UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ To ________________
Commission file number 0-11997
CARRINGTON LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1435663
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 Walnut Hill Lane, Irving, Texas 75038
(Address of principal executive offices and Zip Code)
972-518-1300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date. 9,309,200 shares of
Common Stock, $.01 par value, were outstanding at October 30, 1998.
1
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INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 1998 (unaudited) and
December 31, 1997 3
Condensed Consolidated Statements of
Operations for the three and nine
months ended September 30, 1998 and
1997 (unaudited) 4-5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30,
1998 and 1997 (unaudited) 6
Notes to Condensed Consolidated
Financial Statements (unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
2
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<TABLE>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(In 000's)
(unaudited)
September 30, December 31,
Assets 1998 1997
------ ------
<S> <C> <C>
Cash and cash equivalents $ 4,723 $ 4,023
Accounts receivable, net 3,515 3,457
Inventories 5,051 5,003
Prepaid expenses 858 328
------ ------
Total current assets 14,147 12,811
Property, plant and equipment, net 11,104 10,815
Other assets 1,380 2,537
------ ------
Total assets $26,631 $26,163
====== ======
Liabilities and Shareholders'
Investment
Accounts payable $ 1,215 $ 1,143
Accrued liabilities 2,171 2,194
------ ------
Total current liabilities 3,386 3,337
Shareholders' investment:
Common stock 93 93
Capital in excess of par 51,695 51,585
Deficit (28,543) (28,852)
------ ------
Total Shareholders' investment 23,245 22,826
------ ------
Total liabilities and shareholders'
investment $26,631 $26,163
====== ======
The accompanying notes are an integral part of these statements.
3
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<TABLE>
Condensed Consolidated Statements of Operations
(In 000's, except per share amounts)
(unaudited)
Three Months Ended
September 30,
1998 1997
------ ------
<S> <C> <C>
Net sales $ 6,003 $ 6,229
Cost and expenses:
Cost of sales 2,766 2,576
Selling, general and
administrative 2,509 2,500
Research and development 680 742
Interest, net (53) (74)
------ ------
Income before income taxes 101 485
Provision for income taxes 0 22
------ ------
Net income $ 101 $ 463
===== ======
Net income per share - basic and
diluted $ 0.01 $ 0.05
===== ======
The accompanying notes are an integral part of these statements.
4
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<TABLE>
Condensed Consolidated Statements of Operations
(In 000's, except per share amounts)
(unaudited)
Nine Months Ended
September 30,
1998 1997
------ ------
<S> <C> <C>
Net sales $ 17,818 $ 17,433
Cost and expenses:
Cost of sales 7,946 6,970
Selling, general and
administrative 7,791 8,018
Research and development 1,925 2,336
Interest, net (167) 24
------ ------
Income from operations
before income taxes 323 85
Provision for income taxes 10 70
------ ------
Net income $ 313 $ 15
====== ======
Net income per share - basic and
diluted $ 0.03 $ 0.01
----- ------
Less: Earnings attributable to
preferred shares $ 0.00 $ (0.01)
Net income (loss) available to
common shareholders per share -
basic and diluted $ 0.03 $ (0.00)
====== ======
The accompanying notes are an integral part of these statements.
5
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<TABLE>
Condensed Consolidated Statements of Cash Flows
(In 000's)
(unaudited)
Nine Months Ended
September 30,
1998 1997
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income $ 313 $ 15
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization 806 912
Changes in assets and liabilities:
Receivables, net (58) (1,433)
Inventories (47) (1,039)
Prepaid expenses (530) 130
Other assets 1,136 172
Accounts payable and accrued
liabilities 73 (543)
----- -----
Net cash provided (used) by operating
activities 1,693 (1,786)
Cash flows from investing activities:
Purchases of property, plant and
equipment (1,079) (244)
----- -----
Net cash used by investing activities (1,079) (244)
Cash flows from financing activities:
Issuance of common stock 110 2,584
Repurchase of preferred stock - (7,785)
Debt payments (24) (25)
----- -----
Net cash provided (used) by financing
activities 86 (5,226)
----- -----
Net increase (decrease) in cash and cash
equivalents 700 (7,256)
Cash and cash equivalents, beginning of
period 4,023 11,406
----- -----
Cash and cash equivalents, end of period $4,723 $ 4,150
===== =====
Supplemental disclosure of cash flow
information
Cash paid during the period for
interest $ 1 $ 1
Cash paid during the period for
federal state and local income taxes $ 2 $ 0
The accompanying notes are an integral part of these statements.
6
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<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Condensed Consolidated Financial Statements:
The condensed consolidated balance sheet as of September 30, 1998, the
condensed consolidated statements of operations for the three and nine
month periods ended September 30, 1998 and 1997 and the condensed
consolidated statements of cash flows for the nine month periods ended
September 30, 1998 and 1997 have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include
all normal recurring adjustments) necessary to present fairly the
consolidated financial position, results of operations and cash flows at
September 30, 1998 and for all periods presented have been made. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's annual
report to shareholders or Form 10-K for the year ended December 31, 1997.
(2) Net Income Per Share:
Basic net income per share was computed by dividing net income by the
weighted average number of common shares outstanding. Weighted average
common shares outstanding were 9,308 and 9,305 for the three months ended
September 30, 1998 and 1997, respectively. Weighted average common
shares outstanding for the nine month periods were 9,313 and 8,932 for
1998 and 1997, respectively.
Total dilutive securities were insignificant for the three and nine month
periods ended September 30, 1998 and 1997 and had no impact on diluted
net income per share as their inclusion would have been antidilutive.
Options to purchase shares of common stock outstanding during the three
and nine months ended September 30, 1998 and 1997 were not included in
the calculation of diluted earnings per share because the options
exercise prices were greater than the average market price of the common
shares and, therefore, the effect would be antidilutive. Convertible
preferred shares that were convertible into shares of common stock during
1997 were not included in the calculation of diluted earnings per share
because the effect would be antidilutive.
(3) Business Segments:
The Company operates in two business segments: Wound Care Products
and Caraloe, Inc., a consumer products subsidiary, which sells bulk
ingredients, consumer beverages, Aloe Nutritional[R] and skin care
products.
Corporate Income Before Income Taxes set forth in the following table
includes research and development expenses which were related to the
development of pharmaceutical products not associated with the reporting
segments. Assets which are used in more than one segment are reported in
segment where the predominant use occurs. The Company's production
facility in Costa Rica, which provides bulk ingredients for both
segments, and total cash for the Company are included in Corporate assets.
<PAGE>
Business Segments (In 000's)
Quarter Ended Wound Caraloe,
September 30, 1998 Care Inc. Corporate Total
--------------------------------------------------------------------
Sales to unaffiliated
customers $4,176 $1,827 $ - $6,003
Income (loss) before income
taxes 341 352 (592) 101
Identifiable assets 15,011 1,388 10,232 26,631
Capital expenditures 13 - 190 203
Depreciation and amortization 48 2 199 249
--------------------------------------------------------------------
Quarter Ended Wound Caraloe,
September 30, 1997 Care Inc. Corporate Total
--------------------------------------------------------------------
Sales to unaffiliated
customers $4,681 $1,548 $ - $6,229
Income (loss) before income
taxes 446 341 (302) 485
Identifiable assets 14,563 1,188 9,568 25,319
Capital expenditures 21 - 9 30
Depreciation and amortization 116 - 180 296
--------------------------------------------------------------------
Nine Months Ended Wound Caraloe,
September 30, 1998 Care Inc. Corporate Total
--------------------------------------------------------------------
Sales to unaffiliated
customers $12,650 $5,168 $ - $17,818
Income (loss) before income
taxes 943 1,055 (1,675) 323
Identifiable assets 15,011 1,388 10,232 26,631
Capital expenditures 206 18 855 1,079
Depreciation and amortization 346 2 458 806
--------------------------------------------------------------------
Nine Months Ended Wound Caraloe,
September 30, 1997 Care Inc. Corporate Total
--------------------------------------------------------------------
Sales to unaffiliated
customers $13,797 $3,636 $ - $17,433
Income (loss) before income
taxes 1,282 835 (2,032) 85
Identifiable assets 14,563 1,188 9,568 25,319
Capital expenditures 62 - 182 244
Depreciation and amortization 461 - 451 912
<PAGE>
(4) Income Taxes:
The tax effects of temporary differences have given rise to a deferred
tax asset. At December 31, 1997, the Company provided a valuation
allowance against the entire deferred tax asset due to the uncertainty as
to the realization of the asset. At December 31, 1997, the Company had
net operating loss carryforwards of approximately $36,670,000 for federal
income tax purposes, which expire during the period from 1999 to 2011,
and research and development tax credit carryforwards of approximately
$839,000, which expire during the period from 1999 to 2008, all of which
are available to offset federal income taxes due in future periods. The
provision for federal income taxes for the first nine months of 1998 was
$10,000, which represents the alternative minimum tax. The remaining tax
on income for the nine months ended September 30, 1998 was offset by a
reduction in the valuation allowance.
