(k). With respect to certain of its wound and skin care products, the Company intends to develop claims for which IND and NDA submissions will be required. I-11 Department of Agriculture. Certain products being developed by the Company for animal health indications must be approved by the USDA. The procedure involves extensive clinical research, and USDA approvals are required at various stages of product development. The approval process requires, among other things, presentation of substantial evidence to the USDA as to the safety and efficacy of the proposed product. Furthermore, even if approval to test a product is obtained, there is no assurance that ultimate approval for marketing the product will be granted. USDA approval procedures can be protracted. Other Regulatory Authorities. The Company's advertising and sales practices are subject to regulation by the Federal Trade Commission, the FDA and state agencies. The Company's processing and manufacturing plants are subject to federal, state and foreign laws and to regulation by the Bureau of Alcohol, Tobacco and Firearms of the Department of the Treasury and by the Environmental Protection Agency as well as the FDA. The Company believes that it is in substantial compliance with all applicable laws and regulations relating to its operations, but there is no assurance that such laws and regulations will not be changed. Any such change may have a material adverse effect on the Company's operations. Patents and Proprietary Rights As is industry practice, the Company has a policy of using patent, trademark and trade secret protection with a view to preserving its right to exploit the results of its research and development activities and, to the extent it may be necessary or advisable, to exclude others from appropriating the Company's proprietary technology. The Company's policy is to protect aggressively its proprietary technology by seeking and enforcing patents in a worldwide program. The Company has obtained patents or filed patent applications in the United States and approximately 24 other countries in three series regarding the compositions of acetylated manna derivatives, the processes by which they are produced and the methods of their use. The first series of patent applications, relating to the compositions of acetylated manna derivatives and certain basic processes of their production, was filed in a chain of United States patent applications and its counterparts in the other 24 countries. The first United States patent application in this first series, covering the composition claims of acetylated manna derivatives, matured into United States Patent No. 4,735,935 (the "935 Patent"), which was issued on April 5, 1988. United States Patent No. 4,917,890 (the "890 Patent") issued on April 17, 1990 from a divisional application to the 935 Patent. This divisional application pertains to most of the remaining claims in the original application not covered by the 935 Patent. The 890 Patent generally relates to the basic processes of producing acetylated manna derivatives, to certain specific examples of such processes and to certain formulations of acetylated manna derivatives. Two other divisional applications covering the remaining claims not covered by the 890 Patent matured into patents, the first on September 25, 1990, as United States Patent No. 4,959,214, and the second on October 30, 1990, as United States Patent No. 4,966,892. Foreign patents that are counterparts to the foregoing United States patents I-12 have been granted in some of the member states of the European Economic Community and several other countries. The second series of patent applications related to preferred processes for the production of acetylated manna derivatives. One of them matured into United States Patent No. 4,851,224, which was issued on July 25, 1989. This patent is the subject of a Patent Cooperation Treaty application and national foreign applications in several countries. An additional United States patent based on the second series was issued on September 18, 1990, as United States Patent No. 4,957,907. The third series of patent applications, relating to the uses of acetylated manna derivatives, was filed subsequent to the second series. Three of them matured into United States Patent Nos. 5,106,616, issued on April 21, 1992, 5,118,673, issued on June 2, 1992, and 5,308,838, issued on May 3, 1994. The Company intends to file a number of divisional applications to these patents, each dealing with specific uses of acetylated manna derivatives. A Patent Cooperation Treaty application based on the parent United States application has been filed designating a number of foreign countries in which the Company has the option to file specific applications. In addition, the Company has also obtained a patent in the United States relating to a wound cleanser, U.S. Patent No. 5,284,833, issued on February 8, 1994. This patent application is the subject of a Patent Cooperation Treaty application designating a number of foreign countries in which the Company has the option to file specific applications in the designated foreign countries. The Company has obtained a patent in the United States relating to a therapeutic device made from freeze-dried complex carbohydrate hydrogel (U.S. Patent No. 5,409,703 issued on April 25, 1995). The Company intends to file patent applications with respect to subsequent developments and improvements when it believes such protection is in the best interest of the Company. Although the scope of protection which ultimately may be afforded by the patents and patent applications of the Company is difficult to quantify, the Company believes its patents will afford adequate protection to conduct the business operations of the Company. However, there can be no assurance that (I) any additional patents will be issued to the Company in any or all appropriate jurisdictions, (ii) litigation will not be commenced seeking to challenge the Company's patent protection or such challenges will not be successful, (iii) processes or products of the Company do not or will not infringe upon the patents of third parties or (iv) the scope of patents issued to the Company will successfully prevent third parties from developing similar and competitive products. It is not possible to predict how any patent litigation will affect the Company's efforts to develop, manufacture or market its products. The Company also relies upon, and intends to continue to rely upon, trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive position. The Company typically enters into confidentiality agreements with its scientific consultants, and the Company's key employees have entered into agreements with the Company requiring that they forbear from disclosing confidential information of the Company and assign to the Company all rights in any inventions made while in the Company's employ relating to I-13 the Company's activities. Accordingly, the Company believes that its valuable trade secrets and unpatented proprietary know-how are adequately protected. The technology applicable to the Company's products is developing rapidly. A substantial number of patents have been issued to other biopharmaceutical companies. In addition, competitors have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights relating to products or processes competitive with those of the Company. To the Company's knowledge, acetylated manna derivatives do not infringe any valid, enforceable, United States patents. A number of patents have been issued to others with respect to various extracts of the Aloe vera plant and their uses and formulations, particularly in respect of skin care and cosmetic uses. While the Company is not aware of any existing patents which conflict with its current and planned business activities, there can be no assurance that holders of such other aloe vera based patents will not claim that particular formulations and uses of acetylated manna derivatives in combination with other ingredients or compounds infringe, in some respect, these other patents. In addition, others may have filed patent applications and may have been issued patents relating to products and technologies potentially useful to the Company or necessary to commercialize its products or achieve their business goals. There is no assurance that the Company will be able to obtain licenses of such patents on terms acceptable to it. The Company has given the trade name Carrisyn(R) to certain of its products containing acetylated manna derivatives. A selected series of domestic and foreign trademark applications exists for the marks Carrisyn(R), Manapol(R) and Carrasyn(R) which are registered in the United States and several foreign countries. Further, the Company has filed applications for the registration of a number of other trademarks, including AVMP(TM), both in the United States and in certain foreign countries. The Company believes that its trademarks and trade names are valuable assets. Employees As of March 1, 1996, the Company employed 276 persons, of whom 26 were engaged in the operation and maintenance of its Irving processing plant, 131 were employed at the Company's facility in Costa Rica and the remainder were executive, research, quality assurance, manufacturing, administrative, sales, and clerical personnel. Of the total number of employees, 102 were located in Texas, 131 in Costa Rica and one in Puerto Rico. In addition, 45 sales personnel were located in 26 other states. The Company considers relations with its employees to be good. The employees are not represented by a labor union. Financing In January 1995, the Company entered into a financing arrangement with NationsBank of Texas, N.A. The agreement is composed of a $2,000,000 line of credit which expired one year from the date of the agreement and a $6,300,000 term loan that matures five years from the date of the agreement. The interest rate on both credit facilities is prime plus one-half percent or the London I-14 Interbank Offering Rate plus 200 basis points set for a period of thirty, sixty, ninety or one hundred eighty days. The loans are collateralized by the Company's assets and contain certain covenants. As of December 31, 1995, the Company was not in compliance with the term loan's fixed charge ratio covenant. The Company is in discussions with the Bank and is currently working toward a long-term resolution to the non-compliance. As no binding amendments to the term-loan have been agreed upon as of March 31, 1996, all outstanding debt under the term loan has been presented as current for reporting purposes. Given the current cash position, the Company's short- and long-term liquidity will not be significantly affected. As of March 15, 1996, borrowings outstanding under the line of credit and term loan were $0 and $2,977,073, respectively. ITEM 2. PROPERTIES. The Company believes that all its farming property, manufacturing and laboratory facilities, as described below, and material farm, manufacturing and laboratory equipment are in satisfactory condition and are adequate for the purposes for which they are used. Walnut Hill Facility. The Company's corporate headquarters occupy all of the 35,000 square foot office and manufacturing building (the "Walnut Hill Facility") which is situated on an approximately 6.6 acre tract of land located in the Las Colinas area of Irving, Texas. The Company owns the land and building, which are subject to a mortgage that secures the note assumed by the Company in connection with its acquisition of the property and assigned to NationsBank of Texas, N.A. During the fourth quarter of 1994, the Company began a project to move its manufacturing operation from its Dallas Facility to the unused space at this facility and expand the amount of office space. This project was completed during the third quarter of 1995. The manufacturing operations occupy approximately 19,000 square feet of the facility, and administrative offices occupy approximately 16,000 square feet. Laboratory Facility. The Company leases 24,000 square feet of office, manufacturing and laboratory space (the "Laboratory Facility") in Irving, Texas pursuant to a lease which expires in January 2000. The Company's in-house research and development activities are conducted at the Laboratory Facility. The Company maintains sterile production facilities (which occupy 4,000 square feet of the total space) at the Laboratory Facility for the production of injectable dosage forms of Acemannan Immunostimulant. Dallas Facility. The Company leased a facility with 55,000 square feet of office, manufacturing and warehouse space in Dallas, Texas (the "Dallas Facility") pursuant to a lease that expired in June 1995. The Company did not renew this lease. Until August of 1994, the Company's manufacturing facilities occupied approximately 11,000 square feet, and its warehouse and distribution center facilities occupied approximately 32,000 square feet, of the Dallas Facility. In September 1994, the warehouse and distribution center was moved to a new leased facility in Irving, Texas near the Walnut Hill Facility. Substantially all the Company's wound and skin care products were produced at the Dallas Facility. In the second quarter of 1995, the Company's manufacturing operations were moved to the Walnut Hill Facility. Warehouse and Distribution Facility. In August 1994, the Company leased a 35,050 square feet office and warehouse facility in Irving, Texas near the Walnut Hill Facility. This lease expires in October 2001. The Company moved its warehouse and distribution center from its Dallas Facility I-15 to this facility in September 1994. The warehouse and distribution center occupy approximately 27,000 square feet, and the remaining space is used for offices. Costa Rica Facility. The Company owns approximately 405 acres of land in the Guanacaste province of northwest Costa Rica. This land is being used for the farming of Aloe vera plants and for a processing plant to produce bulk pharmaceutical and injectable mannans and freeze-dried aloe vera extracts used in the Company's operations. Construction of the aloe vera processing plant was completed during the second quarter of 1993, and the plant became operational in June 1993. The Company believes that the Costa Rica farm will provide substantially all the aloe vera leaves required to meet the Company's needs. Development of this facility was partially financed with borrowings under a five-year, U.S. dollar-denominated loan from Corporacion Privada de Inversiones de Centroamerica, S.A. ("CPI"), a private bank operating in San Jose, Costa Rica. The loan was paid off in May 1995. During the first quarter of 1994, the Company initiated a project in Costa Rica to upgrade the production plant to meet regulatory requirements for the production of bulk pharmaceutical oral and injectable mannans as required for IND's. This project was completed in the fourth quarter of 1994. ITEM 3. LEGAL PROCEEDINGS. On October 17, 1995, David L. Hinchey (the "Plaintiff")filed a lawsuit styled David L. Hinchey v. Carrington Laboratories, Inc., Cause No. 95-11007-C in the 68th Judicial District Court of Dallas County, Texas, alleging breach of contract in connection with the termination of his employment by the Company. The lawsuit alleged that the Plaintiff's damages were in excess of $50,000 but did not allege a specific amount of damages. The Company filed an answer generally denying the Plaintiff's allegations. On March 25, 1996, the parties orally and informally agreed to a settlement of the lawsuit that would, among other things, (i) change the date of termination of the Plaintiff's employment from the original date to the date on which the settlement agreement is signed, but without obligating the Company to pay him any additional compensation, (ii) confirm that the option previously granted to him under the Company's 1995 Stock Option Plan to purchase 10,000 shares of Common Stock of the Company at the original price of $18.625 per share is still in effect, (iii) accelerate the vesting of that option so that it is exercisable in full, (iv) confirm that in accordance with the terms of that option he has a period of 30 days from the termination of his employment in which to exercise the option, and (v) result in a dismissal of the lawsuit with prejudice and release the Company from any liability to the Plaintiff arising out of his employment or the termination thereof. Inasmuch as the settlement agreement has not yet been reduced to writing or signed by the parties, there can be no assurance as to whether or when the lawsuit will be settled or, if settled, whether the terms of settlement will be as described above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matter to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report. I-16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of the Company is traded on the NASDAQ National Market under the symbol "CARN". The following table sets forth the high and low sales prices of the Common Stock for each of the periods indicated.
Fiscal 1994 High Low ----------- ---- --- First Quarter $ 14 5/8 $ 11 3/4 Second Quarter 13 5/8 9 5/8 Third Quarter 11 7/8 8 Fourth Quarter 10 3/4 9 5/8 Fiscal 1995 High Low ----------- ---- --- First Quarter $ 11 $ 13 1/8 Second Quarter 11 1/4 24 1/2 Third Quarter 25 1/2 40 3/4 Fourth Quarter 14 3/4 32 1/2
At March 15, 1996, there were 971 holders of record (including brokerage firms and other nominees) of Common Stock. The Company has not paid any cash dividends on the Common Stock and presently intends to retain all earnings for use in its operations. Any decision by the Board of Directors of the Company to pay cash dividends in the future will depend upon, among other factors, the Company's earnings, financial condition and capital requirements. The Company's line of credit and term loan agreements with NationsBank of Texas, N.A. prohibits the Company from declaring or paying cash dividends on any of its capital stock. II-1 ITEM 6. SELECTED FINANCIAL DATA.
- ------------------------------------------------------------------------------------------------------------- Selected Consolidated Financial Information - ------------------------------------------------------------------------------------------------------------- Years Ended November 30, 1991, 1992, 1993, 1994 and Month Ended December 31, 1994 and Year Ended December 31, 1995 November 30, December 31, (Dollars and numbers of shares in thousands ---------------------------------------- ------------------ except per share amounts) 1991 1992 1993 1994 1994 1995 OPERATIONS STATEMENT INFORMATION: Net Sales $15,420 $20,064 $21,184 $25,430 $ 1,781 $24,374 Cost and expenses: Cost of sales 3,288 5,113 5,289 6,415 516 7,944 Selling, general and administrative 7,748 9,687 9,371 11,968 985 12,442 Research and development 2,896 4,141 5,397 5,334 327 5,370 Cost of uncompleted public offering -- 400 -- -- -- -- Interest, net 310 249 218 132 23 115 - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1,178 474 909 1,581 (70) (1,497) Provision for income taxes 31 159 104 160 -- 131 Net income (loss) 1,147 315 805 1,421 (70) (1,628) Net income (loss) per common and common equivalent share: $.14 $.03 $.09 $.18 $(.01) $(.22) - -------------------------------------------------------------------------------------------------------------- Weighted average shares used in per share computations 6,482 6,801 7,324 7,341 7,344 7,933 - -------------------------------------------------------------------------------------------------------------- BALANCE SHEET INFORMATION: Working capital $ 2,517 $ 5,702 $ 5,292 $ 4,720 $ 4,472 $ 8,962 Total assets 9,692 15,115 16,305 19,797 18,899 27,934 Long-term debt, net of current portion 2,725 2,821 2,168 2,035 1,997 86 Total shareholders' investment $ 5,191 $10,062 $11,041 $12,509 $12,439 $22,399 - --------------------------------------------------------------------------------------------------------------
II-2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- BACKGROUND The Company is a research-based pharmaceutical and medical device company engaged in the development, manufacturing and marketing of carbohydrate-based therapeutics for the treatment of major illnesses and the dressing and management of wounds and other skin conditions. The Company sells nonprescription products through its wound and skin care division; veterinary medical devices and pharmaceutical products through its veterinary medical division; and consumer products through its consumer products subsidiary, Caraloe, Inc. The Company's research and product portfolio is primarily based on complex carbohydrate technology derived naturally from the Aloe vera plant. In February 1995, the Company changed its fiscal year ending from November 30 to December 31. Comparative financial statements reflect the single month of December 1994, the fiscal year ended December 31, 1995, and the preceding fiscal years ended November 30. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995 and November 30, 1994, the Company held cash and cash equivalents of $6,222,000 and $1,805,000, respectively. The increase in cash of $4,417,000 from November 30, 1994 to December 31, 1995 was attributable to the issuance of common stock through a private placement and the exercise of options and warrants (see Note 8 to the consolidated financial statements) that resulted in an additional $11,602,000 cash. The cash raised through the sale of common stock has been used for capital expenditures of $4,492,000, to increase inventory by $468,000, to reduce debt by a net amount of $570,000, to reduce trade accounts payable and accrued liabilities by $1,183,000 and to increase prepaid expenses and other assets by $666,000. Prior to the private placement, these expenditures were funded using the Company's line of credit. Subsequent to the private placement, the line of credit was paid off and no additional borrowings under the line have occurred. The capital expenditures related to construction at the Company's headquarters in Irving, Texas and the relocation of its manufacturing facility at a leased site to an unused portion of its headquarters (see Note 3 to the Consolidated Financial Statements). During the first quarter of 1994, the Company completed an evaluation of the production requirements necessary to meet all federal regulatory requirements as a fully-integrated pharmaceutical manufacturer and to provide the production capacity needed to meet long-term sales growth. The Company has moved its wound and skin care manufacturing operation from a leased location to an unused portion of the Company's headquarters facility in Irving, Texas, and expanded its production capability through the addition of higher capacity equipment. At the same location, the Company has upgraded its capability to enable it to produce injectable products that meet FDA standards. An increase in inventory was planned during the first half of the year to meet sales requirements during the period the manufacturing operations were relocating. However, less than forecasted sales of the Company's bulk Aloe vera products and less than projected sales in the Company's wound and skin care products during the year has resulted in higher than expected inventory levels. The Company regularly evaluates its inventory levels and adjusts production levels at both its Costa Rica plant, where the bulk freeze-dried aloe vera extract is manufactured, and at its U.S. plant to meet anticipated demand. As a result of these evaluations, inventory levels were reduced by $910,000 during the second half of the year. In January 1995, the Company entered into an agreement with NationsBank of Texas, N.A. for a $2,000,000 line of credit and a $6,300,000 term loan (see Note 6 to the consolidated financial statements). This agreement increased the Company's available borrowing capacity by over $3,000,000. As of December 31, 1995, the Company had available $2,000,000 under the line of credit and $823,000 under the term loan. In addition to increasing the Company's credit capacity, the agreement lowered the interest rate that the Company has to pay on its outstanding debt by over one percent. Proceeds from the term loan were used to fund planned capital expenditures, a letter of credit required by a supplier, as discussed below, and planned research projects. The line of credit will be used for operating needs, as required. As of December 31, 1995, the Company was not in compliance with II-3 - -------------------------------------------------------------------------------- Management's Discussion and Analysis, continued - -------------------------------------------------------------------------------- with the term loan's fixed charge ratio covenant. The Company is in discussions with the Bank and is curently working toward a long-term resolution to the non- compliance. As no binding amendments to the term-loan have been agreed upon as of March 31, 1996, all outstanding debt under the term loan has been presented as current for reporting purposes. Given the current cash position, the Company's short- and long-term liquidity will not be significantly affected. In February 1995, the Company entered into a supply agreement with its supplier of freeze-dried products. The agreement required that the Company establish a $1,500,000 letter of credit. The term loan with NationsBank was used to fund this letter of credit. The funding of the letter of credit reduces the amount that the Company can borrow under the term loan but does not increase the Company's debt unless the letter of credit is utilized by the supplier. As of March 21, 1996, the supplier has not made a presentation for payment under the letter of credit. The contract also requires the Company to accept minimum monthly shipments of $30,000 and to purchase a minimum of $2,500,000 worth of product over a period of five years. On April 5, 1995, the Company completed a self-directed private placement of 300,000 shares of common stock at a price of $10 per share (see Note 8 to the consolidated financial statements). The net proceeds from this offering were $2,956,000. Of these proceeds, $1,919,000 was used to pay off the outstanding balance and related interest on the Company's line of credit with NationsBank. Additionally, $150,000 was used to pay off debt related to the Company's Costa Rica operations that bore an interest rate of 10.875%. Remaining proceeds are being used to fund capital expenditures, research projects and other operating needs. From February 1995 through December 1995, 71 employees and 6 directors exercised options for 580,951 shares of common stock. The option prices ranged from $6.25 to $29.00. A total of $7,349,000 was raised by the Company through the exercise of these options. As part of registering for resale the shares issued in the April 1995 private placement, the Company allowed certain warrant holders to include the shares of common stock underlying their warrants in the registration if they would exercise the warrants within 30 days of the effective date of the registration statement. Warrants covering a total of 92,000 shares were exercised at prices of $6.25 to $16.25 per share, resulting in the Company's receipt of a total of $1,084,000. The Company began a large scale clinical trial during the third quarter of 1995 for the testing of its Aliminase(TM) (formerly CARN 1000) oral capsules for the treatment of acute flare-ups of ulcerative colitis. The Company estimates that the cost of this clinical trial will be approximately $2,000,000, of which 20% was required as an upfront payment. Payments made in advance to the clinical research organization resulted in prepaid expenses increasing. In late 1995, the Company began an initial Phase I study using an injectable Alovex(TM) (formerly CARN 750) in cancer patients involving six cancer types. The estimated cost of this study is $475,000. In the middle of 1996, the Company may begin a second large scale clinical trial for the testing of Aliminase(TM) oral capsules for the treatment of ulcerative colitis. The cost of this trial is expected to be approximately the same as the one that began in the third quarter of 1995. In November 1995, the Company signed a licensing agreement with a supplier of calcium alginates and other wound care products. Under the agreement, the Company has exclusive marketing rights for ten years to advanced calcium alginate products for North and South America and in the People's Republic of China. Per the agreement, the Company made an up-front payment to the supplier of $500,000. This payment resulted in increasing the prepaid assets of the Company. Additional payments totaling $500,000 will be made to the supplier as new products are delivered. The Company believes that its cash resources, including available cash, bank line of credit and term loan agreement (see Note 6 to the consolidated financial statements) and expected revenues from sales of wound and skin care, veterinary and consumer products will provide the funds necessary to finance its current operations. The Company does not expect that these cash resources will be sufficient to finance the major clinical studies necessary to develop its products to their full commercial potential. Additional funds, therefore, may have to be raised through equity offerings, borrowings, licensing arrangements, or other means. II-4 - -------------------------------------------------------------------------------- Management's Discussion and Analysis, continued - -------------------------------------------------------------------------------- The Company is subject to regulation by numerous governmental authorities in the United States and other countries. Certain of the Company's proposed products will require governmental approval prior to commercial use. The approval process applicable to prescription pharmaceutical products usually takes several years and typically requires substantial expenditures. The Company and any licensees may encounter significant delays or excessive costs in their respective efforts to secure necessary approvals. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of the Company's or any licensees' products. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested could delay or preclude the Company or any licensees from marketing their products, or could limit the commercial use of the products, and thereby have a material adverse effect on the Company's liquidity and financial condition. The production capacity of the Costa Rica plant is larger than the Company's current usage level. Management believes, however, that the cost of the Costa Rica facility will be recovered through operations. The upgraded facility will provide for the production of products needed for large scale clinical trials. At March 11, 1996, the Company had no material capital commitments other than its promissory notes, leases, agreement with suppliers and clinical trials described above. IMPACT OF INFLATION The Company does not believe that inflation has had a material impact on its results of operations. FISCAL 1994 COMPARED TO FISCAL 1995 Net sales decreased from $25,430,000 to $24,374,000, or 4%. The decrease of $1,056,000 resulted from a $2,557,000, or 11%, decrease in the Company's wound and skin care products. Sales of these products decreased from $23,703,000 to $21,146,000. Fourth quarter sales of the wound and skin care products decreased from $5,900,000 to $4,348,000, or 26%. The Company's wound and skin care products have been marketed primarily to hospitals and select acute care providers. This market has become increasing competitive as a result of pressures to control health care costs. Hospital and distributors have reduced their inventory levels and the number of suppliers used. Also, health care providers have formed group purchasing consortia to leverage their buying power. This environment has required the Company to offer greater discounts and allowances throughout the year to maintain customer accounts. Discounts and allowances increased from $1,267,000 to $3,063,000. They averaged 6.2% of gross wound care sales in the fiscal fourth quarter of 1994, compared with a 18.3% average during the fourth quarter of 1995. In February 1996, the Company revised its price list to more accurately reflect current market conditions. Overall wound care prices were lowered by an average of 19%. In addition to these cost pressures, over the last several years the average hospital stay has decreased over 50% resulting in more patients being treated at alternative care facilities and at home by home health care providers. This also had a negative impact on sales since the Company's sales force had been primarily focused on the hospital market. To counter the market changes, the sales force is now also aggressively pursuing the alternative care markets. To continue to grow its wound care business, the Company realized that it had to expand from the $38 million hydrogel market in which it currently competes to a much larger segment of the billion dollar plus wound care market. To achieve this objective, an aggressive program of new product development and licensing was undertaken in 1995 with the goal to create a complete line of wound care products to address all stages of wound management. As a result of this program, the Company launched three new wound care product lines in late January 1996. The Company expects to launch additional products in 1996. However, the Company expects the first quarter of 1996 wound care sales to be over $1.5 million less than the first quarter of 1995 as a result of the reduced prices and other competitive market factors. The Company expects the new products to improve sales during the second quarter. The decrease in the Company's wound and skin care products was partially offset by an increase in sales of Caraloe, Inc., the Company's consumer products subsidiary. Caraloe's sales increased from $1,361,000 to $2,907,000, or 114%. Of this, $1,513,000 is related to the sale of bulk Manapol(R) to one customer, Mannatech. Sales of bulk Manapol(R) to Mannatech increased from $934,000 to $2,447,000. Sales of the II-5 - -------------------------------------------------------------------------------- Management's Discussion and Analysis, continued - -------------------------------------------------------------------------------- Company's veterinary products decreased from $366,000 to $321,000. In March 1996, the Company entered into an agreement with Farnam, Companies, Inc., a leading marketer of veterinary products, to promote and sell its veterinary line on a broader scale. Cost of sales increased from $6,415,000 to $7,944,000, or 23.8%. As a percentage of sales, cost of sales increased from 25.2% to 32.6%. This increase is attributable to the increased sales of bulk Manapol(R), which has a substantially lower profit margin, 33%, as compared to the Company's wound and skin care products. In January 1996, the profit margin on Manapol(R) was reduced to 8% as a result of current production levels and costs at the Company's Costa Rica facility. Also, the increasing discounts, as discussed earlier, resulted in the Company's wound and skin care product costs increasing by approximately 4% as a percentage of sales. Selling, general and administrative expenses increased from $11,968,000 to $12,442,000, or 4%. To accelerate new product development and reduce overhead, the Company was restructured. As a result of the restructuring, approximately $1.4 million of one-time charges were taken during 1995. Of these charges, approximately $700,000 were selling, general and administrative expenses, $500,000 related to severance agreements, $130,000 in increased legal fees and $70,000 to writing off refinancing costs that were incurred when the Company refinanced its long term debt in 1993. Research and development expenses increased from $5,334,000 to $5,370,000, or 1%. During the first half of 1995, $564,000 of cost associated with severance agreements was charged to research and development. These charges reduced internal salaries on an ongoing basis. However, this reduction was offset by beginning the large scale clinical trial for the testing of Aliminase(TM) (formerly CARN 1000) oral capsules for the treatment of acute flare-ups of ulcerative colitis during the third quarter of 1995. The Company expects its research and development costs to increase by over $2,000,000 in 1996 due to the ulcerative colitis and cancer studies. Interest expense increased from $171,000 to $251,000, or 47%, due to increased borrowings during the first four months of 1995. Interest income increased from $38,000 to $136,000, or 258%, due to having more excess cash to invest. Net income for 1994 was $1,421,000, compared with a net loss of $1,628,000 for 1995. This change is a result a changing product mix, increased discounts and one-time charges related to restructuring. Earnings per share were $.18 in 1994, compared to a loss per share of $.22 in 1995. FISCAL 1993 COMPARED TO FISCAL 1994 Net sales increased from $21,184,000 to $25,430,000, or 20%. The increase of $4,246,000 resulted from a $3,220,000, or 16%, increase in sales of the Company's wound and skin products due to a price increase that went into effect in January 1994. Actual unit sales of the wound and skin care products were unchanged from 1993 to 1994. Also attributing to this increase is a $1,084,000, or 393%, increase in sales of Caraloe, Inc., products, including bulk Manapol(R). These increases were partially offset by a $58,000, or 13%, decline in sales of veterinary products. Cost of sales increased from $5,288,000 to $6,415,000, or 21%, due to increase in net sales. As a percentage of net sales, cost of sales was 25% in 1993 and 1994. Selling, general and administrative expenses increased from $9,371,000 to $11,968,000, or 28%, representing a $1,904,000 volume-related increase in sales and marketing expenses and a $693,000 increase in general and administrative expenses attributable to increases in personnel-related costs and legal expenses. Research and development expenses decreased from $5,397,000 to $5,334,000, or 1%. Significant research and development expenditures were postponed in 1994 principally due to deferred clinical studies while the Company was upgrading its manufacturing facilities to meet specification requirements for new products and while it was obtaining the necessary FDA clearances to conduct the clinical studies. Interest expense decreased from $259,000 to $171,000. Interest income decreased slightly from $40,000 to $38,000. Net income increased from $805,000 to $1,421,000, or 77%, with earnings per share increasing from $.09 to $.18. II-6 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to the Consolidated Financial Statements of the Company and its subsidiaries listed on page F-1 of this Annual Report, which are hereby incorporated by reference in this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in or disagreements with accountants on accounting and financial disclosure matters during any period covered by the financial statements filed herein or any period subsequent thereto. II-7 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Compliance" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1995. ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 of Form 10-K is hereby incorporated by reference from the information appearing under the caption "Executive Compensation" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Security Ownership of Management" and "Voting Securities and Principal Shareholders" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1995. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 of Form 10-K is hereby incorporated by reference from the information appearing under the caption "Certain Transactions" in the Company's definitive Proxy Statement relating to its 1996 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 1995. III-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements. Reference is made to the index on page F-1 for a list of all financial statements filed as a part of this Annual Report. (a)(2) Financial Statement Schedules. Reference is made to the index on page F-1 for a list of all financial statement schedules filed as a part of this Annual Report. (a)(3) Exhibits. Reference is made to the Index to Exhibits on pages E-1 through E-7 -- for a list of all exhibits filed as a part of this Annual Report. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the last quarter of its fiscal year ended December 31, 1995. IV-1 CARRINGTON LABORATORIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements of the Company: Consolidated Balance Sheets -- November 30, 1994, December 31, 1994 and 1995 ....................... F - 2 Consolidated Statement of Operations -- years ended November 30, 1993 and 1994, month ended December 31, 1994 and year ended December 31, 1995 ................................................................. F - 3 Consolidated Statements of Shareholders' Investment --years ended November 30, 1993 and 1994, month ended December 31, 1994 and year ended December 31, 1995 ................................................................. F - 4 Consolidated Statements of Cash Flows -- years ended November 30, 1993 and 1994, month ended December 31, 1994 and year ended December 31, 1995 ................................................................. F - 5 Notes to Consolidated Financial Statements ......................................................... F - 6 Report of Independent Public Accountants .......................................................... F - 12
