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, 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. 9,395,064
shares of Common Stock, $.01 par value, were outstanding at November
10, 1999.
<PAGE>
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 1999 (unaudited) and
December 31, 1998 3
Condensed Consolidated Statements of
Operations for the three and nine
months ended September 30, 1999 and
1998 (unaudited) 4-5
Condensed Consolidated Statements
of Cash Flows for the nine months
ended September 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 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, September 30,
1998 1999
(unaudited)
------ ------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,931 $ 2,774
Accounts receivable, net 2,961 3,003
Inventories 4,969 6,155
Prepaid expenses 739 1,008
------ ------
Total current assets 12,600 12,940
Property, plant and equipment, net 11,050 10,853
Other assets 597 545
------ ------
Total assets $24,247 $24,338
====== ======
Liabilities and Shareholders'
Investment
Accounts payable $ 1,369 $ 2,221
Accrued liabilities 1,515 1,671
Note payable - 200
------ ------
Total current liabilities 2,884 4,092
Shareholders' investment:
Common stock 94 94
Capital in excess of par 51,736 51,873
Deficit (30,467) (31,721)
------ ------
Total shareholders' investment 21,363 20,246
------ ------
Total liabilities and
shareholders' investment $24,247 $24,338
====== ======
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
September 30,
1998 1999
------ ------
<S> <C> <C>
Net sales $ 6,003 $ 7,224
Costs and expenses:
Cost of sales 2,766 3,275
Selling, general and administrative 2,509 2,678
Research and development 680 632
Research and development,
Aliminase[TM] clinical trial - 565
Other income - (47)
Interest, net (53) (24)
------ ------
Income before income taxes 101 145
Provision for income taxes 0 0
------ ------
Net income $ 101 $ 145
====== ======
Net income per share- basic
and diluted $ 0.01 $ 0.02
====== ======
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)
Nine Months Ended
September 30,
1998 1999
------ ------
<S> <C> <C>
Net sales $17,818 $20,872
Costs and expenses:
Cost of sales 7,946 10,256
Selling, general and administrative 7,791 7,821
Research and development 1,925 1,945
Research and development,
Aliminase[TM] clinical trial - 2,235
Other income - (47)
Interest, net (167) (84)
------ ------
Income (loss) before income taxes 323 (1,254)
Provision for income taxes 10 0
------ ------
Net income (loss) $ 313 $(1,254)
====== ======
Net income (loss) per share -
basic and diluted $ 0.03 $ (0.13)
====== ======
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)
Nine Months Ended
September 30,
1998 1999
----- ------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 313 $ (1,254)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 806 784
Provision for inventory obsolescence - 42
Changes in assets and liabilities:
Receivables, net (58) (42)
Inventories (47) (1,228)
Prepaid expenses (530) (268)
Other assets 1,136 52
Accounts payable and
accrued liabilities 49 1,007
----- ------
Net cash provided (used) by
operating activities 1,699 (907)
Cash flows from investing activities:
Purchases of property, plant
and equipment (1,079) (586)
----- ------
Net cash used by investing activities (1,079) (586)
Cash flows from financing activities:
Issuances of common stock 110 137
Proceeds of note payable (0) 200
----- ------
Net cash provided by financing activities 110 337
----- ------
Net increase (decrease) in cash
and cash equivalents 700 (1,157)
Cash and cash equivalents, beginning
of period 4,023 3,931
----- ------
Cash and cash equivalents, end
of period $ 4,723 $ 2,774
===== ======
Supplemental disclosure of cash flow
information
Cash paid during the period for
interest $ 1 $ 3
Cash paid during the period for
federal, state and local
income taxes $ 2 $ 12
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 September 30, 1999, the
condensed consolidated statements of operations for the three and nine
month periods ended September 30, 1998 and 1999 and the condensed
consolidated statements of cash flows for the nine month periods ended
September 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 September 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 numbers of common shares outstanding for the
quarters ended September 30, 1998 and 1999 were 9,308,000 and
9,368,000, respectively. The weighted average numbers of common shares
outstanding for the nine month periods ended September 30, 1998 and
1999 were 9,313,000 and 9,357,000, respectively,
In calculating the diluted net loss per share for the three and nine
month periods ended September 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 nine month periods ended
September 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
September 30, 1998 Care Inc. Corporate Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
September 30, 1999
-------------------------------------------------------------------
Sales to unaffiliated
customers $ 3,903 $ 3,321 $ - $ 7,224
Income (loss) before
income taxes 280 823 (958) 145
Identifiable assets 13,926 1,169 9,243 24,338
Capital expenditures - - 165 165
Depreciation and
amortization 181 - 90 271
-------------------------------------------------------------------
Nine Months Ended Wound Caraloe
September 30, 1998 Care Inc. Corporate Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $12,650 $ 5,168 $ - $17,818
Income (loss) before
income taxes 943 1,055 (1,675) 323
Capital expenditures 206 18 855 1,079
Depreciation and
amortization 346 2 458 806
-------------------------------------------------------------------
Nine Months Ended
September 30, 1999
-------------------------------------------------------------------
Sales to unaffiliated
customers $11,538 $ 9,334 $ - $20,872
Income (loss) before
income taxes 187 2,112 (3,553) (1,254)
Capital expenditures 137 - 449 586
Depreciation and
amortization 524 - 260 784
</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 $42,325,000 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 September 30,
1999, the Company has purchased $640,000 of products pursuant to this
commitment and made prepayments of $606,000 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 is currently
evaluating whether 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 September 30, 1999, the Company held cash and
cash equivalents of $3,931,000 and $2,774,000, respectively. The net
decrease in cash of $1,157,000 is primarily attributable to significant
cash outlays for commencement of the Phase III Aliminase[TM] clinical
trial discussed below.
