UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
( x ) For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
Commission file number 0-11997
CARRINGTON LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1435663
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 Walnut Hill Lane, Irving, Texas 75038
(Address of principal executive offices and Zip Code)
972-518-1300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days
Yes X No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date. 9,360,064
shares of Common Stock, $.01 par value, were outstanding at August 10,
1999.
<PAGE>
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1999 (unaudited) and
December 31, 1998 3
Condensed Consolidated Statements of
Operations for the three and six
months ended June 30, 1999 and
1998 (unaudited) 4-5
Condensed Consolidated Statements
of Cash Flows for the six months
ended June 30,1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Condensed Consolidated Balance Sheets
(Dollar amounts in 000's)
December 31, June 30,
1998 1999
(unaudited)
------ ------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,931 $ 2,900
Accounts receivable, net 2,961 3,205
Inventories 4,969 4,599
Prepaid expenses 739 1,093
------ ------
Total current assets 12,600 11,797
Property, plant and equipment, net 11,050 10,961
Other assets 597 573
------ ------
Total assets $24,247 $23,331
====== ======
Liabilities and Shareholders' Investment
Accounts payable $ 1,369 $ 1,845
Accrued liabilities 1,515 1,439
------ ------
Total current liabilities 2,884 3,284
Shareholders' investment:
Common stock 94 94
Capital in excess of par 51,739 51,819
Deficit (30,467) (31,866)
------ ------
Total shareholders' investment 21,366 20,047
------ ------
Total liabilities and
shareholders' investment $24,247 $23,331
====== ======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Three Months Ended
June 30,
1998 1999
------ ------
<S> <C> <C>
Net sales $ 6,027 $ 6,750
Costs and expenses:
Cost of sales 2,599 3,370
Selling, general and administrative 2,778 2,592
Research and development 647 661
Research and development,
Aliminase[TM] clinical trial 0 551
Interest, net (57) (30)
------ ------
Income (loss) before income taxes 60 (394)
Provision for income taxes - -
------ ------
Net income (loss) $ 60 $ (394)
====== ======
Net income (loss) per share-
basic and diluted $ 0.00 $ (0.04)
====== ======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Operations (unaudited)
(Dollar amounts and shares in 000's, except per share amounts)
Six Months Ended
June 30,
1998 1999
------ ------
<S> <C> <C>
Net sales $11,815 $13,648
Costs and expenses:
Cost of sales 5,180 6,981
Selling, general and administrative 5,282 5,143
Research and development 1,245 1,313
Research and development,
Aliminase[TM] clinical trial 0 1,670
Interest, net (114) (60)
------ ------
Income (loss) before income taxes 222 (1,399)
Provision for income taxes 10 -
------ ------
Net income (loss) $ 212 $(1,399)
====== ======
Net income (loss) per share
basic and diluted $ 0.02 $ (0.15)
====== ======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts in 000's)
Six Months Ended
June 30,
1998 1999
----- ------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 212 $(1,399)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 557 513
Provision for inventory obsolescence 127 173
Changes in assets and liabilities:
Receivables, net (72) (244)
Inventories (163) 197
Prepaid expenses (355) (354)
Other assets 1,100 24
Accounts payable and accrued liabilities (216) 401
----- ------
Net cash provided by
operating activities 1,190 (689)
Cash flows from investing activities:
Purchases of property, plant
and equipment (876) (421)
----- ------
Net cash used by investing activities (876) (421)
Cash flows from financing activities:
Issuances of common stock 75 80
Debt payments (16) (1)
----- ------
Net cash provided by financing activities 59 79
----- ------
Net increase (decrease) in cash
and cash equivalents 373 (1,031)
Cash and cash equivalents, beginning
of period 4,023 3,931
----- ------
Cash and cash equivalents, end of period $ 4,396 $ 2,900
----- ------
Supplemental disclosure of cash flow
information
Cash paid during the period for interest $ 2 $ -
Cash paid during the period for federal,
state and local income taxes 65 44
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) Condensed Consolidated Financial Statements:
The condensed consolidated balance sheet as of June 30, 1999, the
condensed consolidated statements of operations for the three and six
month periods ended June 30, 1998 and 1999 and the condensed
consolidated statements of cash flows for the six month periods ended
June 30, 1998 and 1999 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 June 30, 1999 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, 1998.
(2) Net Income (Loss) Per Share:
Basic net income (loss) per share was computed by dividing net income
(loss) by the weighted average number of common shares outstanding.
The weighted average number of common shares outstanding for the
quarters ended June 30, 1998 and 1999 were 9,315,000 and 9,358,000,
respectively. The weighted average number of common shares
outstanding for the six month periods ended June 30, 1998 and 1999
were 9,309,000 and 9,354,000, respectively,
In calculating the diluted net loss per share for the three and six
month periods ended June 30, 1999, no effect was given to options and
warrants because the effect would be antidilutive. Total dilutive
securities were insignificant in the three and six month periods ended
June 30, 1998 and had no impact on diluted net income per share.
(3) Reportable Segments:
The Company operates in two reportable segments: human and veterinary
products sold through its wound care division and Caraloe, Inc., a
consumer products subsidiary, which sells bulk ingredients, consumer
beverages, and nutritional and skin care products.
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes.
Corporate income (loss) before income taxes set forth in the following
table includes research and development expenses which were related to
the development of pharmaceutical products not associated with the
reporting segments. Assets which are used in more than one segment
are reported in the segment where the predominant use occurs. The
Company's production facility in Costa Rica, which provides bulk
ingredients for both segments, and total cash for the Company are
included in the Corporate Assets figure.
<PAGE>
Reportable Segments (in thousands)
<TABLE>
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Quarter Ended Wound Caraloe
June 30, 1998 Care Inc. Corporate Total
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<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 4,494 $ 1,533 $ - $ 6,027
Income (loss) before
income taxes 329 293 (562) 60
Identifiable assets 14,070 2,055 10,093 26,218
Capital expenditures 168 9 379 556
Depreciation and
amortization 149 - 123 272
-------------------------------------------------------------------
Quarter Ended
June 30, 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 3,746 $ 3,004 $ - $ 6,750
Income (loss) before
income taxes (22) 676 (1,048) (394)
Identifiable assets 14,134 1,289 7,908 23,331
Capital expenditures 40 - 225 265
Depreciation and
amortization 167 - 89 256
-------------------------------------------------------------------
Six Months Ended Wound Caraloe
June 30, 1998 Care Inc. Corporate Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 8,474 $ 3,341 $ - $11,815
Income (loss) before
income taxes 602 703 (1,083) 222
Capital expenditures 193 18 665 876
Depreciation and
amortization 299 - 258 557
-------------------------------------------------------------------
Six Months Ended
June 30, 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 7,635 $ 6,013 $ - $13,648
Income (loss) before
income taxes (93) 1,289 (2,595) (1,399)
Capital expenditures 137 - 284 421
Depreciation and
amortization 343 - 170 513
</TABLE>
<PAGE>
(4) Income Taxes:
The tax effects of temporary differences including net operating loss
carryforwards have given rise to net deferred tax assets. At December
31, 1998, 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, 1998, the Company had net operating
loss carryforwards of approximately $35,830,000 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.
(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 June 30,
1999, the Company has purchased $636,000 of products pursuant to this
commitment and made prepayments of $486,000 toward future deliveries
under the commitment. The Company is continuing its effort to develop
the markets for its freeze-dried products. Due to the unique
technology of these products, this effort has taken longer than was
initially expected. In anticipation of increased demand for freeze-
dried products, the Company is currently developing plans to purchase
the amount of products required under the commitment, some of which
may be in the form of freeze-dried bulk material. Due to the very
long shelf life of the freeze-dried products, management believes that
no losses will be incurred as a result of making the purchases
necessary to fulfill the Company's commitment under the agreement.