(5) Commitments and Contingencies:
In February 1995 the Company entered into a commitment to purchase $2.5
million of freeze dried products from its principal supplier over a 66
month period ending in August 2000. The commitment, which also provides
for monthly minimum purchases, is required to be supported to the extent
of 60% of the remaining commitment by a letter of credit from a bank or a
pledged certificate of deposit. Through September 30, 1998, the Company
had purchased $581,000 of products pursuant to this commitment and made
prepayments of $302,000 toward future deliveries under the commitment.
Although management believes that new products which the Company began to
actively market in late 1997, as well as additional products to be
developed, will result in no losses pursuant to this commitment, the
Company could incur significant losses if it is not able to meet the
minimum purchase commitments.
(6) Stock Options:
The Company has an incentive stock option plan (the "Option Plan") under
which incentive stock options and nonqualified stock options may
be granted to certain employees as well as non-employee directors,
consultants and advisors. Options are granted at a price no less than
the market value of the shares on the date of the grant, except for
incentive options to employees who own more than 10% of the total voting
power of the Company's common stock, which are granted at a price no less
than 110% of the market value. Options granted to employees normally
become exercisable at the rate of 25% per year after the first
anniversary of the grant. Options granted to directors are exercisable
in whole or in part beginning on the date of the grant. Options granted
expire four to ten years from the dates of grant. The Company has
reserved 1,500,000 shares of common stock for issuance under the Option
Plan.
The Company's 1985 Stock Option Plan expired in February 1995. The
Company had reserved 1,400,000 shares of common stock for issuance under
this plan.
<PAGE>
As of January 30, 1998 the Company offered all option holders who were
employees or directors the opportunity to exchange their outstanding
options for new options at $4.81 per share, which was the closing market
price on that date. Outstanding options for 681,397 shares were
surrendered, and options for an equal number of shares were issued in
connection with the offer. The surrendered options were canceled. The
new options granted consisted of options for 628,897 shares granted
to employees and options for 52,500 shares granted to non-employee
directors. As disclosed in the Company's Supplement to Proxy Statement,
the options for 52,500 shares granted to non-employee directors as part
of the option exchange offer, as well as options for 47,600 shares also
granted to non-employee directors on January 30, 1998, were subsequently
rescinded. As contemplated by the Supplement to Proxy Statement, new
options for a total of 100,100 shares were subsequently granted to the
non-employee directors on May 14, 1998 at a price of $5.25, which was the
closing market price on that date.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Background
The Company is a research-based pharmaceutical and medical device company
engaged in the development, manufacturing and marketing of naturally
occurring complex carbohydrate and other natural products for
therapeutics in the treatment of major illnesses and the dressing and
management of wounds and other skin conditions. The Company sells
nonprescription products through its wound and skin care division and
consumer products and bulk ingredients through its consumer products
subsidiary, Caraloe, Inc. (See Note 3 to the condensed consolidated
financial statements for financial information on each of the segments.)
The Company's research and product portfolio are primarily based on
complex carbohydrate technology derived naturally from the Aloe vera L.
plant.
Liquidity and Capital Resources
At September 30, 1998 and December 31, 1997, the Company held cash and
cash equivalents of $4,723,000 and $4,023,000, respectively. The net
increase in cash of $700,000 is attributable to the results of operations
and converting a certificate of deposit in the amount of $1,250,000 to
cash. The increases were offset by capital expenditures of $1,079,000
during the period.
The Company has invested in inventory to support sales of bulk products
to Mannatech, Inc. and Aloe Commodities International, Inc ("ACI").
Receivables from these two customers totaled $451,000 and $457,000,
respectively, as of September 30, 1998. In June 1998, the Company
advanced ACI $200,000 on a short-term basis to enable ACI to invest in a
leaf supplier from which the Company expects to purchase Aloe vera L.
leaves pursuant to a letter of intent (discussed below) between the leaf
supplier and Caraloe. ACI's obligation to repay this advance is
evidenced by a 60-day unsecured term note bearing interest at the rate of
10% per annum. In September 1998, an amendment to the note was signed
extending the repayment date of the note to October 30, 1998, and in
November 1998 a second amendment to the note was signed extending the
repayment date of the note to 12/31/98. The Company continues to hold
$600,000 of ACI's Common Stock, that it purchased in 1996 and 1997.
<PAGE>
As of October 31, 1998, the Company had no material capital commitments
other than its leases and agreements with suppliers. In February 1995,
the Company entered into a supply agreement with its supplier of
freeze-dried products. The agreement required that the Company establish
a letter of credit equal to 60% of the minimum purchase commitment of
$2,500,000, but allowed for the amount of the letter of credit to be
reduced by 60% of the payments made under the agreement. In April 1998,
the letter of credit was reduced under this provision of the agreement to
$1,100,000. The supplier currently produces the CarraSorb[TM] M Freeze
Dried Gel and the Carrington[TM] (Aphthous Ulcer) Patch for the Company.
Both of these products represent new technology and are still in the
early phase of marketing. The Company had approximately $487,000 of
CarraSorb[TM] M and Carrington[TM] (Aphthous Ulcer) Patch inventory on
hand as of September 30, 1998.
The supply agreement also requires the Company to make minimum monthly
purchases of $30,000. In February 1998, the supply agreement was amended
to allow for unmet monthly minimum purchase amounts to be met by
prepayments, to be applied to future purchases under the agreement, which
allows the Company to keep inventory at levels appropriate for sales
demand. Current sales of both items are lower than the minimum purchase
requirement, but the Company believes that a licensing, acceptance and
demand for the new technology will increase and will cause demand for
these products to exceed the aggregate minimum purchase requirement. As
of September 30, 1998, the Company had purchased products and made
prepayments totaling approximately $883,000 from this supplier. The
Company is in full compliance with the agreement and, as of October 31,
1998, had the available resources to meet all future minimum purchase
requirements. There is, however, no assurance that the Company will be
able to sell all of the products it is required to purchase from this
supplier. If and to the extent that the Company makes prepayments under
the agreement but does not apply those prepayments to pay for products
that it can sell, such prepayments would eventually have to be charged
against the Company's earnings. As of September 30, 1998, prepayments of
$302,000 have been made.
In November 1997, the Company entered into an agreement with Comerica
Bank-Texas for a $3,000,000 line of credit, collateralized by accounts
receivable and inventory. This credit facility is being used for
operating needs, as required, and to secure the letter of credit
described above. This resulted in reporting an additional $1,250,000 in
operating funds in April 1998, as the certificate of deposit which had
served as collateral for the letter of credit is no longer required.
