UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 2)
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: (972) 518-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Preferred Share Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
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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.
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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 is comprised of three business
divisions. See Note 15 to the financial statements of this annual
report for financial information about these business divisions. The
Company sells, using a network of distributors, nonprescription
products through its Wound and Skin Care Division, 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
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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.
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 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 he 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.
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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.
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 Sorb(TM) 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.
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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 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.
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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).
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 assurance as to whether or when the
USDA will remove the conditional restriction on its approval of this
product.
Human Studies
Evaluation of Aliminase(R)(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(R) 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
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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(R) 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(R) 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(R) (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, 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 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 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.
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Evaluation of Carrasyn Freeze-Dried Gel (Carra Sorb(TM) 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.
Summary. The following table outlines the status of the products
and potential indications of the Company's complex carbohydrates
developed, planned or under development. There is no assurance of
successful development, completion or regulatory approval of any
product not yet on the market.
PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED, PLANNED OR UNDER
DEVELOPMENT PRODUCT OR POTENTIAL INDICATION POTENTIAL MARKET APPLICATIONS
STATUS
Topical
Dressings Pressure and Vascular Ulcers Marketed
Cleansers Wounds Marketed
Antifungal Candida Marketed
Oral
Human
Anti-inflammatory Ulcerative Colitis Phase III
Clinical Trial
Injectable
Human
Anticancer Melanoma, Breast, Prostate, Colon, Phase I
Hypernephroma, and Soft Tissue Clinical Trial
Sarcoma
Veterinary
Anticancer Fibrosarcoma
Marketed
Dental
Pain reduction Aphthous Ulcers Marketed
Vaccine Adjuvant
Veterinary
Poultry Vaccines Marek's Disease Marketed
Livestock Cattle, Sheep
Clinical Trials
Marine (water treatment) Trout, Shrimp Clinical Trials
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Licensing Strategy
The Company expects that prescription pharmaceutical products
containing certain defined mannans will require a substantial degree of
development effort and expense. Before governmental approval to market
any such product is obtained, the Company may license these mannans for
certain indications to other pharmaceutical companies in the United
States or foreign countries and require such licensees to undertake the
steps necessary to obtain marketing approval for specific indications
or in a particular country.
Similarly, the Company intends to license third parties to market
products containing defined mannans for certain human indications when
it lacks the expertise or financial resources to market effectively.
If the Company is unable to enter into such agreements, it may
undertake to market the products itself for such indications. The
Company's ability to market these mannans for specific indications will
depend largely on its financial condition at the time and the results
of related clinical trials. There is no assurance that the Company
will be able to enter into any license agreements with third parties or
that, if such license agreements are concluded, they will contribute to
the Company's overall profits.
In November 1995, the Company signed a licensing agreement with a
supplier of calcium alginates and other wound care products. Under the
agreement, the Company has exclusive marketing rights to advanced
calcium alginates products for North and South America and the People s
Republic of China. The Company will continue to seek opportunities to
license products from third parties that will enhance its product
portfolio.
Raw Materials and Processing
The principal raw material used by the Company in its operations is
the leaf of the plant Aloe barbadensis Miller, popularly known as aloe
vera. Through a patented process, the Company produces bulk
pharmaceutical and injectable mannans and freeze-dried aloe vera
extract from the central portion of the aloe vera leaf known as the
gel. Bulk pharmaceutical mannan, in the form of a hydrogel, is used as
an ingredient in certain of the Company's wound and skin care products.
Through additional processing, bulk mannans may be produced in oral and
injectable dosage forms.
In May 1990, the Company purchased a 405-acre farm in the Guanacaste
province of northwest Costa Rica which currently has approximately 125
acres planted with aloe vera. The Company plans to plant additional
acreage as demand for aloe vera leaves increases. The Company believes
that the Costa Rica farm will be capable of providing substantially all
of the aloe vera leaves required to meet the Company's presently
anticipated needs (see "Properties--Costa Rica Facility" below).
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
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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. It was 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 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.
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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
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
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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.
<PAGE>
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
<PAGE>
October 30, 1990, as United States Patent No. 4,966,892. Foreign
patents that are counterparts to the foregoing United States patents
have been granted in some of the member states of the European Economic
Community and several other countries.