The Company has invested in inventory to support sales of bulk products
to Mannatech, Inc. Receivables from this customer totaled $770,000 as
of September 30, 1999. As of October 29, 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. The Company had fully reserved its investment in and
accounts receivables from ACI as of December 31, 1998. As of October
29, 1999, ACI had made the first three payments according to the
schedule totaling $40,000 which is reflected in other income. Payments
scheduled to be received second and third quarter totalling $65,0000
have not yet been received.
The Company has also commenced bottling drinks for NuSkin
International, Inc., ("NuSkin"), a multi-level marketer of
nutraceutical products, at the Company's Costa Rica facility. This
business was brought to the Company by ACI, and the Company has signed
an agreement with ACI to pay a 10% finder's fee on all sales to NuSkin.
The Company and ACI agreed that 30% of the fee, or 3% of sales to
NuSkin, will be withheld from the finder's fee payments and applied to
the debt owed to the Company by ACI.
As of September 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 $2,039,000 for the nine months ended September 30,
1999.
<PAGE>
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 $387,628 of CarraSorb[TM] M and
Carrington[TM] (Aphthous Ulcer) Patch inventory on hand as of September
30, 1999.
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 is currently evaluating
whether 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 September 30, 1999, the Company had paid this supplier a total of
$1,182,000 for products purchased and prepayments made under the
agreement. The Company is in full compliance with the agreement and,
as of September 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 September 30, 1999 there was $200,000 outstanding
under this credit facility.
<PAGE>
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
September 30, 1999, the net book value of this agreement was $551,000.
The Company has entered into an agreement with Dominick & Dominick LLC
("Dominick") to provide financial advisory services to the Company on a
non-exclusive basis. The Company paid Dominick an initial engagement
fee of $5,000 and agreed to pay a retainer fee of $5,000 per month
beginning August 1, 1999 and a supplemental fee of $5,000 for each
month in which the Company is scheduled to visit Dominick's European
branch offices. Additional fees may become payable if Dominick
performs certain services for the Company. The agreement also
obligates the Company to reimburse Dominick for its reasonable out-of-
pocket expenses incurred on behalf of the Company; to indemnify
Dominick and certain related parties against certain types of claims,
liabilities, losses, damages and expenses; to grant to Dominick a five-
year option to purchase 50,000 shares of the Company's common stock at
a price of $3.50 per share; to grant Dominick certain registration
rights with respect to the option shares; and to grant Dominick an
option to purchase an additional 50,000 shares of the Company's common
stock at a price of $3.50 per share if Dominick performs certain
additional services for the Company. The agreement (excluding the
provisions obligating the Company to grant options to, and to
indemnify, Dominick) may be terminated by either party at any time.
As a result of sharp increases in sales of raw materials produced 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.
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.
<PAGE>
The Company loaned $487,000 to Aloe & Herbs during 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 obligations through September 1999. Regular shipments of
leaves from Rancho Aloe to the Company commenced in April 1999. In
September 1999, the Company also signed an agreement to lease
approximately 17.6 acres of land from Rancho Aloe for one year, with
provisions for automatic renewal in one year increments unless
terminated by the Company or Rancho Aloe, 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. During the quarter ended September 30, 1999,
Aloe & Herbs repaid $2,000 of its debt to the Company. This amount has
been reflected in Other Income.
The Company leases approximately 24,000 square feet of laboratory space
in Irving, Texas for its research and development and quality control
laboratories. The current term of the lease on this space expires on
January 31, 2000, and the Company had the option to renew the lease for
an additional five years. The renewal option called for the new lease
rate to be at fair market value, which is significantly more than the
current lease rate. In exchange for a reduction of the new lease rate,
the Company agreed to renew the lease for 18 months, with no further
option for renewal.
The Company will shut down its bulk material processing facility in
Costa Rica during the second half of November and the first half of
December 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 $400,000.