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 for
advanced calcium alginate products for North and South America and the
People's Republic of China. Under the agreement, the Company made an
up-front payment of $500,000 to the supplier in November 1995, and in
July 1997 and October 1997, additional payments of $166,000 and $167,000,
respectively, were paid to this supplier upon delivery of the
CarraSmart[TM] Hydrocolloid, a new product launched in the third quarter
of 1997. These payments resulted in increasing the prepaid assets of the
Company. As of September 30, 1998, the net book value of this agreement
was $642,000.
<PAGE>
In late 1995, the Company began an initial Phase I dosing study using
CarraVex[TM] injectable (formerly CARN 750) in cancer patients involving
six cancer types. As of December 31, 1997, approximately $295,000 had
been expensed against this study. No expenses were incurred in the first
nine months of 1998, as the Company placed the study on clinical hold,
pending further work on drug formulation.
During 1997, Caraloe experienced a sharp increase in sales of raw
materials processed at the Company's processing facility in Costa Rica.
As a result, the Company's demand for Aloe vera L. leaves has exceeded
and continues to exceed both the current and the normal production
capacity of its farm. It has therefore been necessary for the Company to
purchase Aloe vera L. leaves from other sources at costs that are higher
than the cost of leaves produced on its own farm.
The Company has been exploring other options to obtain the leaves it
needs at lower costs. In March 1998, Caraloe signed a letter of intent
to enter into a supply agreement with a company to be formed (the "leaf
supplier") for the purpose of growing Aloe vera L. plants at a location
in Costa Rica that is less than 15 miles from the Company's processing
plant. The proposed supply agreement would provide for Caraloe
to purchase from the leaf supplier, at mutually agreeable, locally
competitive prices, all of the leaves Caraloe needs, to the extent its
needs exceed the leaves available from the Company's farm plus up to
200,000 kilograms of leaves per month from another local source. The
terms of the proposed supply agreement have not been negotiated, and
there is no assurance that the proposed agreement will be entered into.
Subsequent to the letter of intent, the leaf supplier company was formed
as Aloe and Herbs International, Inc. ("Aloe and Herbs"), a Panamanian
corporation, and the Company received 1.5 million shares in the
corporation as founder's shares for its contribution of expertise in
farming of Aloe vera L. plants. The Company's ownership interest
represents 20% of the outstanding shares of Aloe and Herbs. The Company
also made a $25,000 cash investment in Aloe and Herbs toward the
commencement of its operations. In April 1998, Aloe and Herbs formed
Rancho Aloe, (C.R.) S.A., ("Rancho Aloe"), a wholly-owned Costa Rican
subsidiary, which acquired a 5,000 acre ranch near the Company's
processing plant to be used for farming Aloe vera L. plants. The Company
then purchased $405,000 of Aloe vera L. plants on behalf of Rancho Aloe
in May, 1998 and planted them on the Rancho Aloe farm in exchange for
accounts receivable and a 24-month unsecured note from Rancho Aloe in the
amount of $187,000, bearing interest at the rate of 10% per annum and
payable in 12 monthly installments of principal and interest beginning
July 1, 1999. The accounts receivable from Rancho Aloe will be repaid
through discounts on the price of leaves that the Company purchases from
Rancho Aloe in the future. Due to the immaturity of the plants, Rancho
Aloe does not yet have the ability to supply Aloe vera L. leaves to
purchasers, and it is unlikely that it would be able to supply the
Company with any significant quantities of leaves before the first
quarter of 1999. There is no assurance that the Company will be able to
continue acquiring adequate supplies of Aloe vera L. leaves from other
sources or that it will be able to purchase leaves at costs that will
allow the Company's and Caraloe's products to be price-competitive.
<PAGE>
The Company has reformulated its proprietary product Aliminase[TM] and is
preparing for new Phase III clinical trials of that drug for the
treatment of ulcerative colitis. Although the Company hopes to begin
those trials during the first quarter of 1999, there can be no assurance
as to whether or when such trials will begin or, if begun, whether or not
when they will be completed or what the results will be.
The Company believes that its available cash resources and expected cash
flows from operations will provide the funds necessary to finance its
current operations. However, the Company does not expect that its
current cash resources will be sufficient to finance the major clinical
studies and costs of filing new drug applications necessary to develop
its products to their full commercial potential. Additional funds,
therefore, may have to be raised through equity offerings, borrowings,
licensing arrangements or other means, and there is no assurance that the
Company will be able to obtain such funds on satisfactory terms when they
are needed.
The Company is subject to regulation by numerous governmental authorities
in the United States and other countries. Certain of the Company's
proposed products will require governmental approval prior to commercial
use. The approval process applicable to prescription pharmaceutical
products usually takes several years and typically requires substantial
expenditures. The Company and any licensees may encounter significant
delays or excessive costs in their respective efforts to secure necessary
approvals. Future United States or foreign legislative or administrative
acts could also prevent or delay regulatory approval of the Company's or
any licensees' products. Failure to obtain requisite governmental
approvals or failure to obtain approvals of the scope requested could
delay or preclude the Company or any licensees from marketing their
products, or could limit the commercial use of the products, and thereby
have a material adverse effect on the Company's liquidity and financial
condition.
Impact of Inflation
The Company does not believe that inflation has had a material impact on
its results of operations.
Third Quarter of 1998 Compared With Third Quarter of 1997
Net sales were $6,003,000 in the third quarter of 1998, compared with
$6,229,000 in the third quarter of 1997, a decrease of $226,000 or 3.6%.
Caraloe, Inc., the Company's consumer products subsidiary, increased
sales from $1,547,000 to $1,827,000, or 18.0%. Caraloe sales to
Mannatech, Inc., which are primarily Manapol[R] powder, increased from
$1,197,000 in the third quarter of 1997 to $1,502,000 in the third
quarter of 1998. Sales of the Company's wound and skin care products
decreased from $4,618,000 in the third quarter of 1997 to $4,176,000, or
9.6%, in the third quarter of 1998. The decrease in wound care sales was
primarily due to generally soft conditions in the wound care market
created by potential changes in government reimbursement programs, the
impact of managed care, and consolidation of distributors.
<PAGE>
Cost of sales increased from $2,576,000 to $2,766,000, or 7.4%. As a
percentage of sales, cost of sales increased from 41.4% in the third
quarter of 1997 to 46.1% in the third quarter of 1998. This was due to
the weighted impact of increased sales of Caraloe's products, which have
a lower gross margin than the Company's wound and skin care products, and
to downward pricing pressures in the wound care market.
Selling, general and administrative expenses increased from $2,500,000 in
the third quarter of 1997 to $2,509,000 in 1998.
Research and development expenses decreased to $680,000 from $742,000, or
8.4%. This was due to an overall reduction of general operating
expenses.
Net interest income of $53,000 in the third quarter of 1998 compared to
$74,000 of net interest expense in the third quarter of 1997.
Net income for the third quarter of 1998 was $101,000, versus a net
income of $463,000 for the third quarter of 1997. This was due primarily
to the decrease in wound care sales, which was partially offset by a
reduction in selling expenses and research expenditures. Assuming
dilution, net income per share was $0.01 in the third quarter of 1998,
compared to net income per share of $0.05 during the same period in 1997.
First Nine Months of 1998 Compared With First Nine Months of 1997
Net sales were $17,818,000 in the first nine months of 1998, compared
with $17,433,000 in the first nine months of 1997. This increase of
$385,000, or 2.2%, resulted from an increase of $1,532,000 in sales of
Caraloe, Inc., the Company's consumer products subsidiary. Caraloe's
sales increased from $3,636,000 to $5,168,000, or 42.1%. Caraloe's sales
to Mannatech, Inc., which were primarily Manapol[R] powder, increased
from $2,642,000 in 1997 to $3,842,000 in 1998.
Partially offsetting the above sales increase was a decrease in sales
of the Company's wound and skin care and veterinary products from
$13,797,000 in 1997 to $12,650,000 in 1998, or 8.3%. Decreased wound
care sales are primarily due to generally soft conditions in the wound
care market created by potential changes in government reimbursement
programs, the impact of managed care, and consolidation of distributors.