However, there is no assurance that the Company will be able to sell
all of the products purchased, and the Company could incur significant
losses if it is not able to do so.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Background
The Company is a research-based biopharmaceutical, medical device, raw
materials and nutraceutical company engaged in the development,
manufacturing and marketing of naturally-derived complex carbohydrate
and other natural product therapeutics for the treatment of major
illnesses and the dressing and management of wounds, and nutritional
supplements. The Company is comprised of two business segments. See
Note (3) to the condensed consolidated financial statements for
financial information about these business segments. The Company
sells, using a network of distributors, prescription and
nonprescription human and veterinary products through its wound and
skin care division and consumer and bulk raw material products through
its consumer products subsidiary, Caraloe, Inc. The Company's
research and product portfolio are based primarily on complex
carbohydrates isolated from the Aloe vera L. plant.
<PAGE>
Liquidity and Capital Resources
At December 31, 1998 and June 30, 1999, the Company held cash and cash
equivalents of $3,931,000 and $2,900,000, respectively. The net
decrease in cash of $1,031,000 is primarily attributable to
significant cash outlays for commencement of the Phase III
Aliminase[TM] clinical trials discussed below.
The Company has invested in inventory to support sales of bulk
products to Mannatech, Inc. Receivables from this customer totaled
$1,106,000 as of June 30, 1999. As of July 31, 1999 all of this
balance had been collected.
In February 1999, the Company received a letter from Aloe Commodities
International, Inc. ("ACI") offering a program to repurchase the
Company's 600,000 shares of ACI stock at $1.00 per share, which is the
price the Company paid for the shares, over a 24 month period ending
in March 2001. On June 14, 1999, ACI informed the Company that, due
to debt covenant restrictions, it would not be able to repurchase its
stock. Subsequently, ACI and the Company agreed that the payments
previously made by ACI under the stock repurchase program would be
reapplied to the payment of ACI's indebtedness to the Company and that
the remaining payments to be made by ACI under that program
would likewise be applied to the payment of ACI's indebtedness.
Accordingly, the Company still owns the same amount of stock of ACI
that it owned prior to the inception of the repurchase program. There
is no assurance that ACI will repurchase any of its stock from the
Company or that it will pay all or any portion of its remaining
indebtedness to the Company. As of July 31, 1999, ACI had made the
first three payments, totaling $40,000, according to the schedule.
The Company had fully reserved the entire amount of the $600,000
investment in ACI as of December 31, 1998.
As of June 30, 1999, the Company had no material capital commitments
other than its leases and agreements with suppliers and contracts
related to a Phase III trial. The Company has reformulated its
proprietary product Aliminase[TM] and has re-entered the clinic with
a Phase III trial. The Company signed an agreement with a contract
research organization on January 25, 1999 in the amount of
approximately $3.1 million to perform the Phase III clinical trial,
and initial patient dosing began on April 7, 1999. Costs incurred
under this agreement were $1,384,000 for the six months ended June 30,
1999.
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 $393,000 of CarraSorb[TM] M
and Carrington[TM] (Aphthous Ulcer) Patch inventory on hand as of June
30, 1999.
<PAGE>
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. The Company is continuing its effort to develop the
markets for its freeze-dried products. Due to the unique technology
of these products, this effort has taken longer than was initially
expected. In anticipation of increased demand for freeze-dried
products, the Company is currently developing plans to purchase the
amount of products required under the commitment, some of which may be
in the form of freeze-dried bulk material. Due to the very long shelf
life of the freeze-dried products, management believes that no losses
will be incurred as a result of making the purchases necessary to
fulfill the Company's commitment under the agreement. See Note (5) to
the condensed consolidated financial statements.
As of June 30, 1999, the Company had paid this supplier a total of
$1,122,000 for products purchased and prepayments made under the
agreement. The Company is in full compliance with the agreement and,
as of June 30, 1999, 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.
In November 1997, the Company entered into an agreement with Comerica
Bank-Texas for a $3,000,000 line of credit, secured by accounts
receivable and inventory. This credit facility is used to secure the
Letter of Credit described above and will be used for operating needs,
as required. As of June 30, 1999 there were no amounts outstanding
under this credit facility.
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 the People's Republic of China. 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 June 30, 1999, the net book value of
this agreement was $574,000.
As a result of sharp increases in sales of raw materials processed at
the Company's processing facility in Costa Rica, the Company's demand
for Aloe vera leaves has exceeded and continued 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 leaves
from other sources at costs that are significantly higher than the
cost of leaves produced on its own farm.
<PAGE>
In March 1998, the Company, with four other investors, formed Aloe and
Herbs International, Inc., a Panamanian corporation ("Aloe & Herbs"),
with the sole intent of acquiring a 5,000-acre tract of land in Costa
Rica to be used for the production of Aloe vera leaves to be sold to
the Company at competitive, local market rates. This would allow the
Company to save approximately 50% on the per-kilogram cost of leaves
as compared to the cost of importing leaves from other Central and
South American countries. Aloe & Herbs subsequently formed a wholly-
owned subsidiary, Rancho Aloe (C.R.), S.A., a Costa Rican corporation
("Rancho Aloe"), which acquired the land in March 1998. The Company
reserved all of its loans to Aloe & Herbs at December 31, 1998, due to
uncertainty regarding Aloe & Herbs' ability to meet significant
mortgage obligations in 1999 and 2000. Aloe & Herbs is current on its
mortgage obligation through June 1999. Regular shipments of leaves
from Rancho Aloe to the Company commenced in April 1999. In that same
month, the Company also signed letters of intent to lease
approximately 17.6 acres of land from Rancho Aloe for one year and
planted its own Aloe vera plants in the leased plot due to the lack of
additional productive land on its own farm. The Company also pays a
monthly fee for the maintenance of the plot.
The Company leases approximately 24,000 square feet of laboratory
space in Irving, Texas for its research and development and quality
control laboratories. The lease on this space expires on January 31,
2000, and the Company has exercised its option to renew the lease for
an additional five years. The renewal option calls for the new lease
rate to be at fair market value, which is significantly more than the
current lease rate. The Company and the landlord are currently
negotiating the renewal rate.
The Company will shut down its bulk material processing facility in
Costa Rica during the month of October in order to make modifications
to the production areas and building. These modifications are needed
to increase the capacity of the facility and enable it to accommodate
the growing workforce at the facility. The cost of this project is
expected not to exceed $380,000 . The Company has been building
its inventory of the bulk materials produced in this facility and does
not expect the shutdown to cause any interruption in the supply of raw
materials or finished products to its customers.
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.
<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.
Impact of Inflation
The Company does not believe that inflation has had a material impact
on its results of operations.
Second Quarter of 1999 Compared With Second Quarter of 1998
Net sales were $6,750,000 in the second quarter of 1999, an increase
of $723,000, or 12.0%, compared with $6,027,000 in the second quarter
of 1998. Caraloe, Inc., the Company's consumer products subsidiary,
increased sales 96.0% from $1,533,000 to $3,004,000. Caraloe sales to
Mannatech, Inc., which are primarily Manapol[R] powder, increased from
$1,170,000 in the second quarter of 1998 to $2,761,000 in the second
quarter of 1999. Sales of the Company's wound and skin care products
decreased 16.6%, due to product mix and intense downward pricing
pressure, to $3,746,000 in the second quarter of 1999 as compared to
$4,494,000 in the second quarter of 1998.
Cost of sales increased from $2,599,000 to $3,370,000, or 30.0%. As a
percentage of sales, cost of sales increased from 43.1% in the second
quarter of 1998 to 49.9% in the second quarter of 1999. 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 narrower wound care margins due to downward pricing
pressures.