F-1
- ---------------------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets - ---------------------------------------------------------------------------------------------------------------------------------- As of November 30, 1994 December 31, 1994 December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 1,804,638 $ 464,367 $ 6,222,008 Accounts receivable, net of allowance for doubtful accounts of $197,586, $204,905 and $226,884 at November 30, 1994, December 31, 1994 and December 31, 1995, respectively 2,891,375 2,884,911 2,226,651 Inventories 4,635,769 5,047,149 5,103,988 Prepaid expenses and other 641,184 538,650 858,506 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets 9,972,966 8,935,077 14,411,153 - ---------------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, at cost 14,441,430 14,726,840 18,932,959 Less -- Accumulated depreciation (4,981,041) (5,070,401) (6,222,309) - ---------------------------------------------------------------------------------------------------------------------------------- 9,460,389 9,656,439 12,710,650 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS 363,391 307,460 812,294 - ---------------------------------------------------------------------------------------------------------------------------------- $ 19,796,746 $ 18,898,977 $ 27,934,097 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: CURRENT PORTION OF LONG-TERM DEBT $ 649,993 $ 450,395 $ 3,026,287 Accounts payable 1,217,511 1,557,946 589,607 Accrued liabilities 2,385,842 1,408,075 1,830,573 Short-term borrowings 1,000,000 1,046,532 -- - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 5,253,346 4,462,948 5,446,467 - ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT, net of current portion 2,034,563 1,997,261 88,506 - ---------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT: Preferred stock, $100 par value, 1,000,000 shares authorized, 10,572, 10,572 and 11,840 Series C shares issued at November 30, 1994, December 31, 1994 and December 31, 1995, respectively 1,040,634 1,040,634 1,167,434 Common stock, $.01 par value, 30,000,000 shares authorized, 7,344,390, 7,344,390 and 8,378,999 shares issued and outstanding at November 30, 1994, December 31, 1994 and December 31, 1995, respectively 73,444 73,444 83,790 Capital in excess of par value 33,074,508 33,074,508 44,666,112 Deficit (21,505,938) (21,576,007) (23,344,401) FOREIGN CURRENCY TRANSLATION ADJUSTMENT (173,811) (173,811) (173,811) - ---------------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 12,508,837 12,438,768 22,399,124 $19,796,746 $ 18,898,977 $ 27,934,097 - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these balance sheets. F-2
- --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Operations - --------------------------------------------------------------------------------------------------------------------------- For the Years Ended November 30, 1993, 1994, November 30, December 31, and the Month Ended December 31, 1994 -------------------------- ------------------------ and the Year Ended December 31, 1995 1993 1994 1994 1995 - --------------------------------------------------------------------------------------------------------------------------- NET SALES $21,183,774 $25,429,654 $1,781,017 $24,374,090 COST AND EXPENSES: Cost of sales 5,288,450 6,414,757 516,247 7,944,271 Selling, general and administrative 9,370,946 11,968,200 984,535 12,441,972 Research and development 5,397,000 5,333,780 326,916 5,370,109 Interest expense 258,606 170,755 23,413 250,751 Interest income (39,860) (38,411) (25) (136,096) - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 908,632 1,580,573 (70,069) (1,496,917) Provision for income taxes 104,000 159,335 -- 131,350 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 804,632 $ 1,421,238 $ (70,069) $(1,628,267) - --------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: $.09 $.18 $(.01) $(.22) - ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. F-3
- ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Statements of Shareholders' Investment - ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended November 30, Foreign 1993 and 1994, and the Month Preferred Stock Common Stock Capital in Currency Ended December 31, 1994, and the ----------------------------------------------------- Excess of Translation Year Ended December 31, 1995, Shares Amount Shares Amount Par Value Deficit Adjustment - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, November 30, 1992 8,429 $ 826,334 7,296,202 $72,962 $32,761,703 $(23,495,021) $(103,923) - ------------------------------------------------------------------------------------------------------------------------------- Issuance of common stock upon exercise of stock options and warrants -- -- 40,377 404 253,933 -- -- Dividends on preferred stock 1,011 101,100 -- -- -- (111,674) -- Net income for the year -- -- -- -- -- 804,632 -- Translation adjustment -- -- -- -- -- -- (69,888) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, November 30, 1993 9,440 927,434 7,336,579 73,366 33,015,636 (22,802,063) (173,811) - ------------------------------------------------------------------------------------------------------------------------------- Issuance of common stock upon exercise of stock options and warrants -- -- 7,811 78 58,872 -- -- Dividends on preferred stock 1,132 113,200 -- -- -- (125,113) -- Net income for the year -- -- -- -- -- 1,421,238 -- - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, November 30, 1994 10,572 $1,040,634 7,344,390 $73,444 $33,074,508 $(21,505,938) $(173,811) - ------------------------------------------------------------------------------------------------------------------------------- Net loss for the month -- -- -- -- -- (70,069) -- - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1994 10,572 $1,040,634 7,344,390 $73,444 $33,074,508 $(21,576,007) $(173,811) - ------------------------------------------------------------------------------------------------------------------------------- Sale of common stock at $10 per share, net of issuance costs of $40,732 -- -- 300,000 3,000 2,956,268 -- -- Issuance of common stock upon exercise of stock options and warrants -- -- 710,536 7,105 8,426,340 -- -- Issuance of common stock for management and directors' compensation -- -- 24,073 241 208,996 -- -- Dividends on preferred stock 1,268 126,800 -- -- -- (140,127) -- Net loss for the year -- -- -- -- -- (1,628,267) -- - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1995 11,840 $1,167,434 8,378,999 $83,790 $44,666,112 $(23,344,401) $(173,811) - -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. F-4
- ------------------------------------------------------------------------------------------------ Consolidated Statements of Cash Flows - ------------------------------------------------------------------------------------------------ For the Years Ended November 30, 1993 and 1994 and the Month Ended November 30, December 31, December 31, 1994 and the ------------------------- ------------------------- Year Ended December 31, 1995 1993 1994 1994 1995 - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 804,632 $ 1,421,238 $ (70,069) $(1,628,267) Adjustments to reconcile income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 964,380 1,206,323 109,648 1,277,466 Changes in assets and liabilities: Decrease (increase) in accounts receivable, net 483,691 (603,534) 6,464 658,260 (Increase) in inventories (230,018) (2,072,239) (411,380) (56,839) Decrease (increase) in prepaid expenses and other 227,782 (427,752) 102,534 (319,856) (Increase) decrease in other assets (90,290) 7,535 35,642 (630,391) Increase (decrease) in accounts payable and accrued liabilities.. 773,838 838,264 (637,332) (559,168) - ------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities.... 2,934,015 369,835 (864,493) (1,258,795) ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,575,426) (3,014,053) (285,410) (4,206,119) - ------------------------------------------------------------------------------------------------ Net cash used by investing activities.... (1,575,426) (3,014,053) (285,410) (4,206,119) - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuances of common stock 254,337 58,951 -- 11,392,713 Proceeds from short and long-term borrowings -- 1,500,000 -- 5,741,569 Payments of short and long-term debt (590,730) (385,224) (187,111) (5,847,644) Principal payments of capital lease obligations (69,819) (48,266) (3,257) (64,083) - ------------------------------------------------------------------------------------------------ Net cash (used) provided by financing activities (406,212) 1,125,461 (190,368) 11,222,555 - ------------------------------------------------------------------------------------------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,034) -- -- -- - ------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 948,343 (1,518,757) (1,340,271) 5,757,641 - ------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,375,053 3,323,396 1,804,638 464,367 - ------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,323,396 $ 1,804,639 $ 464,367 $ 6,222,008 - ------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 283,938 $ 206,129 $ 20,386 $ 281,476 Cash paid during the year for income taxes 166,210 124,120 -- 99,157 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Equipment acquired through capital leases -- 114,203 -- -- Issuances of common stock and warrants -- -- -- 209,237 - ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. F-5 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: In February 1995, the Company changed its fiscal year ending from November 30 to December 31. Comparative financial statements reflect the single month of December 1994, the fiscal year ended December 31, 1995, and the preceding fiscal years ended November 30. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Carrington Laboratories, Inc. (the "Company") and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with 1995 presentation. CASH EQUIVALENTS The Company's policy is that all highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. DEPRECIATION AND AMORTIZATION Land improvements, buildings and improvements, furniture and fixtures and machinery and equipment are depreciated on the straight-line method over their estimated useful lives (3 - 40 years). Leasehold improvements and equipment under capital leases are depreciated over the terms of the respective leases (2 - 5 years). TRANSLATION OF FOREIGN CURRENCIES Based on an evaluation of the activities of its Costa Rica subsidiaries, as of September 1, 1993, the Company concluded that the functional currency for these operations was the U.S. dollar. Accordingly, such foreign entities translate monetary assets a nd liabilities at year-end exchange rates while non-monetary items are translated at historical rates. Revenue and expense accounts are translated at the average rates in effect during the year, except for depreciation and cost of sales which are transl ated at historical rates. Translation adjustments and transaction gains or losses are recognized in consolidated income in the year of occurrence. Prior to September 1, 1993, all assets and liabilities of foreign subsidiaries were translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expense accounts were translated at weighted average exchange rates. Translation gains and losses were reflected as a separate component of shareholders' investment. FEDERAL INCOME TAXES Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," was issued in February 1992. As permitted under SFAS No. 109, the Company elected to adopt the new standard retroactively to December 1, 1989. The adoption of SFAS No. 109 had no significant impact on the financial condition and results of operations for any of the years presented. Deferred income taxes reflect the tax effect of temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. These deferred taxes are measured by applying currently enacted tax laws. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Certain of the Company's research and development expenditures qualify for tax credits and such credits are accounted for as a reduction of the current provision for income taxes in the year they are realized. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Certain laboratory and test equipment determined to have alternative future uses in other research and development activities have been capitalized and are depreciated as research and development expense over the life of the equipment. POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS The Financial Accounting Standards Board has issued SFAS No. 106, "Employers' Accounting for Post- Retirement Benefits Other Than Pensions" and SFAS No. 112, "Employers' Accounting for Post-Employment Benefits." The Company does not offer any post- retirement or post-employment benefits; therefore, these statements have no impact on the Company. EARNINGS PER SHARE Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during each period. Stock options and warrants are included as common stock equivalents if the dilutive effect on net earnings per share is greater than 3%. The common stock equivalents were either antidilutive, or represented dilution of less than 3%, in 1993, 1994 and 1995. The weighted average number of common shares used in computing earnings per share was 7,323,521, 7,340,982 and 7,932,675 for the years ended November 30, 1993, 1994 and December 31, 1995. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-6 NOTE TWO. INVENTORIES: Inventories are recorded at the lower of first-in, first-out cost or market. The following summarizes the components of inventory at November 30, 1994 and December 31, 1995:
1994 1995 - ---------------------------------------------------- Raw materials and supplies $ 577,475 $ 583,408 Work-in-process 2,615,090 2,725,399 Finished goods 1,443,204 1,795,181 - ---------------------------------------------------- $4,635,769 $5,103,988 - ----------------------------------------------------
Included in work-in-process is $2,495,021 and $2,537,546 of freeze-dried aloe vera inventory as of November 30, 1994 and December 31, 1995, respectively. Finished goods consist of materials, labor and manufacturing overhead. NOTE THREE. PROPERTY, PLANT AND EQUIPMENT: The Company has a 6.6 acre tract of land and a 35,000 square foot office and manufacturing building situated thereon. This facility is located in Irving, Texas, a suburb of Dallas, and is used as the Company's headquarters. During July 1995, the Company completed the manufacturing and distribution project started during the first quarter of 1994. The project involved the physical relocation of its manufacturing operation from a leased facility in Dallas to an unused portion at the Company's corporate headquarters facility in Irving, Texas. The new facility is intended to meet all federal regulatory requirements applicable to provide the production capacity needed to meet long- term sales growth. At the same location, the Company has upgraded its capability to enable it to produce FDA injectable products that meet FDA standards. The total cost expended on the project was $4,469,000. During the first quarter of 1994, the Company initiated a project in Costa Rica to upgrade its production plant to meet regulatory requirements for the production of bulk acetylated oral and injectable mannans as required for investigational new drugs (INDs). This project was completed in the fourth quarter of 1994 and cost approximately $1,200,000. Funding was provided by existing cash on hand and cash flow from operations. The Company's net investment in property, plant, equipment and other assets in Costa Rica at November 30, 1994 and December 31, 1995 were $4,545,000 and $4,280,000, respectively. The production capacity of the Costa Rica plant is larger than the Company's current usage level. Management believes, however, that the cost of the Costa Rica facility will be recovered through operations. The upgraded facility will provide for the production of products needed for large scale clinical trials. Management will continue to assess the realizability of the Costa Rica plant assets and will use the methodology described in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" when it adopts that statement in 1996. The following summarizes the components of property, plant and equipment at November 30, 1994 and December 31, 1995:
1994 1995 - ---------------------------------------------------------------------------- Land and improvements $ 1,389,433 $ 1,389,334 Buildings and improvements 4,166,115 8,072,992 Furniture and fixtures 822,666 867,571 Machinery and equipment 7,314,440 7,825,667 Leasehold improvements 301,846 330,465 Equipment under capital leases 446,930 446,930 - ---------------------------------------------------------------------------- $14,441,430 $18,932,959 - ----------------------------------------------------------------------------
NOTE FOUR. ACCRUED LIABILITIES: The following summarizes significant components of accrued liabilities at November 30, 1994 and December 31, 1995:
1994 1995 - ---------------------------------------------------------------------------- Accrued payroll $ 587,038 $ 210,185 Accrued management incentive compensation 386,533 - Accrued sales commissions 199,622 251,511 Accrued taxes 133,055 165,249 Preferred dividends 111,168 124,495 Accrued severance liability 126,554 266,735 Other 841,872 812,398 - ---------------------------------------------------------------------------- $ 2,385,842 $ 1,830,573 - ----------------------------------------------------------------------------
F-7 - -------------------------------------------------------------------------------- Notes, continued - -------------------------------------------------------------------------------- NOTE FIVE. SHORT-TERM BORROWINGS: Short-term debt activity for each of the years ended November 30, 1994 and December 31, 1995 was as follows:
1994 1995 - ------------------------------------------------------ Average amount of short-term debt outstanding during the year $ 3,000 $ 467,667 Maximum amount of short-term debt outstanding during the year 1,000,000 1,905,259 Average interest rate at year end 9.25% - Average interest rate for the year - 8.9% - ------------------------------------------------------
NOTE SIX. DEBT: On January 30, 1995, the Company entered into an agreement with NationsBank of Texas, N.A. (the "Bank"). The agreement is composed of a $2,000,000 line of credit that expires one year from the date of the agreement and a $6,300,000 term loan that matures four years from the date of the agreement. The term loan is payable in equal quarterly installments of $250,000 principal, plus accrued interest beginning March 31, 1995 and ending January 30, 1999, when the unpaid balance is due. The interest rate on both credit facilities is the Company's option of prime plus .5% or 30, 60, 90, 180 day reserve adjusted LIBOR (London Interbank Offering Rate) plus 2%. The Company paid a commitment fee of $31,500 on the closing date. In February, the Bank waived the requirement that the Costa Rica assets be pledged to secure the term loan. The Company agreed to pay an additional commitment fee of $31,500 at that time. $1,900,000 of the borrowings from the Bank were used to pay off all of the outstanding balances on notes due to Texas Commerce Bank Dallas, N.A. and $1,827,000 was used to pay off the outstanding balance on the mortgage on the Company's headquarters building in Irving, Texas. Of the term loan, $1,500,000 was carved out to provide a letter of credit to a supplier. The letter of credit did not increase long-term debt but reduced the amount available to borrow under the term loan. The remaining proceeds will be used to fund planned capital expenditures, planned research projects, and other operating needs. As of December 31, 1995, no amounts were outstanding under the line of credit and $2,977,000 was outstanding under the term loan. The interest rate on the borrowing ranged from 7.70% to 8.125% between January 30, 1995 and December 31, 1995. The borrowings under the agreement are secured by the Company's assets in the United States. The Company is required to maintain a consolidated tangible net worth of $12,000,000 through November 29, 1995; $13,750,000 thereafter through November 29, 1996; $15,250, 000 thereafter through November 29, 1997; and $16,750,000 thereafter. Also, the Company cannot permit the ratio of its consolidated total liabilities to consolidated tangible net worth to exceed 1.0 to 1.0 at any time; the ratio of the sum of pretax net income plus unusual charges (severance, extraordinary legal fees and debt refinancing costs related to terminated debt agreements) plus interest expense plus lease expense to fixed charges (interest expense and lease expense) to be less than 1.75 to 1.0; or capital expenditures to exceed $6,500,000 from the date of the agreement to December 31, 1995 or $2,000,000 per year for the calendar years thereafter. In addition, the Company may not pay cash dividends. As of December 31, 1995, the Company was not in compliance with the term loan's fixed charge ratio covenant. The Company is in discussions with the Bank and is currently working toward a long-term resolution to the non-compliance. As no binding amendments to the term-loan have been agreed upon as of March 31, 1996, all outstanding debt under the term loan has been presented as current for reporting purposes. Given the current cash position, the Company's short- and long-term liquidity will not be significantly affected. In order to help finance the development of the Company's Costa Rica facilities, the Company arranged a five-year U.S. dollar-denominated loan in the amount of $600,000 from Corporacion Privada de Inversiones de CentroAmerica, S.A. In May 1995, the note was paid off using proceeds of the Company's private placement (see Note 8.) Long-term debt of the Company for the years ended November 30, 1994 and December 31, 1995 is summarized as follows:
1994 1995 - ---------------------------------------------------------- Note payable on land and building $1,829,199 $ Note payable on Costa Rica development costs 233,318 - Term Loan 416,667 2,977,071 Obligations under capital leases 205,372 137,722 - ---------------------------------------------------------- 2,684,556 3,114,793 Less - Current portion 649,993 3,026,287 - ---------------------------------------------------------- $2,034,563 $ 88,506 - ----------------------------------------------------------
F-8 The Company leases certain computer and other equipment under capital leases expiring at various dates through 1998. The following is a schedule of future minimum lease payments under the capital lease agreements together with the present value of these payments as of December 31, 1995:
Fiscal Years Ending December 31, - ----------------------------------------------- 1996 $ 58,910 1997 51,164 1998 45,425 - ----------------------------------------------- Aggregate minimum lease payments 155,499 Less - Imputed interest included in aggregate minimum lease payments 17,777 - ----------------------------------------------- Present value of aggregate minimum lease payments $137,722 - -----------------------------------------------
NOTE SEVEN. PREFERRED STOCK: SERIES C SHARES In June 1991, the Company completed a transaction whereby the Company issued 7,909 shares of Series C 12% cumulative convertible preferred stock (the "Series C Shares") in exchange for convertible debentures plus interest accrued to the date of exchange to a private investor (the "Investor"). The Series C Shares have a par value of $100 per share, are convertible at par into common stock of the Company at a price of $7.58 per share (subject to certain adjustments), are callable by the Company after Ja nuary 14, 1996 and provide for dividend payments to be made only through the issuance of additional Series C Shares. Subsequent to year end, all cumulative convertible preferred stock was converted to 174,935 shares of the Company's common stock. The Company had previously issued to the Investor a warrant to purchase 25,000 shares of common stock of the Company at $15 per share through February 1, 1996. The Company also extended by three years, to February 1, 1996, the life of certain warrants t hat had previously been issued to this Investor for the purchase of 50,000 shares of common stock of the Company (20,000 of which are now owned 10,000 shares each by two executives of the Investor, one of whom is a director of the Company), and reduced the exercise price of such warrants from $25 to $15 per share, which was above the market price of the common stock at the date of adjustment. In addition to issuing the Series C Shares to the Investor, the Company also reduced the exercise price of warrants held by the Investor and one of its executive officers to purchase 65,000 shares of the Company's common stock from $15 per share to $12.75 per share, which was above the market price of the common stock at the date of adjustment. Subsequent to year end, the Investor exercised 25,000 warrants and the remaining 30,000 warrants at $12.75 per share. NOTE EIGHT. COMMON STOCK: PRIVATE PLACEMENT OF COMMON STOCK In April 1995, the Company completed a self-directed private placement of 300,000 shares of unregistered common stock at a price of $10.00 per share. The average of the high and low sale price of the Company's common stock on the NASDAQ National Market on the day of the placement was $10.69 per share. Total proceeds net of issuance cost was $2,956,268. The Company agreed to use its best efforts to file a registration statement with the Securities and Exchange Commission within 90 days after the placement. Effective July 11, 1995, shares related to the private placement were registered for resale with the Securities and Exchange Commission. Proceeds from the placement were used for planned capital expenditures, payment of bank debt, research and development expenditures and other operating needs. STOCK OPTIONS The following summarizes stock option activity for each of the three years ended November 30, 1993, 1994 and December 31, 1995:
Options Outstanding Shares Price Per Share - ------------------------------------------------------------ Balance, November 30, 1992 644,855 $6.25 to $29.00 Granted 240,205 $8.625 to $13.50 Lapsed or cancelled (114,320) $6.25 to $29.00 Exercised (17,025) $6.25 to $10.25 - ------------------------------------------------------------ Balance, November 30, 1993 753,715 $6.25 to $29.00 Granted 268,350 $8.25 to $12.75 Lapsed or cancelled (118,275) $6.25 to $21.725 Exercised (7,100) $6.25 to $10.25 - ------------------------------------------------------------ Balance, November 30, 1994 896,690 $6.25 to $29.00 Granted 575,475 $11.125 to $35.25 Lapsed or cancelled (72,036) $8.625 to $20.125 Exercised (580,951) $6.25 to $29.00 - ------------------------------------------------------------ Balance, December 31, 1995 819,178 $6.25 to $35.25 - ------------------------------------------------------------- Options exercisable at December 31, 1995 175,424 $6.25 to $29.00 - -------------------------------------------------------------
The Company has an incentive stock option plan (the "Option Plan") under which incentive stock options and nonqualified stock options may be granted to certain employees. Options are granted at a price no less than the market value of the shares on the date of the grant, except for incentive options to employees who own more than 10% of the total voting power of the Company's common stock, to whom incentive options are granted at a price no less than F-9 110% of the market value. Options granted expire four to ten years from the dates of grant. The Company has reserved 1,500,000 shares of common stock for issuance under the Option Plan. As of December 31, 1995 options to purchase 369,725 shares have been granted under the option plan, of which no options for shares have been exercised. The Company's 1985 Option Plan expired February 1995. The Company has reserved 1,400,000 shares of common stock for issuance under this plan. At the time the plan expired, options to purchase 1,150,440 had been granted, of which options for 678,951 shares have been exercised. In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was issued. The disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1995. The Company intends to elect the option allowing it to continue to apply the accounting provisions of APB Opinion 25, "Accounting for Stock Issued to Employees." With the Company's plan of adoption, the impact will be limited to additional footnote disclosure. STOCK WARRANTS From time to time, the Company has granted warrants to purchase common stock to the Company's research consultants and certain other persons rendering services to the Company. The exercise price of such warrants was the market price or in excess of the market price of the common stock at date of issuance. The following summarizes warrant activity for each of the years ended November 30, 1993, 1994 and December 31, 1995:
Warrants Outstanding Shares Price Per Share - ----------------------------------------------------------------------- Balance, November 30, 1992 330,376 $ 5.25 to $30.50 Granted 10,000 $13.00 Lapsed or cancelled (41,126) $19.75 to $30.50 Exercised (20,750) $ 5.25 to $ 6.25 - ----------------------------------------------------------------------- Balance, November 30, 1993 278,500 $ 6.25 to $26.00 Lapsed or cancelled (42,500) $18.00 to $26.00 - ----------------------------------------------------------------------- Balance, November 30, 1994 236,000 $ 6.25 to $20.125 Lapsed or cancelled (130,000) $11.25 to $26.00 Exercised (92,000) $ 6.25 to $16.25 - ----------------------------------------------------------------------- Balance, December 31, 1995 99,000 $12.125 to $20.125 - ----------------------------------------------------------------------- Warrants exercisable at December 31, 1995 99,000 $12.125 to $20.125 - -----------------------------------------------------------------------
Warrants for 78,000 shares expire in 1996. The remaining warrants for 21,000 shares expire between 2000 and 2002. EMPLOYEE STOCK PURCHASE PLAN On October 29, 1992, the Company adopted an Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock Purchase Plan, employees may purchase common stock at a price equal to the lesser of 85% of the market price of the Company's common stock on the last business day preceding the enrollment date as defined as January 1, April 1, July 1 or October 1 or any plan year or 85% of the market price on the last business day of the month. If any employee elects to terminate participation in the Stock Purchase Plan, the employee is not eligible to re-enroll until the first enrollment date following six months from such election. The Stock Purchase Plan provides for the grant of rights to employees to purchase a maximum of 500,000 shares of common stock of the Company commencing on January 1, 1993. As of December 31, 1995, 48,731 shares had been purchased by employees at prices ranging from $7.23 to $29.54 per share. NOTE NINE. SHARE PURCHASE RIGHTS PLAN: The Company's Board of Directors adopted a share purchase rights plan by declaring a dividend distribution of one preferred share purchase right (a "Right") on each outstanding share of the Company's common stock (the "Common Shares"). The dividend distribution was made October 15, 1991, payable to shareholders of record on that date. The Rights are subject to an agreement (the "Rights Agreement") between the Company and the Company's stock transfer agent, and will expire October 15, 2001, unless redeemed at an earlier date. Pursuant to the Rights Agreement, each Right will entitle the holder thereof to buy one one-hundredth of a share of the Company's Series D Preferred Stock (the "Preferred Shares"), at an exercise price of $80, subject to certain antidilution adjustments. The Rights will not be exercisable or transferable apart from the Common Shares, until (i) the tenth day after a person or group acquires 20% or more of the Common Shares or (ii) the tenth business day following the commencement of, or the announcement of an intention to make, a tender or exchange offer for 20% or more of the Common Shares. The Rights will not have any voting rights or be entitled to dividends. If the Company is acquired in a merger or other business combination, each Right will entitle its holder to purchase, at the exercise price of the Right, a number of the acquiring company's common shares having a current market value of twice such F-10 price. Alternately, if a person or group acquires 20% or more of the Common Shares, then each Right not owned by such acquiring person or group will entitle the holder to purchase, for the exercise price, a number of Common Shares having a market value of twice such price. The Rights are redeemable at the Company's option for $.01 per Right at any time prior to the close of business on the seventh day after the first date of public announcement that a person or group has acquired beneficial ownership of 20% or more of the Common Shares. At any time after a person or group acquires 20% or more of the Common Shares, but prior to the time such acquiring person acquires 50% or more of the Common Shares, the Company's Board of Directors may redeem the Rights (other than those owned by the acquiring person or group), in whole or in part, by exchanging one Common Share for each Right. NOTE TEN. OPERATING LEASES: The Company conducts a significant portion of its operations from an office/warehouse/distribution facility and an office/laboratory facility under operating leases that expire over the next seven years. In addition, the Company leases certain office equipment under operating leases that expire over the next four years. The Company is committed under noncancellable operating leases, with minimum lease payments as of December 31, 1995 as follows:
Fiscal Years Ending December 31, - ---------------------------------------------- 1996 $ 403,425 1997 410,130 1998 419,733 1999 394,128 2000 134,055 Thereafter 82,809 - ---------------------------------------------- Total minimum lease payments $1,844,280 - ----------------------------------------------
Total rental expense under operating leases was $422,337, $446,935 and $363,973 for the years ended November 30, 1993, 1994 and December 31, 1995, respectively. NOTE ELEVEN. INCOME TAXES: The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at November 30, 1994 and December 31, 1995 are as follows:
1994 1995 - ----------------------------------------------------------------- - ----------------------------------------------------------------- Net operating loss carryforward $6,744,072 $ 9,834,875 Research and development and other credits 860,509 839,189 Patent fees 287,450 308,110 Other, net 526,930 794,948 Less - Valuation allowance (8,418,961) (11,777,122) - ----------------------------------------------------------------- Deferred income tax asset $ - $ - - -----------------------------------------------------------------
Pursuant to the requirements to SFAS No. 109, a valuation allowance is provided when it is more likely than not the deferred income tax asset will not be realized. The Company has provided a valuation allowance against the entire deferred tax asset at November 30, 1994 and December 31, 1995. The provision for income taxes for the years ended November 30, 1993, 1994 and December 31, 1995 consisted of the following:
1993 1994 1995 - ------------------------------------------------------- Current provision $104,000 $159,335 $131,350 Deferred provision, net - - - - ------------------------------------------------------- Total provision $104,000 $159,335 $131,350 - -------------------------------------------------------
The differences (expressed as a percentage of pre-tax income) between the statutory and effective federal income tax rates are as follows:
1993 1994 1995 - ----------------------------------------------------- Statutory tax rate 34.0% 34.0% (34.0%) State income taxes 6.2 5.4 2.8 Recognition of previously unrecognized deferred tax benefits (36.6) (35.3) - Unrecognized deferred tax benefit - - 34.6 Expenses related to foreign operations 6.2 4.7 4.1 Research and development tax credit adjustment .7 .5 - Other .9 .8 1.3 - ----------------------------------------------------- Effective tax rate 11.4% 10.1% 8.8% - -----------------------------------------------------
At December 31, 1995, the Company had net operating loss carryforwards of approximately $28,926,000 for federal income tax purposes, which expire during the period from 2000 to 2010, and investment and research and development tax credit carryforwards of approximately $839,000, which expire during the period from 1999 to 2008, all of which are available to offset federal income taxes due in future periods. F-11 NOTE TWELVE. CONCENTRATIONS OF CREDIT RISK: Financial instruments that potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's customers are not concentrated in any specific geographic region but are concentrated in the health care industry. Significant sales were made to two unaffiliated customers, Baxter Healthcare Corporation accounted for $2,146,000, $2,775,000 and $3,347,768 and Owens & Minor accounted for $1,780,308, $1,794,609 and $3,347,768 of the Company's net sales in 1993, 1994 and 1995, respectively. Sales by Caraloe, Inc. to an unaffiliated customer, Mannatech, Inc., formerly Emprise, Inc., accounted for $0, $934,000 and $2,488,000 of the Company's net sales in 1993, 1994 and 1995, respectively. The Company performs ongoing credit evaluations of its customers' financial condition and establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers and historical trends and other information. NOTE THIRTEEN. FAIR VALUES OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments. The following methods and assumptions were used by the Company in estimating the fair value disclosures for its financial instruments. For cash, trade receivables and payables, the carrying amounts reported in the Consolidated Balance Sheets approximate fair value. The carrying amounts for revolving notes and notes payable approximate fair value based upon the borrowing rates currently available to the Company for similar bank loans. Note Fourteen. Unaudited Selected Quarterly Financial Data: The unaudited selected quarterly financial data below reflect the fiscal years ended November 30, 1994 and December 31, 1995, respectively.