The Company has been building its inventory of the bulk materials
produced in this facility and does not expect the shutdown to cause any
significant 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>
Regulation
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 1999 Compared With Third Quarter of 1998
Net sales were $7,224,000 in the third quarter of 1999, an increase of
$1,221,000, or 20.3%, compared with $6,003,000 in the third quarter of
1998. Caraloe, Inc., the Company's consumer products subsidiary,
increased sales from $1,827,000 to $3,321,000. Caraloe sales to
Mannatech, Inc., which are primarily Manapol7 powder, increased from
$1,502,000 in the third quarter of 1998 to $2,965,000 in the third
quarter of 1999. Sales of the Company's wound and skin care products
decreased 6.5%, due to product mix and intense downward pricing
pressure, to $3,903,000 in the third quarter of 1999 as compared to
$4,176,000 in the third quarter of 1998.
Cost of sales increased from $2,766,000 to $3,275,000, or 18.4%. As a
percentage of sales, cost of sales decreased from 46.1% in the third
quarter of 1998 to 45.3% in the third quarter of 1999. This was due to
operating efficiencies achieved in the Company's Costa Rica operations
that were partially offset by the weighted impact of increased sales of
Caraloe's products, which have lower gross margins than wound care
products.
Selling, general and administrative expenses increased from $2,509,000
in the third quarter of 1998 to $2,678,000 in 1999.
Research and development expenses increased to $1,197,000 from
$680,000, or 76.0%. This was due to the impact of the costs of the
clinical trial of Aliminase[TM], which were $565,000 for the 1999
quarter.
Net interest income of $24,000 in the third quarter of 1999 compared to
$53,000 of net interest income in the third quarter of 1998.
<PAGE>
Net income for the third quarter of 1999 was $145,000, compared with
net income of $101,000 during the third quarter of 1998. Assuming
dilution, the net income for the third quarter of 1999 was $0.02 per
share, compared to net income of $0.01 per share for the same quarter
of 1998. Excluding Aliminase[TM] clinical trial expenses, net income
for the third quarter of 1999 was $710,000, or $0.08 per share.
First Nine Months of 1999 Compared With First Nine Months of 1998
Net sales were $20,872,000 in the first nine months of 1999, compared
with $17,818,000 in the first nine months of 1998. This increase of
$3,054,000, or 17.1%, resulted from an increase of $4,166,000 in sales
of Caraloe, Inc., the Company's consumer products subsidiary, and a
decrease in wound care sales of $1,112,000. Caraloe's sales increased
from $5,168,000 to $9,334,000, or 80.6%. Caraloe's sales to Mannatech,
Inc., which were primarily Manapol7 powder, increased from $3,842,000
in 1998 to $8,451,550 in 1999.
Partially offsetting the above sales increase was a decrease in sales
of the Company's wound and skin care products from $12,650,000 in 1998
to $11,538,000 in 1999, or 8.8%. 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 $7,946,000 to $10,256,000, or 29.1%. As a
percentage of sales, cost of sales increased from 44.6% in the first
nine months of 1998 to 49.1% in the first nine months 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.
Selling, general and administrative expenses increased to $7,821,000
from $7,791,000.
Research and development expenses increased to $4,180,000 from
$1,925,000, or 117.1%. This increase was primarily due to expenditures
of $2,235,000 made in the clinical trial of the Company's proprietary
drug Aliminase[TM].
Net interest income of $84,000 was realized in the first nine months of
1999, versus net interest income of $167,000 in the first nine months
of 1998. The reduced investment income was primarily due to lower cash
balances invested and reduced investment yields.
Net loss for the first nine months of 1999 was $1,254,000, compared
with net income of $313,000 for the first nine months of 1998.
Assuming dilution, the net loss for the first nine months of 1999 was
$0.13 per share, compared to net income of $0.03 per share for the same
period in 1998. Excluding Aliminase[TM] clinical trial expenses, net
income for the first nine months of 1999 was $981,000, or $0.10 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 was
completed in September 1999, and all systems tested were found
compliant.
With respect to non-information technology systems, the Company has
initiated efforts to assess its exposure due to 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.
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. As of October 29,
1999, the Company had not received any responses from vendors surveyed
which indicate that supply of products to the Company will be affected
by Y2K issues. The Company made specific oral and Internet inquiries
of local U. S. utility companies (electric, gas, water and telephone)
to determine whether these essential services will be available for use
by the Company on and after January 1, 2000. The utility company which
provides gas and electric services to the Company, as well as the local
telephone company, have both publicly certified that their critical
systems are Y2K ready and have been tested to confirm their readiness.
The local government-provided water utility has also certified its
essential systems are Y2K ready.
<PAGE>
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 unforseen Year 2000 unreadiness issues could
have on the Company, the Company cannot provide 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 at that time that approximately 80-90% of their
systems had been tested at that time and found compliant. The bank has
since publicly certified that its systems are prepared and have been
tested and proven ready for Y2K.
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 was approximately $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, which 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. As of October 31, 1999, no such contingency orders
had been received.
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.
<PAGE>
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 or produce sufficient
supplies of Aloe vera leaves at reasonable costs, to stockpile
sufficient inventories of finished goods and bulk materials to supply
customers' needs during the planned shutdown of its Costa Rica facility
and any actual or anticipated disruptions resulting from Y2K problems,
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.