Selling, general and administrative expenses decreased from $2,778,000
in the second quarter of 1998 to $2,592,000 in 1999 despite the
increase in sales. This was primarily attributable to reduced selling
expenses as the Company continued to reap the ongoing cost benefits of
a streamlined sales force and to the lower wound care sales volume.
Research and development expenses increased to $1,212,000 from
$647,000, or 87.3%. This was due to the impact of the costs of the
clinical trial of Aliminase[TM].
Net interest income of $30,000 in the second quarter of 1999 compared
to $57,000 of net interest income in the second quarter of 1998.
<PAGE>
Net loss for the second quarter of 1999 was $394,000 compared with net
income of $60,000 during the second quarter of 1998. Assuming
dilution, the net loss for the second quarter of 1999 was $0.04 per
share, compared to net income of $0.00 per share for the same quarter
of 1998. Excluding Aliminase[TM] clinical trial expenses, net income
for the second quarter of 1999 was $157,000, or $0.02 per share.
First Six Months of 1999 Compared With First Six Months of 1998
Net sales were $13,648,000 in the first six months of 1999, compared
with $11,815,000 in the first six months of 1998. This increase of
$1,833,000, or 15.5%, resulted from an increase of $2,672,000 in sales
of Caraloe, Inc., the Company's consumer products subsidiary, and a
decrease in wound care sales of $839,000. Caraloe's sales increased
from $3,341,000 to $6,013,000, or 80.0%. Caraloe's sales to
Mannatech, Inc., which were primarily Manapol[R] powder, increased
from $2,340,000 in 1998 to $5,487,000 in 1999.
Partially offsetting the above sales increase was a decrease in sales
of the Company's wound and skin care products from $8,474,000 in 1998
to $7,635,000 in 1999, or 9.9%. Decreased wound care sales are
primarily due to generally soft conditions in the wound care market
created by changes in government reimbursement programs, the impact of
managed care, and downward pricing pressures.
Cost of sales increased from $5,180,000 to $6,981,000, or 34.8%. As a
percentage of sales, cost of sales increased from 43.8% in the first
six months of 1998 to 51.1% in the first six months of 1999. As is
true for the 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.
Selling, general and administrative expenses decreased to $5,143,000
from $5,282,000, or 2.6%. This decrease was primarily attributable to
reduced selling expenses as a result of a more streamlined sales force
and to the lower wound care sales volume.
Research and development expenses increased to $2,983,000 from
$1,245,000, or 139.6%. This increase was primarily due to
expenditures of $1,384,000 made in the clinical trial of the Company's
proprietary drug Aliminase[TM].
Net interest income of $60,000 was realized in the first six months of
1999, versus net interest expense of $114,000 in the first six months
of 1998. The reduced investment income was primarily due to lower
cash balances invested and reduced investment yields.
Net loss for the first six months of 1999 was $1,399,000, compared
with net income of $212,000 for the first six months of 1998.
Assuming dilution, the net loss for the first six months of 1999 was
$0.15 per share, compared to net income of $0.02 per share for the
same period in 1998. Excluding Aliminase[TM] clinical trial expenses,
net income for the first six months of 1999 was $271,000, or $0.03 per
share.
<PAGE>
Year 2000 Issues
Like many other organizations, the Company faces the prospect of what
will happen to computers and other microprocessor-controlled equipment
using two digit data fields when they encounter dates beyond 1999, as
they may recognize the "00"of the year 2000 as the year 1900. This
phenomenon, known as the Year 2000 or Y2K issue, may impact the
Company in some manner, although the extent of any impact cannot be
fully determined at this time. The Company has undertaken
considerable efforts to assess its situation in areas that are
determinable at this time.
With respect to information technology systems, the Company has
historically followed a policy of purchasing or licensing commercially
available computer software packages for use in operating its
business. These packages are typically maintained by their developers,
and newer releases of the packages are periodically made available to
the users of the packages for purchase or license or as part of annual
maintenance programs. The Company typically installs these packages
with little or no custom modification to the programs contained
therein. Accordingly, the Company expects to incur little, if any,
cost for custom-developed software. The Company's primary business
application software used in its Texas facilities has been certified
by the vendor as being Y2K compliant, but the primary business
application software used in its Costa Rica facility was found during
1998 not to be ready for the Year 2000. The Company subsequently
acquired and installed a newer release of the software package during
the second quarter of 1999. The Company has initiated a testing
program to insure that all information technology systems are
compliant and will be functional at the beginning of the year 2000.
This program is currently underway and is expected to be completed by
August 1999.
With respect to non-information technology systems, the Company has
initiated efforts to assess its exposure due the Y2K impact on the
portions of its production and laboratory equipment which are
microprocessor-controlled. The Company has determined that there are
no significant pieces of equipment in its Texas facilities that are
not Year 2000-ready. The identified non-conforming equipment will be
upgraded or replaced at an estimated cost of $20,000, and the target
date for completing this task is September 1999. After the equipment
is upgraded or replaced, the Company will test to confirm Y2K
readiness. Testing is expected to be completed by September 1999.
<PAGE>
With respect to third parties, the Company has undertaken to assess
the potential impact to its operations of its vendors and customers
not being prepared for the Year 2000 impact on their systems. The
Company surveyed all of its vendors from whom the Company made
purchases totaling $5,000 or more in a recent 12-month period. To
date, the Company has received responses from approximately 83% of the
vendors surveyed, and the majority of vendors responding indicated
that they were addressing the issue but were not yet fully ready, The
Company made specific oral inquiries of local U. S. utility companies
(electric, gas, water and telephone), each of which indicated it has
made significant strides toward readiness but is not yet fully ready.
Because of the material effect that the failure of any one of these
utilities, particularly the electric company, to provide service to
the Company as a result of Year 2000 unreadiness could have on the
Company, and because of the uncertain responses that these utility
companies have provided, the Company cannot provided assurance that
its operations will not be materially affected by the Year 2000 issue,
nor can it quantify the impact that a failure of one of these
utilities to provide service would cause.
In the first quarter of 1999, the Company met with representatives of
the Costa Rica utility company providing service to its facility in
Costa Rica, who indicated that the utility's operational equipment,
much of which is older analog equipment, has not been tested, but is
backed up by redundant manual/mechanical systems. Newer digital
equipment is being certified as Y2K compliant as installed. The
Company also met with officials of the National Bank of Costa Rica,
who presented a detailed plan for Y2K compliance and testing. The
bank officials indicated that approximately 80-90% of their systems
had been tested at that time and found compliant.
The most reasonably likely worst case scenario for the Company is a
disruption in power to its manufacturing plants, as discussed above.
As part of its contingency plan for dealing with these material
uncertainties, the Company has initiated an inventory program designed
to have several months of inventory of its core wound care products
and raw material products on hand by the end of the third quarter of
1999. The cost of this inventory program is estimated not to exceed
$500,000.
The Company also surveyed its significant customers via the Internet
during the second quarter of 1999 in order to assess their Y2K
readiness. The disruption of a customer's business due to this issue
could also have a negative impact on the Company's sales and
profitability, although the impact to the Company cannot be determined
at this time. The Company has already been contacted by one of its
significant customers who indicated that it will be ordering
additional products from the Company in the fourth quarter of 1999 in
order to be able to avoid any Y2K-related disruptions in its service
to its own customers.
<PAGE>
The costs of the Company's Y2K remediation programs are being funded
with cash flows from operations and are not expected to exceed
$100,000, excluding inventory buildup. Some of these costs relate
solely to the upgrade of existing functionality. In total, these
costs are not expected to be substantially different from the normal
recurring costs of systems and equipment upgrades and therefore are
not expected to have a material adverse effect on the Company's
overall results of operations or cash flows.