Cost of sales increased from $6,970,000 in 1997 to $7,946,000 in 1998, or
14.0%. As a percentage of sales, cost of sales increased from 40.0% in
the first nine months of 1997 to 44.6% in the first nine months of 1998.
As was true for the third quarter, this was due to the weighted impact of
increased sales of Caraloe's products, which have a lower gross margin
than the Company's wound and skin care products, and to downward pricing
pressures in the wound care market.
Selling, general and administrative expenses decreased from $8,018,000 in
1997 to $7,791,000 in 1998, or 3.7%. This decrease was primarily
attributable to lower selling expenses which were reduced in response to
the lower wound care sales volume.
Research and development ("R&D") expenses decreased from $2,336,000 in
1997 to $1,925,000 in 1998, or 17.6%. Contributing to the decrease in
R&D expenses was a reduction of internal salaries and general operating
expenses.
<PAGE>
Net interest income of $167,000 was realized in the first nine months of
1998, versus net interest expense of $24,000 in the first nine months of
1997. In the first nine months of 1997, the Company realized losses on
its mutual fund account of $204,000, or 1.8% of the beginning year cash
balance, when the account was converted to cash to meet the financing
needs of the Company.
Net income for the first nine months of 1998 was $313,000 versus a net
income of $15,000 for the first nine months of 1997. This change was
primarily the result of reduced selling expenses and R & D expenditures.
Assuming dilution, net income available to common shareholders per share
was $0.03 in the first nine months of 1998, compared to a loss available
to common shareholders per share of less than $0.01 in 1997. The net
income available to common shareholders per common share in 1997 included
the recognition of a $70,000, or $0.01 per common share, deemed dividend
on the Company's Series E Convertible Preferred Stock.
All statements other than statements of historical fact contained in this
report, including statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (and similar
statements contained in the Notes to Condensed Consolidated Financial
Statements), concerning the Company's financial position, liquidity,
capital resources and results of operations, its prospects for the future
and other matters, are forward-looking statements. Forward-looking
statements in this report generally include or are accompanied by words
such as "anticipates", "believes", "estimated", "expects", "intends",
"hopes", "exploring" or words of similar import. Such forward-looking
statements include, but are not limited to, statements regarding the
Company's belief that it will be able to sell all of the freeze dried,
calcium alginate and certain other wound care products that it is
required to purchase under its existing agreements with the suppliers of
those products; the Company's plan to enter into (or to have Caraloe
enter into) an agreement with a supplier that will sell Aloe vera L.
leaves to the Company or Caraloe at prices equal to or less than the
Company's cost of growing leaves on its own farm, and to continue
purchasing Aloe vera L. leaves from other sources as necessary; the
Company's plan to conduct Phase III clinical trials of Aliminase[TM]; the
Company's belief that its available cash and revenues from operations
will provide the funds necessary to finance its current operations; and
various other matters.
<PAGE>
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, no assurance can be given that
such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in
such forward-looking statements include but are not limited to the
possibilities that the demand for the Company's freeze dried, calcium
alginate and certain other wound care products may not be sufficient to
enable it to sell the products it is required to purchase from its
suppliers under existing supply agreements; that the Company may be
unable to negotiate a satisfactory agreement with the leaf supplier that
proposes to grow Aloe vera L. leaves and sell them to the Company, or the
leaf supplier may be unable to supply such leaves when they are needed by
the Company, and the Company may not be able to purchase sufficient
quantities of Aloe vera L. leaves to enable it to satisfy the demand for
the Company's and Caraloe's products or to meet the Company's or
Caraloe's obligations under supply agreements with customers, or the cost
of purchasing such leaves may be so high that the Company and Caraloe
will not be able to sell their products at competitive prices; that the
Company may be unable to obtain the approval of the FDA, or to obtain the
funds necessary, to proceed with the planned clinical trials of
Aliminase[TM]; and that the Company's available cash and expected cash
flow from operations may not be sufficient to finance the Company's
current operations for a variety of reasons.
All forward-looking statements in this report are expressly qualified in
their entirety by the cautionary statements in the two immediately
preceding paragraphs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is not required to make the disclosures contemplated by Item
3 in this report.
<PAGE>
Part II
Item 1. Legal Proceedings
As previously reported by the Company, in November 1997 the Company
received a letter from the Texas Department of Licensing and Regulation
(the "TDLR") alleging that the Company's Walnut Hill facility in Irving,
Texas had been inspected and found in non-compliance with provisions of
the Texas Architectural Barriers Act (the "Act") and regulations issued
thereunder. The Act and the related regulations contain design
requirements to ensure that disabled persons can make use of public
facilities. An inspection report describing the alleged deficiencies was
enclosed with the letter. The letter stated that the Walnut Hill
facility was required to be brought into compliance and written
verification furnished to the TDLR within 30 days, and that the Company
should contact the TDLR if compliance could not be accomplished within
that time. The letter also stated that failure to respond to the letter
would result in the matter being referred to the TDLR's Enforcement
Division, which could result in a maximum administrative penalty of
$1,000 per violation per day.
The Company has subsequently taken a number of steps to correct the
alleged deficiencies and has kept the TDLR informed, orally and in
writing, of its plans and its progress. In June, 1998, the Company sent
the TDLR a letter describing the work it had done and proposed to do and
explaining why it was not feasible to correct certain of the alleged
deficiencies. Although the Company expected that the work it proposed to
do would be completed by September 30, 1998, delays in receiving some of
the necessary materials prevented the completion of some of the work by
that date. In October 1998, after the Company informed the TDLR that
some of the alleged deficiencies had been corrected, the TDLR sent the
Company a letter listing the remaining alleged deficiencies and informing
the Company that its proposal not to correct certain alleged deficiencies
would be treated as an enforcement issue after all of the work proposed
to be done is completed. As soon as the remaining necessary materials
are received, the Company's contractor will proceed to carry out the
remaining work that it has been engaged to perform. The estimated total
cost of all of the work performed and to be performed is approximately
$40,000.
Since the additional work to be performed will not correct all of the
remaining alleged deficiencies, the Company intends to seek waivers of
the alleged deficiencies that it does not correct. However, there is no
assurance that the waivers will be granted, and the Company may be
subject to fines for any alleged deficiencies that are not corrected or
waived. If the TDLR takes any enforcement action that the Company deems
unacceptable, the Company may elect to contest such action.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 Promissory Note of Rancho Aloe, (C.R.) S.A., dated July 1, 1998
payable to the order of the Registrant in the principal amount
of $186,655.00.
10.2 Wound and Skin Care Purchase Agreement dated August 27th, 1998,
between American Association for Homes & Services for the Aging
and Carrington Laboratories, Inc.
10.3 Purchase Agreement dated October 1, 1998, between Vencor, Inc.
and Carrington Laboratories, Inc.
10.4 Letter agreements dated September 30, 1998 and November 4, 1998
between Aloe Commodities International, Inc. and the Registrant
amending due date of Promissory Note dated June 17, 1998 from
Aloe Commodities International, Inc. to the Registrant. (The
Promissory Note was filed as Exhibit 10.4 to the Registrant's
Form 10-Q Quarterly Report for the Quarter ended June 30,
1998.)
27.1 Financial Data Schedule
b. Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the
quarter ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARRINGTON LABORATORIES, INC.
(Registrant)
Date: November 6, 1998 By: /s/ Carlton E. Turner
Carlton E. Turner,
President and C.E.O.
(principal executive
officer)
Date: November 6, 1998 By: /s/ Robert W. Schnitzius
Robert W. Schnitzius
Chief Financial Officer
(principal financial and
accounting officer)
S-1
<PAGE>
INDEX TO EXHIBITS
Item Description
No.
10.1 Promissory Note of Rancho Aloe, (C.R.) S.A., dated July 1, 1998
payable to the order of the Registrant in the principal amount
of $186,655.00.
10.2 Wound and Skin Care Purchase Agreement dated August 27th, 1998,
between American Association for Homes & Services for the Aging
and Carrington Laboratories, Inc.