<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 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 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's
increased inventories of finished products and bulk materials may be
insufficient to supply customers' needs during the planned shutdown of
its Costa Rica facility or any actual or anticipated disruptions
resulting from Y2K problems, 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.
<PAGE>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 Exclusive Sales and Trademark Agreement dated June 11,
1999, between Caraloe, Inc., and Nutra Vine.
10.2 Lease Agreement between Rancho Aloe and Sabila
Industrial, S.A. dated September 23, 1999.
10.3 Letter Agreement between Aloe Commodities International,
Inc. and Carrington Laboratories, Inc. dated September
29, 1999.
10.4 Fourth Lease Amendment between Western Atlas
International, Inc. and Carrington Laboratories, Inc.,
dated August 31, 1999.
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, 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: November 15, 1999 By: /s/ Carlton E. Turner
Carlton E. Turner,
President and C.E.O.
(principal executive
officer)
Date: November 15, 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 and Trademark Agreement dated June 11,
1999, between Caraloe, Inc., and Nutra Vine.
10.2 Lease Agreement between Rancho Aloe and Sabila Industrial,
S.A. dated September 23, 1999.
10.3 Letter Agreement between Aloe Commodities International,
Inc. and Carrington Laboratories, Inc. dated September 29,
1999.
10.4 Fourth Lease Amendment between Western Atlas International,
Inc. and Carrington Laboratories, Inc., dated August 31,
1999.
27.1 Financial Data Schedule
</TABLE>
EXHIBIT 10.1
SALES AND TRADEMARK LICENSE AGREEMENT
THIS SALES AND TRADEMARK LICENSE AGREEMENT ("Agreement"),
effective as of June 11, 1999, is made by and between CARALOE, INC.
("Licensor"), a Texas corporation, having its principal place of
business at 2001 Walnut Hill Lane, Irving, Texas 75038, and NUTRA VINE
("Licensee"), having its principal place of business at 17311 Center
Court Circle, Spring, TX 77379.
W I T N E S S E T H:
WHEREAS, Licensor desires to sell to Licensee and Licensee
desires to purchase from Licensor bulk aloe vera mucilaginous
polysaccharide (hereinafter referred to under the product name of
"Manapol[R] Powder"), to be purchased according to the specifications,
prices, and terms as set forth on the attached Schedule A and to be
used in product or products manufactured by Licensee (the
"Manufactured Products");
WHEREAS, Carrington Laboratories, Inc., ("Carrington") a Texas
corporation, claims the ownership of the trademark Manapol[R] (the
"Mark") and has granted to Licensor an exclusive license to use the
Mark and to sub-license others to use it;
WHEREAS, Licensee is desirous of obtaining from Licensor, and
Licensor is willing to grant to Licensee, a license to use the Mark in
connection with the advertising and sale of the Manufactured Products
subject to the terms, conditions and restrictions set forth herein;
and
WHEREAS, Licensor and Licensee are mutually desirous of insuring
the consistent quality of all products sold in connection with the
Mark;
NOW, THEREFORE, in consideration of premises, the mutual
covenants, promises and agreement set forth herein, and other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby covenant, promise and agree as
follows:
Article 1
LICENSE
1.1 Terms and Conditions. Licensor hereby grants to Licensee
the non-transferable right and license to use the Mark in connection
with the labeling, advertising and sale of Manufactured Products
manufactured and sold by Licensee in the United States during the term
of this Agreement. During the term of this Agreement, Licensee shall
have the non-exclusive right to use the Mark in connection with
Manufactured Products containing Manapol[R] Powder that are intended
for sale to the ultimate consumer in the United States.
<PAGE>
1.2 Sublicenses. Licensee shall not have the right to grant
sublicenses without the written permission of Licensor with respect to
the license granted herein; however, Licensee may engage a third party
or parties to make and affix labels for the Manufactured Products in
compliance with Articles 2,3, and 4 hereof, and/or to distribute and
sell the Manufactured Products in compliance with the terms and
conditions of this Agreement. Licensee shall be expressly obligated
to ensure full compliance with all terms and conditions of this
Agreement.
1.3 Quality Standards. Licensee agrees that the nature and
quality of all goods sold by Licensee under the Mark, and all
advertising, promotional and other related uses of the Mark by
Licensee shall conform to standards set by and be under the control of
Licensor and Carrington.
1.4 Quality Maintenance. Licensee agrees to cooperate with
Licensor and Carrington in facilitating control by Licensor and
Carrington of the nature and quality of all Manufactured Products, to
permit reasonable inspection of Licensee's operation, and to supply
Licensor and Carrington with specimens of uses of the Mark upon
request. Licensee shall comply with all applicable laws and
regulations and obtain all appropriate government approvals pertaining
to the sale, distribution and advertising of goods covered by this
License.
1.5 Form of Use. Licensee agrees to use the mark only in the
form and manner and with appropriate legends as prescribed from time
to time by Licensor, and not to use any other trademark or service
mark in connection with the Mark without prior written approval of
Licensor.