Forward Looking Statements
All statements other than statements of historical fact contained in
this report, including but not limited to statements in this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" (and similar statements contained in the Notes
to Consolidated Financial Statements) concerning the Company's
financial position, liquidity, capital resources and results of
operations, its prospects for the future and other matters, are
forward-looking statements. Forward-looking statements in this report
generally include or are accompanied by words such as "anticipate",
"believe", "estimate", "expect", "intend" or words of similar import.
Such forward-looking statements include, but are not limited to,
statements regarding the Company's plan or ability to achieve growth
in demand for or sales of products, to reduce expenses and
manufacturing costs and increase gross margin on existing sales, to
initiate, continue or complete clinical and other research programs,
to obtain financing when it is needed, to fund its operations from
revenue and other available cash resources, to enter into licensing
agreements, to develop and market new products and increase sales of
existing products, to obtain government approval to market new
products, to 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, to
purchase sufficient supplies of Aloe vera leaves at reasonable prices,
and to properly assess its situation with respect to Y2K issues and
avoid any material adverse effects of the Y2K problem, as well as
various other matters.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, no assurance can be given
that such expectations will prove correct. Factors that could cause
the Company's results to differ materially from the results discussed
in such forward-looking statements include but are not limited to the
possibilities that the Company may be unable to obtain the funds
needed to carry out large scale clinical trials and other research and
development projects, that the results of the Company's clinical
trials may not be sufficiently positive to warrant continued
development and marketing of the products tested, that new products
may not receive required approvals by the appropriate government
agencies or may not meet with adequate customer acceptance, that the
Company may not be able to obtain financing when needed, that the
Company may not be able to obtain appropriate licensing agreements for
products that it wishes to market or products that it needs assistance
in developing, that the Company's efforts to improve its sales and
reduce its costs may not be sufficient to enable it to fund its
operating costs from revenues and available cash resources, that one
or more of the customers that the Company expects to purchase
significant quantities of products from the Company or Caraloe may
fail to do so, that competitive pressures may require the Company to
<PAGE>
lower the prices of or increase the discounts on its products, that
the Company's sales of products it is contractually obligated to
purchase from suppliers may not be sufficient to enable and justify
its fulfillment of those contractual purchase obligations, that other
parties who owe the Company substantial amounts of money may be unable
to pay what they owe the Company, that the Company may suffer adverse
effects from Y2K problems affecting the Company or its vendors
(including utility companies) or customers, and that the Company may
be unable to produce or obtain, or may have to pay excessive prices
for, the raw materials or products it needs.
All forward-looking statements in this report are expressly qualified
in their entirety by the cautionary statements in the two immediately
preceding paragraphs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk from changes in foreign currency
exchange rates and the supply and prices of Aloe vera leaves has not
changed materially from its exposure at December 31, 1998, as
described in the Company's Form 10-K Annual Report for the year then
ended. Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the 1999 Annual Meeting of Shareholders held on May 20, 1999, R.
Dale Bowerman was re-elected to serve as a director of the Company for
a term expiring at the 2002 annual meeting. The holders of 7,668,574
shares voted for Mr. Bowerman, and the holders of 195,775 shares
abstained.
The other directors whose terms of office continued after the meeting
are George DeMott, Robert A. Fildes, Ph.D., Selvi Vescovi and Carlton
E. Turner, Ph.D., D.Sc. James T. O'Brien resigned his position as a
director effective as of the date of the 1999 Annual Shareholders
meeting. No one was nominated for election to succeed Mr. O'Brien.
The directorship vacated by him remains open and may be filled by
action of the Board at a future date.
The appointment of Ernst & Young LLP as independent auditors for the
Company for the fiscal year ending December 31, 1999 was approved by
the holders of 7,794,637 shares, with the holders of 22,769 shares
voting against approval and the holders of 46,943 shares abstaining.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 Exclusive Sales Representative Agreement dated April
13, 1999, between Caraloe, Inc., and Classic
Distributing Company.
10.2 Exclusive Sales Representative Agreement dated April
13, 1999, between Caraloe, Inc., and Glenn Corporation.
10.3 Terms Sheet for Lease of Rancho Aloe Farm Land to
Sabila Industrial dated April 20, 1999.
10.4 Terms Sheet for Maintenance of Sabila Industrial Plants
on Leased Land dated April 20, 1999.
10.5 Amendment Number One dated May 27, 1999, to the Sales
Distribution Agreement dated April 17, 1998, between
Carrington Laboratories, Inc. and Carrington
Laboratories, Belgium, NV and CSC Pharmaceuticals,
Ltd., Dublin.
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 June 30, 1999.
<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: August 12, 1999 By: /s/ Carlton E. Turner
---------------------
Carlton E. Turner
President and C.E.O.
(principal executive
officer)
Date: August 12, 1999 By: /s/ Robert W. Schnitzius
------------------------
Robert W. Schnitzius,
Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
INDEX TO EXHIBITS
Item Description
No.
10.1 Exclusive Sales Representative Agreement dated April 13,
1999, between Caraloe, Inc., and Classic Distributing
Company.
10.2 Exclusive Sales Representative Agreement dated April 13,
1999, between Caraloe, Inc., and Glenn Corporation.
10.3 Terms Sheet for Lease of Rancho Aloe Farm Land to Sabila
Industrial dated April 20, 1999.
10.4 Terms Sheet for Maintenance of Sabila Industrial Plants on
Leased Land dated April 20, 1999.
10.5 Amendment Number One dated May 27, 1999, to the Sales
Distribution Agreement dated April 17, 1998, between
Carrington Laboratories, Inc. and Carrington Laboratories,
Belgium, NV and CSC Pharmaceuticals, Ltd., Dublin.
27.1 Financial Data Schedule
EXHIBIT 10.1
EXCLUSIVE SALES REPRESENTATIVE
AGREEMENT
This Agreement, dated April 13, 1999, by and between CARALOE,
INC., a Texas corporation ("Company"), having its principal address at
2001 Walnut Hill Lane, Irving, Texas 75038, and CLASSIC DISTRIBUTING
COMPANY ("Representative"), having its principal address at 660 Jessie
Street, San Fernando, CA 91340.
W I T N E S S E T H:
WHEREAS, Company manufactures and sells ingredients and products
(collectively, the "Products") for cosmetic, health care and
nutritional purposes; and
WHEREAS, Company desires to engage Representative as an
independent representative for the purpose of soliciting customers for
and selling the Products in the U.S.A.; and
WHEREAS, Representative desires to represent Company in
soliciting customers for and selling the Products in California (the
"Territory") and is prepared to commit to use its best efforts in this
regard;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Appointment of Representative and Territory. Company hereby
appoints Representative to act as exclusive sales representative for
the sale of the Products in the Territory, and Representative hereby
accepts such appointment.
2. Term. The initial term of this Agreement shall commence on
the date of this Agreement and shall expire at midnight on April 12,
2000. Following the initial term, this Agreement will be
automatically renewed on the same terms and conditions set forth
herein for successive renewal terms of one year each, unless either
party hereto gives written notice of termination to the other party at
least ninety (90) days prior to the end of the initial term or the
then-current renewal term, in which case this Agreement shall
terminate at the end of such term.
3. Duties of Representative. Representative shall use its best
efforts to promote, develop and increase sales of the Products in the
Territory in accordance with the general marketing strategy set forth
by Company from time to time. Representative's duties shall include,
but shall not be limited to:
(a) assessing the market potential of the Products in the
Territory;
(b) advising Company on the suitability of its promotional
materials and the effectiveness of its general
marketing strategy;
(c) actively soliciting orders for and promoting the
Products;
<PAGE>
(d) cultivating existing customers and potential customers
for the Products;
(e) initiating contacts with potential customers for the
purpose of selling the Products to them;
(f) participating in negotiations between customers and
Company, but only at the request and direction of
Company;
(g) advising customers with respect to technical or sales
information prepared by Company;
(h) acting as a general liaison between customers and
Company; and
(i) assisting Company in resolving controversies that may
arise with customers in the Territory during the term
of this Agreement.