1994 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------------------- Net sales $6,414,153 $5,969,416 $6,303,426 $ 6,742,659 Gross profit 5,092,901 4,508,094 4,682,973 4,730,929 Net income 402,795 403,752 391,750 222,941 Income per share .05 .05 .05 .03 Weighted average shares 7,337,458 7,339,148 7,342,932 7,344,390 1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------------------- Net sales $6,275,759 $6,407,881 $6,621,396 $ 5,069,054 Gross profit 4,636,540 4,331,661 4,351,009 3,110,609 Net income (496,782) (286,555) 162,522 (1,007,452) Income per share (.07) (.04) .02 (.12) Weighted average shares 7,359,387 7,812,878 8,213,508 8,344,929 - -------------------------------------------------------------------------
- ------------------------------------------------------------------------- Report of Independent Public Accountants - ------------------------------------------------------------------------- To the Shareholders and Board of Directors of Carrington Laboratories, Inc., and Subsidiaries: We have audited the accompanying consolidated balance sheets of Carrington Laboratories, Inc. (a Texas corporation), and subsidiaries as of November 30, 1994, December 31, 1994, and December 31, 1995, and the related consolidated statements of operations, shareholders' investment, and cash flows for each of the two years in the period ended November 30, 1994, the month ended December 31, 1994, and the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carrington Laboratories, Inc., and subsidiaries as of November 30, 1994, December 31, 1994 and December 31, 1995, and the results of their operations and their cash flows for the two years ended November 30, 1994, the month ended December 31, 1994 and the year ended December 31, 1995, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas February 9, 1996 F-12 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CARRINGTON LABORATORIES, INC. Date: April 1, 1996 By: /s/ Carlton E. Turner ----------------------- Carlton E. Turner, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ Carlton E. Turner President, Chief Executive April 1, 1996 - ----------------------------- Officer and Director Carlton E. Turner /s/ Sheri L. Pantermuehl Chief Financial Officer April 1, 1996 - ----------------------------- (principal financial and Sheri L Pantermuehl accounting officer) /s/ R. Dale Bowerman Director April 1, 1996 - ----------------------------- R. Dale Bowerman /s/ George DeMott Director April 1, 1996 - ----------------------------- George DeMott /s/ Robert A. Fildes, Ph.D. Director April 1, 1996 - ----------------------------- Robert A. Fildes, Ph.D. /s/ Thomas J. Marquez Director April 1, 1996 - ----------------------------- Thomas J. Marquez /s/ James T. O'Brien Director April 1, 1996 - ----------------------------- James T. O'Brien /s/ Selvi Vescovi Director April 1, 1996 - ----------------------------- Selvi Vescovi
S - 1 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CARRINGTON LABORATORIES, INC. Date: April 1, 1996 By: ------------------------------ Carlton E. Turner, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- - ----------------------------- President, Chief Executive April 1, 1996 Carlton E. Turner Officer and Director - ----------------------------- Chief Financial Officer April 1, 1996 Sheri L. Pantermuehl (principal financial and accounting officer) - ----------------------------- Director April 1, 1996 R. Dale Bowerman - ----------------------------- Director April 1, 1996 George DeMott - ----------------------------- Director April 1, 1996 Robert A. Fildes, Ph.D. - ----------------------------- Director April 1, 1996 Thomas J. Marquez - ----------------------------- Director April 1, 1996 James T. O'Brien - ----------------------------- Director April 1, 1996 Selvi Vescovi
S - 2 INDEX TO EXHIBITS
Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 3.1 Restated Articles of Incorporation of Carrington (incorporated herein by reference to Exhibit 3.1 to Carrington's 1988 Annual Report on Form 10-K). 3.2 Statement of Cancellation of Redeemable Shares of Carrington dated June 9, 1989 (incorporated herein by reference to Exhibit 3.2 to Carrington's 1991 Annual Report on Form 10-K). 3.3 Statement of Change of Registered Office and Registered Agent of Carrington (incorporated herein by reference to Exhibit 3.1 to Carrington's Quarterly Report on Form 10- Q for the quarter ended May 31, 1991). 3.4 Statement of Resolution Establishing Series D Preferred Stock of Carrington (incorporated herein by reference to Exhibit 3.1 to Carrington's Quarterly Report on Form 10- Q for the quarter ended August 31, 1991). 3.5* Bylaws of Carrington, as amended through April 27, 1995. 4.1 Form of certificate for Common Stock of Carrington (incorporated herein by reference to Exhibit 4.5 to Carrington's Registration Statement on Form S-3 (No. 33-57360) filed with the Securities and Exchange Commission on January 25, 1993). 4.23 Rights Agreement dated as of September 19, 1991, between Carrington and Ameritrust Company National Association (incorporated herein by reference to Exhibit 1 to Carrington's Report on Form 8-K dated September 19, 1991). 10.1+ 1985 Stock Option Plan of Carrington (incorporated herein by reference to Exhibit 10.2 to Carrington's 1993 Annual Report on Form 10-K). 10.2+ Form of Nonqualified Stock Option Agreement for employees, as amended, relating to Carrington's 1985 Stock Option Plan (incorporated herein by reference to Exhibit 4.2 to Carrington's Registration Statement on Form S-8 (No. 33-50430) filed with the Securities and Exchange Commission on August 4, 1992).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.3+ Form of Nonqualified Stock Option Agreement for nonemployee directors, relating to Carrington's 1985 Stock Option Plan (incorporated herein by reference to Exhibit 4.3 to Carrington's Registration Statement on Form S-8 (No. 33-50430) filed with the Securities and Exchange Commission on August 4, 1992). 10.4 Continuing Guaranty dated June 30, 1987, by Carrington in favor of American Hospital Supply Corporation (incorporated herein by reference to Exhibit 10.88 to Carrington's 1987 Annual Report on Form 10-K). 10.5 Lease agreement dated as of July 28, 1988, between Carrington and ESBO Holdings, Inc. (incorporated herein by reference to Exhibit 10.71 to Carrington's 1988 Annual Report on Form 10-K). 10.6 Assumption Agreement dated August 2, 1989, between Resource Savings Association, E. Don Lovelace, Jerry L. Lovelace and Carrington (relating to the assumption by Carrington of obligations under the Promissory Note listed as Exhibit 10.9 and the Deed of Trust, Security Agreement and Assignment of Rents listed as Exhibit 10.10) (incorporated herein by reference to Exhibit 10.62 to Carrington's 1991 Annual Report on Form 10-K). 10.7 Promissory Note in the principal amount of $2,350,000, dated May 9, 1985, made by E. Don Lovelace and Jerry L. Lovelace and payable to Resource Savings Association (assumed by Carrington pursuant to the Assumption Agreement listed as Exhibit 10.8) (incorporated herein by reference to Exhibit 10.63 to Carrington's 1991 Annual Report on Form 10-K). 10.8 Deed of Trust, Security Agreement and Assignment of Rents dated May 9, 1985, made by E. Don Lovelace and Jerry L. Lovelace in favor of William B. Sechrest for the benefit of Resource Savings Association (assumed by Carrington pursuant to the Assumption Agreement listed as Exhibit 10.8) 10.9 First Amendment to Lease dated October 6, 1989, amending Lease listed as Exhibit 10.5 (incorporated herein by reference to Exhibit 10.58 to Carrington's 1990 Annual Report on Form 10-K).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.10 Common Stock Purchase Warrant (amended and restated) dated June 28, 1991, issued by Carrington to High Plains Baptist Hospital (incorporated herein by reference to Exhibit 10.12 to Carrington's 1993 Annual Report on Form 10-K). 10.11 Form of Common Stock Purchase Warrant issued by Carrington to certain persons in February 1990 (incorporated herein by reference to Exhibit 10.52 to Carrington's 1989 Annual Report on Form 10-K). 10.12 Common Stock Purchase Warrant dated March 27, 1990, issued by Carrington to Barry Kitt (incorporated herein by reference to Exhibit 10.45 to Carrington's 1990 Annual Report on Form 10-K). 10.13 Common Stock Purchase Warrant dated July 19, 1990, issued by Carrington to H. Reginald McDaniel, M.D. (incorporated herein by reference to Exhibit 10.46 to Carrington's 1990 Annual Report on Form 10-K). 10.14 License Agreement dated September 20, 1990, between Carrington and Solvay Animal Health, Inc. (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended August 31, 1990). 10.15+ Employment Agreement dated as of December 11, 1990, between Carrington and Karl H. Meister (incorporated herein by reference to Exhibit 10.54 to Carrington's 1990 Annual Report on Form 10-K). 10.16 English translation of Loan Agreement dated as of December 14, 1990, between Finca Savila, S.A. and Corporacion Privada de Inversiones de Centroamerica, S.A., together with Carrington's continuing guarantee dated as of December 17, 1990 in favor of lender (incorporated herein by reference to Exhibit 19.1 to Carrington's 1991 Annual Report on Form 10-K). 10.17 Form of Common Stock Purchase Warrant (amended and restated) dated June 28, 1991, issued by Carrington to High Plains Baptist Hospital (incorporated herein by reference to Exhibit 10.19 to Carrington's 1993 Annual Report on Form 10-K).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.18 Form of Common Stock Purchase Warrant dated January 11, 1991, issued by Carrington to R. Dale Bowerman (incorporated herein by reference to Exhibit 10.49 to Carrington's 1990 Annual Report on Form 10-K). 10.19 Form of Common Stock Purchase Warrant (amended and restated) dated June 28, 1991, issued by Carrington to T.H. Holloway, Jr. (incorporated herein by reference to Exhibit 10.21 to Carrington's 1993 Annual Report on Form 10-K). 10.20 Contract Research Agreement dated as of August 8, 1991, between Carrington and Texas Agriculture Experimental Station, as agent for the Texas A&M University System (incorporated herein by reference to Exhibit 10.55 to Carrington's 1991 Annual Report on Form 10-K). 10.21 Lease Agreement dated as of August 30, 1991, between Carrington and Western Atlas International, Inc. (incorporated herein by reference to Exhibit 10.59 to Carrington's 1991 Annual Report on Form 10-K). 10.22 Form of Common Stock Purchase Warrant dated September 19, 1991, issued by Carrington to each of Ian R. Tizard, Ph.D., J. Harold Helderman, M.D., Maurice C. Kemp, David L. Busbee and Gerald R. Bratton (incorporated herein by reference to Exhibit 10.34 to Carrington's 1991 Annual Report on Form 10-K). 10.23 Second Amendment to Lease dated November 14, 1991, amending Lease listed as Exhibit 10.5 (incorporated herein by reference to Exhibit 10.58 to Carrington's 1991 Annual Report on Form 10-K). 10.24 Form of Common Stock Purchase Warrant dated March 19, 1992, issued by Carrington to Hedgemoor Consultants, Inc. (incorporated herein by reference to Exhibit 10.65 to Carrington's 1992 Annual Report on Form 10-K). 10.25 Form of Common Stock Purchase Warrant dated April 29, 1992, issued by Carrington to Haskell and Joyce Sells (incorporated herein by reference to Exhibit 10.66 to Carrington's 1992 Annual Report on Form 10-K).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.26 Form of Common Stock Purchase Warrant dated April 29, 1992, issued by Carrington to Vance Kirkland Meares (incorporated herein by reference to Exhibit 10.67 to Carrington's 1992 Annual Report on Form 10-K). 10.27 Form of Common Stock Purchase Warrant dated April 29, 1992, issued by Carrington to Patrice M. Carroll (incorporated herein by reference to Exhibit 10.68 to Carrington's 1992 Annual Report on Form 10-K). 10.28 Form of Common Stock Purchase Warrant dated April 29, 1992, issued by Carrington to Michael A. Carroll (incorporated herein by reference to Exhibit 10.69 to Carrington's 1992 Annual Report on Form 10-K). 10.29+* Employee Stock Purchase Plan of Carrington as amended through June 15, 1995. 10.30 Stock Purchase Agreement dated October 27, 1992, between Carrington and the investors named therein (incorporated herein by reference to Exhibit 2.1 to Carrington's Registration Statement Form S-3 (No. 33- 57360) filed with the Securities and Exchange Commission on January 25, 1993). 10.31 Registration Rights Agreement between Carrington and Leslie B. Clements and related letter from Carrington to Mr. Clements dated January 21, 1993 (incorporated herein by reference to Exhibit 2.3 to Carrington's Registration Statement on Form S-3 (No. 33-57360) filed with the Securities and Exchange Commission on January 25, 1993). 10.32 Registration Rights Agreement between Carrington and Dr. Robert H. Carpenter and related letter from Carrington to Dr. Carpenter dated January 21, 1993 (incorporated herein by reference to Exhibit 2.4 to Carrington's Registration Statement on Form S-3 (No. 33-57360) filed with the Securities and Exchange Commission on January 25, 1993). 10.33 Registration Rights Agreement between Carrington and Charles F. May and related letter from Carrington to Mr. May dated January 21, 1993 (incorporated herein by reference to Exhibit 2.5 to Carrington's Registration Statement on Form S-3 (No. 33-57360) filed with the Securities and Exchange Commission on January 25, 1993).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.34 Registration Rights Agreement between Carrington and Bertram D. Siegel and related letter from Carrington to Mr. Siegel dated January 21, 1993 (incorporated herein by reference to Exhibit 2.6 to Carrington's Registration Statement on Form S-3 (No. 33-57360) filed with the Securities and Exchange Commission on January 25, 1993). 10.35+ Employment Agreement dated as of August 11, 1992, between Carrington and Stephen G. Madison (incorporated herein by reference to Exhibit 10.76 to Carrington's 1992 Annual Report on Form 10-K). 10.36 Common Stock Purchase Warrant dated September 14, 1993, issued by Carrington to E. Don Lovelace (incorporated herein by reference to Exhibit 10.44 to Carrington's 1993 Annual Report on Form 10-K). 10.37 Common Stock Purchase Warrant dated September 14, 1993, issued by Carrington to Jerry L. Lovelace (incorporated herein by reference to Exhibit 10.45 to Carrington's 1993 Annual Report on Form 10-K). 10.38 Modification and Extension Agreement dated as of September 15, 1993, relating to Assumption Agreement listed as Exhibit 10.8, Promissory Note listed as Exhibit 10.9 and Deed of Trust, Security Agreement and Assignment of Rents listed as Exhibit 10.10 (incorporated herein by reference to Exhibit 10.46 to Carrington's 1993 Annual Report on Form 10-K). 10.39 Non-Exclusive Supply Agreement dated as of January 26, 1994, between Carrington and Cambrex Hydrogels, Inc. (incorporated herein by reference to Exhibit 10.47 to Carrington's 1993 Annual Report on Form 10-K). 10.40 Third Amendment to Lease dated as of February 15, 1994, amending Lease listed as Exhibit 10.5 (incorporated herein by reference to Exhibit 10.48 to Carrington's 1993 Annual Report on Form 10-K). 10.41 Agreement Regarding Termination of Employment and Full and Final Release dated February 16, 1994, between Carrington and David A. Hotchkiss (incorporated herein by reference to Exhibit 10.49 to Carrington's 1993 Annual Report on Form 10-K).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.42+ 1995 Stock Option Plan (incorporated herein by reference to Exhibit 10.50 to Carrington's 1994 Annual Report on Form 10-K). 10.43 Supply Agreement dated May 16, 1994, between Caraloe, Inc. and Emprise International, Inc. (incorporated herein by reference to Exhibit 10.51 to Carrington's 1994 Annual Report on Form 10-K). 10.44 Trademark License Agreement dated May 16, 1994, between Caraloe, Inc. and Emprise International, Inc. (incorporated herein by reference to Exhibit 10.52 to Carrington's 1994 Annual Report on Form 10-K). 10.45 License Agreement dated March 18, 1994, between Carrington and Societe Europeenne de Biotechnologie (incorporated herein by reference to Exhibit 10.53 to Carrington's 1994 Annual Report on Form 10-K). 10.46 Agreement dated March 28, 1994, between Carrington and Keun Wha Pharmaceutical Co., Ltd., (incorporated herein by reference to Exhibit 10.54 to Carrington's 1994 Annual Report on Form 10-K). 10.47 Lease Agreement dated June 15, 1994, between DFW Nine, a California limited partnership, and Carrington (incorporated herein by reference to Exhibit 10.55 to Carrington's 1994 Annual Report on Form 10-K). 10.48+ Agreement Regarding Termination of Employment and Full and Final Release dated August 17, 1994, between Carrington and Stephen G. Madison (incorporated herein by reference to Exhibit 10.56 to Carrington's 1994 Annual Report on Form 10-K). 10.49 Lease Amendment dated August 23, 1994, amending Lease Agreement listed as Exhibit 10.54 (incorporated herein by reference to Exhibit 10.57 to Carrington's 1994 Annual Report on Form 10-K). 10.50 License Agreement dated September 29, 1994, between Carrington and Immucell Corporation (incorporated herein by reference to Exhibit 10.58 to Carrington's 1994 Annual Report on Form 10-K). 10.51 Consulting Agreement dated November 17, 1994, between Carrington and R. Dale Bowerman (incorporated herein by reference to Exhibit 10.59 to Carrington's 1994 Annual Report on Form 10-K).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.52 Third Lease Amendment dated December 1, 1994, amending Lease Agreement listed as Exhibit 10.21 (incorporated herein by reference to Exhibit 10.60 to Carrington's 1994 Annual Report on Form 10-K). 10.53 Credit Agreement dated January 30, 1995, between Carrington and NationsBank of Texas, N.A. (incorporated herein by reference to Exhibit 10.61 to Carrington's 1994 Annual Report on Form 10-K). 10.54 Settlement Agreement dated February 7, 1995, between Carrington, Bill H. McAnalley, Clinton H. Howard and Royal Bodycare, Inc. (incorporated herein by reference to Exhibit 10.62 to Carrington's 1994 Annual Report on Form 10-K). 10.55 Production Contract dated February 13, 1995, between Carrington and Oregon Freeze Dry, Inc. (incorporated herein by reference to Exhibit 10.63 to Carrington's 1994 Annual Report on Form 10-K). 10.56 Management Compensation Plan (incorporated herein by reference to Exhibit 10.64 to Carrington's 1994 Annual Report on Form 10-K). 10.57 Research Agreements dated June 24, 1994, September 16, 1994, and February 2, 1995, between Southern Research Institute and Carrington (incorporated herein by reference to Exhibit 10.65 to Carrington's 1994 Annual Report on Form 10-K). 10.58 Trademark License Agreement between Caraloe, Inc. (Licensor) and Emprise International, Inc. (Licensee) dated March 31, 1995 (incorporated herein by reference to Exhibit 10.2 to Carrington's Second Quarter 1995 Report on Form 10-Q). 10.59 Supply Agreement between Caraloe, Inc. (Seller) and Emprise International, Inc. (Buyer) dated March 31,1995 (incorporated herein by reference to Exhibit 10.3 to Carrington's Second Quarter 1995 Report on Form 10-Q). 10.60 Sales Distribution Agreement between the Chinese Academy of Sciences and Carrington Laboratories, Inc. dated August 16, 1995 (incorporated herein by reference to Exhibit 10.1 to Carrington's Third Quarter 1995 Report on Form 10-Q).
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.61 Sales Distribution Agreement between the Chinese Academy of Sciences and Carrington Laboratories, Inc. dated August 16, 1995 (incorporated herein by reference to Exhibit 10.2 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.62 Sales Distribution Agreement between the Chinese Academy of Sciences and Carrington Laboratories, Inc. dated August 16, 1995 (incorporated herein by reference to Exhibit 10.3 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.63 Supply and Distribution Agreement between Medical Polymers, Inc., and Carrington Laboratories, Inc., dated September 15, 1995 (incorporated herein by reference to Exhibit 10.4 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.64 Clinical Services Agreement between Pharmaceutical Products Development, Inc., and Carrington Laboratories, Inc., dated July 10, 1995 (incorporated herein by reference to Exhibit 10.5 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.65 Non-exclusive Sales and Distribution Agreement between Innovative Technologies Limited and Carrington Laboratories, Inc. dated August 22, 1995 (incorporated herein by reference to Exhibit 10.6 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.66 Supplemental Agreement to Non-exclusive Sales and Distribution Agreement between Innovative Technologies Limited and Carrington Laboratories, Inc. dated October 16, 1995 (incorporated herein by reference to Exhibit 10.7 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.67 Product Development and Exclusive Distribution Agreement between Innovative Technologies Limited and Carrington Laboratories, Inc. dated November 10, 1995 (incorporated herein by reference to Exhibit 10.8 to Carrington's Third Quarter 1995 Report on Form 10-Q). 10.68+* Resignation Agreement and Full and Final Release dated February 24, 1995, between Carrington and Bill H. McAnalley.