10.3 Purchase Agreement dated October 1, 1998, between Vencor, Inc.
and Carrington Laboratories, Inc.
10.4 Letter agreements dated September 30, 1998 and November 4, 1998
between Aloe Commodities International, Inc. and the Registrant
amending due date of Promissory Note dated June 17, 1998 from
Aloe Commodities International, Inc. to the Registrant. (The
Promissory Note was filed as Exhibit 10.4 to the Registrant's
Form 10-Q Quarterly Report for the Quarter ended June 30,
1998.)
27.1 Financial Data Schedule
E-1
EXHIBIT-10.1
PROMISSORY NOTE
$186,655.00 Dallas, Texas July 1, 1998
FOR VALUE RECEIVED, the undersigned, RANCHO ALOE, (C.R.) S.A., a
Costa Rica corporation (the "Maker"), hereby promises to pay to the order
of SABILA INDUSTRIAL, S.A., a Costa Rica corporation (the "Payee"), the
principal sum of One Hundred Eighty Six Thousand Six Hundred Fifty Five
and No/100 Dollars ($186,655.00), with interest on the unpaid balance
thereof from the date hereof until maturity at the rate or rates
hereinafter provided, both principal and interest being payable as
hereinafter provided in lawful money of the United States of America at
2001 Walnut Hill Lane, Irving, Texas 75038, or at such other place as may
be designated from time to time by the holder of this Note.
The unpaid principal of this Note outstanding from time to time
shall bear interest prior to maturity at the rate of ten percent (10%)
per annum or the maximum interest rate permitted under applicable law,
whichever is less. All past due principal and/or interest or
installments thereof shall bear interest from maturity until paid at the
rate of eighteen percent (18%) per annum or the maximum interest rate
permitted under applicable law, whichever is less.
The principal of and interest on this Note shall be due and payable
in monthly installments of Eighteen Thousand Fifty and 93/100 Dollars
($18,050.93) each, payable on the first day of each and every calendar
month, beginning July 1, 1999, and continuing regularly thereafter until
June 1, 2000 (the "Final Due Date"), on which date all unpaid principal
of and accrued interest on this Note shall be due and payable. Each
payment made on this Note shall be applied first to the payment of
accrued interest due on the unpaid principal balance hereof, and the
remainder of each such payment shall be applied to the reduction of the
unpaid principal balance hereof.
The Maker shall have the right to prepay, without penalty, at any
time and from time to time prior to maturity, all or any part of the
unpaid principal balance of this Note, provided that any such principal
thus prepaid is accompanied by accrued interest on such principal. Any
partial prepayments of principal shall be applied to installments thereof
in the inverse order of their maturity.
If any installment of the principal of or interest on this Note is
not paid in full as above promised, the holder of this Note or any part
thereof shall have the option of declaring the unpaid principal balance
hereof and the interest accrued hereon to be immediately due and payable.
<PAGE>
It is the intent of the Maker and the Payee, in the execution and
acceptance of this Note and all other instruments now or hereafter
securing this Note, to contract in strict compliance with applicable
usury law. In furtherance thereof, the Maker and the Payee stipulate and
agree that none of the terms and provisions contained in this Note, or in
any other instrument executed in connection herewith, shall ever be
construed to create a contract to pay, for the use, forbearance or
detention of money, interest at a rate in excess of the maximum interest
rate permitted to be charged by applicable law; that neither the Maker
nor any guarantors, endorsers or other parties now or hereafter becoming
liable for payment of this Note shall ever be obligated or required to
pay interest on this Note at a rate in excess of the maximum interest
rate that may be lawfully charged under applicable law; and that the
provisions of this paragraph shall control over all other provisions of
this Note and any other instruments now or hereafter executed in
connection herewith that may be in apparent conflict herewith. The
holder of this Note expressly disavows any intention to charge or collect
excessive unearned interest or finance charges in the event the maturity
of this Note is accelerated. If the maturity of this Note shall be
accelerated for any reason, or if the principal of this Note is paid
prior to the end of the term of this Note, and as a result thereof the
interest received for the actual period of existence of the indebtedness
evidenced by this Note exceeds the applicable maximum lawful rate, the
holder of this Note shall, at its option, either refund to the Maker the
amount of such excess or credit the amount of such excess against the
principal balance of this Note then outstanding and thereby shall render
inapplicable any and all penalties of any kind provided by applicable law
as a result of such excess interest. If the Payee or any other holder of
this Note shall collect money that is deemed to constitute interest that
would increase the effective interest rate on this Note to a rate in
excess of that permitted to be charged by applicable law, an amount equal
to interest in excess of the lawful rate shall, upon such determination,
at the option of the holder of this Note, be either immediately returned
to the Maker or credited against the principal balance of this Note then
outstanding, in which event any and all penalties of any kind under
applicable law as a result of such excess interest shall be inapplicable.
By execution of this Note, the Maker acknowledges that it believes the
indebtedness evidenced by this Note to be non-usurious and agrees that
if, at any time, the Maker should have reason to believe that such
indebtedness is in fact usurious, it will give the holder of this Note
notice of such condition, and such holder shall have ninety (90) days
from the date such notice is given in which to make appropriate refund or
other adjustment in order to correct such condition, if in fact such
exists. The term "applicable law," as used in this Note, shall mean the
laws of the State of Texas or the laws of the United States, whichever
laws allow the greater rate of interest, as such laws now exist or may be
changed or amended or come into effect in the future.
If the indebtedness represented by this Note or any part thereof is
collected at law or in equity or through any bankruptcy, receivership,
probate or other court proceedings, or if this Note is placed in the
hands of an attorney for collection after default, the Maker and all
endorsers, guarantors and sureties of this Note jointly and severally
agree to pay to the holder of this Note, in addition to the principal and
interest due and payable hereon, all the costs and expenses of such
holder in enforcing this Note, including without limitation reasonable
attorney's fees and legal expenses.
<PAGE>
The Maker and all endorsers, guarantors and sureties of this Note
and all other persons liable or to become liable on this Note severally
waive presentment for payment, demand, notice of demand and of dishonor
and nonpayment of this Note, notice of intention to accelerate the
maturity of this Note, notice of acceleration, protest and notice of
protest, diligence in collecting, and the bringing of suit against any
other party, and agree to all renewals, extensions, modifications,
partial payments, and releases or substitutions of security, in whole or
in part, with or without notice, before or after maturity.
This Note and the rights, duties and liabilities of the parties
hereunder and/or arising from or relating in any way to the indebtedness
evidenced by this Note or the transaction of which such indebtedness is a
part shall be governed by and construed for all purposes in accordance
with the laws of the State of Texas and the laws of the United States
applicable to transactions within such state.
IN WITNESS WHEREOF, the Maker has executed this Note on the date
first set forth above.
RANCHO ALOE, (C.R.) S.A.
Name: L. Scott McKnight
Title: Chairman of the Board
EXHIBIT 10.2
AMERICAN ASSOCIATION FOR HOMES & SERVICES FOR THE AGING
WOUND AND SKIN CARE PURCHASE AGREEMENT
THIS WOUND AND SKIN CARE PURCHASE AGREEMENT (the "Agreement")
is made and entered into as of the 27th day of August, 1998 by
and between American Association for Homes & Services for the Aging
("AAHSA"), a Delaware corporation, on its own behalf and on behalf of the
"AAHSA" membership (the "Buyer") and Carrington Laboratories, Inc.,
having its principal place of business at 2001 Walnut Hill Lane,
Irving, TX 75038 , ("Seller").
AGREEMENT:
1. Agreement to Purchase. Upon receipt of a Purchase Order, Seller
agrees to sell and deliver to Buyer, and Buyer agrees to purchase from
Seller, the following described Wound and Skin Care products or services
at the prices set forth herein, subject to and in accordance with the
terms and conditions, covenants and agreements of the Terms and
Conditions attached hereto as Exhibit A and incorporated herein by
reference. This is a Wound and Skin Care Purchase Agreement.