4. Acceptance of Orders and Prices.
(a) Representative shall have no power or authority to
enter into any contracts on Company's behalf or to bind Company in any
way whatsoever. Representative shall submit all orders that it
receives for Products to Company for acceptance or rejection.
(b) Representative shall transmit all orders for Products
to Company by telefax or other prompt means. Company shall transmit
its acceptance or rejection of each order to Representative by telefax
or other prompt means. Company will not reject orders arbitrarily but
only for customer credit, manufacturing or other valid reasons. All
orders for Products that are not affirmatively rejected by Company
within thirty (30) days after their receipt by Company shall be deemed
accepted.
(c) Representative shall inform customers that orders for
Products are sought and received subject to acceptance by Company and
upon Company's standard terms and conditions.
(d) In dealing with customers or potential customers,
Representative shall quote prices in accordance with the applicable
price list or price quotations supplied by Company and shall not grant
any deductions, discounts, allowances, rebates, requests to return
products, or changes in terms of payment or other terms and conditions
without Company's prior, specific, consent in each case.
(e) Company shall provide Representative with Company's
current price list for the Products in the Territory in U.S. dollars
at the time of execution of this Agreement and thereafter whenever
there is any change in such list or Representative requests such a
list.
<PAGE>
5. Commissions.
(a) Company shall pay Representative a commission in U. S.
dollars equal to 10% of Representative's Net Sales, as defined in
paragraph 5(b) below, subject to the provisions of paragraph 5(e)
below.
(b) As used in this Agreement, "Net Sales" shall mean the
invoice price of the Products sold by Representative, less any
customer discounts, rebates, promotional allowances and credits for
product returns allowed by Company and excluding shipping, insurance,
duties and taxes (collectively, "the Allowable Deductions"). All
amounts referred to in this subparagraph shall be in U. S. dollars.
(c) Representative's right to receive commissions shall
accrue upon Company's receipt of payment by customers of the invoices
on which such commissions are based. Company shall pay commissions
owed to Representative within thiry (30) days after they accrue.
(d) Company shall provide to Representative with each
commission payment a brief statement setting forth the invoice price
of the Products sold, the Allowable Deductions, the resulting Net
Sales amount, and the amount of the commission payable to
Representative, as well as the total amount of Representative's Net
Sales for the year to date.
(e) Representative shall not be entitled to receive the
full amount of the commissions payable on sales of Products that have
ultimate destinations outside the Territory but shall share such
commissions with Company's local representatives for such destinations
in proportions that shall be negotiated and mutually agreed upon by
Company, Representative and such local representatives.
6. Shipping/Packing. Company shall be solely responsible for
the packing, shipping, and invoicing of the Products.
7. Promotional and Technical Materials. Company shall, at its
expense, furnish Representative with such promotional and technical
materials as are appropriate for use in the Territory and in such
quantities as may reasonably be needed by Representative in the
performance of its duties hereunder.
8. Advertising, Trade Shows, and Other Special Services
Requested by Company.
(a) If Company requests that Representative engage in
certain advertising to promote the Products in the Territory,
Representative shall do so, and Company shall bear the costs of such
requested advertising. This subparagraph shall not be construed to
limit Representative's right to conduct its own advertising, at its
own expense.
<PAGE>
(b) If Company so requests, Representative shall
participate in trade shows, arrange special promotional events (such
as, but not limited to, cocktail parties for customers), conduct
special studies or perform other special services that are not part of
Representative's normal and regular duties. In such event, Company
shall compensate Representative for such additional services on a
basis to be determined by mutual agreement of the parties on a case-
by-case basis and shall also reimburse Representative for all
reasonable out-of-pocket expenses incurred by it in performing such
additional services promptly after receiving appropriate evidence of
such expenses.
9. Warranties. Representative is not authorized to and shall
not make or modify any warranties on behalf of Company, unless and
except to the extent that Company expressly authorizes it in writing
to do so.
10. Expenses. Except as otherwise expressly provided in this
Agreement, Representative shall bear all expenses incurred by it in
carrying out its obligations under this Agreement.
11. Confidentiality. During the term of this Agreement and at
all times thereafter, Representative shall not, and shall not permit
any of its employees or agents to, disclose to any third parties any
technology, know-how, technical information, trade secrets or other
confidential information of Company, except with the express written
consent of Company or to the extent required by applicable law.
12. Exclusivity.
(a) Company has not granted and shall not grant to any
other person or entity the right to act as Company's representative
for the sale of Products in the Territory during the term of this
Agreement.
(b) During the term of this Agreement, Representative shall
not, in the Territory, directly or indirectly, sell, offer for sale,
promote, or represent anyone other than Company for the sale or
promotion of, any products or services that are competitive with any
of the Products or services of Company.
13. Early Termination. Notwithstanding the provisions of
paragraph 2 above, either party shall be entitled to terminate this
Agreement immediately by giving written notice of termination to the
other party at any time, if:
(a) the other party commits a material breach of this
Agreement and fails to cure such breach within thirty (30) days
after receiving written notice from the terminating party
identifying the breach and requiring that it be cured, or
<PAGE>
(b) the other party dies (if such party is an individual),
is liquidated or dissolved (if such party is an entity), makes an
assignment for the benefit of creditors, files a petition for
relief under the Federal Bankruptcy Code or any other present or
future federal or state insolvency, bankruptcy or similar law
(collectively, a "Bankruptcy Law"), is the subject of an
involuntary petition for relief filed under any applicable
Bankruptcy Law and such petition is not dismissed within sixty
(60) days after the filing thereof, or is the subject of an order
for relief entered under any applicable Bankruptcy Law or of an
order of receivership entered by any state or federal court.
14. Effect of Termination. Following any termination of this
Agreement, neither party shall have any further liability or
obligation to the other party hereunder or in respect hereof, except
that:
(a) the provisions of paragraphs 11, 14, 15, 17-20 and 22-
27 hereof shall survive any termination of this Agreement and
shall continue to be binding on the parties hereto;
(b) each party shall continue to have all rights and
obligations that shall have accrued at or prior to the
termination of this Agreement, including but not limited to any
rights and obligations resulting from any breach of this
Agreement;
(c) the termination of this Agreement shall not terminate
Representative's right to receive commissions in accordance with
paragraph 5 above on Representative's sales of Products for which
Company receives orders on or before the date of termination of
this Agreement, even if Company receives payment for such
Products after such date of termination; and
(d) the termination of this Agreement shall not terminate
Company's right to deduct all Allowable Deductions in accordance
with paragraph 5 above in determining the Net Sales on which
commissions are payable to Representative under this Agreement,
even if such Allowable Deductions arise after the date of
termination of this Agreement.
15. No Commissions on Orders Received after Termination of
Agreement. Representative will not be entitled under any
circumstances to receive any commissions on sales of Products for
which orders are received by Company after the date of termination of
this Agreement.
16. Independent Contractor Relationship. The parties to this
Agreement are independent contractors, and nothing in this Agreement
shall be construed to create any partnership, joint venture or
employer-employee relationship between them. Neither party shall have
the right, power or authority to bind or obligate the other party, and
neither party shall hold itself out to any third party as having such
right, power or authority, in the absence of express written
authorization from the other party. Representative shall be
responsible for reporting and paying all taxes that are payable with
respect to any income received by it from Company pursuant to this
Agreement.