1.6 Infringement Proceedings. Licensee agrees to promptly
notify Licensor of any unauthorized use of the Mark by others as it
comes to Licensee's attention. Licensor shall have the sole right and
discretion to bring infringement or unfair competition proceedings
involving the Mark, or to authorize Licensee to do so.
Article 2
CERTAIN OBLIGATIONS OF LICENSEE AND LICENSOR
2.1 Representations by Licensee. Licensee shall not represent
in any manner that it owns any right, title or interest in or to the
Mark. Licensee acknowledges that its use of the Mark shall inure to
the benefit of Licensor and shall not create in Licensee's favor any
right, title or interest in or to the Mark.
2.2 Discontinuation of Use of Mark. Upon the expiration or
termination of this Agreement, Licensee will cease and desist from all
use of the Mark in any manner and will not adopt or use, without
Licensor's prior written consent, any word or mark which is
confusingly or deceptively similar to the Mark, except that Licensee
may continue to use the Mark under the terms and conditions of this
Agreement in connection with any remaining supplies of Manapol[R]
Powder purchased by Licensee from Licensor until such supplies are
exhausted.
<PAGE>
2.3 FDA Compliance of Products. All products on which the Mark
is used by Licensee shall be manufactured, packaged, labeled,
advertised, marketed and sold in compliance with the Federal Food,
Drug and Cosmetic Act and the rules and regulations promulgated
thereunder, as amended from time to time.
2.4 Inspection. Upon reasonable notice, Licensor reserves the
right to inspect the Manufactured Products bearing the Mark and
Licensee's manufacturing facilities at all reasonable times to insure
Licensee's compliance with this Agreement.
2.5 Use of Trademark. Licensee shall not use the Mark except as
specifically set forth herein. Without limiting the generality of the
preceding sentence, Licensee shall not use the Mark in connection with
the sale or advertising of any products other than the Manufactured
Products. Any use of the Mark pursuant to this agreement is non-
exclusive. Whenever the Licensee uses the Mark, it shall also
indicate that such name is the registered trademark of Carrington and
shall take all reasonable measures to assure that there is no
confusion of ownership of the Mark or the substance which it
identifies, the same being the proprietary property of the Licensee.
Article 3
MANUFACTURING AND SALE
3.1 Manufacturing Facilities. All manufacturing of the
Manufactured Products shall be done in the Licensee's own facilities
or qualified contract manufacturing facilities.
3.2 Combination With Other Products. Licensee shall not combine
Manapol[R] Powder with any product or substance in any manner which
would violate any laws, rules or regulations of any state, federal or
other governmental body. Licensee shall not combine Manapol[R] Powder
with any other substance in a Manufactured Product that is to be
advertised or sold for use or consumption by humans or animals if the
approval of the U.S. Food and Drug Administration (the "FDA") or the
U.S. Department of Agriculture ("USDA") for such use or consumption is
required and has not been obtained.
3.3 Compliance by Third Parties. Licensee shall take all steps
reasonably necessary to ensure that its distributors and any other
parties to whom it sells any of the Manufactured Products for resale
do not relabel, repackage, advertise, sell or attempt to sell
Manapol[R] Powder or any of the Manufactured Products in a manner
that would violate this Agreement if done by Licensee.
3.4 Manapol[R] Powder Content. The amount of Manapol[R] Powder
to be contained in each of the Manufactured Products shall be no less
than fifteen milligrams (15 mgs) of Manapol[R] Powder per ounce of
Manufactured Products. The parties shall meet once each year to
determine and agree upon the Manapol[R] Powder content for existing
and proposed Manufactured Products.
<PAGE>
Article 4
LABELS AND ADVERTISING
4.1 FDA Compliance of Labels and Advertising. All labels and
advertising relating to the Manufactured Products offered in
connection with the Mark must strictly comply with all applicable
rules and regulations of the FDA.
4.2 Mandatory Requirements. Licensee shall cause all labels,
packaging, advertising and promotional materials used by it in
advertising, marketing and selling any product manufactured by or on
behalf of Licensee that contains Manapol[R] Powder to contain (I) the
Mark, (ii) a statement setting forth the concentration of Manapol[R]
Powder contained in Manufactured Products, and (iii) the following
legend:
Manapol[R] is a registered trademark of Carrington Laboratories, Inc.
4.3 Claims by Licensee. Licensee hereby agrees not to make, or
permit any of its employees, agents or distributors to make, any
claims of any properties or results relating to Manapol[R] Powder or
any Manufactured Product which would violate any applicable law.
4.4 FDA or USDA Approval of Claims. If Licensee desires to seek
FDA or USDA approval as to any specific claims with respect to
Manapol[R] Powder or any Manufactured Products, Licensee hereby agrees
to (I) notify Licensor of the claims and the application prior to
filing and (ii) to keep Licensor informed as to the progress of the
application, including but not limited to sending Licensor copies of
all communications or notices to or from the FDA or USDA, as
applicable.
4.5 Right to Approve Labels, etc. If Licensor so requests,
Licensee shall not use any label, advertisement or marketing material
that contains the Mark unless such label, advertisement or marketing
material has first been submitted to and approved by Licensor.