The second series of patent applications related to preferred
processes for the production of acetylated 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
<PAGE>
with its scientific consultants, and the Company's key employees have
entered into agreements with the Company requiring that they forbear
from disclosing confidential information of the Company and assign to
the Company all rights in any inventions made while in the Company's
employ relating to the Company's activities. Accordingly, the Company
believes that its valuable trade secrets and unpatented proprietary
know-how are adequately protected.
The technology applicable to the Company's products is developing
rapidly. A substantial number of patents have been issued to other
biopharmaceutical companies. In addition, competitors have filed
applications for, or have been issued, patents and may obtain
additional patents and proprietary rights relating to products or
processes competitive with those of the Company.
To the Company's knowledge, acetylated 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 Carrasyn(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 , 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, 42 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.
<PAGE>
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 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 ration
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, 1995, borrowings outstanding under the line
of credit and term loan were $0 and $2,977,073, respectively.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Background
The Company is a research-based pharmaceutical and medical device
company engaged in the development, manufacturing and marketing of
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
<PAGE>
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.
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 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 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 31, 1996 and
January 16, 1997, the supplier had not made a presentation for payment
under the letter of credit. On April 29, 1996, the Company's
management elected to pay off the entire term loan balance of
$2,977,000 plus $18,000 in accrued interest with available cash to
eliminate the interest expense on the term loan. The Company pledged a
$1,500,000 certificate of deposit (CD) to secure the letter of credit.
The supply agreement 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. At the request of the
supplier, the minimum buy quantities were waived for the three month
period ending December 31, 1996. The supplier currently produces the
CarraSorb(TM)M Freeze Dried Gel and the Aphthous Ulcer Patch for the
Company. Both of these products represent new technology and are still
in the product launch phase. The Company had approximately $49,000 and
$232,000 of CarraSorb(TM)M and Aphthous Ulcer Patch inventory on hand as
of March 31, 1996 and January 16, 1997, respectively. Current sales
are lower than the minimum purchase requirement but the Company
believes that as demand for the new technology increases, demand will
exceed the minimum purchase requirement. The Company is in full
compliance with the agreement and has the available resources to meet
all future minimum purchase requirements as of January 16, 1997.
<PAGE>
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(R) (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 up-front
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(R) 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.
<PAGE>
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.
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.
<PAGE>
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 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.
To accelerate new product development and reduce overhead, the Company
was restructured in 1995. The restructuring included the lay-off of
seventeen high level and under-utilized positions in administration,
marketing, and research and development for a net reduction in salaries
and benefits of approximately $120,000 per month. Also, the Company
relocated its manufacturing operations to its current facility on
Walnut Hill in Irving, Texas and immediately realized a reduction in
overhead and production costs as the new facility is more efficient
than the prior location. As the Walnut Hill facility is owned by the
Company, rent and other facility expenses related to the former
production facility of approximately $25,000 per month were eliminated.
Each of these items is expected to reduce future expenses and improve
cash flow results. As a result of the restructuring, approximately
$1.4 million of one-time charges were taken during 1995. Of these
charges, only $275,000 remained unpaid as of December 31, 1995.
Of these charges, approximately $700,000 were selling, general and
administrative expenses, $500,000 related to severance agreements,
$130,000 was due to increased legal fees and a $70,000 write off of
unamortized legal and banking costs that resulted when the Company
refinanced its long term debt in 1993. Approximately, $90,000 of cost
<PAGE>
were incurred in 1995 to complete the refinancing. These costs are
included in other long term assets and will be amortized over the term
of the loan. As a result, selling, general and administrative expenses
increased from $11,968,000 to $12,442,000, or 4%.
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 resulting from the above described
restructuring was charged to research and development. These charges
will reduce internal salaries on an ongoing basis. However, this
reduction was offset in 1995 by beginning the large scale clinical
trial for the testing of Aliminase(R) (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.