<PAGE>
17. Equitable Relief. In recognition of the fact that a breach
by Representative of the provisions of paragraph 11 above will cause
irreparable damage to Company for which monetary damages alone will
not constitute an adequate remedy, Company shall be entitled as a
matter of right (without being required to prove damages or furnish
any bond or other security) to obtain a restraining order, an
injunction or other equitable relief from any court of competent
jurisdiction restraining any further violation of such provisions by
Representative and/or requiring Representative to comply with such
provisions. Such right to equitable relief shall not be exclusive but
shall be in addition to all other rights and remedies to which Company
may be entitled at law or in equity.
18. Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of
Texas, without regard to the principles of conflicts of laws thereof.
19. Dispute Resolution. Except as otherwise provided in
paragraph 17 above, any dispute arising under or with respect to this
Agreement shall be resolved by binding arbitration in Dallas County,
Texas, pursuant to the Commercial Arbitration Rules of the American
Arbitration Association. The parties shall be entitled to conduct
reasonable discovery, in accordance with the Federal Rules of Civil
Procedure, prior to the arbitration hearing, and the Federal Rules of
Evidence shall be applicable to the arbitration hearing. The
arbitration hearing shall be conducted by a panel of three
arbitrators. Each party shall select one arbitrator, and the two
arbitrators selected by the parties shall select the third arbitrator.
If the two arbitrators selected by the parties are unable to agree on
a third arbitrator, the parties (or, if the parties fail to agree, the
American Arbitration Association) shall select the third arbitrator in
the manner specified for selecting a sole arbitrator in Rule 13 of the
above-mentioned Commercial Arbitration Rules. The decision of the
arbitrators shall be final, binding on the parties and enforceable by
any court of competent jurisdiction.
20. Notices. All notices required or permitted to be given
under this Agreement shall be in writing and shall be deemed to have
been given on the earlier of the date of receipt by the party to whom
the notice is given or when mailed by certified or registered United
States mail, postage prepaid, addressed to the appropriate party at
the address shown for such party in the introductory paragraph of this
Agreement or at such other address as such party shall have designated
by written notice given to the other party in accordance with this
paragraph.
21. Integration and Modification. This Agreement contains the
entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes any and all prior agreements and
understandings, whether written or oral, between such parties relating
to such subject matter. No modification, alteration, amendment or
supplement to this Agreement shall be valid or effective unless the
same is in writing and signed by the party against which it is sought
to be enforced.
<PAGE>
22. Gender and Number. In this Agreement, pronouns of any
gender shall be construed to include any other gender, and words in
the singular form shall be construed to include the plural and vice
versa, unless the context requires otherwise.
23. Severability. If any provision of this Agreement is held to
be unenforceable, this Agreement shall be considered divisible, and
such provision shall be deemed inoperative to the extent it is
unenforceable, and in all other respects this Agreement shall remain
in full force and effect; provided, however, that if any such
provision may be made enforceable by limitation thereof, then such
provision shall be deemed to be so limited and shall be enforceable to
the maximum extent permitted by applicable law.
24. Waiver. No delay on the part of either party in exercising
any right, power or remedy that it may have in connection herewith
shall operate as a waiver thereof, nor shall any waiver thereof or any
single or partial exercise thereof preclude any further exercise
thereof or the exercise of any other right, power or remedy. No
waiver of any provision of this Agreement, and no consent to any
departure therefrom, shall be effective unless such waiver or consent
is in writing and signed by the party against whom it is sought to be
enforced, and no such waiver or consent shall be effective except with
respect to the particular case and purpose for which it is given.
Nothing in this paragraph shall be deemed to negate or override any
provision of this Agreement that establishes a specific period of time
for the performance of any act.
25. Assignment. This Agreement may not be assigned by either
party hereto without the written consent of the other party, and any
assignment attempted in violation of this paragraph shall be void and
ineffective.
26. Successors and Assigns. Subject to the other terms and
provisions hereof, this Agreement shall inure to the benefit of and be
binding on the parties hereto and their respective heirs, successors
and permitted assigns.
<PAGE>
27. Headings. The headings of the various paragraphs of this
Agreement have been inserted for convenient reference only, shall not
be construed to enlarge, diminish or otherwise change the express
provisions hereof, and shall not be considered for any purpose in
interpreting this Agreement.
28. Counterparts. This Agreement may be signed in counterparts,
each of which shall be deemed an original and all of which shall
together constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date first set forth above.
Company: CARALOE, INC.
By:
Bill Pine
General Manager
Representative: CLASSIC DISTRIBUTING COMPANY
By:
Name: Larry H. Helscher
Title: President
EXHIBIT 10.2
EXCLUSIVE SALES REPRESENTATIVE
AGREEMENT
This Agreement, dated April 13, 1999, by and between CARALOE,
INC., a Texas corporation ("Company"), having its principal address at
2001 Walnut Hill Lane, Irving, Texas 75038, and GLENN CORPORATION
("Representative"), having its principal address at 325 Cedar Street,
#525, St. Paul, MN 55101-1013.
W I T N E S S E T H:
WHEREAS, Company manufactures and sells ingredients and products
(collectively, the "Products") for cosmetic, health care and
nutritional purposes; and
WHEREAS, Company desires to engage Representative as an
independent representative for the purpose of soliciting customers for
and selling the Products in the U.S.A.; and
WHEREAS, Representative desires to represent Company in
soliciting customers for and selling the Products in Minnesota, North
Dakota, South Dakota, Montana, Wyoming, Idaho, Washington, Oregon,
Nevada, Colorado, New Mexico, Oklahoma, Kansas, Nebraska, Iowa,
Missouri, Arkansas, Illinois, Indiana, Ohio, Michigan, Wisconsin, Utah
and Arizona (the "Territory") and is prepared to commit to use its
best efforts in this regard;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. Appointment of Representative and Territory. Company hereby
appoints Representative to act as exclusive sales representative for
the sale of the Products in the Territory, and Representative hereby
accepts such appointment.
2. Term. The initial term of this Agreement shall commence on
the date of this Agreement and shall expire at midnight on April 12,
2000. Following the initial term, this Agreement will be
automatically renewed on the same terms and conditions set forth
herein for successive renewal terms of one year each, unless either
party hereto gives written notice of termination to the other party at
least ninety (90) days prior to the end of the initial term or the
then-current renewal term, in which case this Agreement shall
terminate at the end of such term.
3. Duties of Representative. Representative shall use its best
efforts to promote, develop and increase sales of the Products in the
Territory in accordance with the general marketing strategy set forth
by Company from time to time. Representative's duties shall include,
but shall not be limited to:
(a) assessing the market potential of the Products in the
Territory;
(b) advising Company on the suitability of its promotional
materials and the effectiveness of its general
marketing strategy;
<PAGE>
(c) actively soliciting orders for and promoting the
Products;
(d) cultivating existing customers and potential customers
for the Products;
(e) initiating contacts with potential customers for the
purpose of selling the Products to them;
(f) participating in negotiations between customers and
Company, but only at the request and direction of
Company;
(g) advising customers with respect to technical or sales
information prepared by Company;
(h) acting as a general liaison between customers and
Company; and
(i) assisting Company in resolving controversies that may
arise with customers in the Territory during the term
of this Agreement.
4. Acceptance of Orders and Prices.
(a) Representative shall have no power or authority to
enter into any contracts on Company's behalf or to bind Company in any
way whatsoever. Representative shall submit all orders that it
receives for Products to Company for acceptance or rejection.
(b) Representative shall transmit all orders for Products
to Company by telefax or other prompt means. Company shall transmit
its acceptance or rejection of each order to Representative by telefax
or other prompt means. Company will not reject orders arbitrarily but
only for customer credit, manufacturing or other valid reasons. All
orders for Products that are not affirmatively rejected by Company
within thirty (30) days after their receipt by Company shall be deemed
accepted.
(c) Representative shall inform customers that orders for
Products are sought and received subject to acceptance by Company and
upon Company's standard terms and conditions.