Licensor shall not unreasonably withhold its approval of any such
label, advertisement or marketing material.
Article 5
ROYALTY
5.1 Licensee agrees to pay to Licensor a royalty of $0.15 per
unit of Manufactured Products produced by or for the Licensee.
5.2 Within seven (7) days after the end of each calendar month
Licensee shall provide Licensor with a written report listing the
quantities of Manufactured Products produced during that month.
Accompanying each such report shall be sufficient evidence, such as
vendors invoices, batch records, or other such evidence of production,
to substantiate the quantities included in the report.
5.3 All royalties for Manufactured Products produced in a month
shall be due and payable within thirty (30) days of the end of such
month.
<PAGE>
5.4 All payments hereunder are to be paid in U.S. currency at
the address set forth at the beginning of the Agreement.
Article 6
NEGATION OF WARRANTIES, DISCLAIMER AND INDEMNITY
6.1 Negation of Warranties, etc. Nothing in this Agreement
shall be construed or interpreted as:
(a) a warranty or representation by Licensor that any product
made, used, sold or otherwise disposed of under the license granted in
this Agreement is or will be free of infringement or the like of the
rights of third parties; or
(b) an obligation by Licensor to bring or prosecute actions or
suits against third parties for infringement or the like of the Mark
or of any registration that may subsequently be granted for such Mark;
or
(c) granting by implication, estoppel or otherwise any licenses
or rights other than those expressly granted hereunder.
6.2 Disclaimer. LICENSOR MAKES NO REPRESENTATIONS, EXTENDS NO
WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT
LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A
PARTICULAR PURPOSE, AND ASSUMES NO RESPONSIBILITIES WHATSOEVER WITH
RESPECT TO THE USE, SALE OR OTHER DISPOSITION BY LICENSEE OR ITS
CUSTOMERS, VENDEES OR OTHER TRANSFEREES, WITH RESPECT TO THE MARK OR
ANY PRODUCTS MADE OR SOLD BY LICENSEE. THE FOREGOING NOTWITHSTANDING,
SELLER DOES REPRESENT THAT THE MANAPOL[R] POWDER DOES MEET THE
SPECIFICATIONS OUTLINED ON SCHEDULE A AND THAT IT IS A FOOD SUPPLEMENT
UNDER THE FDA RULES AND REGULATIONS.
6.3 Liability of Licensee for Products. Licensee shall assume
all financial and other obligations for the Manufactured Products made
for it or sold by it under this Agreement and Licensor shall not incur
any liability or responsibility to Licensee or to third parties
arising out of or connected in any manner with the Manufactured
Products and/or Licensee's products made or sold pursuant to this
Agreement. In no event shall Licensor be liable for lost profits,
special damages, consequential damages or contingent liabilities
arising out of or connected in any manner with this Agreement or the
Manufactured Products made for Licensee or sold by Licensee under this
Agreement.
6.4 Indemnity of Licensor. Licensee agrees to defend, indemnify
and hold Licensor, its officers, directors, employees and agents,
harmless against all claims, liabilities, demands, damages, expenses
or losses arising out of or connected with (a) the wrongful or
negligent use by Licensee of the Mark or (b) any use, sale or other
disposition of the Manufactured Products and/or Licensee's products by
Licensee or by any other party.
6.5 Negation of Trademark Warranty. Licensee acknowledges that
Licensor makes no warranty, express or implied, with respect to its
ownership of any rights relating to the Mark.
<PAGE>
Article 7
TERM AND TERMINATION
7.1 Term. Unless terminated earlier as provided for herein,
this Agreement shall remain in full force and effect for one year
commencing on date first written above and shall end at midnight one
year from the date of this Agreement. This Agreement shall be renewed
for one year terms at the request of the Licensee, provided that such
notice is given to Licensor at least sixty (60) days prior to the
expiration of the then current term of the agreement and provided that
the Licensee has not made substantial and uncorrected violations of
this Agreement as provided for in Paragraph 7.2.
7.2 Breach of Agreement. Except as provided otherwise in
Section 7.3, if either party breaches any material provision of this
Agreement and fails to cure the breach within thirty (30) days after
receipt of written notice from the nonbreaching party specifying the
breach, then the nonbreaching party may terminate this Agreement upon
written notice to the breaching party, which right of termination
shall be in addition to, and not in lieu of, all other rights and
remedies the nonbreaching party may have against the breaching party
under this Agreement, at law or in equity. Failure by Licensor to
give notice of termination with respect to any such failure shall not
be deemed a waiver of its right at a later date to give such notice if
such failure continues or again occurs, or if another failure occurs.
7.3 Immediate Termination. Licensor may immediately terminate
this Agreement, upon written notice to Licensee, upon the occurrence
of any one or more of the following events: (I) Licensee breaches any
provision of Articles 1, 2, 3, or 4; (ii) Licensee voluntarily seeks
protection under any federal or state bankruptcy or insolvency laws;
(iii) a petition for bankruptcy or the appointment of a receiver is
filed against Licensee and is not dismissed within thirty (30) days
thereafter; (iv) Licensee makes any assignment for the benefit of its
creditors; or (v) Licensee ceases doing business.