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Sequentially Exhibit Number Exhibit Numbered Page -------------- ------- ------------- 10.69+* Revised and Restated Resignation Agreement dated March 14, 1995, between Carrington and Karl H. Meister. 10.70* Common Stock Purchase Warrant dated August 4, 1995, issued by Carrington to Clifford T. Kalista. 10.71* Consulting Agreement dated May 5, 1995, between Carrington and Clifford T. Kalista. 10.72+* Form of Nonqualified Stock Option Agreement for employees relating to Carrington's 1995 Stock Option Plan (incorporated herein by reference to Exhibit 10.50 to Carrington's 1994 Annual Report on Form 10-K.) 10.73+* Form of Nonqualified Stock Option Agreement for nonemployee directors relating to Carrington's 1995 Stock Option Plan. 10.74 Form of Stock Purchase dated April 5, 1995 between Carrington and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.1 to Carrington's Registration Statement 33-60833 on Form S-3). 10.75 Form of Registration Rights Agreement dated June 20, 1995 between Carrington and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.2 to Carrington's Registration Statement 33-60833 on Form S-3). 10.76* Supply and Distribution Agreement between Farnam Companies, Inc. and Carrington Laboratories, Inc. dated March 22, 1996. 10.77+* Termination Agreement and Full and Final Release dated August 18, 1995, between Carrington and Terry M. Nida. 11.1* Computation of Net Income (Loss) Per Common and Common Equivalent Share. 21.1* Subsidiaries of Carrington. 23.1* Consent of Arthur Andersen LLP 27.1* Financial Data Schedule
- ---------- * Filed herewith. + Management contract or compensatory plan. E - 10 EX-3.5 2 BYLAWS OF CARRINGTON LABS EXHIBIT 3.5 AS AMENDED THROUGH APRIL 27, 1995 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 of Shareholders. With respect to any matter, the holders of a majority of the shares entitled to vote on that matter, present in person or represented by proxy, shall be requisite to and shall constitute a quorum at each meeting of shareholders for the transaction of business with respect to that matter, except as otherwise provided by statute, the Articles of Incorporation or these Bylaws. 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, in which case the vote of such specified portion shall be requisite to constitute the act of the meeting, the affirmative vote of the holders of a majority of the shares entitled to vote on that matter and represented in person or by proxy at a meeting of shareholders at which a quorum is present shall be the act of the shareholders. 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 - 2 - 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 - 3 - 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. - 4 - 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 - 5 - 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, either for or without 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 - 6 - 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. No contract or transaction between the Corporation and one or more of its directors or officers or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (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 contract or transaction are disclosed or are known to the shareholders 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. - 7 - 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 serving 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 - 8 - 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. - 9 - The 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 - 10 - 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 - 11 - 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 - 12 - 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. - 13 - 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 such 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. - 14 - 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 - 15 - 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 - 16 - 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 profit 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 - 17 - liability, 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 - 18 - 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. - 19 - 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 - 20- 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. -21- EXHIBIT A AS AMENDED THROUGH OCTOBER 26, 1993 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. A-1 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 of Shareholders. With respect to any matter, the holders of a majority of the shares entitled to vote on that matter, present in person or represented by proxy, shall be requisite to and shall constitute a quorum at each meeting of shareholders for the transaction of business with respect to that matter, except as otherwise provided by statute, the Articles of Incorporation or these Bylaws. 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, in which case the vote of such specified portion shall be requisite to constitute the act of the meeting, the affirmative vote of the holders of a majority of the shares entitled to vote on that matter and represented in person or by proxy at a meeting of shareholders at which a quorum is present shall be the act of the shareholders. 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 A-2 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 A-3 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 and Qualifications. 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 A-4 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. 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. A-5 Section 4. Removal; Filling of Vacancies. Any or all of the directors may be removed, either for or without 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 A-6 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. No contract or transaction between the Corporation and one or more of its directors or officers or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (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 contract or transaction are disclosed or are known to the shareholders 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 A-7 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 serving 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 A-8 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. The 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 A-9 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 A-10 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 Chairman of the Board, 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, with the exception of the Chairman of the Board, 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 Chairman of the Board or 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. A-11 Section 7. Chairman of the Board. The Chairman of the Board 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. He shall advise and counsel the President and the other officers of the Corporation and shall exercise such powers and perform such duties as shall be assigned to or required of him from time to time by the Board of Directors or the Executive Committee. Section 8. 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, or if such officer shall not have been elected or be serving, 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 9. 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 Chairman of the Board, the Executive Committee or the Board of Directors. Section 10. 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 Chairman of the Board, the Executive Committee or the Board of Directors. Section 11. 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 Chairman of the Board, the Executive Committee or the Board of Directors. A-12 Section 12. 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 Chairman of the Board, the Executive Committee or the Board of Directors. Section 13. 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 Chairman of the Board, the Executive Committee or the Board of Directors. Section 14. 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 15. 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 A-13 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 Chairman of the Board, 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 Chairman of the Board, 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 Chairman of the Board, 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 such 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; A-14 (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 A-15 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. A-16 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 profit 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 A-17 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 liability, 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 A-18 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. A-19 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 A-20 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. A-21 EX-10.29 3 CARRINGTON EMPLOYEE STOCK PUR. PLAN EXHIBIT 10.29 AS AMENDED THROUGH JUNE 15, 1995 CARRINGTON LABORATORIES, INC. EMPLOYEE STOCK PURCHASE PLAN Section 1. Purpose. It is the purpose of the Plan to promote the interests of the Company and its shareholders by providing a method by which eligible employees may use voluntary payroll deductions to purchase shares of Common Stock at a discount, thereby affording them the opportunity to invest in the Company at a preferential price, and to acquire a proprietary interest in the Company and an increased personal interest in its continued success and progress. The Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code and shall be construed accordingly. Section 2. Definitions. As used herein the following terms have the following meanings: (a) "Affiliate" means any corporation that is a subsidiary corporation of the Company within the meaning of Section 424(f) of the Code and that has been designated by the Committee as an Affiliate for purposes of the Plan. (b) "Board of Directors" means the Board of Directors of the Company. (c) "Code" means the United States Internal Revenue Code of 1986, as from time to time amended. (d) "Committee" means the Committee described in Section 4 hereof. (e) "Common Stock" means the $.01 par value Common Stock of the Company. (f) "Company" means Carrington Laboratories, Inc. (g) "Compensation" means (i) with respect to a salaried employee, the basic annual salary of such employee as of the first day of the Plan Year (except with respect to a salaried employee whose participation in the Plan begins on an Enrollment Date other than January 1, in which case, for the Plan Year in which such participation begins, "Compensation" means that portion of the basic annual salary of such employee, as of the Enrollment Date on which such participation begins, that is payable for the period from such Enrollment Date through the remainder of that Plan Year), and shall not include bonuses, overtime pay, allowances, commissions, deferred compensation payments or any other extraordinary compensation, and (ii) with respect to an hourly compensated employee, the straight-time hourly rate of pay of such employee as of the first day of the Plan Year, multiplied by 2,080 (except with respect to an hourly compensated employee whose participation in the Plan begins on April 1, July 1 or October 1, in which case, for the Plan Year in which such participation begins, "Compensation" means the straight-time hourly rate of pay of such employee as of such April 1, July 1 or October 1, multiplied by 1,560, 1,040 or 520, respectively), and shall not include bonuses, overtime pay, premium pay or other irregular payments. The Compensation of an employee who does not receive salary or wages computed in United States dollars shall be determined by converting such salary or wages into United States dollars in accordance with the Compensation Exchange Rate. (h) "Compensation Exchange Rate" means the New York foreign currency exchange rate as reported in The Wall Street Journal for the last business day in December immediately preceding the first day of the Plan Year. (i) "Eligible Employee" means any employee of the Company or an Affiliate who is eligible to participate in the Plan pursuant to Section 5 hereof. (j) "Enrollment Date" means any January 1, April 1, July 1 or October 1 of any Plan Year. (k) "Fair Market Value" means the closing sale price on the date in question (or, if there was no reported sale on such date, on the last preceding day on which any reported sale occurred) of the Common Stock on the Nasdaq National Market or any national stock exchange or other stock market on which the Common Stock may from time to time be traded. (l) "Option" means any option to purchase shares of Common Stock granted by the Committee pursuant to the provisions of the Plan. (m) "Participant" means an Eligible Employee who elects to participate in the Plan pursuant to Section 6 hereof. (n) "Plan" means this Carrington Laboratories, Inc. Employee Stock Purchase Plan. (o) "Plan Year" means each period beginning on January 1 and ending on the following December 31, commencing January 1, 1993. Section 3. Number of Shares. The aggregate number of shares of Common Stock issued pursuant to Options granted under the Plan shall not exceed a total of 500,000 shares. The maximum number of shares of Common Stock available for sale under the Plan is subject to adjustment as provided in Section 14. The Common Stock to be delivered upon exercise of Options may consist of authorized but unissued shares of Common Stock or shares of Common Stock previously issued and reacquired by the Company. Section 4. Administration of the Plan. The Plan shall be administered by the Committee, which shall consist of three or more employees of the Company. Each member of the Committee shall be appointed by and shall serve at the pleasure of the Board of Directors. The Board of Directors shall have the sole continuing authority to appoint members of the Committee both in - 2 - substitution for members previously appointed and to fill vacancies however caused. The following provisions shall apply to the administration of the Plan by the Committee: (a) The Committee shall designate one of its members as Chairman and shall hold meetings at such times and places as it may determine. Each member of the Committee shall be notified in writing of the time and place of any meeting of the Committee at least two days prior to such meeting, provided that such notice may be waived by a Committee member. A majority of the members of the Committee shall constitute a quorum and any action taken by a majority of the members of the Committee present at any duly called meeting at which a quorum is present (or action unanimously approved in writing) shall constitute action by the Committee. (b) The Committee may appoint a Secretary (who need not be a member of the Committee) who shall keep minutes of its meetings. The Committee may make such rules and regulations for the conduct of its business as it may determine. (c) The Committee shall have full authority subject to the express provisions of the Plan to interpret the Plan, to provide, modify and rescind rules and regulations relating to it and to make all other determinations and perform such actions as the Committee deems necessary or advisable to administer the Plan. (d) No member of the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. Section 5. Eligible Employees. Each employee of the Company or an Affiliate shall be eligible to participate in the Plan; provided, however, that: (a) An employee shall not be granted an Option if such employee would, immediately after grant of the Option, own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any parent or subsidiary corporation of the Company (within the meaning of Section 424(e) and (f) of the Code). For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under any outstanding options shall be treated as stock owned by the employee; and (b) No employee shall be granted an Option under the Plan which would permit such employee's rights to purchase shares of stock under all employee stock purchase plans of the Company and its parent and subsidiary corporations (within the meaning of Section 424(e) and (f) of the Code) to accrue (within the meaning of Section 423(b)(8) of the Code) at a rate which exceeds U.S. $25,000 of fair market value of such stock (determined at the time such option is granted) for each calendar year during which any such option granted to such employee is outstanding at any time. For purposes of this Section 5, the term "employee" shall not include an employee whose customary employment is 20 hours or less per week or is for not more than five months in any calendar year. - 3 - Section 6. Method of Participation. Each person who will be an Eligible Employee on any Enrollment Date may elect to participate in the Plan by executing and delivering to the Company, on or before such Enrollment Date, a payroll deduction authorization form as provided in this Section. Such Eligible Employee shall thereby become a Participant on such Enrollment Date and shall remain a Participant until such Eligible Employee's participation is terminated as provided in Section 11 or 12 hereof; provided, however, that if the Company does not receive such payroll deduction authorization form in time to implement the authorized withholding for the payroll period that includes such Enrollment Date, no withholding shall be made on behalf of such Participant pursuant to this Plan until the next succeeding payroll period. The payroll deduction authorization form executed by a Participant shall request withholding, by means of substantially equal payroll deductions over the Plan Year, of an amount which shall be not more than 10% nor less than 1% of such Participant's Compensation for the Plan Year. A Participant may change the withholding rate of his or her payroll deduction authorization within such limits by delivering a new payroll deduction authorization form to the Company; provided, however, that a change pursuant to this sentence may be made by each Participant no more than three times in respect of any Plan Year; and provided further, that if the Company does not receive such new payroll deduction authorization form in time to implement the change for the payroll period during which it receives such form, the change authorized thereby shall not be made until the next succeeding payroll period. All amounts withheld in accordance with a Participant's payroll deduction authorization shall be credited to a withholding account for such Participant. No interest shall be payable on withholding accounts. Section 7. Grant of Options. Each Participant shall be granted an Option on the first day of each Plan Year to purchase shares of Common Stock; provided, however, that a Participant who begins participation on an Enrollment Date other than January 1 in accordance with Section 6 shall be granted an Option on such Enrollment Date and on the first day of each succeeding Plan Year. Each Option shall be exercisable in installments on the last business day of each calendar month during the Plan Year, beginning with the month in which the Option is granted, for the number of whole shares of Common Stock to be determined by dividing (a) the balance in the Participant's withholding account on the last business day of the month by (b) the purchase price per share of the Common Stock as determined under Section 8. In no event shall the number of shares with respect to which an Option is granted to a Participant in a Plan Year exceed that number of shares which has an aggregate Fair Market Value (determined on the date of grant) of U.S. $25,000, and the number of shares actually purchased by a Participant in a Plan Year may not exceed this number. The Company shall reduce, on a substantially proportionate basis, the number of shares of Common Stock receivable by each Participant upon exercise of an Option in any month in the event that the total number of shares then available under the Plan is less than the total number of shares with respect to which all Participants exercise Options in such month. Section 8. Option Price. The purchase price per share of Common Stock under each installment of each Option shall equal the lesser of (a) 85% of the Fair Market Value per share of Common Stock on the date of grant of the Option or (b) 85% of the Fair Market Value per share of Common Stock on the date on which the installment is exercised. - 4 - Section 9. Exercise of Options. An employee who is a Participant in the Plan on the last business day of a month shall be deemed automatically to have exercised the current installment of the Option granted to him or her for that Plan Year. Upon such exercise, the Company shall apply the entire balance of the Participant's withholding account to the purchase of the maximum number of whole shares of Common Stock as determined under Section 7. For purposes of this Section 9, the balance in the withholding account of a Participant whose salary or wages are not computed in United States dollars shall be converted into United States dollars in accordance with the New York foreign currency exchange rate as reported in The Wall Street Journal for the last business day of the month. Shares of Common Stock purchased for a Participant under the Plan shall be held in custody for the account of such Participant as provided in the following paragraph unless he or she has requested, by written notice to the Company at any time, with respect to any installment of an Option or with respect to all installments, that certificates representing shares purchased for his or her account under the Plan not be held in custody. The Company shall issue and deliver to the Participant certificates representing shares for which such a request has been made as soon as practicable after such shares are purchased, subject to the limitations set forth in the following sentence of this Section 9. Certificates representing shares for which such a request has not previously been made and which are being held in custody shall be issued and delivered to the Participant as soon as practicable after the end of the month in which the Participant makes a written request to the Company therefor; provided, however, that the obligation of the Company to deliver shares of Common Stock shall be postponed for such period of time as may be necessary to register or qualify the purchased shares under the Securities Act of 1933 and any applicable foreign or state securities law; and, provided further, that the Participant shall not be entitled to receive a certificate representing the shares in his or her account under the Plan, other than at the end of a Plan Year or upon withdrawal from the Plan pursuant to Section 11 or 12, unless there are ten or more shares in such account. The Company shall issue or cause to be issued one or more global certificates (collectively, the "Global Certificate"), in the name of an officer or officers of Company designated from time to time by the Committee to serve as Custodian for Participants in the Plan, representing all shares purchased for Participants under the Plan that the Company has not been requested to deliver to the Participants. The Company shall maintain complete and accurate records indicating the number of shares purchased for each Participant under the Plan for which certificates have not been issued and delivered to such Participant, and the Company shall, no less frequently than quarterly, deliver reports to such Participants indicating such number of shares and containing such other information as the Company may deem necessary or advisable. A Participant shall possess all of the rights and privileges of a stockholder of the Company with respect to Common Stock purchased under the Plan upon the issuance to or for the benefit of the Participant of a certificate or certificates (including the Global Certificate) representing such shares. The Company shall deliver or cause to be delivered to each Participant for whom shares of Common Stock have been purchased under the Plan and are represented by the Global Certificate all dividends and distributions in respect of such shares and all notices, proxy statements and other communications to the Company's shareholders in accordance with applicable law and the rules and regulations of the Securities and Exchange Commission. - 5 - No fractional shares shall be issued upon exercise of any installment of an Option. Any balance remaining in a Participant's withholding account following exercise of an installment shall be returned to the Participant, except that any such balance representing a fractional share of Common Stock shall be retained in the withholding account and applied to the purchase of shares in the next month. The cash proceeds received by the Company upon exercise of an Option shall constitute general funds of the Company. To the extent any installment of an Option is exercised with respect to less than all of the shares of Common Stock available for purchase under such installment, the unexercised portion of the installment shall expire and become null and void as of the end of the month for which such installment was exercisable. Any unexercised portion of an Option shall expire and become null and void as of the end of the Plan Year in which such Option was granted. Section 10. Restrictions on Sale of Stock. Shares of Common Stock purchased under the Plan may not be sold, pledged or otherwise transferred within two years after the date of purchase unless such shares are first offered to the Company for purchase at a price equal to the Fair Market Value of the shares on the date on which the Participant delivers written notice of such offer to the Company. The Company must accept or reject the offer no later than 5:00 p.m., Central Time, on the next business day following its receipt of the written notice from the Participant. If the Company rejects or fails to accept the offer, the Participant shall be free to sell, pledge or transfer the shares covered by such offer; provided, however, that shares of Common Stock purchased under the Plan may not be sold, pledged or otherwise transferred under any circumstances prior to the approval of the Plan by the Company's shareholders in accordance with Section 17. Certificates representing shares of Common Stock issued under the Plan shall contain a restrictive legend describing or referring to the restrictions imposed by this Section 10, in accordance with applicable law, until such restrictions have terminated with respect to the shares represented by such certificates. Section 11. Cancellation of Option and Withdrawal From the Plan. A Participant who holds an Option under the Plan may at any time prior to exercise of the final installment thereof pursuant to Section 9 cancel the remaining unexercised portion of such Option by written notice delivered to the Company. Upon such cancellation, the balance in the Participant's withholding account and any shares being held in custody shall be returned to such Participant and he or she shall cease to be a Participant. Partial cancellation shall not be permitted. A Participant may terminate his payroll deduction authorization as of any date by written notice delivered to the Company and shall thereby cease to be a Participant as of such date. Partial termination of a payroll deduction authorization shall not be permitted, except to the extent expressly permitted by Section 6 of this Plan. Any Participant who voluntarily terminates his or her payroll deduction authorization prior to the last business day of a month shall be deemed to have cancelled the remaining unexercised portion of his or her Option, including the installment that would have been exercisable on the last business day of such month. A Participant who withdraws from the Plan pursuant to this Section 11 may re-enroll as of any subsequent Enrollment Date on which he or she is an Eligible Employee in accordance with the procedure set forth in Section 6 of this Plan; provided, however, that a Participant shall not - 6 - be permitted to re-enroll in the Plan until an Enrollment Date that is at least six months after the date of his or her withdrawal. Section 12. Termination of Employment. Upon the termination of a Participant's employment with the Company or an Affiliate for any reason, such person shall cease to be a Participant, the unexercised portion of any Option held by such Participant under the Plan shall be deemed cancelled, the balance of such Participant's withholding account and any shares being held in custody shall be returned to such Participant (or, in the event of the Participant's death, to the executor or administrator of his or her estate) and he or she shall have no further rights under the Plan. All Participants shall have the same rights and privileges under the Plan. Notwithstanding the foregoing, nothing in the Plan shall confer upon any Participant any right to continue in the employ of the Company or an Affiliate or in any way interfere with the right of the Company or an Affiliate to terminate the employment of the Participant at any time, with or without cause. Transfers of employment among the Company and its Affiliates and approved leaves of absence not exceeding 90 days shall not be considered terminations of employment for purposes of this Plan. Section 13. Transferability. An Option granted under the Plan shall not be transferable by the Participant and shall be exercisable only by the Participant. Section 14. Adjustments Upon Changes in Common Stock. In the event the Company shall effect a split of the Common Stock or declare a dividend payable in Common Stock, or in the event the outstanding Common Stock shall be combined into a smaller number of shares, the maximum number of shares as to which Options may be granted under the Plan shall be increased or decreased proportionately, and the Fair Market Value per share of Common Stock as of the date of grant of all outstanding Options shall be adjusted, for purposes of making the determination required by Section 8 of this Plan, in a manner deemed appropriate by the Board of Directors. In the event of a reclassification of Common Stock not covered by the foregoing, or in the event of a liquidation or reorganization of the Company, including a merger, consolidation or sale of assets, the Board of Directors shall make such adjustments, if any, as it may deem appropriate in the number, purchase price and kind of shares that are covered by Options theretofore granted under the Plan or that are otherwise subject to the Plan. The provisions of this Section shall only be applicable if, and only to the extent that, the application thereof does not conflict with any valid governmental statute, regulation or rule. Section 15. Amendment and Termination of the Plan. Subject to the right of the Board of Directors to terminate the Plan prior thereto, the Plan shall terminate when all or substantially all of the Common Stock reserved for purposes of the Plan has been purchased. No Options may be granted after termination of the Plan. The Board of Directors may alter or amend the Plan but may not without the approval of the shareholders of the Company and of any regulatory authorities having jurisdiction make any alteration or amendment thereof which operates (a) to increase the total number of shares of Common Stock which may be issued under the Plan (other than as provided in - 7 - Section 14), (b) to modify the criteria for determining the employees (or class of employees) eligible to receive Options under the Plan or (c) to materially increase benefits accruing under the Plan to Participants who are subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"). No termination or amendment of the Plan shall adversely affect the rights of a Participant under an outstanding Option, except with the consent of such Participant. Section 16. Requirements of Law. The granting of Options and the issuance of Common Stock upon the exercise of an Option shall be subject to all applicable laws, rules and regulations and to such approval by governmental agencies as may be required. Section 17. Effective Date of the Plan. The Plan shall become effective, as of the date of its adoption by the Board of Directors, if it is duly approved at the 1993 annual meeting of stockholders of the Company. The affirmative vote of the holders of at least a majority of the shares of stock of the Company present and voting on the approval of the Plan at the meeting, provided that the total number of shares voting for the proposal represents more than 50% of the total number of shares of stock entitled to vote at such annual meeting, shall be required to approve the Plan. If the Plan is not so approved, the Plan shall terminate, the unexercised portions of all Options granted hereunder shall be null and void and all shares of Common Stock theretofore issued upon the exercise of Options under the Plan shall be deemed cancelled. Certificates representing shares issued to Participants prior to shareholder approval of the Plan shall bear appropriate legends indicating that the shares have been issued contingent upon shareholder approval and are cancellable in the event such approval is not obtained. Upon such cancellation, Participants shall promptly deliver to the Company all certificates representing cancelled shares and the Company shall promptly return to the Participants, without interest, all funds obtained from such Participants through payroll deductions and used for the purchase of such shares. Section 18. Rule 16b-3 Compliance. Transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors adopted under the Exchange Act, some of which conditions are not set forth herein. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. - 8 - EX-10.68 4 RESIGNATION AGREEMENT EXHIBIT 10.68 RESIGNATION AGREEMENT AND FULL AND FINAL RELEASE Carrington Laboratories, Inc. ("Carrington") and Bill H. McAnalley ("McAnalley") hereby agree upon a compromise and full and final settlement of all issues and disputes between them on the terms set forth below: 1. Resignation. McAnalley hereby voluntarily resigns from his position of Senior Vice President of Research for Carrington effective February 24, 1995. 2. Salary and Benefits. In accordance with Carrington's existing policies, McAnalley has received or will receive the following pay and benefits regardless of whether he enters into this Agreement: (i) payment of McAnalley's regular base salary through February 24,1995, less all normal withholdings; (ii) payment for all accrued and unused vacation leave through February 24, 1995, less all normal withholdings; and (iii) payment of the stock portion of McAnalley's 1994 Management Incentive Compensation bonus. In addition, Carrington will settle promptly all authorized reimbursable business expenses, if any, when McAnalley has submitted appropriate documentation to Carrington. 3. Special Separation Benefits. In consideration of the General Release, Nondisparagement, and Confidentiality Obligations provisions of this Agreement, and contingent upon McAnalley's acceptance of the terms of this Agreement, Carrington offers to continue to employ McAnalley as an inactive employee at a salary of $6,250 per month, payable in accordance with its normal payroll practices and subject to normal withholdings, from February 25, 1995, until the earlier to occur of the following two dates: (i) the date McAnalley obtains Alternative Employment; or (ii) February 24, 1996 (the earlier date is hereinafter referred to as the "Employment Termination Date"). For the purposes of this Agreement, "Alternative Employment" means any arrangement whereby McAnalley agrees to provide services, whether as an employee, independent contractor, or otherwise, to any person or entity other than Carrington for remuneration if the arrangement either: (i) requires McAnalley to work at least thirty hours per week; or (ii) provides total compensation to McAnalley, including but not limited to wages, salaries, bonuses, and benefits, at a rate that is equal to or greater than $100,000 per year. The period from February 25, 1995, through the Employment Termination Date is hereinafter referred to as the "Inactive Period." In addition, should McAnalley secure Alternative Employment before February 24, 1996, Carrington will pay to McAnalley a bonus of $75,000, subject to normal withholdings. 