2. Products and Prices. See Exhibit B. Pricing firm from August
27, 1998 to October 31, 1999, then not more than a five percent (5%)
increase per year for subsequent two years.
F.O.B.: Destination per Distributor of choice, i.e., Briggs
Corporation, McKesson, General Medical, or others if requested.
Payment Terms: Per Distributor of choice, i.e., Briggs
Corporation, McKesson, General Medical, or others if requested.
3. Term. The term of this Agreement shall be for a period
commencing on the 27th day of August, 1998 and expiring on the
26th day of August , 2001. Terms and condition for this Agreement are
firm for this period, unless specifically provided herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
AMERICAN ASSOCIATION FOR CARRINGTON LABORATORIES, INC.
HOMES & SERVICES FOR THE AGING
By: /s/Kurt Krummel By: /s/ Kirk Meares
Title: Director Group Purchasing Title: Vice President, Sales & Marketing
("Buyer") ("Seller")
<PAGE>
EXHIBIT A
TERMS AND CONDITIONS
1. Contract period: August 27, 1998 to August 26, 2001.
2. Prices will be firm from August 27, 1998 to October 31, 1999, then
not more than a five percent (5%) increase per year for subsequent
two years.
3. Contract includes a short-term cancellation clause: 30 days
Termination. Either party may terminate this Agreement for any
reason upon 30 days written notice. Seller shall discontinue work
under this Agreement immediately upon receipt of such notice and
shall take all necessary steps to protect work completed. At Buyer's
election, Seller shall deliver any portion of the goods, with all
warranties, or shall dispose of such goods as Buyer may reasonably
direct. Seller shall be entitled to (a) the agreed price of all
goods delivered pursuant to this Agreement; (b) all actual costs
incurred by Seller in connection with goods not completed or
delivered to Buyer (except that there shall be no allowance for such
goods that are Seller's standard stock); and (c) reasonable
termination fee intended to compensate Seller for unrecoverable costs
incurred, provided that the total of such amounts shall not exceed
the total price stated in this Agreement.
4. All goods must be delivered FOB destination. (Per Distributor of
Choice, i.e., Briggs Corporation, or McKesson, General Medical, or
others if requested.
5. Payment terms are: (Per Distributor of choice, i.e., Briggs
Corporation, McKesson, General Medical, or others if requested.)
6. Products are provided for evaluation at no charge as needed for
evaluation for conversion to Carrington products.
<PAGE>
7. Fill rate is guaranteed at 99 percent. (Refers to Back Orders)
8. Manufacturer will fill back orders with approved substitutes at no
additional cost to facility.
9. Liability Insurance Certificate will be provided.
10. Value added services include:
Carrington offers the Carrington SmartOutcomes System Program. This
program is being established to assist long term care facilities with
the implementation of the Medicare changes. See attached brochure
and seminar schedule.
CONTACT PERSON FOR "AAHSA": Name, Address, Phone & Fax Number
Dena Kitchens, Sales Operations Manager
Carrington Laboratories, Inc.
2001 Walnut Hill Lane
Irving, TX 75038
Phone: 800-527-5216, ext. 1222; Fax (972) 518-1020
EXHIBIT 10.3
VENCOR, INC.
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement" is made and entered into as
of the 1st day of October, 1998 by and between Vencor, Inc., a Delaware
corporation, on its own behalf and on behalf of certain owned or
controlled entities listed in Exhibit A ("Buyer") and Carrington
Laboratories, Inc., having its principal place of business at 2001 Walnut
Hill Lane, Irving, TX 75038, ("Seller").
AGREEMENT:
1. Agreement to Purchase. Upon receipt of a Purchase Order, Seller
agrees to sell and deliver to Buyer, and Buyer agrees to purchase from
Seller, the following described products or services at the prices set
forth herein, subject to and in accordance with the terms and conditions,
covenants and agreements of the Terms and Conditions attached hereto as
Exhibit B and incorporated herein by reference and subject to the terms
regarding quantity contained in such Purchase Order.
2. Products and Prices. See Exhibit C. Pricing firm until
September 30, 2001.
F.O.B.: Destination
Payment Terms: Per Dealer
3. Term. The term of this Agreement shall be for a period
commencing on the 1st day of October, 1998 and expiring on the 30th day
of September, 2001. Terms and condition for this Agreement are firm for
this period, unless specifically provided herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
VENCOR, INC. CARRINGTON LABORATORIES, INC.
By: /s/ Michael Lobier By: /s/ Kirk Meares
Title: Chief Operating Officer Title: Vice President, Sales & Marketing
("Buyer") ("Seller")
<PAGE>
EXHIBIT B
TERMS AND CONDITIONS
1. Inconsistent Terms. In the event of any inconsistency or
conflict among the terms and conditions of this Agreement, the
inconsistency or conflict shall be resolved by giving the contract
documents the following order of precedence: (a) the standard terms and
conditions contained in this Exhibit, (2) any terms and conditions
expressly incorporated by reference in this Agreement, (3) any other
terms and conditions that may be a part of this Agreement.
2. Changes. Buyer may make changes within the general scope of
this Agreement, but no additional charge not authorized in writing by
Buyer will be allowed. Seller shall notify Buyer within five days after
receipt of a notice of change if the change will affect the delivery
schedule or price.
3. Extras. No additional charges or extras not set out in this
Agreement will be allowed or paid. This includes, without limitation,
freight, packing, marking, handling, expediting, insurance or storage.
4. Variations in Quantities. Any variation between the quantities
specified and the quantities accepted by Buyer will not constitute a
failure by Buyer to comply with this Agreement, provided the variation
does not exceed five percent of the quantities specified. Payment shall
be adjusted accordingly.
5. Right to Inspect Rejected Goods. Payment before inspection of
goods shall not constitute acceptance. Buyer may, but need not, inspect
the goods covered by this Agreement at all reasonable times and places
during their manufacture and before and after delivery; they shall be
subject to final inspection by Buyer and acceptance at destination.
Anything not in accordance with the specifications may, at Buyer's
option, either be returned or held for Seller's instruction. Inspection,
reshipment and return costs incurred with respect to nonconforming or
defective goods will be borne by Seller. Unless Buyer directs, Seller
shall not replace returned goods.
6. Packing. Seller shall package all shipments hereunder in
accordance with the requirements specified in this Agreement or, if such
are not specified, in accordance with standard commercial practices.
Each shipment must contain a packing list indicating purchase agreement
number, item numbers and other identifying information corresponding to
that set out on the face of this Agreement.
7. Marking. Prior to shipment, each package shall be clearly
marked with Buyer's purchase agreement number, shipping symbols, serial
numbers, weights, measurements and other identification as may be
directed by Buyer or reasonably necessary to facilitate due delivery.
8. Price. All prices are for goods delivered F.O.B. to Buyer's
specified destination, freight prepaid, and represent the entire cost to
Buyer, unless specifically stated otherwise. This means that they
include, without limitation, all charges for engineering, labor, overhead
and similar items.
<PAGE>
9. Compliance with Laws, Regulations and Codes. Seller warrants
that all goods furnished hereunder will comply with, and be manufactured,
priced, sold and labeled in compliance with applicable federal, state and
local laws, codes, rules, regulations, orders and ordinances, including,
without limitation, environmental protection, energy and labor laws and
regulations and applicable industry codes and standards.