(d) In dealing with customers or potential customers,
Representative shall quote prices in accordance with the applicable
price list or price quotations supplied by Company and shall not grant
any deductions, discounts, allowances, rebates, requests to return
products, or changes in terms of payment or other terms and conditions
without Company's prior, specific, consent in each case.
(e) Company shall provide Representative with Company's
current price list for the Products in the Territory in U.S. dollars
at the time of execution of this Agreement and thereafter whenever
there is any change in such list or Representative requests such a
list.
<PAGE>
5. Commissions.
(a) Company shall pay Representative a commission in U. S.
dollars equal to 10% of Representative's Net Sales, as defined in
paragraph 5(b) below, subject to the provisions of paragraph 5(e)
below.
(b) As used in this Agreement, "Net Sales" shall mean the
invoice price of the Products sold by Representative, less any
customer discounts, rebates, promotional allowances and credits for
product returns allowed by Company and excluding shipping, insurance,
duties and taxes (collectively, "the Allowable Deductions"). All
amounts referred to in this subparagraph shall be in U. S. dollars.
(c) Representative's right to receive commissions shall
accrue upon Company's receipt of payment by customers of the invoices
on which such commissions are based. Company shall pay commissions
owed to Representative within thiry (30) days after they accrue.
(d) Company shall provide to Representative with each
commission payment a brief statement setting forth the invoice price
of the Products sold, the Allowable Deductions, the resulting Net
Sales amount, and the amount of the commission payable to
Representative, as well as the total amount of Representative's Net
Sales for the year to date.
(e) Representative shall not be entitled to receive the
full amount of the commissions payable on sales of Products that have
ultimate destinations outside the Territory but shall share such
commissions with Company's local representatives for such destinations
in proportions that shall be negotiated and mutually agreed upon by
Company, Representative and such local representatives.
6. Shipping/Packing. Company shall be solely responsible for
the packing, shipping, and invoicing of the Products.
7. Promotional and Technical Materials. Company shall, at its
expense, furnish Representative with such promotional and technical
materials as are appropriate for use in the Territory and in such
quantities as may reasonably be needed by Representative in the
performance of its duties hereunder.
8. Advertising, Trade Shows, and Other Special Services
Requested by Company.
(a) If Company requests that Representative engage in
certain advertising to promote the Products in the Territory,
Representative shall do so, and Company shall bear the costs of such
requested advertising. This subparagraph shall not be construed to
limit Representative's right to conduct its own advertising, at its
own expense.
<PAGE>
(b) If Company so requests, Representative shall
participate in trade shows, arrange special promotional events (such
as, but not limited to, cocktail parties for customers), conduct
special studies or perform other special services that are not part of
Representative's normal and regular duties. In such event, Company
shall compensate Representative for such additional services on a
basis to be determined by mutual agreement of the parties on a case-
by-case basis and shall also reimburse Representative for all
reasonable out-of-pocket expenses incurred by it in performing such
additional services promptly after receiving appropriate evidence of
such expenses.
9. Warranties. Representative is not authorized to and shall
not make or modify any warranties on behalf of Company, unless and
except to the extent that Company expressly authorizes it in writing
to do so.
10. Expenses. Except as otherwise expressly provided in this
Agreement, Representative shall bear all expenses incurred by it in
carrying out its obligations under this Agreement.
11. Confidentiality. During the term of this Agreement and at
all times thereafter, Representative shall not, and shall not permit
any of its employees or agents to, disclose to any third parties any
technology, know-how, technical information, trade secrets or other
confidential information of Company, except with the express written
consent of Company or to the extent required by applicable law.
12. Exclusivity.
(a) Company has not granted and shall not grant to any
other person or entity the right to act as Company's representative
for the sale of Products in the Territory during the term of this
Agreement.
(b) During the term of this Agreement, Representative shall
not, in the Territory, directly or indirectly, sell, offer for sale,
promote, or represent anyone other than Company for the sale or
promotion of, any products or services that are competitive with any
of the Products or services of Company.
13. Early Termination. Notwithstanding the provisions of
paragraph 2 above, either party shall be entitled to terminate this
Agreement immediately by giving written notice of termination to the
other party at any time, if:
(a) the other party commits a material breach of this
Agreement and fails to cure such breach within thirty (30) days
after receiving written notice from the terminating party
identifying the breach and requiring that it be cured, or
<PAGE>
(b) the other party dies (if such party is an individual),
is liquidated or dissolved (if such party is an entity), makes an
assignment for the benefit of creditors, files a petition for
relief under the Federal Bankruptcy Code or any other present or
future federal or state insolvency, bankruptcy or similar law
(collectively, a "Bankruptcy Law"), is the subject of an
involuntary petition for relief filed under any applicable
Bankruptcy Law and such petition is not dismissed within sixty
(60) days after the filing thereof, or is the subject of an order
for relief entered under any applicable Bankruptcy Law or of an
order of receivership entered by any state or federal court.
14. Effect of Termination. Following any termination of this
Agreement, neither party shall have any further liability or
obligation to the other party hereunder or in respect hereof, except
that:
(a) the provisions of paragraphs 11, 14, 15, 17-20 and 22-
27 hereof shall survive any termination of this Agreement and
shall continue to be binding on the parties hereto;
(b) each party shall continue to have all rights and
obligations that shall have accrued at or prior to the
termination of this Agreement, including but not limited to any
rights and obligations resulting from any breach of this
Agreement;
(c) the termination of this Agreement shall not terminate
Representative's right to receive commissions in accordance with
paragraph 5 above on Representative's sales of Products for which
Company receives orders on or before the date of termination of
this Agreement, even if Company receives payment for such
Products after such date of termination; and
(d) the termination of this Agreement shall not terminate
Company's right to deduct all Allowable Deductions in accordance
with paragraph 5 above in determining the Net Sales on which
commissions are payable to Representative under this Agreement,
even if such Allowable Deductions arise after the date of
termination of this Agreement.
15. No Commissions on Orders Received after Termination of
Agreement. Representative will not be entitled under any
circumstances to receive any commissions on sales of Products for
which orders are received by Company after the date of termination of
this Agreement.
16. Independent Contractor Relationship. The parties to this
Agreement are independent contractors, and nothing in this Agreement
shall be construed to create any partnership, joint venture or
employer-employee relationship between them. Neither party shall have
the right, power or authority to bind or obligate the other party, and
neither party shall hold itself out to any third party as having such
right, power or authority, in the absence of express written
authorization from the other party. Representative shall be
responsible for reporting and paying all taxes that are payable with
respect to any income received by it from Company pursuant to this
Agreement.
<PAGE>
17. Equitable Relief. In recognition of the fact that a breach
by Representative of the provisions of paragraph 11 above will cause
irreparable damage to Company for which monetary damages alone will
not constitute an adequate remedy, Company shall be entitled as a
matter of right (without being required to prove damages or furnish
any bond or other security) to obtain a restraining order, an
injunction or other equitable relief from any court of competent
jurisdiction restraining any further violation of such provisions by
Representative and/or requiring Representative to comply with such
provisions. Such right to equitable relief shall not be exclusive but
shall be in addition to all other rights and remedies to which Company
may be entitled at law or in equity.
18. Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of
Texas, without regard to the principles of conflicts of laws thereof.
19. Dispute Resolution. Except as otherwise provided in
paragraph 17 above, any dispute arising under or with respect to this
Agreement shall be resolved by binding arbitration in Dallas County,
Texas, pursuant to the Commercial Arbitration Rules of the American
Arbitration Association. The parties shall be entitled to conduct
reasonable discovery, in accordance with the Federal Rules of Civil
Procedure, prior to the arbitration hearing, and the Federal Rules of
Evidence shall be applicable to the arbitration hearing. The
arbitration hearing shall be conducted by a panel of three
arbitrators. Each party shall select one arbitrator, and the two
arbitrators selected by the parties shall select the third arbitrator.