4. Employee Benefit Plans. In consideration of the General Release, Nondisparagement, and Confidentiality Obligations provisions of this Agreement, and contingent upon McAnalley's acceptance of the terms of this Agreement, Carrington offers to continue McAnalley's eligibility to participate in any group insurance or stock purchase plans offered by Carrington, subject to the terms of each such plan and provided he timely pays any cost that he would be required as an employee to pay in connection therewith, until the Employment Termination Date. Unless earlier terminated in accordance with the terms of any such plan, McAnalley's participation in all such plans shall terminate on the Employment Termination Date, 1 except to the extent (if any) that he is entitled, and elects, to continue insurance coverage thereafter at his own expense pursuant to the Consolidated Omnibus Budget Reconciliation Act. 5. Special Consulting Benefits. In consideration of the General Release, Nondisparagement, and Confidentiality Obligations provisions of this Agreement, and contingent upon McAnalley's acceptance of the terms of this Agreement, if as of February 24, 1996, the Inactive Period has not ended by reason of McAnalley having obtained Alternative Employment, then Carrington offers to retain McAnalley as a consultant at a rate of pay of $6,250 per month from February 25, 1996, until the earlier to occur of the following two dates: (i) the date McAnalley obtains Alternative Employment; or (ii) February 24, 1999 (the earlier date is hereinafter referred to as the "Consulting Termination Date"). The period, if any, during which McAnalley is retained in such a consultant capacity is hereinafter referred to as the "Consulting Period." During the Consulting Period, McAnalley acknowledges and agrees that he will be acting as an independent contractor and that he will be responsible for any self-employment, social security, or other taxes required by law to be paid regarding the fees paid to him by Carrington. 6. Notification. McAnalley agrees to notify Carrington in writing immediately upon obtaining Alternative Employment. Except as expressly provided in this Agreement, McAnalley is not and will not be entitled to receive any other compensation or payment from Carrington by reason of or in connection with his employment with Carrington or the termination thereof. 7. Services. During the Inactive Period and, if any, the Consulting Period, McAnalley agrees to make himself available to Carrington from time to time, and to perform for Carrington upon reasonable request by Carrington, services (hereinafter referred to as the "Services"). The Services shall include such services as McAnalley performed for Carrington prior to McAnalley's resignation as Senior Vice President of Research. 8. Authority. Alter February 24, 1995, McAnalley has not been and will not be obligated or authorized, and has not held himself out and shall not hold himself out as being authorized, to make any representations, enter into any contracts, commitments, or obligations, or perform any other acts of any kind whatsoever on behalf of Carrington. McAnalley also has not been and will not be authorized to hold himself out as an agent or active employee of Carrington after February 24, 1995. 9. Stock Options. In consideration of McAnalley's agreement to all of the terms and conditions of this Agreement, Carrington hereby accelerates the maturity of all existing options heretofore granted him by Carrington to purchase shares of Carrington's common stock, so that all of such options, to the extent they have not already expired or been exercised, shall be exercisable in full from the Effective Date of this Agreement (as defined in Section 17 hereof) through the Employment Termination Date. McAnalley understands that all of such options will expire on the close of business on the 30th day following the Employment Termination Date, except to the extent that they are earlier exercised or terminated in accordance with their terms. If any of the options that expire because of the termination of McAnalley's employment with Carrington have exercise prices that are in excess of the closing price per share 2 of Carrington's common stock on the American Stock Exchange (the "Amex") or the NASDAQ National Market System ("NASDAQ"), as the case may be, on the date of expiration of such options (or, if such date is not a trading date on the Amex or NASDAQ, then on the trading date next following such expiration date [the applicable date being hereinafter called the "Issue Date"]), Carrington will issue to McAnalley, effective as of the Issue Date, a Common Stock Purchase Warrant (the "Warrant"), in substantially the form attached to this Agreement as Exhibit A, entitling him to purchase the same number of shares of Carrington's common stock that he was entitled to purchase under such options immediately prior to their expiration (the "Warrant Shares"), at an exercise price equal to the closing price per share of Carrington's common stock on the Amex or NASDAQ, as the case may be, on the Issue Date for a period of four years from the Issue Date. McAnalley understands and acknowledges that the Warrant and any Warrant Shares that he purchases upon exercise thereof have not been and will not be registered under any state or federal securities laws. McAnalley represents, warrants and agrees that if the Warrant is issued to him, he will acquire the Warrant and any Warrant Shares that he purchases upon exercise thereof for investment and without a view to the distribution thereof and will execute and deliver to Carrington, at the time of the issuance of the Warrant to him and upon each exercise of the Warrant, an investment letter satisfactory to Carrington. 10. General Release. McAnalley and his family members, heirs, successors, and assigns (hereinafter referred to collectively as the "Releasing Parties") hereby release, acquit, and forever discharge Carrington and its shareholders, officers, directors, Fiduciaries, agents, servants, employees, representatives, attorneys, insurers, successors, and assigns (hereinafter referred to collectively as the "Released Parties") from any and all claims, demands, and causes of action of every kind and character, whether vicarious, derivative, or direct, that any of the Releasing Parties now has or may hereafter have or assert against any or all of the Released Parties growing out of, resulting from, or connected in any way with McAnalley's employment or the termination of his employment with Carrington, including but not limited to any and all claims for damages (actual, exemplary, liquidated, or unliquidated), back pay, future pay, deferred compensation, bonuses, commissions, severance payments, vacation and leave benefits, unreimbursed business expenses, overtime compensation, reinstatement or priority placement, past and future medical or other employee benefits for McAnalley or his dependents, employee retirement benefits, contributions to company-sponsored 401(k) plans (except as presently vested in any savings plan sponsored by Carrington in which McAnalley is a participant), medical and counseling costs, injunctive relief, declaratory relief, attorney's fees, costs of court, disbursements, interest, or any other form whatsoever of legal or equitable relief to which any of the Releasing Parties claims or might claim entitlement as a result of any alleged act or omission of any of the Released Parties, including but not limited to any alleged unlawful age discrimination or any other form of unlawful employment discrimination, retaliation, wrongful termination, breach of contract (express or implied), tortious interference with contract, promissory estoppel, detrimental reliance, negligent or intentional infliction of emotional distress, negligent hiring and supervision, assault, battery, defamation of character, any alleged act of harassment or intimidation, negligent or intentional misrepresentation or fraud, invasion of privacy, or any other intentional or negligent tort, or any alleged violation of the Age Discrimination in Employment 3 Act of 1967, Title VII of the Civil Rights Act of 1964, the Texas Commission on Human Rights Act, the Americans With Disabilities Act, the Employee Retirement Income Security Act of 1974, the public policy of the United States, the State of Texas, or any other state, or any other federal or state statutory or common law, or any other alleged adverse employment action by any of the Released Parties, and all other loss, expense, or detriment of every kind and character, whether past or future, that any of the Releasing Parties may have sustained or may hereafter sustain by reason of any act or omission of any of the Released Parties growing out of, resulting from, or connected in any way with McAnalley's employment or the termination of his employment with Carrington. This general release does not apply to any rights or claims that may arise after the date this Agreement is executed by McAnalley. 11. Nondisparagement. McAnalley shall not make any statements, orally or in writing, or engage in any other acts that would directly or indirectly cause any harm or damage to Carrington or any of the other Released Parties, including, but not limited to, directly or indirectly, (i) making any derogatory statement whatsoever with regard to the validity or enforceability of any of the claims of any of Carrington's current patents or, more specifically, stating or representing to any person that any of Carrington's current patents, or any of the claims of any of Carrington's current patents, are invalid or unenforceable for any reason whatsoever; (ii) promoting, instigating, encouraging, cooperating, assisting, or participating in any way whatsoever in any claim or proceeding (judicial or administrative, including any proceeding in the United States Patent and Trademark Office) in any way contesting or challenging the enforceability or validity of any of the claims of any of the current Carrington patents for any reason whatsoever, including, but not limited to, any request for reissue or reexamination of any Carrington patent, in whole or in part; or (iii) claiming, challenging, or contesting in any way or manner whatsoever, either judicially or administratively (including, but not limited to, any request for reissue or reexamination of any Carrington patent in the United States Patent and Trademark Office), the validity or enforceability of any of the claims of any of the Carrington patents. 12. Confidentiality Obligations. McAnalley acknowledges and confirms all agreements and obligations, including the obligation of confidentiality, set forth in that certain Employee's Confidentiality and Invention Agreement by and between Carrington and McAnalley dated May 21,1991 (the "Confidentiality Agreement"). In addition, McAnalley agrees that the terms of this Agreement shall be and remain confidential, and shall not be disclosed by him to any person other than his spouse, attorney, and accountant or tax return preparer if such persons have agreed to keep such information confidential, and except as may be required by law or judicial process. 13. Effect of Breach. McAnalley acknowledges and agrees that should he or any of the other Releasing Parties breach any of their obligations set forth in this Agreement, (i) Carrington will have no further obligation to comply with its undertakings in Sections 3, 4, or 5 hereof, but that all of the other provisions of this Agreement shall remain in full force and effect; (ii) McAnalley may be required to repay any payments made to him and reimburse Carrington for any payments made on his behalf or for his benefit pursuant to Sections 3, 4, or 5 hereof; (iii) the Releasing Parties also may be liable for any of the Released Parties' damages caused by the breach, including without limitation their costs and attorney's fees incurred in defending claims brought in breach of this Agreement or bringing claims to enforce this Agreement; and (iv) 4 Carrington may terminate and cancel the Warrant, refuse to issue any shares upon any attempted exercise thereof, and require McAnalley to return to Carrington the Warrant and any and all shares previously issued to him upon his exercise thereof or, if any of such shares have been sold, the proceeds of sale thereof. 14. Effect and Use of Agreement. McAnalley agrees that this Agreement does not in any manner constitute an admission of liability or wrongdoing on the part of Carrington or any of the other Released Parties, but that Carrington expressly denies any such liability or wrongdoing and enters into this Agreement in compromise and settlement of a disputed claim for the sole purpose of avoiding trouble, litigation and expense. McAnalley further agrees that, except to the extent necessary to enforce this Agreement, neither this Agreement nor any part of it may be construed, used, or admitted into evidence in any judicial, administrative, or arbitral proceeding as an admission of any kind by Carrington or any of the other Released Parties. 15. Representation Regarding Certain Laws. McAnalley understands and acknowledges that various state and federal laws (including the Age Discrimination in Employment Act of 1967) prohibit discrimination in employment based on sex, race, age, color, national origin, religion, disability, citizenship and veteran status, and that the law also prohibits breach of contract (express or implied) and intentional or negligent tortious conduct. 16. Effective Period of Offer. Carrington's offer of the terms set forth in this Agreement will expire at midnight on the twenty-first day following the date of Carrington's execution of this Agreement, i.e., on March 17, 1995. McAnalley may accept this offer at any time before such expiration by executing this Agreement and returning it to Carrington. 17. Effective Date of Agreement. This Agreement will become effective and enforceable seven (7) days after McAnalley's execution and delivery to Carrington of this Agreement (the "Effective Date"). At any time before the Effective Date, McAnalley may revoke his acceptance of this Agreement. 18. Consultation With An Attorney. Carrington hereby advises McAnalley to consult an attorney before executing this Agreement. 19. Representation Regarding Meaning and Execution of the Agreement. McAnalley further acknowledges and represents that he has read this Agreement, that he has had the opportunity to have this Agreement read and explained to him by his attorney, that he fully understands the meaning and effect of his action in executing this Agreement, and that his execution of this Agreement is knowing and voluntary. 20. Miscellaneous. McAnalley and Carrington agree that this Agreement and the Confidentiality Agreement (a) contain and constitute the entire understanding and agreement between them regarding the subject matter hereof; (b) contain captions and definitions that are included only for convenience of reference and are not intended and shall not be construed to change the express provisions of this Agreement; (c) supersede and cancel any previous negotiations, agreements, commitments and writings regarding the subject matter of this 5 Agreement; (d) may not be released, discharged, abandoned, supplemented, changed or modified in any manner except by a writing of concurrent or subsequent date signed by both parties hereto; (e) are binding on and shall inure to the benefit of McAnalley, his heirs, successors and assigns, and Carrington and its successors and assigns, and that the terms of Section 10 hereof shall inure to the benefit of all of the Released Parties; and (f) shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States. McAnalley and Carrington further agree that (i) if any provision of this Agreement is held to be unenforceable, such provision shall be considered to be separate, distinct, and severable from the remaining provisions of this Agreement and shall not affect the validity or enforceability of such remaining provisions, all of which shall remain in full force and effect; and (ii) if any provision of this Agreement is held to be unenforceable as written but may be made to be enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. SIGNED on the dates shown below. CARRINGTON LABORATORIES, INC. Dated: February 24, 1995 By: Karl H. Meister -------------------------- President and CEO Dated: , 1995 --------------------------- -------------------------------------- Bill H. McAnalley 6 EXHIBIT A NOTICE: THE WARRANTS REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY JURISDICTION. THESE WARRANTS MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO THE EXPRESS PROVISIONS HEREOF. THE WARRANTS REPRESENTED BY THIS INSTRUMENT ARE SUBJECT TO CANCELLATION AND TERMINATION UNDER CERTAIN CIRCUMSTANCES PURSUANT TO A RESIGNATION AGREEMENT AND FULL AND FINAL RELEASE DATED ________________, 1995 BETWEEN THE COMPANY AND THE WARRANTHOLDER. Void after CARRINGTON LABORATORIES, INC. Common Stock Purchase Warrant CARRINGTON LABORATORIES, INC. (the "Company") hereby certifies that for valuable consideration, the receipt of which is hereby acknowledged, BILL H. McANALLEY (the "Warrantholder") is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time after ________________, 19____, and before 5:00 p.m. Dallas, Texas time on _________________________ (the "Expiration Date"), ______________________ (________) fully paid and non-assessable shares of Common Stock of the Company at the price of $________ per share (the "Purchase Price"); provided, however, that the Warrants represented by this instrument are subject to cancellation and termination under certain circumstances pursuant to a Resignation Agreement and Full and Final Release dated ________________, 1995 between the Company and the Warrantholder. As used herein, the following terms have the following respective meanings unless the context requires otherwise: (a) The term "Common Stock" includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall as a class, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency). (b) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (c) The term "Original Issue Date" means _______________________, the date as of which the Warrants were first issued. - 1 - (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 hereof or otherwise. (e) The term "Purchase Price" shall be the then applicable exercise price for one share of Common Stock hereunder. (f) The term "Securities Acts" means the Securities Act of 1933, as amended, and the securities or blue sky laws of any jurisdiction applicable to any exercise, transfer or surrender for exchange of the Warrants or of Common Stock (or Other Securities) previously issued upon exercise of the Warrants. (g) The term "Warrants" means the warrants represented by this instrument. 1. Sale or Exercise Without Registration. Subject to the provisions of Section 12 hereof, if, at the time of any exercise, transfer or surrender for exchange of any Warrants or of Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrants or Common Stock (or Other Securities) shall not be registered under the Securities Acts, the Company may require, as a condition of allowing such exercise, transfer or exchange, that (i) the holder or transferee of such Warrants or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Acts and (ii) the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company, provided that the disposition thereof shall at all times be within the control of such holder or transferee, as the case may be. The Warrantholder represents to the Company that he is acquiring the Warrants for investment and not with a view to the distribution thereof. 2. Exercise of Warrants. 2.1 Exercise in Full. Subject to the provisions hereof, the Warrants may be exercised in full by the holder hereof by surrender of this instrument, with the Warrant Exercise Form attached hereto duly executed by such holder, to the Company at its principal office in Dallas County, Texas, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this instrument (without giving effect to any adjustment therein) by the Purchase Price. 2.2 Partial Exercise. Subject to the provisions hereof, the Warrants may be exercised in part by surrender of this instrument in the manner and at the place provided in Subsection 2.1, except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect - 2 - to any adjustment therein) designated by the holder in the Warrant Exercise Form attached hereto by (b) the Purchase Price. Upon any such partial exercise, the Company will forthwith issue and deliver to the holder hereof a new Common Stock Purchase Warrant of like tenor, in the name of the holder hereof, calling in the aggregate on the face thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this instrument minus the number of such shares designated by the holder in the Warrant Exercise Form attached hereto. No fractional shares of Common Stock may be purchased upon exercise of any Warrants. 3. Delivery of Stock Certificates, Etc. on Exercise. As soon as practicable after the exercise of the Warrants in full or in part, the Company will cause to be issued in the name of and delivered to the holder hereof a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share, together with any other stock or Other Securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 4 hereof or otherwise. 4. Adjustment for Dividends in Other Stock, Property, Etc.; Reclassification, Etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or Other Securities or property (other than cash) by way of dividend, or (b) any cash paid or payable (including, without limitation, by way of dividend), except out of earned surplus of the Company, or (c) other or additional (or less) stock or Other Securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case, the holder of the Warrants, upon the exercise thereof as provided in Section 2 hereof, shall be entitled to receive the amount of stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) which such holder would hold on the date of such exercise if on the Original Issue Date such holder had been the holder of record of the number of shares of Common Stock called for on the face of this instrument and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Section 5 hereof. - 3 - 5. Reorganization, Consolidation, Merger, Etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this instrument, upon the exercise of the Warrants as provided in Section 2 hereof at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and Other Securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised the Warrants immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4 hereof. 6. Notices of Record Dates, Etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any Other Securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the holder of the Warrants a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified, unless the date so specified is officially established less than 20 days in advance of such date, in which case such notice shall be mailed not later than three (3) business days after such date is officially established. 7. Reservation of Stock, Etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the - 4 - Warrants, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants. 8. Listing on Securities Exchanges. If, at the time any of the Warrants are exercised, the Company's Common Stock or Other Securities then subject to such Warrants are listed on any national securities exchange and the shares issuable upon exercise of such Warrants have not already been so listed, the Company will, at its expense, promptly file an application to list on such exchange, subject to official notice of issuance, all shares of Common Stock or Other Securities, as the case may be, from time to time issuable upon the exercise of the Warrants, and will use its best efforts to cause such shares to be so listed as promptly as reasonably possible. In the event such a listing application must be filed following the exercise of any Warrants, the Company may postpone the issuance and delivery of the shares issuable in respect thereof until the listing of such shares has been completed. 9. Exchange of Warrants. Subject to the provisions of Section 12 hereof, upon surrender for exchange of this instrument, properly endorsed, to the Company, the Company at its own expense will issue and deliver to the holder thereof a new Common Stock Purchase Warrant of like tenor, in the name of such holder, calling in the aggregate on the face thereof for the number of shares of Common Stock that are subject to purchase upon exercise of the Warrants represented by this instrument. 10. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this instrument and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of this instrument, the Company at its expense will execute and deliver, in lieu thereof, a new Common Stock Purchase Warrant of like tenor. 11. Warrant Agent. The Company may, by written notice to the holder of the Warrants, appoint an agent having an office in Dallas County, Texas for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 2 hereof, exchanging instruments representing the Warrants pursuant to Section 9 hereof, and replacing instruments representing the Warrants pursuant to Section 10 hereof, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Restriction on Transfer, Etc. The Warrants and this instrument are issued upon the following terms, to all of which the holder or owner hereof by the taking hereof consents and agrees: (a) notwithstanding any term or provision hereof to the contrary, this instrument and the Warrants (and any instrument for which this instrument may be exchanged or replaced) may not be transferred or assigned except by will or pursuant to the laws of descent and distribution, and any such transfer or assignment by will or pursuant to the laws of descent and distribution shall be subject to the conditions set forth in Section 1 hereof; and - 5 - (b) until the Warrants are transferred on the books of the Company, the Company may treat the registered holder of this instrument as the absolute owner hereof and of the Warrants for all purposes, notwithstanding any notice to the contrary. 13. Notices, Etc. All notices and other communications from the Company to the holder of the Warrants shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of the Warrants who has so furnished an address to the Company. 14. Miscellaneous. This instrument and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. THIS INSTRUMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. The headings in this instrument are for purposes of reference only and shall not limit or otherwise affect any of the terms hereof. Dated: ____________________ CARRINGTON LABORATORIES, INC. By: ------------------------------ President - 6 - CARRINGTON LABORATORIES, INC. WARRANT EXERCISE FORM The undersigned, being the owner and holder of the attached Common Stock Purchase Warrant, hereby exercises the right to purchase _____________ shares of Common Stock of Carrington Laboratories, Inc., in accordance with the terms and conditions of such Common Stock Purchase Warrant, and herewith makes payment in full of the aggregate Purchase Price of such shares, in the amount of $______________. Please issue and deliver a certificate or certificates representing such shares, registered in the name of the undersigned, to the undersigned at the address set forth below. If the number of shares hereby purchased is not all of the shares purchasable under the attached Common Stock Purchase Warrant, please also issue and deliver to the undersigned, at the address set forth below, a new Common Stock Purchase Warrant of like tenor, registered in the name of the undersigned, covering the number of shares remaining purchasable under the attached Common Stock Purchase Warrant. Dated: ------------------------- Address: ------------------------------------ Signature - ------------------------------------ - ------------------------------------ ------------------------------------ Type or Print Name - ------------------------------------ - ------------------------------------ ------------------------------------ Social Security Number EX-10.69 5 REVISED/RESTATED RESIGNATION AGREEMENT EXHIBIT 10.69 REVISED AND RESTATED RESIGNATION AGREEMENT This Revised and Restated Resignation Agreement (this "Agreement") is made by and between CARRINGTON LABORATORIES, INC., a Texas corporation ("Carrington"), and KARL H. MEISTER ("Meister") for the purpose of changing the employment relationship between the parties in accordance with the terms set forth below: 1. Resignation; Termination of Employment Agreement. Effective as of the Effective Date, as defined in Section 16 hereof, (a) Meister hereby voluntarily resigns from his positions of Director, President and Chief Executive Officer of Carrington and from all director and officer positions that he currently holds with Carrington's subsidiary corporations, and (b) the existing Employment Agreement dated December 12, 1990 between Carrington and Meister and the Amendment thereto dated February 24, 1993 (collectively, the "Employment Agreement") is hereby terminated in its entirety, except that Sections 27 and 29 thereof shall survive such termination and shall continue in full force and effect. 2. Continuation and Term of Employment. After the Effective Date, Meister shall continue to be an employee of Carrington for the term hereinafter set forth but shall be on inactive status, subject to Section 5 hereof. The term of Meister's employment with Carrington shall terminate effective upon the earliest to occur of the following dates (the "Employment Termination Date"): (a) the date of his death; (b) the date on which he gives written notice to Carrington of his election to terminate such employment; (c) the date on which Carrington's Board of Directors elects to terminate Meister's employment for Cause, as hereinafter defined; or (d) December 11, 1998. As used in this Agreement, the term "Cause" shall mean (a) any act by Meister that is, in the good faith opinion of Carrington's Board of Directors, adverse to the best interests of Carrington, or (b) the breach by Meister of any of his obligations under (i) this Agreement, (ii) the Confidentiality Agreement referred to in Section 11 hereof or (iii) Section 27 of the Employment Agreement. 3. Compensation. (a) Through the Effective Date, Carrington will continue to pay Meister all salary and benefits to which he is entitled under the Employment Agreement and in accordance with the terms thereof. If the portion of the incentive compensation bonus that is payable to Meister in shares of Carrington's Common Stock for 1994 shall not have been paid to him by the Effective Date, Carrington shall deliver such shares to him as promptly as possible after the Effective Date. (b) During the period from the Effective Date through December 11, 1995, Carrington shall pay Meister a salary at the rate of $260,000 per year, payable in accordance with its normal payroll practices and subject to applicable withholdings. (c) During the period from and after December 11, 1995 to the Employment Termination Date, Carrington shall pay Meister a base salary of $1.00 per year, payable in - 1 - full, annually, on the next regular payroll payment date after December 11 of each year during the term of his employment with Carrington. If, during the period from December 11, 1995 to the Employment Termination Date, Meister performs any Services (as defined in Section 5 hereof) at Carrington's request, Carrington shall pay Meister additional compensation at the rate of $1,000 per day for such Services, which compensation shall be payable in accordance with Carrington's normal payroll practices and subject to applicable withholdings. (d) Carrington shall reimburse Meister for all properly reimbursable business expenses incurred by Meister prior to the Effective Date promptly after Meister timely submits a proper expense report and supporting documentation to Carrington. Carrington will reimburse Meister for business expenses incurred by Meister after the Effective Date only if (i) Meister obtains advance written authorization from the President or a Vice President of Carrington to incur such expenses and (ii) Meister timely submits a proper expense report and supporting documentation to Carrington. (e) Except as expressly provided in this Agreement, Meister is not and will not be entitled to receive any other compensation or payment from Carrington by reason of or in connection with his employment with Carrington or the termination thereof. 4. Employee Benefit Plans. Meister may continue to participate in any group insurance, 401(k) or stock purchase plans offered by Carrington, subject to the terms of each such plan and provided he timely pays any cost that he would normally be required to pay in connection therewith, until the earliest of (a) December 11, 1995, (b) the Employment Termination Date, or (c) the date on which Meister obtains Other Employment, as that term is hereinafter defined (the earliest of such dates being hereinafter called the "Benefits Termination Date"). Unless earlier terminated in accordance with the terms of any such plan, Meister's participation in all such plans shall terminate on the Benefits Termination Date, except to the extent (if any) that he is entitled, and elects, to continue insurance coverage thereafter at his own expense pursuant to the Consolidated Omnibus Budget Reconciliation Act. As used in this Agreement, the term "Other Employment" means any arrangement whereby Meister agrees to provide services, whether as an employee, independent contractor, or otherwise, to any person, group or entity other than Carrington or any of its subsidiary corporations for remuneration if the arrangement either (i) requires Meister to work at least thirty hours per week, or (ii) calls for Meister to receive total compensation, including but not limited to wages, salaries, bonuses, and benefits, at a rate that is equal to or greater than $100,000 per year. Meister shall notify Carrington in writing immediately upon obtaining Other Employment. 5. Services. During the period from the Effective Date to the Employment Termination Date, Meister shall, upon reasonable request by Carrington from time to time, perform for Carrington, or one or more of its subsidiary corporations, services of the same general nature as he performed for Carrington prior to his resignation as its President and Chief Executive Officer ("Services"). Notwithstanding the foregoing, however, after Meister obtains Other Employment, he shall not be required to perform Services for more than eight hours in any calendar month. - 2 - 6. Authority. After the Effective Date, (a) Meister will not be, and shall not hold himself out as being, a director, officer or active employee of Carrington or any of its subsidiary corporations, and (b) Meister will not be obligated or authorized, and shall not hold himself out as being authorized, to make any representations, enter into any contracts, commitments, or obligations, or perform any other acts of any kind whatsoever on behalf of Carrington or any of its subsidiary corporations. 7. Stock Options. In consideration of Meister's agreement to all of the terms and conditions of this Agreement, Carrington hereby accelerates the maturity of all existing options heretofore granted to him by Carrington to purchase shares of Carrington's common stock, effective as of the Effective Date, so that all of such options, to the extent they have not then already expired or been exercised, shall be exercisable in full from the Effective Date through the earlier of the Employment Termination Date or the respective dates on which such options expire or terminate in accordance with their respective terms. Meister understands that all of such options will expire at the close of business on the 30th day following the Employment Termination Date, unless they are earlier exercised or terminated or they earlier expire in accordance with their terms, or unless the period for their exercise is extended in accordance with their respective terms due to the termination of Meister's employment with Carrington by reason of his death or disability. 