10. Equal Employment Opportunity Policy. As a subcontractor
(as that term is defined in 41 CFR [S] 60-1.3) for Buyer (who is a prime
contractor as that term is defined in 41 CFR [S] 60-1.3), Seller agrees,
if applicable, to comply with the Equal Employment Opportunity policies
provided in Executive Order 11246 (as set forth in 41 CFR [S] 60-1.4(a)
and incorporated herein by reference), the Rehabilitation Act of 1973 (as
set forth in 41 CFR [S]60-741.5(a) and incorporated herein by reference),
and the Vietnam Era Veterans Readjustment Assistance Act (as set forth in
41 CFR [S] 60-250.4 and incorporated herein by reference).
11. Open Records. If applicable to the subject matter of this
Agreement and pursuant to the requirement of 42 CFR 420.300 et. seq.,
Seller hereby agrees to make available to the Secretary of Health and
Human Services (HHS), the Comptroller of the General Accounting Office
(GAO), or their authorized representatives, all contracts, books,
documents and records relating to the nature and extent of costs
hereunder for a period of four years after the furnishing of services
hereunder. In addition, Seller hereby agrees, if any services are to be
provided by subcontract, to require by contract that such subcontract
make available to the HHS and GAO, or their authorized representative,
all contracts, books, documents and records relating to the nature and
costs thereunder for a period of four years after the furnishing of
services thereunder.
12. Confidentiality. During the terms of this Agreement and
surviving its expiration or termination, Seller will regard and preserve
as confidential all information related to the business of Buyer and its
clients and patients that may be obtained by any source as the result of
this Agreement. Seller will not, without first obtaining Buyer's prior
written consent, disclose to any person, firm or enterprise for use for
its benefit any information relating to the pricing, methods, processes,
financial data, lists, apparatus, statistics, programs, research,
development or related information of Buyer, concerning past, present or
future business activities or plans of Buyer, and results or terms of
the provision of services performed by Seller under this Agreement.
Confidential information does not include: (a) information that is in the
public domain prior to the disclosure, becomes part of the public domain
through no wrongful act of the Seller; (b) information that was in lawful
possession of the Seller prior to the disclosure; (c) information that
was independently developed by Seller outside the scope of this
Agreement. Neither Seller nor Buyer shall use the name of the other in
any advertising or publicity releases without securing the prior written
approval of the other.
13. Disclosure. Seller agrees to comply at all times with the
regulation issued by the Department of Health and Human Services,
published at 42 CFR 1001, and which relate to Seller's obligation to
report and disclose discounts, rebates and other reductions to Buyer for
products purchased by Buyer under this Agreement.
<PAGE>
14. Warranties.
a. Seller warrants that the products to be supplied under this
Agreement are fit and sufficient for the purpose intended; that they are
merchantable, of good quality and free from defects, whether patent or
latent, in materials or workmanship; and that products sold to Buyer
hereunder conform to or exceed the higher of grading standards recognized
by Seller's industry or United States government approved grading.
Seller further warrants that it has good title to the products supplied
and that the products are free and clear from all liens and encumbrances.
Such warranties, together with any other warranty set forth in Seller's a
advertising literature, and service warranties and guarantees, shall run
to Buyer, its successors and assigns. Seller also warrants that any
services provided hereunder shall (a) be performed in accordance with the
conditions and requirements contained herein and (b) reflect the level of
skill, knowledge and judgment required or reasonably expected of
suppliers supplying comparable services.
b. If Buyer discovers that any item of material or equipment
supplied or services performed by Seller hereunder fails to conform to
the above warranties, then Seller shall, at Buyer's option and at no cost
to Buyer, promptly repair, replace or modify any item of material and
equipment or correct or re-perform any service so that it conforms to
the above warranties. Seller shall provide all labor, engineering,
supervision, equipment, tools and materials necessary to effect the
remedy and shall bear all expenses in connection therewith, including
transportation costs. Seller shall perform its remedial obligations
hereunder in a timely manner consistent with Buyer's reasonable
requirements. If Seller is unable to remedy such nonconformity during a
time period consistent with Buyer's reasonable requirements, Buyer may
undertake to remedy the nonconformity, and in such case Seller shall
reimburse Buyer for any reasonable costs thereby incurred.
15. Indemnity. To the fullest extent permitted by law, Seller
shall indemnify and hold harmless Buyer and Buyer's directors, officers,
agents and employees from and against all claims, losses, liabilities,
damages and expenses (including reasonable attorneys fees) for personal
injury or death of persons (including, but not limited to, Buyer's
employees) and damage to Buyer's property or facilities or the property
of any other person or entity in any manner arising out of, caused by or
connected with this Agreement or any of the material or equipment
supplied or services performed hereunder. Nothing herein shall be
construed as making Seller liable for any injuries, deaths or damages
caused solely by the gross negligence or willful misconduct of Buyer or
its agents or employees. If requested by Buyer, Seller shall undertake
the defense of Buyer and its directors, officers and employees in
connection with any claim or action for which they are entitled to
indemnity under this paragraph.
16. Insurance. Seller shall maintain adequate liability,
employer's liability and workers compensation insurance to protect Buyer
and its agents, employees and contractors with respect to the indemnity
contained in Paragraph 15 and any claims under workers compensation,
safety and health and similar laws and regulations. If requested, Seller
shall furnish evidence of such insurance in form and substance
satisfactory to Buyer.
<PAGE>
17. Time of the Essence; Delay. Time is of the essence hereof.
All goods shall be furnished and services rendered by the time or times
specified in this Agreement, provided that Seller shall not be in breach
if any delay is authorized in writing by Buyer or due to an act of
omission of Buyer, fire, unusual transportation delay, strikes or other
labor troubles beyond Seller's control, or other causes beyond Seller's
control. Seller shall give Buyer immediate notice, to be confirmed in
writing, of any such delay.
18. Termination for Cause. Without prejudice to its other
rights and remedies at law and in equity, either party may terminate this
Agreement effective immediately upon written notice if the other party
commits a breach of this Agreement, and such breach is not cured within
10 days following the time the nonbreaching party receives written notice
of the breach. Buyer shall have no further liability hereunder, except
for conforming deliveries previously made.
19. Other Termination. Either party may terminate this
Agreement for any reason upon 30 days written notice. Seller shall
discontinue work under this Agreement immediately upon receipt of such
notice and shall take all necessary steps to protect work completed. At
Buyer's election, Seller shall deliver any portion of the goods, with all
warranties, or shall dispose of such goods as Buyer may reasonably
direct. Seller shall be entitled to (a) the agreed price of all goods
delivered pursuant to this Agreement; (b) all actual costs incurred by
Seller in connection with goods not completed or delivered to Buyer
(except that there shall be no allowance for such goods that are Seller's
standard stock); and (c) a reasonable termination fee intended to
compensate Seller for unrecoverable costs incurred, provided that the
total of such amounts shall not exceed the total price stated in this
Agreement.
20. Bankruptcy. Subject to applicable bankruptcy law, in
the event of any proceeding by or against Seller in bankruptcy,
reorganization or insolvency or for the appointment of a receiver or any
assignment for the benefit of creditors, Buyer may terminate this
Agreement without further liability except for conforming deliveries
previously made.
21. Title and Security Interests. If full or partial payment is
made to Seller prior to the delivery of all goods or the performance of
all services hereunder, title to all goods identified to this Agreement
at the time of such payment or thereafter shall pass to Buyer, and Seller
shall be deemed a bailee of all goods remaining in its possession, but in
no event shall the risk of loss pass to Buyer until the goods are
delivered to the destination specified herein and accepted. Seller
agrees to maintain insurance coverage in types and amount satisfactory to
Buyer for goods that are or become so identified at any time of this
Agreement. Additionally, Seller grants to Buyer a security interest in
all goods that are or may become so identified, which security interest
shall be in addition to all other rights of Buyer under this Agreement or
applicable laws, and Seller agrees to execute financing statements or
such other documents as Buyer may reasonably require to perfect and
protect that interest.
<PAGE>
22. Invoices and Payment. If freight charges are to be paid by
Buyer, they shall be shown as a separate item on the invoice and the paid
freight bill or receipt must be attached. Delay in receiving accurate
invoices will be considered cause for withholding payment without loss of
cash discount privilege. Discount periods will begin when invoices are
received at Buyer's address indicated on the face hereof. Payment under
this Agreement shall not constitute acceptance of defective items. If
any person or entity asserts a claim or lien against Buyer or its
property or facilities arising out of Seller's performance hereunder,
Buyer shall have the right to retain out of any payments due or to become
due to Seller an amount sufficient to protect Buyer completely from all
claims, losses, damages, and expenses until the breach has been cured or
the claim or lien has been satisfied, terminated or released to Buyer's
satisfaction.