If the two arbitrators selected by the parties are unable to agree on
a third arbitrator, the parties (or, if the parties fail to agree, the
American Arbitration Association) shall select the third arbitrator in
the manner specified for selecting a sole arbitrator in Rule 13 of the
above-mentioned Commercial Arbitration Rules. The decision of the
arbitrators shall be final, binding on the parties and enforceable by
any court of competent jurisdiction.
20. Notices. All notices required or permitted to be given
under this Agreement shall be in writing and shall be deemed to have
been given on the earlier of the date of receipt by the party to whom
the notice is given or when mailed by certified or registered United
States mail, postage prepaid, addressed to the appropriate party at
the address shown for such party in the introductory paragraph of this
Agreement or at such other address as such party shall have designated
by written notice given to the other party in accordance with this
paragraph.
21. Integration and Modification. This Agreement contains the
entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes any and all prior agreements and
understandings, whether written or oral, between such parties relating
to such subject matter. No modification, alteration, amendment or
supplement to this Agreement shall be valid or effective unless the
same is in writing and signed by the party against which it is sought
to be enforced.
<PAGE>
22. Gender and Number. In this Agreement, pronouns of any
gender shall be construed to include any other gender, and words in
the singular form shall be construed to include the plural and vice
versa, unless the context requires otherwise.
23. Severability. If any provision of this Agreement is held to
be unenforceable, this Agreement shall be considered divisible, and
such provision shall be deemed inoperative to the extent it is
unenforceable, and in all other respects this Agreement shall remain
in full force and effect; provided, however, that if any such
provision may be made enforceable by limitation thereof, then such
provision shall be deemed to be so limited and shall be enforceable to
the maximum extent permitted by applicable law.
24. Waiver. No delay on the part of either party in exercising
any right, power or remedy that it may have in connection herewith
shall operate as a waiver thereof, nor shall any waiver thereof or any
single or partial exercise thereof preclude any further exercise
thereof or the exercise of any other right, power or remedy. No
waiver of any provision of this Agreement, and no consent to any
departure therefrom, shall be effective unless such waiver or consent
is in writing and signed by the party against whom it is sought to be
enforced, and no such waiver or consent shall be effective except with
respect to the particular case and purpose for which it is given.
Nothing in this paragraph shall be deemed to negate or override any
provision of this Agreement that establishes a specific period of time
for the performance of any act.
25. Assignment. This Agreement may not be assigned by either
party hereto without the written consent of the other party, and any
assignment attempted in violation of this paragraph shall be void and
ineffective.
26. Successors and Assigns. Subject to the other terms and
provisions hereof, this Agreement shall inure to the benefit of and be
binding on the parties hereto and their respective heirs, successors
and permitted assigns.
27. Headings. The headings of the various paragraphs of this
Agreement have been inserted for convenient reference only, shall not
be construed to enlarge, diminish or otherwise change the express
provisions hereof, and shall not be considered for any purpose in
interpreting this Agreement.
28. Counterparts. This Agreement may be signed in counterparts,
each of which shall be deemed an original and all of which shall
together constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date first set forth above.
Company: CARALOE, INC.
By:
Bill Pine
General Manager
Representative: GLENN CORPORATION
By:
Name: Glenn Lillmars
Title: President
EXHIBIT 10.3
Terms Sheet for Lease of Rancho Aloe Farm Land to Sabila Industrial
----------------------------------------------------------------------
* Lease of land for planting Aloe vera plants at a rate of $7.00
per Ha per month.
* Term of lease is from April 26, 1999 until April 25, 2000. The
lease may be terminated by either party after 6 months of the
lease term have expired, provided that 30 days written notice is
provided to the other party.
* Leased plots will be adjacent to the BPM plots at Rancho Aloe.
* Rancho Aloe will prepare the land for planting at their cost.
* Sabila Industrial will pay Rancho Aloe $135 per Ha for planting
labor.
* Lease rate is a gross rate--no additional rentals, fees or taxes
will apply.
* Upon termination of the lease, Rancho Aloe will buy the plants at
the price of Sabila Industrial's documented invested cost, which
will include the purchase price of the plants, including freight,
plus the cost of land preparation, planting, land maintenance,
fertilization or harvesting, if any.
* Title to the plants remains with Sabila Industrial until such
time as Rancho Aloe purchases the plants.
Date: April 20, 1999
Agreed to: /s/ Bernard Tice
------------------------
/s/ Robert W. Schnitzius
------------------------
EXHIBIT 10.4
Terms Sheet for Maintenance of Sabila Industrial Plants on Leased Land
----------------------------------------------------------------------
* Sabila Industrial will pay $122 per Ha for Rancho Aloe to
maintain the plants on leased plots and control the weeds on the
leased plots.
* Plants and land will be kept in the same condition as other plots
at Rancho Aloe.
* Sabila Industrial will not pay for any irrigation of the plants
during the term of the maintenance agreement unless specifically
requested by Sabila Industrial. If irrigation is requested,
Sabila Industrial will pay $150 per Ha per month for irrigation
services.
Date: April 20, 1999
Agreed to: /s/ Bernard Tice
------------------------
/s/ Robert W. Schnitzius
------------------------
EXHIBIT 10.5
Amendment Number One
To That Certain Agreement by and between Carrington Laboratories, Inc.,
and
Carrington Laboratories Belgium, N.V. and CSC Pharmaceuticals, LTD.,
Dublin
This attachment amends and revises that certain Sales
Distribution Agreement dated April 17, 1998, by and between Carrington
Laboratories, Inc., and Carrington Laboratories Belgium N.V. (together
hereinafter referred to as "Carrington") and CSC Pharmaceuticals, LTD,
Dublin, a Swiss Corporation ("CSC").
Article 3. Certain Performance Requirements
3.13 CSC shall have the ability to access all technical files
relevant to all products covered under this agreement for a
period up to five (5) years after termination of the
Agreement.
3.14 CSC is granted authorization to all Carrington post-
marketing data obtained in any market area covered by this
Agreement and CSC is authorized to use Carrington's current
contractors or select a contractor of its choice to gather
market data in the territory covered by this Agreement. This
shall include production and post-marketing surveillance
data.
Article 4. Registration of Products
4.10 The DiaB[TM] and RadiaCare[TM] Products are authorized to be
marketed in the U.S., European Union and Pacific Rim by the
relevant regulatory body. Carrington authorizes CSC to
market the Products under the DiaB[TM] or RadiaCare[TM]
names or a name that CSC selects for the Products in the
territory covered by this Agreement.
<PAGE>
This Amendment shall become effective upon its execution by both
parties.
All other terms and conditions of the Agreement remain unchanged.
AGREED AND ACCEPTED BY:
CARRINGTON LABORATORIES, INC.
_________________________________
Name: Carlton E. Turner, Ph.D., D.Sc.
Title: President & CEO
CARRINGTON LABORATORIES BELGIUM N.V.
_________________________________
Name: Carlton E. Turner, Ph.D., D.Sc.
Title: President & CEO
CSC PHARMACEUTICALS, LTD DUBLIN
_________________________________
Name: Dr. Yervant Zarmanian
Title: CEO
<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>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,900
<SECURITIES> 0
<RECEIVABLES> 3,504
<ALLOWANCES> 299
<INVENTORY> 4,599
<CURRENT-ASSETS> 11,797
<PP&E> 20,846
<DEPRECIATION> 9,885
<TOTAL-ASSETS> 23,331
<CURRENT-LIABILITIES> 3,284
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 19,953
<TOTAL-LIABILITY-AND-EQUITY> 23,331
<SALES> 13,648
<TOTAL-REVENUES> 13,708
<CGS> 6,981
<TOTAL-COSTS> 8,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,399)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