8. General Release. Meister and his family members, heirs, successors, and assigns (hereinafter referred to collectively as the "Releasing Parties") hereby release, acquit, and forever discharge Carrington and its shareholders, directors, officers, fiduciaries, agents, servants, employees, representatives, attorneys, insurers, successors, and assigns (hereinafter referred to collectively as the "Released Parties") from any and all claims, demands, and causes of action of every kind and character, whether vicarious, derivative, or direct, that any of the Releasing Parties now has or may hereafter have or assert against any or all of the Released Parties growing out of, resulting from, or connected in any way with Meister's employment or the termination of his active or inactive employment with Carrington, including but not limited to any and all claims for damages (actual, exemplary, liquidated, or unliquidated), back pay, future pay, deferred compensation, bonuses, commissions, severance payments, vacation and leave benefits, unreimbursed business expenses, overtime compensation, reinstatement or priority placement, past and future medical or other employee benefits for Meister or his dependents, employee retirement benefits, contributions to company-sponsored 401(k) plans (except as presently vested in any savings plan sponsored by Carrington in which Meister is a participant), medical and counseling costs, injunctive relief, declaratory relief, attorney's fees, costs of court, disbursements, interest, or any other form whatsoever of legal or equitable relief to which any of the Releasing Parties claims or might claim entitlement as a result of any alleged act or omission of any of the Released Parties, including but not limited to any alleged unlawful age discrimination or any other form of unlawful employment discrimination, retaliation, wrongful termination, breach of contract (express or implied), tortious interference with contract, promissory estoppel, detrimental reliance, negligent or intentional infliction of emotional distress, negligent hiring and supervision, assault, battery, defamation of character, any alleged act of harassment or intimidation, negligent or intentional misrepresentation or fraud, invasion of privacy, or any other intentional or negligent tort, or any alleged violation of the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the - 3 - Texas Commission on Human Rights Act, the Americans With Disabilities Act, the Employee Retirement Income Security Act of 1974, the public policy of the United States, the State of Texas, or any other state, or any other federal or state statutory or common law, or any other alleged adverse employment action by any of the Released Parties, and all other loss, expense, or detriment of every kind and character, whether past or future, that any of the Releasing Parties may have sustained or may hereafter sustain by reason of any act or omission of any of the Released Parties growing out of, resulting from, or connected in any way with Meister's employment or the termination of his active or inactive employment with Carrington. IT IS THE EXPRESS INTENTION AND AGREEMENT OF THE PARTIES THAT THE FOREGOING PROVISIONS OF THIS SECTION 8 RELEASE THE RELEASED PARTIES FROM ANY AND ALL LIABILITY FOR THEIR OWN NEGLIGENCE. This general release does not apply to any rights or claims that may arise after the date this Agreement is executed by Meister. 9. Indemnification. (a) To the extent permitted by applicable law, Carrington (i) shall indemnify and hold harmless Meister from and against any losses, damages and liabilities that he may suffer or incur as a result of any claims, actions or proceedings made or brought against him arising out of or based upon any matters being investigated by the U. S. Attorney's Office in Philadelphia, Pennsylvania, on behalf of the U. S. Department of Health and Human Services, involving Carrington or any of its present or former employees, and (ii) shall reimburse Meister for any reasonable legal and other expenses reasonably incurred by him in defending and investigating any such claim, action or proceeding. (A claim, action or proceeding of the nature described in the immediately preceding sentence is hereinafter called an "Action.") (b) Notwithstanding the provisions of Section 9(a) hereof, Carrington shall not be obligated to indemnify and hold harmless Meister against any losses, damages or liabilities resulting from, or to reimburse him for any expenses incurred in connection with, any Action in which he is found liable for willful or intentional misconduct in the performance of his duties to Carrington, or if and to the extent that it is determined by a court of competent jurisdiction or in good faith by Carrington's Board of Directors that such Action or any loss, damage, liability or expense suffered or incurred by Meister in connection therewith resulted from (i) a breach by Meister of his duty of loyalty to Carrington or its shareholders, (ii) an act or omission of Meister that was not in good faith or that involved intentional misconduct or a knowing violation of the law, (iii) a transaction from which Meister received an improper benefit, whether or not the benefit resulted from an action taken by him within the scope of his positions with Carrington, (iv) an act or omission by Meister for which the liability of a director or officer of a corporation is expressly provided for by statute, (v) an act or omission by Meister that he did not reasonably believe (in the case of conduct in his official capacity as a director of Carrington) was in Carrington's best interest or (in all other cases) was not opposed to Carrington's best interests, or (vi) in the case of a criminal proceeding, an act or omission by Meister that he had reasonable cause to believe was unlawful. - 4 - (c) Promptly after the receipt by Meister of notice of the commencement of any Action against him, he shall, if he intends to make a claim in respect thereof for indemnification under this Section 9, notify Carrington in writing of the commencement of such Action. The failure of Meister so to notify Carrington, if prejudicial to Carrington's ability to defend such Action, shall relieve Carrington of any liability to Meister under this Section 9 with respect to such Action and any loss, damage, liability or expense arising therefrom or incurred in connection therewith, but such failure shall not relieve Carrington from any other liability that it may have to Meister under this Section 9 or otherwise. (d) If any such Action is asserted or brought against Meister, Carrington shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to Meister. After notice from Carrington to Meister of its election to assume the defense of such Action, Carrington shall not be liable to Meister under this Section 9 for any legal or other expenses subsequently incurred by Meister in connection with the defense of such Action. Meister shall have the right to employ separate counsel in any such Action and to participate in the defense thereof, but Carrington shall not be liable for the fees and expenses of such counsel if Carrington has assumed the defense of such Action with counsel reasonably satisfactory to Meister. (e) Carrington shall not be liable for any settlement of any Action effected without its written consent, which shall not be unreasonably withheld. If an Action to which this Section 9 is applicable is settled with the written consent of Carrington, or if a final judgment is rendered against Meister in any such Action, Carrington shall indemnify and hold harmless Meister from and against such settlement or judgment as provided in this Section 9. (f) In addition to the indemnification provided for by subsections (a) through (e) of this Section 9, Carrington shall at all times indemnify Meister in accordance with the provisions of Article Nine of Carrington's Bylaws, as in effect at the Effective Date. A copy of such Bylaws is attached as Exhibit A to this Agreement. 10. Nondisparagement. Meister shall not make any statements, orally or in writing, or engage in any other acts that would directly or indirectly cause any harm or damage to Carrington or any of the other Released Parties. Likewise, Carrington shall not make any statements, orally or in writing, or engage in any other acts that would directly or indirectly cause any harm or damage to Meister. 11. Confidentiality Obligations. Meister acknowledges and confirms all agreements and obligations, including the obligation of confidentiality, set forth in that certain Employee's Confidentiality and Invention Agreement dated May 21, 1991 between Carrington and Meister (the "Confidentiality Agreement"). In addition, Meister agrees that the terms of this Agreement shall be and remain confidential, and shall not be disclosed by him to any person other than his spouse, attorney, and accountant or tax return preparer if such persons have agreed to keep such information confidential, and except as may be required by law or judicial process. - 5 - 12. Noncompetition. Meister agrees that, during the period from the Effective Date through December 11, 1998, he will not, directly or indirectly, for his own account or for the benefit of any other person, anywhere throughout the United States, engage in any activity comparable to the activities he has performed or had ultimate supervisory responsibility for and control over in his capacity as the President and Chief Executive Officer of Carrington on behalf of any firm, person, corporation or enterprise that is now or hereafter becomes engaged in the business of developing, manufacturing or selling products for the management of wounds and products based on aloe vera that are in direct competition with those developed, manufactured or sold by Carrington or its subsidiary corporations. Meister acknowledges that in his role as President and Chief Executive Officer of Carrington he has performed or had ultimate supervisory responsibility for and control over all research and development, manufacturing and operations, business development, and marketing and sales activities of Carrington and its subsidiary corporations, both domestically (within and throughout the United States) and internationally. Carrington acknowledges that this Section 12 is intended only to restrain competitive activity by Meister to the extent necessary to protect Carrington's goodwill or other business interests. 13. Effect of Breach. Meister acknowledges and agrees that should he or any of the other Releasing Parties materially breach any of their obligations set forth in this Agreement, (a) Carrington will have no further obligation to comply with its undertakings in Sections 2, 3(b), 3(c), 4, and 9 hereof, but all of the other provisions of this Agreement shall remain in full force and effect; (b) Meister may be required to repay any payments made to him and reimburse Carrington for any payments made on his behalf or for his benefit pursuant to Sections 3(b), 3(c), 4, and 9 hereof; (c) Meister and the other Releasing Parties shall also pay and be responsible for the Released Parties' damages caused by the breach, including without limitation their costs and attorney's fees incurred in (i) defending claims brought in breach of this Agreement or (ii) successfully bringing claims to enforce this Agreement; and (d) Carrington may terminate and cancel any or all of the stock options referred to in Section 7 hereof. Carrington shall pay and be responsible for all legal fees and expenses incurred by Meister as a result of Carrington's materially breaching any of its obligations under this Agreement or as a result of Carrington's unsuccessfully contesting the validity or enforceability of this Agreement. 14. Representation Regarding Certain Laws. Meister understands and acknowledges that various state and federal laws (including the Age Discrimination in Employment Act of 1967) prohibit discrimination in employment based on sex, race, age, color, national origin, religion, disability, citizenship and veteran status, and that the law also prohibits breach of contract (express or implied) and intentional or negligent tortious conduct. 15. Effective Period of Offer. Carrington's offer of the terms set forth in this Agreement will expire at midnight on the twenty-first day following the date of Carrington's execution of this Agreement, i.e., on April 4, 1995. Meister may accept this offer at any time before such expiration by executing this Agreement and returning it to Carrington. - 6 - 16. Effective Date of Agreement. This Agreement will become effective and enforceable seven (7) days after Meister's execution and delivery to Carrington of this Agreement (the "Effective Date"). At any time before the Effective Date, Meister may revoke his acceptance of this Agreement. 17. Consultation With An Attorney. Carrington hereby advises Meister to consult an attorney before executing this Agreement. 18. Representation Regarding Meaning and Execution of Agreement. Meister further acknowledges and represents that he has read this Agreement, that he has had the opportunity to have this Agreement read and explained to him by his attorney, that he fully understands the meaning and effect of his action in executing this Agreement, and that his execution of this Agreement is knowing and voluntary. 19. Notices. All notices required or permitted to be given hereunder shall be in writing and shall be deemed given when delivered to the addressee in person, sent to the addressee by telefacsimile transmission to the telephone number at which the addressee normally receives telefacsimile communications, or deposited in the United States mail, postage prepaid, certified or registered mail, return receipt requested, addressed to the appropriate party at the address set forth opposite such party's name below, or at such other address as such party shall have theretofore designated by written notice given to the other party in accordance with this section: Carrington: Carrington Laboratories, Inc. 2001 Walnut Hill Lane Irving, Texas 75038 Attention: Chief Executive Officer Meister: Mr. Karl H. Meister P. O. Box 601 New Vernon, New Jersey 07976 20. Miscellaneous. Meister and Carrington agree that this Agreement, the Confidentiality Agreement and Sections 27 and 29 of the Employment Agreement (all of which are hereinafter collectively called the "Final Agreement") (a) contain and constitute the entire understanding and agreement between them regarding the subject matter hereof; (b) contain captions and definitions that are included only for convenience of reference and are not intended and shall not be construed to change the express provisions of the Final Agreement; (c) supersede and cancel any previous negotiations, agreements, commitments and writings regarding the subject matter of the Final Agreement; (d) may not be released, discharged, abandoned, supplemented, changed or modified in any manner except by a writing of concurrent or subsequent date signed by both parties hereto; (e) are binding on and shall inure to the benefit of Meister, his heirs, successors and assigns, and Carrington and its successors and assigns, and that the terms of Section 8 hereof shall inure to the benefit of and be enforceable by all of the Released Parties; and (f) shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States. - 7 - Meister and Carrington further agree that (i) if any provision of this Agreement is held to be unenforceable, such provision shall be considered to be separate, distinct, and severable from the remaining provisions of this Agreement and shall not affect the validity or enforceability of such remaining provisions, all of which shall remain in full force and effect; and (ii) if any provision of this Agreement is held to be unenforceable as written but may be made to be enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. SIGNED on the dates shown below. CARRINGTON LABORATORIES, INC. Dated: March 14, 1995 By: -------------------------------------- Selvi Vescovi, Chairman of the Board Dated: March 14, 1995 ------------------------------------------ KARL H. MEISTER - 8 - EX-10.70 6 COMMON STOCK PURCHASE WARRANT EXHIBIT 10.70 NOTICE: THE WARRANTS REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY JURISDICTION. THESE WARRANTS MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO THE EXPRESS PROVISIONS HEREOF. Void after May 4, 1999 CARRINGTON LABORATORIES, INC. Common Stock Purchase Warrant CARRINGTON LABORATORIES, INC. (the "Company") hereby certifies that for valuable consideration, the receipt of which is hereby acknowledged, CLIFFORD T. KALISTA (the "Warrantholder") is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time after August 4, 1995, and before 5:00 p.m. Dallas, Texas time on May 4, 1999 (the "Expiration Date"), Twenty Thousand (20,000) fully paid and non-assessable shares of Common Stock of the Company at the price of $16.00 per share (the "Purchase Price"). As used herein, the following terms have the following respective meanings unless the context requires otherwise: (a) The term "Common Stock" includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall as a class, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency). (b) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. (c) The term "Original Issue Date" means May 5, 1995, the date as of which the Warrants were first issued. (d) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 5 hereof or otherwise. - 1 - (e) The term "Purchase Price" shall be the then applicable exercise price for one share of Common Stock hereunder. (f) The term "Securities Acts" means the Securities Act of 1933, as amended, and the securities or blue sky laws of any jurisdiction applicable to any exercise, transfer or surrender for exchange of the Warrants or of Common Stock (or Other Securities) previously issued upon exercise of the Warrants. (g) The term "Warrants" means the warrants represented by this instrument. 1. Sale or Exercise Without Registration. Subject to the provisions of Section 12 hereof, if, at the time of any exercise, transfer or surrender for exchange of any Warrants or of Common Stock (or Other Securities) previously issued upon the exercise of Warrants, such Warrants or Common Stock (or Other Securities) shall not be registered under the Securities Acts, the Company may require, as a condition of allowing such exercise, transfer or exchange, that (i) the holder or transferee of such Warrants or Common Stock (or Other Securities), as the case may be, furnish to the Company a satisfactory opinion of counsel to the effect that such exercise, transfer or exchange may be made without registration under the Securities Acts and (ii) the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company, provided that the disposition thereof shall at all times be within the control of such holder or transferee, as the case may be. The Warrantholder represents to the Company that he is acquiring the Warrants for investment and not with a view to the distribution thereof. 2. Exercise of Warrants. 2.1 Exercise in Full. Subject to the provisions hereof, the Warrants may be exercised in full by the holder hereof by surrender of this instrument, with the Warrant Exercise Form attached hereto duly executed by such holder, to the Company at its principal office in Dallas County, Texas, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock called for on the face of this instrument (without giving effect to any adjustment therein) by the Purchase Price. 2.2 Partial Exercise. Subject to the provisions hereof, the Warrants may be exercised in part by surrender of this instrument in the manner and at the place provided in Subsection 2.1, except that the amount payable by the holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment therein) designated by the holder in the Warrant Exercise Form attached hereto by (b) the Purchase Price. Upon any such partial exercise, the Company will forthwith issue and deliver to the holder hereof a new Common Stock Purchase Warrant of like tenor, in the name of the holder hereof, calling in the aggregate on the face thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this instrument minus the number of such shares designated by the holder in the Warrant Exercise Form attached hereto. No fractional shares of Common Stock may be purchased upon exercise of any Warrants. - 2 - 3. Delivery of Stock Certificates, Etc. on Exercise. As soon as practicable after the exercise of the Warrants in full or in part, the Company will cause to be issued in the name of and delivered to the holder hereof a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current market value of one full share, together with any other stock or Other Securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 4 hereof or otherwise. 4. Adjustment for Dividends in Other Stock, Property, Etc.; Reclassification, Etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or Other Securities or property (other than cash) by way of dividend, or (b) any cash paid or payable (including, without limitation, by way of dividend), except out of earned surplus of the Company, or (c) other or additional (or less) stock or Other Securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, then, and in each such case, the holder of the Warrants, upon the exercise thereof as provided in Section 2 hereof, shall be entitled to receive the amount of stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) which such holder would hold on the date of such exercise if on the Original Issue Date such holder had been the holder of record of the number of shares of Common Stock called for on the face of this instrument and had thereafter, during the period from the Original Issue Date to and including the date of such exercise, retained such shares and all such other or additional (or less) stock and Other Securities and property (including cash in the cases referred to in Subsections (b) and (c) of this Section 4) receivable by him as aforesaid during such period, giving effect to all adjustments called for during such period by Section 5 hereof. 5. Reorganization, Consolidation, Merger, Etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this instrument, upon the exercise of the Warrants as provided in Section 2 hereof at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Common Stock (or Other Securities) issuable upon such exercise prior to such consummation or such effective date, the stock and Other Securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such - 3 - dissolution, as the case may be, if such holder had so exercised the Warrants immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4 hereof. 6. Notices of Record Dates, Etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any Other Securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the holder of the Warrants a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty (20) days prior to the date therein specified, unless the date so specified is officially established less than 20 days in advance of such date, in which case such notice shall be mailed not later than three (3) business days after such date is officially established. 7. Reservation of Stock, Etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants. 8. Listing on Securities Exchanges. If, at the time any of the Warrants are exercised, the Company's Common Stock or Other Securities then subject to such Warrants are listed on any national securities exchange and the shares issuable upon exercise of such Warrants have not already been so listed, the Company will, at its expense, promptly file an application to list on such exchange, subject to official notice of issuance, all shares of Common Stock or Other Securities, as the case may be, from time to time issuable upon the exercise of the Warrants, and will use its best efforts to cause such shares to be so listed as promptly as reasonably possible. In the event such a listing application must be filed following the exercise of any Warrants, the Company may postpone - 4 - the issuance and delivery of the shares issuable in respect thereof until the listing of such shares has been completed. 9. Exchange of Warrants. Subject to the provisions of Section 12 hereof, upon surrender for exchange of this instrument, properly endorsed, to the Company, the Company at its own expense will issue and deliver to the holder thereof a new Common Stock Purchase Warrant of like tenor, in the name of such holder, calling in the aggregate on the face thereof for the number of shares of Common Stock that are subject to purchase upon exercise of the Warrants represented by this instrument. 10. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this instrument and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of this instrument, the Company at its expense will execute and deliver, in lieu thereof, a new Common Stock Purchase Warrant of like tenor. 11. Warrant Agent. The Company may, by written notice to the holder of the Warrants, appoint an agent having an office in Dallas County, Texas for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 2 hereof, exchanging instruments representing the Warrants pursuant to Section 9 hereof, and replacing instruments representing the Warrants pursuant to Section 10 hereof, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Restriction on Transfer, Etc. The Warrants and this instrument are issued upon the following terms, to all of which the holder or owner hereof by the taking hereof consents and agrees: (a) notwithstanding any term or provision hereof to the contrary, this instrument and the Warrants (and any instrument for which this instrument may be exchanged or replaced) may not be transferred or assigned except by will or pursuant to the laws of descent and distribution, and any such transfer or assignment by will or pursuant to the laws of descent and distribution shall be subject to the conditions set forth in Section 1 hereof; and (b) until the Warrants are transferred on the books of the Company, the Company may treat the registered holder of this instrument as the absolute owner hereof and of the Warrants for all purposes, notwithstanding any notice to the contrary. 13. Notices, Etc. All notices and other communications from the Company to the holder of the Warrants shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder, or, until an address is so furnished, to and at the address of the last holder of the Warrants who has so furnished an address to the Company. - 5 - 14. Miscellaneous. This instrument and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. THIS INSTRUMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. The headings in this instrument are for purposes of reference only and shall not limit or otherwise affect any of the terms hereof. Dated: May 5, 1995 CARRINGTON LABORATORIES, INC. By: ------------------------------------------- Carlton E. Turner, Ph.D., D.Sc. President and Chief Executive Officer - 6 - CARRINGTON LABORATORIES, INC. WARRANT EXERCISE FORM The undersigned, being the owner and holder of the attached Common Stock Purchase Warrant, hereby exercises the right to purchase _____________ shares of Common Stock of Carrington Laboratories, Inc., in accordance with the terms and conditions of such Common Stock Purchase Warrant, and herewith makes payment in full of the aggregate Purchase Price of such shares, in the amount of $______________. Please issue and deliver a certificate or certificates representing such shares, registered in the name of the undersigned, to the undersigned at the address set forth below. If the number of shares hereby purchased is not all of the shares purchasable under the attached Common Stock Purchase Warrant, please also issue and deliver to the undersigned, at the address set forth below, a new Common Stock Purchase Warrant of like tenor, registered in the name of the undersigned, covering the number of shares remaining purchasable under the attached Common Stock Purchase Warrant. Dated: ---------------------------------- Address: ------------------------------------ Signature - ------------------------------------ - ------------------------------------ ------------------------------------ Type or Print Name - ------------------------------------ - ------------------------------------ ------------------------------------ Social Security Number - 7 - EX-10.71 7 CARRINGTON CONSULTING AGREEMENT EXHIBIT 10.71 CARRINGTON, INC. CONSULTING AGREEMENT This Consulting Agreement is made as of May 5, 1995, by and between Carrington, Inc., a Texas corporation (the "Company"), and Clifford T. Kalista ("Consultant"). It is agreed as follows: 1. EFFECTIVE DATE. The effective date of this Agreement shall be May 5, 1995. It shall last for a term of three (3) months from the effective date unless terminated pursuant to the terms hereof. 2. EMPLOYMENT OF CONSULTANT. Subject to the terms and conditions of this Agreement, the Company hereby employs Consultant as an independent contractor, to consult with and advise the Company with respect to general healthcare and managed care policies, directions, strategies and financing alternatives. 3. PRINCIPAL DUTIES. During the three (3) month term of this Agreement, Consultant shall at all times use his best efforts to consult with and advise the Company with respect to the foregoing matters. Such work shall be conducted at the facilities of the Company, or as the parties agree. 4. COMPENSATION. (a) As compensation for all of the services and covenants to be performed by Consultant hereunder, the Company shall grant and issue to Consultant a nontransferable Common Stock Purchase Warrant (the "Warrant") entitling Consultant to purchase 20,000 shares of the Company's Common Stock at a purchase price of $16.00 per share (being the closing price of the Company's Common Stock on the NASDAQ on the date of this Agreement) during the period from August 5, 1995 through May 4, 1999. The Warrant shall be substantially the same in form and substance as the form of Common Stock Purchase Warrant attached to this Agreement as Exhibit A. (b) If this Agreement shall terminate prior to May 3, 1995 due to Consultant's death, disability, or material breach of this Agreement, (i) the number of shares of the Company's Common Stock that Consultant is entitled to purchase pursuant to the Warrant shall be reduced to a number that bears the same ratio to 20,000 as the number of days between and including the date of this 1 Agreement and the date of termination of the Agreement bears to 91, and (ii) Consultant shall promptly surrender the Warrant to the Company in exchange for a new Warrant entitling him to purchase such reduced number of shares. 5. OWNERSHIP OF WORK PRODUCT. The Company and Consultant agree that the work product of Consultant in performance of services required by this Agreement, including, without limitation, reports, information, data, documents, marketing plans, marketing information, brochures, market studies and press materials, shall be the exclusive property of the Company and shall be deemed a "work for hire." No work product of Consultant shall be deemed to fall within any other classification which would result in ownership rights of any description concerning such materials vesting in Consultant. In the event any ownership rights in Consultant's work product are deemed to vest in Consultant, Consultant hereby assigns all such rights to the Company. Consultant agrees that any materials produced by Consultant in the course of performing services under this Agreement shall not be the subject of an application for copyright, perfection of copyright or patent by or on behalf of Consultant and that Consultant shall cooperate with the Company in any application for copyright or patent it deems appropriate concerning any materials produced pursuant to this Agreement. 6. OTHER ACTIVITIES; CONFLICTS. a) Consultant may engage in any other activities during the term of this Agreement so long as such activities or services do not prevent or limit Consultant from performing the tasks assigned hereunder in a reasonably diligent fashion. b) Consultant represents and agrees that: (1) Consultant will not disclose to the Company any information which may be deemed to be confidential or proprietary to any other party for which Consultant may have rendered any services or otherwise obtained; (2) Consultant is not a party to any agreement or arrangements which prohibit Consultant from performing the services hereunder; (3) Consultant does not believe that the services to be rendered to the Company hereunder will conflict with any obligations which Consultant has or may have had to any party for whom Consultant has performed services or otherwise; and (4) In the event that any task requested to be performed by Consultant hereunder will result in any conflict with the representations contained in this subparagraph (b), Consultant shall immediately so advise the Company, in which case Consultant shall not be obligated to and shall not perform such conflicting services. 2 (5) Consultant is an accredited investor as that term is defined and used in accordance with the Federal Securities Laws and will execute and deliver to the Company an investment letter, satisfactory in form and substance to the Company, with respect to the Warrant and any shares of the Company's Common Stock purchased by him upon exercise thereof. 7. TERM AND SURVIVAL. This Agreement shall be effective as of the effective date referred to in paragraph 1 above, and shall continue for a period of three (3) months unless (a) Consultant dies, in which case this Agreement shall automatically terminate, or (b) Consultant is unable, or fails or refuses, to perform services requested of him of the Company hereunder for a period of thirty (30) days or more, in which case the Company may terminate this Agreement by giving written notice of termination to Consultant. The provisions of Section 4(b), 5 and 9 of this Agreement shall survive the expiration or termination of this Agreement. 8. INDEPENDENT CONTRACTOR. In performing services under this Agreement, Consultant shall be and act as an independent contractor and shall be subject to the Company's direction only as to specific areas of the Company's interests with respect to which the Company desires the benefit of Consultant's services and advice. 9. CONFIDENTIAL INFORMATION. Consultant shall hold any Company information (and any information of a customer of the Company) which he obtains in the performance of this Agreement in confidence and shall not, except as required in the conduct of the Company's business or as authorized in advance, in writing, by the Company, publish or disclose, or authorize anyone else to publish, disclose or make use of, any such information unless and until such information shall have ceased to be confidential or proprietary, as evidenced by general public knowledge through no fault of Consultant. 10. COMMITMENTS. Consultant agrees that Consultant will make no commitments on behalf of the Company without specific prior written authorization by the Company. Consultant further agrees to indemnify and hold the Company harmless from any and all injury, loss or damage suffered by virtue of any unauthorized commitment made by Consultant. 11. SUPERSEDES OTHER CONTRACTS. This Agreement supersedes all prior agreements and understandings between Consultant and the Company regarding the subject matter hereof. 3 12. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Texas. 13. NOTICES. All notices required or permitted to be given by either party to the other pursuant to this Agreement shall be in writing and shall be deemed properly given if sent by (a) overnight courier, (b) hand delivery, (c) postage paid certified or registered U. S. mail, return receipt requested, or (d) telefacsimile to the addressee party at the address or telefacsimile number, as the case may be, set forth beneath such party's signature below, or at such other address or telefacsimile number as such party shall have theretofore specified by written notice to the notifying party pursuant to this section. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date above written. CARRINGTON, INC. ________________________________________ By: ________________________________ CLIFFORD T. KALISTA CARLTON E. TURNER, Ph.D., D.Sc. PRESIDENT & CEO 2001 Walnut Hill Lane Irving, TX 75038 Facsimile: (214) 518-1020 EX-10.72 8 NONQUALIFIED STOCK OPTION AGREEMENT EXHIBIT 10.72 CARRINGTON LABORATORIES, INC. NONQUALIFIED STOCK OPTION AGREEMENT This Agreement, made as of ______________, 19____, by and between CARRINGTON LABORATORIES, INC., a Texas corporation (the "Company"), and ________________________ ______________________ ("Employee"), W I T N E S S E T H: WHEREAS, it has been determined (i) that Employee is eligible to receive a nonqualified stock option under the Company's 1995 Stock Option Plan (the "Plan"), and (ii) that such an option should be granted to Employee; NOW, THEREFORE, the Company and Employee hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings, respectively: (a) "Affiliate" shall have the meaning set forth in Article I, Section 1.02(a) of the Plan and shall include any party now or hereafter coming within that definition. (b) "Commencement Date" shall mean the date which is one (1) year from the date of this Agreement. (By way of example, if the date of this Agreement were January 1, 1996, the Commencement Date would be January 1, 1997.) (c) "Common Stock" shall have the meaning set forth in Article I, Section 1.02(e) of the Plan. (d) "Expiration Date" shall mean the date which is ten (10) years from and inclusive of the date of this Agreement. (By way of example, if the date of this Agreement were January 1, 1996, the Expiration Date would be December 31, 2005.) 