23. Attorneys Fees. Should any litigation ensue between the
parties hereto or their successors or assigns relating to this Agreement,
and should Buyer prevail in any such litigation, Seller shall pay to
Buyer an amount equal to the attorneys fees, plus any other expenses
reasonably incurred by Buyer in relation to any such dispute.
24. Governing Law and Forum Selection. The parties agree that
this Agreement is to be governed by the laws of the Commonwealth of
Kentucky and if either party seeks to resolve any disputes through
litigation, such litigation shall be instituted and prosecuted only in a
state or federal court of appropriate jurisdiction located in Louisville,
Jefferson County, Kentucky.
25. Additional Terms, Purchase Order. Buyer's purchase order
(which can be supplied upon demand) and all of the terms and conditions
thereof are incorporated herein. Any conflicting terms or conditions in
any invoice of documents supplied by Seller are expressly rejected and
shall not be included in any contract with Buyer.
26. Personal Inducements. No personal cash, merchandise,
equipment or other items of intrinsic value shall be offered by or on
behalf of any particular vendor to any facility affiliated with Buyer
and/or its employees or officers as an inducement to purchase from that
vendor.
<PAGE>
27. Miscellaneous. This Agreement and the terms and conditions
incorporated by reference or otherwise made a part hereof constitute
the entire agreement of the parties and supersede any prior or
contemporaneous agreements or understandings. Seller shall not assign or
subcontract any right or obligation in this Agreement without Buyer's
prior written consent. Failure by Buyer in any instance to insist upon
observance or performance by Seller of any of the terms, conditions or
provisions of this Agreement shall not be deemed a waiver of any such
terms, conditions or provisions. No waiver shall be binding upon Buyer
unless in writing and signed by Buyer and any such waiver shall be
limited to the particular instance referred to. Payment of any sum to
Seller by Buyer with knowledge of any breach shall not be deemed to be a
waiver of such breach or any other breach. The remainder of this
Agreement will not be voided by the invalidity of one or more of its
provisions. The obligation of Seller in this Agreement shall survive
acceptance of the goods and payment therfor by Buyer. "Buyer" means
Vencor, Inc. or its subsidiary indicated on Exhibit B of this Agreement
and includes its designated representatives, successors and assigns.
"Seller" means the person, firm, corporation or other business entity
indicated on the face of this Agreement.
28. Year 2000. Seller represents and warrants that the
provisions of products and services hereunder shall not be interrupted by
the advent of the new century and that Seller currently is attempting to
resolve the Year 2000 problem as it may relate to Seller's business
operations, to eliminate any date ambiguity in Seller's operating systems
associated with the new century, and to become Century-compliant by
January 1, 2000.
29. Value Added Services. See Exhibit D.
EXHIBIT 10.4
September 30, 1998
Aloe Commodities International, Inc.
12901 Nicholson, Suite 370
Farmers Branch, TX 75234
Gentlemen:
Reference is made to the Promissory Note dated June 17, 1998 of Aloe
Commodities International, Inc. (the "Maker") payable to the order of
Carrington Laboratories, Inc. (the "Payee") in the original principal
amount of $200,000 (the "Note"). The third paragraph on the first page
of the Note provides as follows:
The principal of and interest on this Note shall be due and
payable on August 17, 1999, (the "Final Due Date"), on which date
all unpaid principal of and accrued interest on this Note shall be
due and payable.
The Maker and the Payee agree that the paragraph quoted above
contained a typographical error, in that the Final Due Date was
originally intended to be August 17, 1998, not August 17, 1999. The
Maker and the Payee now desire to extend the Final Due Date beyond the
intended date of August 17, 1998 to October 30, 1998, with the same
effect as if the Note had originally designated the latter date as the
Final Due Date. Accordingly, the Maker and the Payee agree that the
third paragraph on the first page of the Note is hereby amended,
effective as of June 17, 1998, to read in its entirety as follows:
The principal of and interest on this Note shall be due and
payable on October 30, 1998 (the "Final Due Date"), on which date
all unpaid principal of and accrued interest on this Note shall be
due and payable.
The Maker and the Payee confirm that the Note remains in full force
and effect as originally written, except as amended by this letter.
Aloe Commodities International, Inc.
<PAGE>
September 30, 1998
Page 2
Please indicate your agreement to the terms of this letter by
signing the enclosed copy of this letter in the space provided below and
returning that copy to the undersigned.
CARRINGTON LABORATORIES, INC.
By: /s/ Robert W. Schnitizius
Robert W. Schnitzius
Treasurer and Chief Financial Officer
Agreed to in all respects:
ALOE COMMODITIES INTERNATIONAL, INC.
By: /s/Fred Lauterbach
Name: Fred Lauterbach
Title: Vice President
met
<PAGE>
November 4, 1998
Aloe Commodities International, Inc.
12901 Nicholson, Suite 370
Farmers Branch, TX 75234
Gentlemen:
Reference is made to the Promissory Note dated June 17, 1998 of Aloe
Commodities International, Inc. (the "Maker") payable to the order of
Carrington Laboratories, Inc. (the "Payee") in the original principal
amount of $200,000 (the "Note"), and to that certain letter dated
September 30, 1998 which extended the final payment date of the Note from
August 17, 1998 to October 30, 1998.
The Maker and the Payee now desire to extend the Final Due Date
beyond the intended date of October 30, 1998 to December 31, 1998, with
the same effect as if the Note had originally designated the latter date
as the Final Due Date. Accordingly, the Maker and the Payee agree that
the third paragraph on the first page of the Note is hereby amended,
effective as of October 30, 1998 to read in its entirety as follows:
The principal of and interest on this Note shall be due and
payable on December 31, 1998 (the "Final Due Date"), on which date
all unpaid principal of and accrued interest on this Note shall be
due and payable.
The Maker and the Payee confirm that the Note remains in full force
and effect as originally written, except as amended by this letter.
Please indicate your agreement to the terms of this letter by
signing the enclosed copy of this letter in the space provided below and
returning that copy to the undersigned.
CARRINGTON LABORATORIES, INC.
By: /s/ Robert W. Schnitzius
Robert W. Schnitzius
Treasurer and Chief Financial Officer
Agreed to in all respects:
ALOE COMMODITIES INTERNATIONAL, INC.
By: /s/ L. Scott McKnight
Name: L. Scott McKnight
Title: President
RWS:met
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (1)
Statements of Balance Sheets, (2) Statements of Operations, and (3) Statements
of Cash Flows, and is qualified in its entirety by reference to such financial
statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 4,723 4,150
<SECURITIES> 0 0
<RECEIVABLES> 3,901 3,621
<ALLOWANCES> 386 276
<INVENTORY> 5,051 4,533
<CURRENT-ASSETS> 14,147 12,266
<PP&E> 20,225 19,095
<DEPRECIATION> 9,121 8,055
<TOTAL-ASSETS> 26,631 25,019
<CURRENT-LIABILITIES> 3,380 2,858
<BONDS> 0 0
0 0
0 0
<COMMON> 93 93
<OTHER-SE> 23,152 22,349
<TOTAL-LIABILITY-AND-EQUITY> 26,631 25,319
<SALES> 17,818 17,433
<TOTAL-REVENUES> 17,818 17,433
<CGS> 7,946 6,970
<TOTAL-COSTS> 17,662 17,324
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (167) 24
<INCOME-PRETAX> 323 85
<INCOME-TAX> 10 70
<INCOME-CONTINUING> 313 15
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 313 15
<EPS-PRIMARY> .03 (.00)
<EPS-DILUTED> .03 (.00)
</TABLE>