7.4 Survival of Provisions. In the event of termination,
cancellation or expiration of this Agreement for any reason, Sections
2.2, 6.1, 6.2, 6.3, 6.4, 6.5, 8.3 and 9.1 hereof shall survive such
termination, cancellation or expiration and remain in full force and
effect.
<PAGE>
Article 8
RIGHTS UPON DEFAULT
8.1 Licensor's Rights Upon Default. If Licensee (I) fails to
make a payment hereunder when due or (ii) otherwise breaches any term
of this Agreement, and such failure or breach is not cured to
Licensor's reasonable satisfaction within five (5) days (in the case
of a failure to make a payment) or thirty (30) days (in any other
case) after receipt of notice thereof by Licensee, or if Licensee
fails to perform or observe any covenant or condition on its part to
be performed when required to be performed or observed, and such
failure continues after the applicable grace period, if any, specified
in the Agreement, Licensor may refuse to make further deliveries
hereunder and may terminate this Agreement upon notice to Licensee
and, in addition, shall have such other rights and remedies, including
the right to recover damages, as are available to Licensor under
applicable law or otherwise. If Licensee becomes bankrupt or
insolvent, or if a petition in bankruptcy is filed by or against it,
or if a receiver is appointed for it or its properties, Licensor may
refuse to make further deliveries hereunder and may terminate this
Agreement upon notice to Licensee, without prejudice to any rights of
Licensor existing hereunder or under applicable law or otherwise. Any
subsequent shipment of Manapol[R] Powder by Licensor after a failure
by Licensee to make any payment hereunder, or after any other default
by Licensee hereunder, shall not constitute a waiver of any rights of
Licensor arising out of such prior default; nor shall Licensor's
failure to insist upon strict performance of any provision of this
Agreement be deemed a waiver by Licensor of any of its rights or
remedies hereunder or under applicable law or a waiver by Licensor of
any subsequent default by Licensee in the performance of or compliance
with any of the terms of this Agreement.
8.2 Licensee's Rights Upon Default. If Licensor fails in any
material respect to perform its obligations hereunder, and such
failure is not cured to Licensee's reasonable satisfaction within
thirty (30) days after receipt of notice thereof by Licensor, Licensee
shall have the right to refuse to accept further deliveries hereunder
and to terminate this Agreement upon notice to Licensor and, in
addition, shall have such other rights and remedies, including the
right to recover damages, as are available to Licensee under
applicable law or otherwise. Any subsequent acceptance of delivery of
Manapol[R] Powder by Licensee after any default by Licensor under this
Agreement shall not constitute a waiver of any rights of Licensee
arising out of such prior default; nor shall Licensee's failure to
insist upon strict performance of any provision of this Agreement be
deemed a waiver by Licensee of any of its rights or remedies hereunder
or under applicable law or a waiver by Licensee of any subsequent
default by Licensor in the performance of or compliance with any of
the terms of this Agreement.
<PAGE>
8.3 Equitable Relief. A breach or default by Licensee of any of
the provisions of Articles 1, 2, 3 and 4 hereof shall cause Licensor
to suffer irreparable harm and, in such event, Licensor shall be
entitled, as a matter of right, to a restraining order and other
injunctive relief from any court of competent jurisdiction,
restraining any further violation thereof by Licensee, its officers,
agents, servants, employees and those persons in active concert or
participation with them. The right to a restraining order or other
injunctive relief shall be supplemental to any other right or remedy
Licensor may have, including, without limitation, the recovery of
damages for the breach or default of any of the terms of this
Agreement.
Article 9
CONFIDENTIALITY
9.1 During the term of this Agreement, Licensee may acquire from
Licensor or its affiliates technical, commercial, operating or other
proprietary information relative to the business or operations of
Licensor or its affiliates (the "Confidential Information"). Licensee
shall maintain the confidentiality, and take all necessary precautions
to safeguard the secrecy, of any and all Confidential Information it
may acquire from Licensor or its affiliates. Licensee shall not use
any of such Confidential Information for its own benefit or for the
benefit of anyone else. Licensee shall not publicly disclose the
existence of this Agreement or the terms hereof without the prior
written consent of Licensor.
Article 10
MISCELLANEOUS
10.1 Force Majeure. Licensor shall not have any liability
hereunder if it shall be prevented from performing any of its
obligations hereunder by reason of any factor beyond its control,
including, without limitation, fire, explosion, accident, riot, flood,
drought, storm, earthquake, lightning, frost, civil commotion,
sabotage, vandalism, smoke, hail, embargo, act of God or the public
enemy, other casualty, strike or lockout, or interference, prohibition
or restriction imposed by any government or any officer or agent
thereof ("Force Majeure"), and Licensor's obligations, so far as may
be necessary, shall be suspended during the period of such Force
Majeure and shall be cancelled in respect of such quantities of
Manapol[R] Powder as would have been sold hereunder but for such
suspension. Licensor shall give to Licensee prompt notice of any such
Force Majeure, the date of commencement thereof and its probable
duration and shall give a further notice in like manner upon the
termination thereof. Each party hereto shall endeavor with due
diligence to resume compliance with its obligations hereunder at the
earliest date and shall do all that it reasonably can to overcome or
mitigate the effects of any such Force Majeure upon its obligations
under this Agreement.