2. Option. The Company hereby grants to Employee the option to purchase, on the terms hereinafter set forth, shares of the Company's Common Stock at a price of $_________ per share during the period beginning on the Commencement Date and ending on the first to occur of (i) the Expiration Date or (ii) the date on which the employment of Employee by the Company or any of its Affiliates terminates for any reason; provided, however, that (a) if such employment terminates on or after the Commencement Date and on or before the Expiration Date, other than by reason of Employee's retirement, death or disability, then Employee may exercise this option, to the extent he was entitled to do so at the date of such termination of employment, at any time within thirty (30) days after the date of such termination but not after the Expiration Date; or (b) if such employment terminates on or after the Commencement Date and on or before the Expiration Date by reason of Employee's becoming permanently and totally disabled (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended), or by reason of amended), or by reason of Employee's death, then Employee (or Employee's legal representative, if Employee is legally incompetent), the executor or administrator of Employee's estate or anyone who shall have acquired this option by will or pursuant to the laws of descent and distribution may exercise this option, to the extent Employee was entitled to do so at the date of such termination, at any time within one (1) year after such termination but not after the Expiration Date; or (c) if such employment terminates on or after the Commencement Date and on or before the Expiration Date by reason of Employee's retirement, Employee may exercise this option, to the extent he was entitled to do so at the date of such retirement, at any time within three (3) years after the date of such retirement; provided, however, that if Employee shall die within such three-year period, then the executor or administrator of Employee's estate or anyone who shall have acquired this option by will or pursuant to the laws of descent and distribution may exercise this option, to the extent Employee was entitled to do so at the date of his death, at any time within the first to expire of (i) two (2) years after the date of his death or (ii) three (3) years after the date of his retirement, but not after the Expiration Date in any event. Notwithstanding anything to the contrary herein, this option shall terminate immediately upon the termination of Employee's employment on account of fraud, dishonesty or the performance of other acts detrimental to the Company or an Affiliate, or if, following the date of termination of Employee's employment, the Company determines that there is good cause to cancel this option. A transfer of employment among the Company and any of its Affiliates without interruption of service shall not be considered a termination of employment for purposes of this Agreement. The Stock Option Committee that administers the Plan shall have the authority to make, in its sole discretion, any and all determinations that are required to be made in connection with this Agreement regarding the reasons for or circumstances of the termination of Employee's employment with the Company or any Affiliate, including but not limited to the determinations of (1) whether Employee's employment by the Company or any of its Affiliates terminated by reason of Employee's retirement, death or disability or on account of fraud, dishonesty or the performance of other acts detrimental to the Company or whether there is good cause to cancel this option, and (2) what criteria or requirements, if any, should be applied in making the determinations described in clause (1) of this sentence. - 2 - 3. Exercise During Employment. Except as provided in Section 2 hereof, this option may not be exercised unless Employee is at the time of exercise an employee of the Company or an Affiliate. 4. Exercisability. Subject to the provisions of Sections 2 and 3 hereof, this option may be exercised during the period beginning on the Commencement Date and ending on the Expiration Date in accordance with the following schedule: (a) that number of whole shares of Common Stock which equals or most closely approximates (but does not exceed) 25% of the total number of shares covered by this option may be purchased in whole at any time, or in part from time to time, on or after the Commencement Date; (b) an additional number of whole shares of Common Stock which equals or most closely approximates (but does not exceed) 25% of the total number of shares covered by this option may be purchased in whole at any time, or in part from time to time, on or after the date which is two (2) years from and inclusive of the date of this Agreement; (c) an additional number of whole shares of Common Stock which equals or most closely approximates (but does not exceed) 25% of the total number of shares covered by this option may be purchased in whole at any time, or in part from time to time, on or after the date which is three (3) years from and inclusive of the date of this Agreement; and (d) all remaining shares of Common Stock covered by this option may be purchased in whole at any time, or in part from time to time, on or after the date which is four (4) years from and inclusive of the date of this Agreement. Notwithstanding any contrary indication in this Agreement, (i) no fractional shares of Common Stock may be purchased upon exercise of this option, and (ii) upon the occurrence of a Change in Control (as defined in the Plan) prior to the termination of this option, this option shall immediately and automatically become exercisable with respect to all of the shares of Common Stock, if any, as to which it was not already exercisable, and this provision shall be applicable regardless of whether such Change in Control occurs before or after the Commencement Date; provided, however, that this provision shall not be interpreted to increase the number of shares of Common Stock for which this option may be exercised by Employee if his employment by the Company or any of its Affiliates shall have terminated prior to the occurrence of such Change in Control. 5. Manner of Exercise. This option may be exercised by written notice signed by the person entitled to exercise the same and delivered to the President of the Company or sent by United States registered mail addressed to the Company (for the attention of the President) at its corporate office in Irving, Texas. Such notice shall state the number of shares of Common Stock - 3 - as to which this option is exercised and shall be accompanied by payment of the full purchase price of such shares, plus the amount of any federal, state or local taxes required by law to be paid or withheld in connection with such exercise. 6. Payment. The purchase price for shares of Common Stock purchased upon exercise of this option shall be paid in cash or by check in United States dollars. 7. Delivery of Shares. Delivery of the certificate or certificates representing the shares of Common Stock purchased upon exercise of this option shall be made promptly after the Company's receipt of notice of exercise and payment. If the Company so elects, its obligation to deliver shares of Common Stock upon the exercise of this option shall be conditioned upon its receipt from the person exercising this option of any additional documents that, in the opinion of the Company and its legal counsel are required in order to comply with any applicable law. 8. Adjustments. In the event that, before delivery by the Company of all the shares of Common Stock in respect of which this option is granted, the Company shall have effected a Common Stock split or a dividend payable in Common Stock, or the outstanding Common Stock of the Company shall have been combined into a smaller number of shares, the shares of Common Stock still subject to this option shall be increased or decreased to reflect proportionately the increase or decrease in the number of shares outstanding, and the purchase price per share shall be decreased or increased to make the aggregate purchase price for all the shares then subject to this option the same as immediately prior to such stock split, stock dividend or combination. In the event of a reclassification of the shares of Common Stock not covered by the foregoing, or in the event of a liquidation or reorganization (including a merger, consolidation or sale of assets) of the Company, the Board of Directors of the Company shall make such adjustments, if any, as it may deem appropriate in the number, purchase price and kind of shares still subject to this option. 9. Transferability. This option is not transferable otherwise than by will or the laws of descent and distribution, and during the lifetime of Employee this option is exercisable only by Employee or, if Employee is legally incompetent, by Employee's legal representative. 10. Employment. Nothing in this Agreement confers upon Employee any right to continue in the employ of the Company or any Affiliate, nor shall this Agreement interfere in any manner with the right of the Company or any Affiliate to terminate the employment of Employee with or without cause at any time. 11. Option Subject to Plan. By execution of this Agreement, Employee agrees that this option and the shares of Common Stock to be received upon exercise hereof shall be governed by and subject to all applicable provisions of the Plan. 12. Construction. This option shall not be treated as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. This Agreement is governed by, - 4 - and shall be construed and enforced in accordance with, the laws of the State of Texas. Words of any gender used in this Agreement shall be construed to include any other gender, unless the context requires otherwise. The headings of the various sections of this Agreement are intended for convenience of reference only and shall not be used in construing the terms hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. CARRINGTON LABORATORIES, INC. By:____________________________________ Carlton E. Turner, Ph.D., President _______________________________________ Signature of Employee _______________________________________ (Type or print name of Employee) - 5 - RECORD OF EXERCISE DATE NO. OF SHARES EXERCISED INITIAL/AGREED - ---- ----------------------- -------------- _______________ ___________________________ _________________ _______________ ___________________________ _________________ _______________ ___________________________ _________________ _______________ ___________________________ _________________ _______________ ___________________________ _________________ - 6 - EX-10.73 9 NONQUALIFIED STOCK OPT. AGR. NONEMPL. DIR. EXHIBIT 10.73 CARRINGTON LABORATORIES, INC. NONQUALIFIED STOCK OPTION AGREEMENT WITH NONEMPLOYEE DIRECTOR This Agreement, made as of ______________, 19__, by and between CARRINGTON LABORATORIES, INC., a Texas corporation (the "Company"), and ________________________________________________ ("Director"), W I T N E S S E T H: WHEREAS, the Company's 1995 Stock Option Plan (the "Plan") provides that a four-year, nonqualified stock option to purchase 2,500 shares of the Company's Common Stock shall be granted automatically, on the date of each annual meeting of shareholders of the Company, to each person who (i) is a nonemployee director of the Company on the date of such grant and immediately following such annual meeting and (ii) has served in that capacity for at least six months immediately preceding the date of such grant; and WHEREAS, the annual meeting of shareholders of the Company for the current calendar year was held on the date of this Agreement, and Director satisfies the conditions described in clauses (i) and (ii) of the immediately preceding paragraph and is willing to accept the option that he is entitled to receive under the Plan on the date of this Agreement; NOW, THEREFORE, the Company and Director hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings, respectively: (a) "Affiliate" shall have the meaning set forth in Article I, Section 1.02(a) of the Plan and shall include any party now or hereafter coming within that definition. (b) "Board" means the Board of Directors of the Company. (c) "Commencement Date" shall mean the date of this Agreement. (d) "Common Stock" shall have the meaning set forth in Article I, Section 1.02(e) of the Plan. (e) "Expiration Date" shall mean the date which is four (4) years from and inclusive of the date of this Agreement. (By way of example, if the date of this Agreement were January 1, 1996, the Expiration Date would be December 31, 1999.) 2. Option. The Company hereby grants to Director the option to purchase, on the terms hereinafter set forth, 2,500 shares of the Company's Common Stock at a price of $_______ per share during the period beginning on the Commencement Date and ending on the Expiration Date. Except as otherwise provided herein, this option shall remain effective during its entire term, regardless of whether the Director continues to serve as a director of the Company. In the event of Director's death on or before the Expiration Date, the executor or administrator of Director's estate or anyone who shall have acquired this option by will or pursuant to the laws of descent and distribution may exercise this option at any time on or before the Expiration Date, to the extent Director was entitled to do so at the time of his death. Notwithstanding anything to the contrary herein, this option shall terminate immediately on the termination of Director's Board membership if he ceases to serve on the Board by reason of his (a) fraud or intentional misrepresentation, or (b) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Affiliate. The Stock Option Committee that administers the Plan shall have the authority to make, in its sole discretion, any and all determinations that are required to be made in connection with this Agreement regarding the reasons for or circumstances of Director's ceasing to serve on the Board, including but not limited to the determinations of (1) whether Director ceased to serve on the Board for any of the reasons set forth in clause (a) or clause (b) of the immediately preceding paragraph and (2) what criteria or requirements, if any, should be applied in making the determinations described in clause (1) of this sentence. 3. Exercisability. Subject to the provisions of Section 2 hereof, this option may be exercised in whole at any time, or in part from time to time, during the period beginning on the Commencement Date and ending on the Expiration Date. Notwithstanding any contrary indication in this Agreement, no fractional shares of Common Stock may be purchased upon exercise of this option. 4. Manner of Exercise. This option may be exercised by written notice signed by the person entitled to exercise the same and delivered to the President of the Company or sent by United States registered mail addressed to the Company (for the attention of the President) at its corporate office in Irving, Texas. Such notice shall state the number of shares of Common Stock as to which this option is exercised and shall be accompanied by payment of the full purchase price of such shares, plus the amount of any federal, state or local taxes required by law to be paid or withheld in connection with such exercise. 5. Payment. The purchase price for shares of Common Stock purchased upon exercise of this option shall be paid in cash or by check in United States dollars. 6. Delivery of Shares. Delivery of the certificate or certificates representing the shares of Common Stock purchased upon exercise of this option shall be made promptly after the Company's receipt of notice of exercise and payment. If the Company so elects, its obligation to deliver shares of Common Stock upon the exercise of this option shall be conditioned upon its receipt from the person exercising this option of any additional documents that, in the opinion of the Company and its legal counsel, are required in order to comply with any applicable law. 7. Adjustments. In the event that, before delivery by the Company of all the shares of Common Stock in respect of which this option is granted, the Company shall have effected a Common Stock split or a dividend payable in Common Stock, or the outstanding Common Stock - 2 - of the Company shall have been combined into a smaller number of shares, the shares of Common Stock still subject to this option shall be increased or decreased to reflect proportionately the increase or decrease in the number of shares outstanding, and the purchase price per share shall be decreased or increased to make the aggregate purchase price for all the shares then subject to this option the same as immediately prior to such stock split, stock dividend or combination. In the event of a reclassification of the shares of Common Stock not covered by the foregoing, or in the event of a liquidation or reorganization (including a merger, consolidation or sale of assets) of the Company, the Board shall make such adjustments, if any, as it may deem appropriate in the number, purchase price and kind of shares still subject to this option. 8. Transferability. This option is not transferable otherwise than by will or the laws of descent and distribution, and during the lifetime of Director this option is exercisable only by Director or, if Director is legally incompetent, by Director's legal representative. 9. Board Membership. Nothing in this Agreement confers upon Director any right to continue to serve as a director of the Company, nor shall this Agreement interfere in any manner with the right of the Company's shareholders to terminate Director's position as a director of the Company with or without cause at any time. 10. Option Subject to Plan. By execution of this Agreement, Director agrees that this option and the shares of Common Stock to be received upon exercise hereof shall be governed by and subject to all applicable provisions of the Plan. 11. Construction. This option shall not be treated as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. This Agreement is governed by, and shall be construed and enforced in accordance with, the laws of the State of Texas. Words of any gender used in this Agreement shall be construed to include any other gender, unless the context requires otherwise. The headings of the various sections of this Agreement are intended for convenience of reference only and shall not be used in construing the terms hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. CARRINGTON LABORATORIES, INC. By:____________________________________ Carlton E. Turner, Ph.D., President _________________________________ Signature of Director - 3 - RECORD OF EXERCISE
DATE NO. OF SHARES EXERCISED INITIAL/AGREED - ---- ----------------------- -------------- - ----------------------- ---------------------------------- --------------- - ----------------------- ---------------------------------- --------------- - ----------------------- ---------------------------------- --------------- - ----------------------- ---------------------------------- --------------- - ----------------------- ---------------------------------- ---------------
- 4 - EX-10.76 10 SUPPLY AND DISTRIBUTION AGREEMENT EXHIBIT 10.76 SUPPLY and DISTRIBUTION AGREEMENT by and between FARNAM COMPANIES, INC. and CARRINGTON LABORATORIES, INC. This "Supply and Distribution Agreement" (hereinafter "AGREEMENT") executed on the ________ day of March, 1996, by and between FARNAM COMPANIES, INC. (hereinafter "FARNAM"), an Arizona corporation with its principal place of business at 301 West Osborn Road, Phoenix, Arizona 85013, and CARRINGTON LABORATORIES, INC. (hereinafter "CARRINGTON"), a Texas corporation with its principal place of business at 2001 Walnut Hill Lane, Irving, Texas 75038, WITNESSETH: WHEREAS, CARRINGTON has developed an injectable acemannan immunostimulant product and various other aloe-based treatment cleansing and management products which, along with any and all improvements thereto, shall hereinafter be known as the "PRODUCTS"; said PRODUCTS being further described in Exhibit A attached hereto, which is subject to change from time to time as improvements occur; and WHEREAS, CARRINGTON has submitted for and received the necessary approval(s) and/or license(s), specifically U.S. Vet. Lic. 384 issued by the United States Department of Agriculture (hereinafter "U.S.D.A."), for the manufacture, sale and distribution of the PRODUCTS, or any of them; and WHEREAS, CARRINGTON desires to manufacture, and FARNAM desires to have CARRINGTON manufacture for it, quantities of said PRODUCTS as per the terms and conditions of this AGREEMENT. NOW, THEREFORE, in consideration of the provisions, covenants, and mutual undertakings of the parties as provided herein, the parties do hereby agree as follows: 1. Grant of Exclusive Rights to Market, Sell, and Distribute. (a) During the term of this AGREEMENT and any renewal(s) hereof, and according to the terms and conditions set forth herein, CARRINGTON grants to FARNAM the exclusive rights (exclusive even as to CARRINGTON) to market, sell, and distribute the PRODUCTS in and through the over-the- 1 counter (OTC) and ethical (i.e. veterinary) channels of distribution within the animal health market for/within the United States and Canada. In the event CARRINGTON possesses existing inventory of the PRODUCTS and desires to sell such inventory within its usual channels of distribution, then FARNAM's rights, as granted hereunder, shall be co-exclusive with CARRINGTON until such time, but in any event not to exceed a six (6) month period of time, as CARRINGTON's existing inventory of PRODUCTS is depleted. (b) During the term of this AGREEMENT and any renewal(s) hereof, and according to the terms and conditions set forth herein, CARRINGTON agrees to grant to FARNAM the exclusive rights (exclusive even as to CARRINGTON) to market, sell, and distribute the PRODUCTS in and through the over-the-counter (OTC) and ethical (i.e. veterinary) channels of distribution within the animal health market for/within international markets outside of the United States and/or Canada as the parties later mutually agree. Any such international markets shall be delineated in Exhibit B, attached hereto, said Exhibit B shall, from time to time, be subject to revision and/or replacement in accordance with this AGREEMENT. 2. Grant of Exclusive Rights - Trademarks. (a) CARRINGTON grants to FARNAM, for the term of this AGREEMENT and any renewal(s) hereof, the exclusive rights to use CARRINGTON's "CarraVet(TM)" trademark/trade name, along with any and all associated trade dress, in connection with FARNAM's marketing, selling, and distributing the PRODUCTS hereunder. All labels, packaging, advertising and promotional material used by FARNAM in connection with the PRODUCTS FARNAM markets, sells, and distributes hereunder which bear CARRINGTON's "CarraVet(TM)" mark shall also bear the following legend: CarraVet(TM) is a trademark of Carrington Laboratories, Inc. FARNAM shall not use CARRINGTON's "CarraVet(TM)" mark except as specifically set forth herein. Without limiting the generality of the preceding sentence, FARNAM shall not use CARRINGTON's "CarraVet(TM)" mark in connection with the sale or advertising of any products other than the PRODUCTS. At CARRINGTON's request and expense, FARNAM shall take whatever action is reasonably necessary to assist CARRINGTON or its assigns in registering CARRINGTON's "CarraVet(TM)" mark with the U.S. Patent and Trademark Office (hereinafter "PTO"). FARNAM understands that 2 CARRINGTON or its assigns may rely solely upon FARNAM's use of CARRINGTON's "CarraVet(TM)" mark to obtain or maintain registration with the PTO. Upon the termination of this AGREEMENT, FARNAM will cease and desist from all use of CARRINGTON's "CarraVet(TM)" trademark/trade name, along with any and all associated trade dress, in any manner and will not adopt or use, without CARRINGTON's prior written consent, any word or mark which is confusingly or deceptively similar to CARRINGTON's "CarraVet(TM)" mark, except that FARNAM may continue to use CARRINGTON's "CarraVet(TM)" mark under the terms and conditions of this AGREEMENT in connection with any remaining inventory of the PRODUCTS until such inventory is exhausted. (b) The foregoing notwithstanding, FARNAM may desire to use FARNAM's own trademarks, trade names, and/or trade dress on or in connection with the PRODUCTS it markets, sells, and distributes hereunder; and shall do so at FARNAM's sole discretion. 3. Ownership of Formulations and Registrations. It is understood between the parties that the PRODUCTS, the PRODUCTS' formulations, licenses/registrations (except those licenses/registrations obtained by FARNAM pursuant to paragraph 11(b) hereunder), specifications, and any and all other data directly related to the PRODUCTS, which was produced by or on behalf of CARRINGTON, shall be, and remain, the sole and exclusive responsibility and property of CARRINGTON. 4. Manufacture of the PRODUCTS. (a) During the term of this AGREEMENT and any renewal(s) hereof, and according to the terms and conditions set forth herein, CARRINGTON agrees to manufacture for FARNAM and FARNAM agrees to have CARRINGTON manufacture for it, the PRODUCTS in strict accordance/compliance with the PRODUCTS' approval(s) and/or license(s) and the PRODUCTS' labeled formulation/specifications as delineated in Exhibit A, attached hereto. (b) Within thirty (30) days of the execution of this AGREEMENT, FARNAM shall supply to CARRINGTON the appropriate camera-ready art, if necessary, for the PRODUCTS' labeling and packaging materials (i.e. cartons, inserts, shippers). Notwithstanding the foregoing, FARNAM shall submit to CARRINGTON, for CARRINGTON's advance written approval, draft samples of all labeling, packaging, 3 advertising, and promotional material for the PRODUCTS; said approval shall occur within ten (10) days of CARRINGTON's receipt of same and shall not be unreasonably withheld. (c) CARRINGTON shall furnish to FARNAM, for FARNAM's advance written approval, samples of all final, ready for reproduction labeling and packaging for the PRODUCTS. (d) CARRINGTON shall supply the PRODUCTS as "finished goods" to FARNAM in the form of finished goods, ready for resale. "Finished goods" shall consist of the ready-for-resale PRODUCTS, including labels, product containers, cartons, inserts, shippers, final containers, and all labor required to produce and supply such. The finished goods product configurations for the PRODUCTS are delineated in Exhibit C, attached hereto. 5. Pricing Terms. (a) CARRINGTON shall provide the PRODUCTS (as specified in paragraph 4 hereinabove) to FARNAM in accordance with the pricing and minimum production runs delineated in Exhibit D, attached hereto, freight-on-board (F.O.B.) CARRINGTON's distribution facility. (b) CARRINGTON may, beginning January 1, 1997 and no more than once per calendar year thereafter, increase the price of the PRODUCTS, as delineated in Exhibit D, by an amount not to exceed any increased costs of labor, raw materials, and/or packaging since the first production run under this AGREEMENT, and only to the extent that it is necessary for CARRINGTON to maintain CARRINGTON's percentage gross margin at the level at which it was during the first production run under this AGREEMENT, provided that FARNAM receives from CARRINGTON a one hundred twenty (120) day advance written notice of such a price increase before said price increase shall become effective, and further provided that FARNAM does not exercise its right to terminate this AGREEMENT in accordance with paragraph 5(c) hereinbelow. Any and all PRODUCT(S) purchase orders made by FARNAM and received by CARRINGTON prior to the date said written notice of such a price increase is received by FARNAM shall be filled and paid for at the price existing prior to said increase. Any and all PRODUCT(S) purchase orders made by FARNAM and received by CARRINGTON after the effective date of such a price increase pursuant to this paragraph 5 shall be filled and paid for at the increased price. 4 Any and all PRODUCT(S) purchase orders made by FARNAM and received by CARRINGTON after said written notice of such a price increase is received by FARNAM but before the effective date of said price increase pursuant to this paragraph 5 shall be filled and paid for at the price existing prior to said increase, provided that said order(s) are not significantly different in quantity or timing from those of FARNAM's previous ordering history hereunder. (c) FARNAM shall have the option to terminate this AGREEMENT effective upon the date such a price increase is to take effect as provided in paragraph 5(b) herein, provided that CARRINGTON receives from FARNAM written notice of FARNAM's intent to so terminate at least ninety (90) days prior to the date such price increase is to take effect as provided in paragraph 5(b) herein. Both parties hereto agree that in the event of any conflict between the terms of FARNAM's purchase order or CARRINGTON's acknowledgment or any other document, and this AGREEMENT, the terms of this AGREEMENT shall govern. 6. Pricing in Effect for Calendar Year 1998. During calendar year 1998 (January 1, 1998 through December 31, 1998) and only for calendar year 1998, CARRINGTON may, no more than once during the period, increase the current price of the PRODUCTS to a price(s) which, in the opinion of CARRINGTON and FARNAM, is/are based upon animal health market indicators and which the "market will bear"; provided, however, that any such increase shall not be more than fifteen percent (15%) of the existing price of the PRODUCTS, or any of them. All provisions of paragraph 5, except that provision which determines the amount by which pricing may be increased, shall remain in effect during calendar year 1998, specifically including the provisions of paragraph 5(c). Pricing for calendar year 1999, and any and all calendar years thereafter during which this AGREEMENT is in effect, shall be in conformance with paragraph 5. 7. Payment Terms. Payment terms shall be 1% fifteen (15) net thirty (30) days from the date of invoice (i.e. 1% discount if paid within fifteen (15) days, otherwise net amount due within thirty (30) days from the date of invoice). 5 8. Title and Risk of Loss. Title and risk of loss for the goods supplied under this AGREEMENT shall transfer from CARRINGTON to FARNAM upon CARRINGTON's placement of the goods with a FARNAM designated carrier. In the event of any conflict between the terms of FARNAM's purchase order or CARRINGTON's acknowledgment or any other document, and this AGREEMENT, the terms of this AGREEMENT shall govern. 9. Sales Forecasts and Purchase Orders. FARNAM shall, on a quarterly basis, furnish to CARRINGTON a twelve (12) month rolling forecast of PRODUCT(S) purchases/orders, with the first three (3) month period of said forecast serving as a commitment by FARNAM which will be confirmed by FARNAM's written purchase order(s). CARRINGTON shall acknowledge in writing all FARNAM purchase orders for the PRODUCTS within fifteen (15) days of CARRINGTON's receipt of said purchase orders, at which time any discrepancies and/or deficiencies in the purchase order pricing shall be brought to FARNAM's attention by CARRINGTON. FARNAM purchase orders for the PRODUCTS which are not acknowledged by CARRINGTON within said fifteen (15) days shall be deemed accepted by CARRINGTON as written. Both parties hereto agree that in the event of any conflict between the terms of FARNAM's purchase order or CARRINGTON's acknowledgment or any other document, and this AGREEMENT, the terms of this AGREEMENT shall govern. 10. Annual Minimum Purchase Amount. Beginning January 1, 1997, and for each calendar year thereafter, in the event FARNAM's cumulative purchases per calendar year of the PRODUCTS fail to reach the dollar amounts delineated in Exhibit E, attached hereto, then CARRINGTON, at its sole and exclusive discretion, and as its sole and exclusive remedy, may terminate the exclusivity of FARNAM's rights to market, sell, and distribute the PRODUCTS. In the event CARRINGTON exercises its right to terminate FARNAM's exclusive rights to market, sell, and distribute the PRODUCTS, FARNAM's rights to market, sell, and distribute the PRODUCTS shall be maintained, but on a non-exclusive basis for the remaining term of this AGREEMENT and any renewal(s) hereof. Beginning with the execution hereof and continuing through December 31, 1996, CARRINGTON and FARNAM each agree that FARNAM shall in no way be obligated to purchase a minimum dollar amount of PRODUCTS and that the conditions and provisions of this paragraph 10 are inapplicable during this period. 6 11. PRODUCTS State and Federal Registrations. (a) CARRINGTON shall be responsible for obtaining and/or maintaining any and all federal registrations, approvals, licensures, etc. as may be required or necessary for the lawful manufacture, marketing, sale, and distribution of the PRODUCTS including, but not limited to, any and all interaction with the U.S.D.A. and the United States Food and Drug Administration (hereinafter "F.D.A."). (b) CARRINGTON agrees to allow and/or authorize FARNAM to license/register, or have licensed/registered for it, the PRODUCTS at the state/province level with each and any of the United States and Canada, and at the state/province/other political sub-division level of any and all international countries/markets to which FARNAM has been granted rights pursuant to paragraph 1(b) herein. To this end, CARRINGTON agrees to fully cooperate with FARNAM in any and all manner whatsoever, including, but not limited to, executing, filing, and/or authorizing FARNAM to cite to any and all papers, documents, data, and/or support materials and performing such other proper acts as may be deemed necessary, in order to secure to FARNAM said licenses/registrations. 12. Right of First Refusal. During the term of this AGREEMENT and any renewal(s) hereof, should CARRINGTON develop any new product formulations intended for use in the animal health market, CARRINGTON agrees that CARRINGTON shall forthwith grant to FARNAM, by written notice, a period of sixty (60) days within which to evaluate the new product(s) and potentially negotiate and enter into an agreement with CARRINGTON for rights to market, sell, and distribute said new product(s). Should FARNAM then desire to market, sell, and distribute said new product(s), CARRINGTON and FARNAM agree to negotiate in good faith and with all good intentions in attempting to enter into an agreement for such rights, said agreement to be reasonable upon all terms and conditions. 13. CARRINGTON's Representations and Warranties. CARRINGTON represents and warrants to FARNAM that: (a) the PRODUCTS supplied to FARNAM hereunder are manufactured in accordance with the PRODUCTS' approval(s) and/or license(s), including without limitation U.S. Vet. Lic. 384, and the PRODUCTS' labeled formulation/specifications as provided in Exhibit A, attached hereto. Furthermore, CARRINGTON shall test each lot of the PRODUCTS in order to ensure that said lot meets said specifications, and CARRINGTON shall keep and maintain a record of said test results; and 7 (b) the PRODUCTS supplied to FARNAM hereunder have a minimum shelf life of not less than two (2) years from the date of manufacture and CARRINGTON shall not ship PRODUCTS to FARNAM with a remaining shelf life of less than twenty (20) months; and (c) the PRODUCTS supplied to FARNAM hereunder are quality goods and are fit for the uses specified on the PRODUCTS' labels; and (d) the PRODUCTS supplied to FARNAM hereunder are manufactured in accordance with, and are otherwise in full compliance (in all material respects) with, current Good Manufacturing Practices and any and all other laws, rules, regulations, and licenses, state and/or federal, which may be applicable; and (e) the manufacture, distribution, and/or sale of the PRODUCTS does not infringe upon any patent, trade secret, or other proprietary right of any third party; and (f) the marketing, distribution, and/or sale of the PRODUCTS by FARNAM does not, to the best of CARRINGTON's knowledge, reasonable investigation having been made, violate any laws, rules, or regulations, state and/or federal, which may be applicable including, without limitation, those laws, rules and/or regulations of the U.S.D.A. and/or the F.D.A.; and (g) all labels and advertising relating to the PRODUCTS comply with all applicable rules and regulations of the U.S.D.A. and/or the F.D.A. and all other applicable laws, rules and regulations, including but not limited to F.D.A. requirements relating to product ingredients. Information regarding the ingredients of the PRODUCTS shall be furnished by CARRINGTON to FARNAM from time to time, and when furnished, shall be incorporated in Exhibit A, attached hereto; and (h) all information relating to the PRODUCTS in verbal or written form provided to FARNAM by CARRINGTON prior to execution of this AGREEMENT and during this AGREEMENT is truthful and accurate. No significant facts which may relate to the salability of the PRODUCTS have been withheld or omitted by CARRINGTON; and (i) CARRINGTON acknowledges that it is subject to scrutiny from federal, state and local authorities in the day-to-day operations of its business, and represents that it is not presently the subject of any governmental investigations, or demands regarding, inter alia, the proper and lawful disposal of waste. CARRINGTON warrants to the best of its knowledge, reasonable inquiry having been made, that it is complying and will continue to comply with all federal, state and local laws, including those respecting, 8 inter alia, the proper disposal of waste materials and other laws governing the proper and lawful handling of chemicals, medical devices, etc. It is further understood by both parties that FARNAM is and will be relying upon these representations and warranties, the inaccuracy or incompleteness of any of which shall be a material breach of this AGREEMENT. 