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets As of
November 30, December 31, December 31,
1994 1994 1995
------------- ------------- ------------
<S> <C> <C> <C>
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, Decem-
ber 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 & 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
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
<TABLE/>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
For the Years Ended November 30, 1993 and 1994
and the Month Ended December 31, 1994 and the
Year Ended December 31, 1995 November 30, December 31,
1993 1994 1994 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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)
<TABLE/>
The accompanying notes are an integral part of these statements.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Investment
For the Years Ended November 30, 1993 and 1994, and the Month Ended
December 31, 1994, and the Year Ended December 31, 1995, Foreign
Capital in Currency
Preferred Stock Common Stock Excess of Translation
Shares Amount Shares Amount Par Value Deficit Adjustment
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
---------------------------------------------------------------------------------------
<PAGE>
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)
----------------------------------------------------------------------------------------
<TABLE/>
The accompanying notes are an integral part of these statements.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended November 30, 1993 and 1994
and the Month Ended December 31, 1994 and the
Year Ended December 31, 1995 November 30, December 31,
1993 1994 1994 1995
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
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
----------- ----------- ---------- ----------
<PAGE>
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
<TABLE/>
The accompanying notes are an integral part of these statements.
<PAGE>
Notes to the 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 and liabilities at year-end exchange rates while non-monetary
items are translated at historical rates. Revenue and expense accounts
are translated at the average rates in effect during the year, except
for depreciation and cost of sales which are translated at historical
rates. Translation adjustments and transaction gains or losses are
recognized in 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.
<PAGE>
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.
REVENUE RECOGNITION The Company recognizes revenue when title to the
goods transfers. For the majority of the Company's sales, this occurs
at the time of shipping. Certain customers do not take title until the
goods are delivered to their location or agent.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 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.
<PAGE>
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 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 the 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
<PAGE>
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
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
<PAGE>
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
========== ===========
<PAGE>
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 January 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 that 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.
<PAGE>
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 $ 8.62 to $13.50
Lapsed or canceled (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 canceled (118,275) $ 6.25 to $21.72
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 canceled (72,036) $ 8.625 to $20.12
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 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.
<PAGE>
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 canceled (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 canceled (42,500) $18.00 to $26.00
------------------------------------------------------------------------
Balance, November 30, 1994 236,000 $ 6.25 to $20.12
Lapsed or canceled (130,000) $11.25 to $26.00
Exercised (92,000) $ 6.25 to $16.25
------------------------------------------------------------------------
Balance, December 31, 1995 99,000 $12.125 to $20.12
------------------------------------------------------------------------
Warrants exercisable at
December 31, 1995 99,000 $12.125 to $20.12
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.
<PAGE>
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 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
<PAGE>
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
======== ======== ========
<PAGE>
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.
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 $2,492,000 and Owens &Minor accounted for
$1,456,000, $1,795,000 and $3,348,000 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.
<PAGE>
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
<PAGE>
(15) Sales by Division
The following summarizes the Company's sales by division and
consolidated sales for the years ending December 31, 1995, November 30,
1994 and 1993
(Dollar amounts in 000's)
Carrington Laboratories Consolidated
------------------------------- ----------------
Year Ended Wound Carrington Caraloe Total
December 31, 1995 Care Veterinary Sales Inc. Sales
------------------ -------- ---------- ---------- ------- -------
Sales, net $21,147 $320 $21,467 $2,907 $24,374
Cost of Goods Sold 5,971 163 6,134 1,810 7,944
-------- ------ -------- ------- -------
Gross Margin $15,176 $157 $ 15,333 $1,097 $16,430
======== ====== ======== ======= =======
Year Ended
November 30, 1994
Sales, net $23,665 $404 $24,069 $1,361 $25,430
Cost of Goods Sold 5,392 190 5,582 833 6,415
-------- ------ -------- ------- -------
Gross Margin $18,273 $214 $18,487 $ 528 $19,015
======== ====== ======== ======= =======
Year Ended
November 30, 1993
Sales, net $20,684 $463 $21,147 $ 37 $21,184
Cost of Goods Sold 4,822 445 5,267 22 5,289
-------- ------ -------- ------- -------
Gross Margin $15,862 $ 18 $15,880 $ 15 $15,895
======== ====== ======== ======= =======
<PAGE>
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 misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Carrington Laboratories, Inc., and subsidiaries as of November 30, 1994,
December 31, 1994 and December 31, 1995, and the consolidated 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
<PAGE>
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: January __, 1997 By: /s/ Sheri L. Pantermuehl
---------------------------
Sheri L. Pantermuehl, CFO
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