14. FARNAM's Representations and Warranties. FARNAM represents and warrants to CARRINGTON that: (a) FARNAM will maintain a sufficient inventory of the PRODUCTS to assure an adequate supply of PRODUCTS to serve the market segments granted to it in paragraph 1 hereunder; and (b) FARNAM's advertising, marketing, and distributor policies do not, to the best of FARNAM's knowledge, reasonable investigation having been made, violate any laws, rules or regulations, state and/or federal, which may be applicable including, without limitation, those laws, rules and/or regulations of the U.S.D.A. and/or the F.D.A.; and (c) FARNAM will not make, or permit any of its employees, agents or representatives to make, any claims of any properties or results relating to the PRODUCTS, unless such have received written approval from CARRINGTON and from the applicable governmental authority; and (d) FARNAM will not use any label, advertisement or promotional material on or with respect to or relating to the PRODUCTS unless such label, advertisement or promotional material has first been submitted to and approved by CARRINGTON in accordance with paragraph 4(b) herein; and (e) FARNAM will actively and aggressively promote the sale of the PRODUCTS to all customers and potential customers within the market segments granted to it in paragraph 1 hereunder; and (f) FARNAM will take all steps reasonably necessary to ensure that its distributors and any other parties to whom it sells any of the PRODUCTS for resale do not relabel, repackage, advertise, sell or attempt to sell the PRODUCTS in a manner that would violate this AGREEMENT if done by FARNAM; and (g) FARNAM acknowledges that it is subject to scrutiny from federal, state and local authorities in the day-to-day operations of its business, and represents that it is not presently the subject 9 of any governmental investigations, or demands regarding, inter alia, the proper and lawful disposal of waste. FARNAM warrants to the best of its knowledge, reasonable inquiry having been made, that it is complying and will continue to comply with all federal, state and local laws, including those respecting, inter alia, the proper disposal of waste materials and other laws governing the proper and lawful handling of chemicals, medical devices, etc. It is further understood by both parties that CARRINGTON is and will be relying upon these representations and warranties, the inaccuracy or incompleteness of any of which shall be a material breach of this AGREEMENT. 15. Return of Outdated/Nonconforming PRODUCTS. CARRINGTON agrees to accept for return and replacement, if appropriate under the circumstances, or, if inappropriate under the circumstances, for return and credit, any PRODUCTS which are out-of-date (e.g. the shelf life date of the PRODUCT(S) has expired) by one hundred twenty (120) days or less or any PRODUCTS that do not conform to any of CARRINGTON's representations or warranties specified herein, with all costs and expenses involved in the return shipping and/or disposal of any such nonconforming PRODUCTS to be borne by CARRINGTON. Any such replacement PRODUCTS shall be invoiced and paid for at the same price as that which was in effect for the non-conforming and returned PRODUCTS. CARRINGTON shall not be responsible for outdated PRODUCT(S) which are returned to FARNAM and which are more than one hundred twenty (120) days out-of-date (e.g. the shelf life date of the PRODUCT(S) has been expired for more than one hundred twenty (120) days). 16. Recall. In the event of a recall of any of the PRODUCTS, due to CARRINGTON's breach of any of its representations or warranties specified herein or due to CARRINGTON's negligence or due to any other act or omission of CARRINGTON or due to federal or state agency action, CARRINGTON shall bear all costs and expenses associated with said recall including, but not limited to, all printing, postage, and labor involved with the announcement of said recall, and all freight and postage expense for the return of the PRODUCTS. If replacement of the recalled-PRODUCT(S) is appropriate and permitted for under the recall, then CARRINGTON may replace the recalled-PRODUCT(S) with like PRODUCT(S) not subject to the recall. If replacement of the recalled-PRODUCT(S) is not appropriate or is not allowed for under the 10 recall, then CARRINGTON shall issue a credit to FARNAM for the "recalled-PRODUCT(S) holder's" purchase price of the PRODUCTS involved in the recall. In the event of a recall of any of the PRODUCTS, due to FARNAM's negligence or due to any other act or omission of FARNAM, FARNAM shall bear all costs and expenses associated with said recall including, but not limited to, all printing, postage, and labor involved with the announcement of said recall, and all freight and postage expense for the return of the PRODUCTS. 17. Indemnification by CARRINGTON. CARRINGTON hereby indemnifies and holds FARNAM, its divisions, parent company, subsidiaries, affiliates, agents, employees, successors, and assigns forever harmless from and against any and all liability, actions, claims, losses, costs, damages, fines, penalties, and expenses (including, but not limited to, reasonable and necessary investigation and attorneys fees), threatened and/or incurred, by reason of or arising out of CARRINGTON's manufacture of the PRODUCTS, or any person or entity's purchase, use, or attempted use of the PRODUCTS, or any third party's claim of infringement of any patent, trade secret, or any other proprietary right regarding the PRODUCTS, or CARRINGTON's breach of any of its representations, warranties, or obligations specified herein, or CARRINGTON's negligence or other act or omission, unless such is substantially due to FARNAM's negligence or the use of FARNAM's trademark(s) or trade dress for/on the PRODUCTS. Furthermore, CARRINGTON agrees to immediately assume the handling, adjustment, and defense of any claim, allegation, petition, suit, or action covered by this paragraph 17; and FARNAM, without waiving any of its rights under this paragraph or this AGREEMENT, specifically reserves the right to participate, at its own expense, in the handling, adjustment, and defense of any such claim, allegation, petition, suit, or action. CARRINGTON agrees to maintain, at its own expense, product liability insurance in the amount of at least Three Million Dollars ($3,000,000.00). CARRINGTON shall provide FARNAM with appropriate documentation evidencing such. 18. Indemnification by FARNAM. FARNAM hereby indemnifies and holds CARRINGTON, its divisions, parent company, subsidiaries, affiliates, agents, employees, successors, and assigns forever harmless from and against any and all liability, actions, claims, losses, costs, damages, fines, penalties, and expenses (including, but not limited to, reasonable and necessary investigation and attorneys fees), 11 threatened and/or incurred, by reason of or arising out of FARNAM's breach of any of its representations, warranties, or obligations specified herein, or FARNAM's negligence or other act or omission (of FARNAM), or the use of FARNAM's trademark(s) or trade dress for/on the PRODUCTS. Furthermore, FARNAM agrees to immediately assume the handling, adjustment, and defense of any claim, allegation, petition, suit, or action covered by this paragraph 18; and CARRINGTON, without waiving any of its rights under this paragraph or this AGREEMENT, specifically reserves the right to participate, at its own expense, in the handling, adjustment, and defense of any such claim, allegation, petition, suit, or action. FARNAM shall maintain, at its own expense, appropriate commercial insurance in the amount of at least Three Million Dollars ($3,000,000.00). FARNAM shall provide CARRINGTON with appropriate documentation evidencing such. 19. Term and Termination. Unless earlier terminated by any of the following occurrences, this AGREEMENT shall be in full force and effect for an initial period of five (5) years from the date of execution hereof and, thereafter, shall automatically be renewed for five (5) year terms: (a) If both parties agree in writing to terminate this AGREEMENT, then this AGREEMENT shall so terminate according to the terms of said writing when fully executed; or (b) If either party notifies the other party in writing of its intent to terminate this AGREEMENT at the end of the then-existing term, and the other party receives said written notification at least ninety (90) days prior to the end of the then-existing term, then this AGREEMENT shall terminate at the end of said term; or (c) If either party materially breaches this AGREEMENT, the non-breaching party may terminate this AGREEMENT ninety (90) days following receipt by the breaching party of written notice from the non-breaching party of said material breach, provided that the breaching party has not cured said material breach within the ninety (90) day time period. Any such termination shall be without prejudice to any other rights or remedies available to the terminating party, including, without limitation, the right to seek specific performance of this AGREEMENT or to recover full damages for its breach; or (d) If FARNAM decides to terminate in accordance with paragraph 5(c) herein, then this AGREEMENT shall so terminate. 12 The terms, conditions, rights, duties, and obligations set forth in paragraphs 13, 14, 15, 16, 17 and 18 herein shall survive any termination of this AGREEMENT due to the continued existence of the PRODUCTS within the animal health market and within the possession of consumers. Furthermore, after termination of this AGREEMENT, FARNAM may market, sell and distribute any remaining inventories of PRODUCTS which FARNAM had on hand upon the effective date of such termination; provided, however, that within thirty (30) days of the termination of this AGREEMENT, CARRINGTON may, at its discretion and option, purchase FARNAM's full and existing inventory of the PRODUCTS at the same price paid by FARNAM for said inventory. 20. Force Majeure. Neither party shall be liable for any failure to perform under this AGREEMENT when such failure (other than failure to make any payment of sums due hereunder) is caused by factors beyond the reasonable control of such party, including by way of illustration, but not limited to, war, embargo, fire or other calamity, strikes, unavailability of raw materials or ingredients, supply allocations, or actions of governmental authorities. 21. No Partnership/Agency. Nothing in this AGREEMENT shall be deemed by implication or otherwise to have created any partnership or principal/agent relationship between the parties hereto. 22. Assignment. This AGREEMENT shall not be assignable in whole or in part by either party without the prior written consent of the other party. 23. Binding Upon. This AGREEMENT shall be binding upon and shall inure to the benefit of each of the parties hereto and their respective heirs, devisees, legatees, executors, administrators, successors, and permitted assigns; particularly, and without limiting the foregoing in any way whatsoever, this AGREEMENT shall be binding upon any successor corporation or entity of either party hereto, whether such successor entity is established through merger, acquisition, buyout, partnership, association, change of ownership, or any reorganization of any kind whatsoever 24. Non-waiver. Any failure or delay by either party to insist upon strict performance of any provision hereof or to exercise any right, power, privilege, or remedy consequent upon default hereunder 13 shall not constitute a waiver of any provision, right, power, or privilege, or of any available remedy under this AGREEMENT, including any provision the performance of which was not insisted upon and/or any right, power, privilege, and/or remedy which was not exercised. 25. Choice of Law and Forum. This AGREEMENT shall be construed in accordance with and shall be governed by the laws of the State of Arizona. Any case or controversy arising out of or related to this AGREEMENT may be filed in any court within the state of Arizona, whether state or federal, having general jurisdiction over the subject matter. 26. Severability. In the event that any one or more of the provisions (or portion thereof) set forth in this AGREEMENT shall be for any reason held invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this AGREEMENT, and this AGREEMENT shall be construed as if the invalid, illegal, or unenforceable provision(s) (or portion thereof) had never been set forth herein. If any one or more of the provisions (or portion thereof) contained in this AGREEMENT shall for any reason be held to be excessively broad as to time, duration, activity, subject, or geographical scope, it shall be construed by reducing it so as to be enforceable to the extent capable. 27. Entire Agreement. This AGREEMENT and that certain "Confidentiality Agreement" by and between the parties dated on or about August 30, 1995 comprise the entire agreement between the parties relative to the subject matter and supersede all other understandings or agreements between the parties relative to the subject matter. 28. Amendment/Modification. This AGREEMENT may not be amended or modified except through a writing referencing this AGREEMENT and fully executed by both parties hereto. 29. Paragraph Headings. The headings/titles to each paragraph of this AGREEMENT are for reference purposes only and shall not be used to interpret said paragraph, nor any other provision or paragraph of this AGREEMENT. All interpretations of the meaning of each paragraph of this AGREEMENT shall rely solely upon the content of that paragraph and/or the content of the AGREEMENT and shall not incorporate the heading/title of that or any other paragraph for such interpretation. 14 IN WITNESS WHEREOF, each of the parties hereto has caused this AGREEMENT to be executed by its duly authorized representative on the date first above given. FARNAM CARRINGTON Farnam Companies, Inc. Carrington Laboratories, Inc. - ---------------------------------- ------------------------------- Charles B. Duff Carlton E. Turner, Ph.D., D.Sc. President President and Chief Executive Officer - ---------------------------------- ------------------------------- Date Date - ---------------------------------- ------------------------------- David R. Arnold Witness ------------------------------- Print 15 EXHIBIT A PRODUCTS Description, Formulation, and Label Ingredient Specifications ACEMANNAN IMMUNOSTIMULANT Acemannan immunostimulant ACEMANNAN IMMUNOSTIMULANT (DILUENT) Sodium chloride CARRAVET(TM) WOUND DRESSING, 1.0 OZ., 3.5 OZ. Purified Water, Trithanolamine, Polyvinylpyrrolidone, Panthenol, Carbomer 940, Glutamic Acid, Methylparaben, Sodium Chloride, Imidazolidinyl Urea, Sodium Benzoate, Potassium Sorbate, Sodium EDTA, Acemannan Hydrogel, Sodium Metabisulfite, Citric Acid (may be added for pH adjustment) CARRAVET(TM) SPRAY-GEL WOUND DRESSING, 8 OZ. Purified Water, Trithanolamine, Polyvinylpyrrolidone, Panthenol, Carbomer 940, Glutamic Acid, Methylparaben, Sodium Chloride, Imidazolidinyl Urea, Sodium Benzoate, Potassium Sorbate, Sodium EDTA, Acemannan Hydrogel, Sodium Metabisulfite, Citric Acid (may be added for pH adjustment) CARRAVET(TM) WOUND CLEANSER, 8 OZ. Cocoamphodiacetate, Dibasic Sodium Phosphate, Edetate Disodium, Glycerol Laurate, Mannitol, Methylparaben, Purified water, Sucrose Laurate CVMD(TM) WOUND CLEANSER, 12 OZ. Purified Water, Mannitol, Sucrose Laurate, Disodium Phosphate, Methylparaben, Disodium EDTA, Glyceryl Monolaurate, Cocoamphodiacetate CARRAVET(TM) MULTI PURPOSE CLEANSING FOAM, 4 OZ. Water, Isobutane, Propane, Ammonium Laureth Sulfate, Methylparaben, Fragrance, Imidazolidinyl Urea, Potassium Sorbate, Sodium Benzoate, Sodium Laureth Sulfate, Sodium Metabisulfite, Aloe Vera Gel Extract Containing Acemannan, Tocopherol (Vitamin E) CARRAVET(TM) 4" X 4" SURGICAL GAUZE PADS Aloe Vera Gel Extract Containing Acemannan, Carbomer 940, Citric Acid, Edetate Disodium, Imidurea, L-glutamic Acid, Methylparaben, Panthenol, Polyvinylpyrrolidone, Potassium Sorbate, Purified Water, Sodium Benzoate, Sodium Chloride, Sodium Metabisulfite, Trolamine CARRAVET(TM) 2" X 2" SURGICAL GAUZE PADS Aloe Vera Gel Extract Containing Acemannan, Carbomer 940, Citric Acid, Edetate Disodium, Imidurea, L-glutamic Acid, Methylparaben, Panthenol, Polyvinylpyrrolidone, Potassium Sorbate, Purified Water, Sodium Benzoate, Sodium Chloride, Sodium Metabisulfite, Trolamine 16 CARRASCENT(TM) ODOR ELIMINATOR, 1 OZ. Water, Alcohol, Fragrance, Quaternium-15, FD&C Blue #1 CARRASCENT(TM) ODOR ELIMINATOR, 8 OZ. Water, Alcohol, Fragrance, Quaternium-15, FD&C Blue #1 17 EXHIBIT B Other International Territories Granted to FARNAM in Accordance with Paragraph 1(b) None agreed to at this time. 18 EXHIBIT C Finished Goods Product Configurations for the PRODUCTS ACEMANNAN IMMUNOSTIMULANT KIT Each kit contains: o 4-10 mL vials of diluent with black and white pressure sensitive label o 4-10 mL vials Acemannan with black and white pressure sensitive label per chipboard box with divider with a printed, pressure sensitive, 2-color label (red and black) o 1-black and white package insert per kit o 3 kits per corrugated shipper with pre-printed, 1-color label ACEMANNAN IMMUNOSTIMULANT INDIVIDUAL Each kit contains: o 1-10 mL vial of diluent with black and white pressure sensitive label o 1-10 mL vial of Acemannan with black and white pressure sensitive label per chipboard box with a printed, pressure sensitive, 2-color label (red and black) o black and white package insert per kit o 12 kits per corrugated shipper with a pre-printed, 1-color label CARRAVET(TM) WOUND DRESSING, 1.0 OZ. o 1-4 color printed LDPE polyethylene tube o 1-butterfly tube top o 12 tubes per chipboard box printed with a 4-color label o 6 chipboard boxes per corrugated shipper with a pre-printed, 1-color label CARRAVET(TM) WOUND DRESSING, 3.5 OZ. o 1-4 color printed LDPE polyethylene tube o 1-butterfly tube top o 12 tubes per corrugated shipper and a pre-printed, 1-color label CARRAVET(TM) SPRAY-GEL WOUND DRESSING, 8 OZ. o 1-HDPE white bottle o 1-all white trigger sprayer (spray and stream) o 1-pressure sensitive 4-color label o 6-bottles per corrugated shipper with a pre-printed, 1-color label CARRAVET(TM) WOUND CLEANSER, 8 OZ. 19 o 1-HDPE white bottle o 1-all white trigger sprayer (spray and stream) o 1-pressure sensitive 4-color label o 12-bottles per corrugated shipper with a pre-printed, 1-color label 20 CVMD(TM) WOUND CLEANSER, 12 OZ. o 1-HDPE white bottle o 1-all white trigger sprayer (spray and stream) o 1-pressure sensitive 4-color label o 6-bottles per corrugated shipper with a pre-printed, 1-color label CARRAVET(TM) MULTI PURPOSE CLEANSING FOAM, 4 OZ. o 1 aerosol litho can with 4-color label o 1-white plastic lid o 12-cans per corrugated shipper and a pre-printed, 1-color label CARRAVET(TM) 4" X 4" SURGICAL GAUZE PADS o 1-4" x 4" twelve-ply gauze pad saturated with CarraVet Hydrogel Wound Dressing o 1-Dressing per foil pouch with a printed, 4-color label o 10-foil pouches per chipboard box printed with a 4-color label o 10-chipboard boxes per corrugated shipper with a pre-printed, 1-color label CARRAVET(TM) 2" X 2" SURGICAL GAUZE PADS o 1-2" x 2" twelve-ply gauze pad saturated with CarraVet Hydrogel Wound Dressing o 1-Dressing per foil pouch with a printed, 4-color label o 10-foil pouches per chipboard box printed with a 4-color label o 10-chipboard boxes per corrugated shipper with a pre-printed, 1-color label CARRASCENT(TM) ODOR ELIMINATOR, 1 OZ. o 1-4 color silkscreen LDPE silk-screened bottle o 1-pump sprayer with cap o 48 bottles per corrugated shipper with a pre-printed 1-color label CARRASCENT(TM) ODOR ELIMINATOR, 8 OZ. o 1-4 color silkscreen LDPE silk-screened bottle o 1-pump sprayer with cap o 12 bottles per corrugated shipper with a pre-printed 1-color label 21 EXHIBIT D "Finished Goods" Pricing ================================================================================ Item Description Price to FARNAM ================================================================================ Acemannan Immunostimulant Kit $ 23.75 each - -------------------------------------------------------------------------------- Acemannan Immunostimulant Individual $ 6.09 each - -------------------------------------------------------------------------------- CarraVet(TM)Wound Dressing, 1.0 oz. $ 1.23 each - -------------------------------------------------------------------------------- CarraVet(TM)Wound Dressing, 3.5 oz. $ 2.65 each - -------------------------------------------------------------------------------- CarraVet(TM)Spray-Gel Wound Dressing, 8 oz. $ 6.03 each - -------------------------------------------------------------------------------- CVMD(TM)Wound Cleanser, 8 oz. $ 2.50 each - -------------------------------------------------------------------------------- CarraVet(TM)Wound Cleanser, 12 oz. $ 2.88 each - -------------------------------------------------------------------------------- CarraVet(TM)Multi Purpose Cleansing Foam, 4 oz. $ 2.30 each - -------------------------------------------------------------------------------- CarraVet(TM)4" x 4" Surgical Gauze Pads, each $ 1.09 each - -------------------------------------------------------------------------------- CarraVet(TM)2" x 2" Surgical Gauze Pads, each $ 0.75 each CarraScent(TM)Odor Eliminator, 1 oz. $ 1.85 each CarraScent(TM)Odor Eliminator, 8 oz. $ 3.15 each TRC Animal Health Spray Gel, 2 oz. $ 2.00 each - -------------------------------------------------------------------------------- TRC Animal Health Wound Dressing, 3.5 oz. $ 2.65 each - -------------------------------------------------------------------------------- TRC Animal Health Wound Dressing, 1.0 oz. $ 1.23 each - -------------------------------------------------------------------------------- TRC Animal Health Wound Cleanser, 8.0 oz. $ 2.50 each ================================================================================ 22 EXHIBIT E Annual Cumulative Minimum Purchase Amounts of the PRODUCTS Sold Within the United States and Canada Necessary to Maintain FARNAM's Exclusivity Therein For the period beginning January 1, 1997 and $ 450,000 ending December 31, 1998 For the calendar year beginning January 1, 1999 $ 300,000 For the calendar year beginning January 1, 2000 $ 350,000 For each calendar year beginning January 1, 2001 $ 500,000 and each calendar year thereafter 23 EX-10.77 11 TERMINATION AGREEMENT EXHIBIT 10.77 TERMINATION AGREEMENT AND FULL AND FINAL RELEASE Carrington Laboratories, Inc. ("Carrington") and Terry Nida ("Nida") hereby agree upon a compromise and full and final settlement of all issues and disputes between them on the terms set forth below: 1. Salary and Benefits. In accordance with Carrington's existing ------------------- policies, Nida has received or will receive the following pay and benefits regardless of whether he enters into this Agreement: (i) payment of Nida's regular base salary through August 18, 1995 less all normal withholdings; (ii) payment for all accrued and unused vacation leave through August 18, 1995, less all normal withholdings. In addition, Carrington will settle promptly all authorized reimbursable business expenses, if any, when Nida has submitted appropriate documentation to Carrington. 2. Special Separation Benefits. In consideration of the General Release, --------------------------- Nondisparagement, and Confidentiality Obligations provisions of this Agreement, and contingent upon Nida's acceptance of the terms of this Agreement, Carrington offers to continue to employ Nida as an inactive employee at a salary rate of $12,500.00 per month, payable in accordance with its normal payroll practices and subject to normal withholdings, from August 18, 1995, until October 31, 1995 which shall be called the Employment Termination Date. The period from August 18, 1995, through the Employment Termination Date is hereinafter referred to as the "Inactive Period." 3. Employee Benefit Plans. In consideration of the General Release, ---------------------- Nondisparagement, and Confidentiality Obligations provisions of this Agreement, and contingent upon Nida's acceptance of the terms of this Agreement, Carrington offers to continue Nida's eligibility to participate in any group insurance or stock purchase plans offered by Carrington, subject to the terms of each such plan and provided he timely pays any cost that he would be required as an employee to pay in connection therewith, until the Employment Termination Date. Unless earlier terminated in accordance with the terms of any such plan, Nida's participation in all such plans shall terminate on the Employment Termination Date, except to the extent (if any) that he is entitled, and elects, to continue insurance coverage thereafter at his own expense pursuant to the Consolidated Omnibus Budget Reconciliation Act. 4. Services. During the Inactive Period and, if any, the Consulting -------- Period, Nida agrees to make himself available to Carrington and to perform for Carrington upon reasonable request by Carrington, services (hereinafter referred to as the "Services"). The Services shall include such services as Nida performed for Carrington as Vice President of Marketing and Sales. 5. Authority. After August 18, 1995, Nida has not been and will not be --------- obligated or authorized, and has not held himself out and shall not hold himself out as being authorized, to make any representations, enter into any contracts, commitments, or obligations, or perform any other acts of any kind whatsoever on behalf of Carrington. Nida also has not been and will not be authorized to hold himself out as an agent or active employee of Carrington after August 18, 1995. 1 6. General Release. Nida and his family members, heirs, successors, and --------------- assigns (hereinafter referred to collectively as the "Releasing Parties") hereby release, acquit, and forever discharge Carrington and its shareholders, officers, directors, fiduciaries, agents, servants, employees, representatives, attorneys, insurers, successors, and assigns (hereinafter referred to collectively as the "Released Parties") from any and all claims, demands, and causes of action of every kind and character, whether vicarious, derivative, or direct, that any of the Releasing Parties now has or may hereafter have or assert against any or all of the Released Parties growing out of, resulting from, or connected in any way with Nida's employment or the termination of his employment with Carrington, including but not limited to any and all claims for damages (actual, exemplary, liquidated, or unliquidated), back pay, future pay, deferred compensation, bonuses, commissions, severance payments, vacation and leave benefits, unreimbursed business expenses, overtime compensation, reinstatement or priority placement, past and future medical or other employee benefits for Nida or his dependents, employee retirement benefits, contributions to company-sponsored 401(k) plans (except as presently vested in any savings plan sponsored by Carrington in which Nida is a participant), medical and counseling costs, injunctive relief, declaratory relief, attorney's fees, costs of court, disbursements, interest, or any other form whatsoever of legal or equitable relief to which any of the Releasing Parties claims or might claim entitlement as a result of any alleged act or omission of any of the Released Parties, including but not limited to any alleged unlawful age discrimination or any other form of unlawful employment discrimination, retaliation, wrongful termination, breach of contract (express or implied), tortious interference with contract, promissory estoppel, detrimental reliance, negligent or intentional infliction of emotional distress, negligent hiring and supervision, assault, battery, defamation of character, any alleged act of harassment or intimidation, negligent or intentional misrepresentation or fraud, invasion of privacy, or any other intentional or negligent tort, or any alleged violation of the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the Texas Commission on Human Rights Act, the Americans With Disabilities Act, the Employee Retirement Income Security Act of 1974, the public policy of the United States, the State of Texas, or any other state, or any other federal or state statutory or common law, or any other alleged adverse employment action by any of the Released Parties, and all other loss, expense, or detriment of every kind and character, whether past or future, that any of the Releasing Parties may have sustained or may hereafter sustain by reason of any act or omission of any of the Released Parties growing out of, resulting from, or connected in any way with Nida's employment or the termination of his employment with Carrington. This general release does not apply to any rights or claims that may arise after the date this Agreement is executed by Nida. 7. Nondisparagement Nida shall not make any statements, orally or in ---------------- writing, or engage in any other acts that would directly or indirectly cause any harm or damage to Carrington or any of the other Released Parties. 8. Confidentiality Obligations. Nida acknowledges and confirms all ---------------------------- agreements and obligations, including the obligation of confidentiality, set forth in that certain Employee's Confidentiality and Invention Agreement by and between Carrington and Nida, which is attached as Appendix A, and shall be executed in conjunction with this agreement. In addition, Nida agrees that the terms of this Agreement shall be and remain confidential, and shall not be disclosed by him to any person other than his spouse, attorney, and accountant or tax return preparer if such persons 2 have agreed to keep such information confidential, and except as may be required by law or judicial process. 9. Effect of Breach. Nida acknowledges and agrees that should he or any ---------------- of the other Releasing Parties breach any of their obligations set forth in this Agreement, (i) Carrington will have no further obligation to comply with its undertakings in Sections 3 or 4 hereof, but that all of the other provisions of this Agreement shall remain in full force and effect; (ii) Nida may be required to repay any payments made to him and reimburse Carrington for any payments made on his behalf or for his benefit pursuant to Sections 3 or 4 hereof; (iii) the Releasing Parties also may be liable for any of the Released Parties' damages caused by the breach, including without limitation their costs and attorney's fees incurred in defending claims brought in breach of this Agreement or bringing claims to enforce this Agreement. 10. Effect and Use of Agreement. Nida agrees that this Agreement does not --------------------------- in any manner constitute an admission of liability or wrongdoing on the part of Carrington or any of the other Released Parties, but that Carrington expressly denies any such liability or wrongdoing and enters into this Agreement in compromise and settlement of a disputed claim for the sole purpose of avoiding trouble, litigation and expense. Nida further agrees that, except to the extent necessary to enforce this Agreement, neither this Agreement nor any part of it may be construed, used, or admitted into evidence in any judicial, administrative, or arbitral proceeding as an admission of any kind by Carrington or any of the other Released Parties. 11. Representation Regarding Certain Laws. Nida understands and ------------------------------------- acknowledges that various state and federal laws (including the Age Discrimination in Employment Act of 1967) prohibit discrimination in employment based on sex, race, age, color, national origin, religion, disability, citizenship and veteran status, and that the law also prohibits breach of contract (express or implied) and intentional or negligent tortious conduct. 12. Effective Period of Offer. Carrington's offer of the terms set forth ------------------------- in this Agreement will expire at midnight on the twenty-first day following the date of Carrington's execution of this Agreement, i.e., on September 8, 1995. ---- Nida may accept this offer at any time before such expiration by executing this Agreement and returning it to Carrington. 13. Effective Date of Agreement. This Agreement will become effective and ---------------------------- enforceable seven (7) days after Nida's execution and delivery to Carrington of this Agreement (the "Effective Date"). At any time before the Effective Date, Nida may revoke his acceptance of this Agreement. 14. Consultation With An Attorney. Carrington hereby advises Nida to ----------------------------- consult an attorney before executing this Agreement. 15. Representation Regarding Meaning and Execution of Agreement. Nida ----------------------------------------------------------- further acknowledges and represents that he has read this Agreement, that he has had the opportunity to have this Agreement read and explained to him by his attorney, that he fully understands the meaning and effect of his action in executing this Agreement, and that his execution of this Agreement is knowing and voluntary. 3 16. Miscellaneous. Nida and Carrington agree that this Agreement and the ------------- Confidentiality Agreement (a) contain and constitute the entire understanding and agreement between them regarding the subject matter hereof; (b) contain captions and definitions that are included only for convenience of reference and are not intended and shall not be construed to change the express provisions of this Agreement; (c) supersede and cancel any previous negotiations, agreements, commitments and writings regarding the subject matter of this Agreement; (d) may not be released, discharged, abandoned, supplemented, changed or modified in any manner except by a writing of concurrent or subsequent date signed by both parties hereto; (e) are binding on and shall inure to the benefit of Nida, his heirs, successors and assigns, and Carrington and its successors and assigns, and that the terms of Section 6 hereof shall inure to the benefit of all of the Released Parties; and (f) shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States. Nida and Carrington further agree that (i) if any provision of this Agreement is held to be unenforceable, such provision shall be considered to be separate, distinct, and severable from the remaining provisions of this Agreement and shall not affect the validity or enforceability of such remaining provisions, all of which shall remain in full force and effect; and (ii) if any provision of this Agreement is held to be unenforceable as written but may be made to be enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. SIGNED on the dates shown below. CARRINGTON LABORATORIES, INC. Dated: August 18, 1995 By: _____________________________________ Dr. Carlton E. Turner President and CEO Dated: _____________, 1995 _____________________________________ Terry Nida 4 EX-11.1 12 COMPUTATION OF NET INCOME PER SHARE Exhibit 11.1 CARRINGTON LABORATORIES, INC., AND SUBSIDIARIES COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
November 30, December 31, -------------------------- ---------------------------- 1993 1994 1994 1995 ----------- ----------- ----------- ------------- Net Income $ 804,632 $ 1,421,238 $ (70,069) $ (1,628,267) Preferred stock dividend requirement (111,674) (125,113) -- (140,127) ----------- ----------- ----------- ------------- Income for computing income per common share from operations $ 692,938 $ 1,296,125 $ (70,069) $ (1,768,394) =========== =========== =========== ============= Average common and common equivalent shares outstanding 7,323,521 7,340,982 7,344,390 7,932,675 =========== =========== =========== ============= Net income per common and common equivalent share $ .09 $ .18 $ (.01) $ (.22) =========== =========== =========== =============
(1) Common stock equivalents have been excluded since the effect of net income (loss) per share of their inclusion would be either antidilutive or represent a dilution of less than 3%. EX-21.1 13 SUBSIDIARIES OF CARRINGTON 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
E - 14 EX-23.1 14 ARTHUR ANDERSEN CONSENT Exhibit 23.1 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report dated February 9, 1996, included in the Carrington Laboratories, Inc., Form 10-K for the year ended December 31, 1995, into the Company's previously filed Registration Statements on Form S-8 (File No. 33-22849, File No. 33-36041, File No. 33-42002, File No. 33-50430, File No. 33-64407, File No. 33-64403 and File No. 33-64405) and on Form S-3 (File No. 33-57360 and File No. 33-60833). It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1995, or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Dallas, Texas, March 29, 1996 EX-27 15 FINANCIAL DATA SCHEDULE
5 YEAR 1-MO JAN-01-1995 DEC-01-1994 DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994 6,222,008 464,367 0 0 2,453,535 3,089,816 (226,884) 204,905 5,103,988 5,047,149 14,411,153 8,935,077 18,932,959 14,726,840 (6,222,309) (5,070,401) 27,934,097 18,898,977 3,464,223 4,462,948 0 0 0 0 1,167,434 1,040,634 83,790 73,444 21,147,900 11,324,690 27,399,124 12,438,768 24,374,090 1,781,017 24,374,090 1,781,017 7,944,271 516,247 12,441,972 984,535 5,370,109 326,916 0 0 250,751 23,413 (1,496,917) (70,069) 131,350 0 (1,628,267) (70,069) 0 0 0 0 0 0 (1,628,267) (70,069) (.22) (.01) (.22) (.01)
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