10.2 Amendment. This Agreement may be changed, modified, or
amended only by an instrument in writing duly executed by each of the
parties hereto.
<PAGE>
10.3 Entire Agreement. This Agreement constitutes the full and
complete agreement of the parties hereto and supersedes any and all
prior understandings, whether written or oral, with respect to the
subject matter hereof.
10.4 No Waiver. The failure of either party to insist upon
strict performance of any obligation hereunder by the other party,
irrespective of the length of time for which such failure continues,
shall not be a waiver of its right to demand strict compliance in the
future. No consent or waiver, express or implied, by either party to
or of any breach or default in the performance of any obligation
hereunder by the other party shall constitute a consent or waiver to
or of any other breach or default in the performance of the same or
any other obligation hereunder.
10.5 Notices. All notices required or permitted to be made or
given pursuant to this Agreement shall be in writing and shall be
considered as properly given or made when personally delivered or when
duly deposited in the mail, first class mail, postage prepaid, or when
transmitted by prepaid telegram, and addressed to the applicable
address first above written or to such other address as the addressee
shall have theretofore specified in a written notice to the notifying
party.
10.6 Assignment. This Agreement or any of the rights or
obligations created herein may be assigned, in whole or in part, by
Licensor. However, this Agreement is personal to Licensee, and
Licensee may not assign this Agreement or any of its rights, duties or
obligations under this Agreement to any third party without Licensor's
prior written consent, and any attempted assignment by Licensee not in
accordance with this Section 10.6 shall be void.
10.7 Relationship of Parties. Nothing contained herein shall be
construed to create or constitute any employment, agency, partnership
or joint venture arrangement by and between the parties, and neither
of them has the power or authority, express or implied, to obligate or
bind the other in any manner whatsoever.
10.8 Remedies Cumulative. Unless otherwise expressly provided
herein, the rights and remedies hereunder are in addition to, and not
in limitation of, any other rights and remedies, at law or in equity,
and the exercise or one right or remedy will not be deemed a waiver of
any other right or remedy.
10.9 Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, provided, however, that the
foregoing shall not be deemed to expand or otherwise affect the
limitations on assignment and delegation set forth in Section 10.6
hereof, and except as otherwise expressly provided in this Agreement,
no other person or business entity is intended to or shall have any
right or interest under this Agreement.
10.10 Governing Law. This Agreement shall be governed by and
interpreted, construed and enforced in accordance with the laws of the
State of Texas, excluding, however, any conflicts of law rules that
would require the application of the laws of any other state or
country.
<PAGE>
10.11 Headings. The headings used in this Agreement are for
convenience of reference only and shall not be used to interpret this
Agreement.
10.12 Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original and
all of which will constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first
above written.
CARALOE, INC.
By: s/s Bill Pine
General Manager
NUTRA VINE
By: /s/ Linda Lavender
President & CEO
<PAGE>
SCHEDULE A
NUTRA VINE
Manapol[R] Powder Product Specification
PRODUCT DESCRIPTION
PRODUCT: Manapol[R] Powder
CODE: C-200
SOURCE: Aloe barbadensis Miller
USES: The pure, stabilized Manapol[R] Powder is suitable for
use in pharmaceutical and beverage formulations
SPECIFICATION SHEET
Test Specification Method
------------------------------------------------------
Appearance Fine white to beige
powder
Complex > = 30 HPLC(SEC)
Carbohydrates
(wt. %)
Water, wt.% < = 14% TGA
Residue on Ignition < = 16% TGA
wt.%
Microbiological Meets USP Standard USP
Purity
Fiber, wt.% < = 60% TGA
Solubility approx. 240 Gel Point CARN
Gelization
pH Not Adjusted CARN
Fiber Enriched CARN
Viscosity (cP) approx. 40 CARN
4 mg/ml solution
Total Acid Value approx. 0.7 CARN
(As Malic Acid)
<PAGE>
SCHEDULE A
NUTRA VINE
Territory
Licensee is permitted to market agreed upon products containing
Manapol[R] Powder in the United States.
Pricing Schedule for Manapol[R] Powder
Quantity Per Order Prices
1 to 25 kg $1,600.00 / kg
26 to 50 kg $1,500.00 / kg
51 to 100 kg $1,400.00 / kg
Terms are net/30 days with approved credit F.O.B., Irving, Texas
All pricing is subject to change with thirty (30) days written notice.
EXHIBIT 10.2
LEASE AGREEMENT
RANCHO ALOE (CR), SOCIEDAD ANONIMA, corporate identity number 3-101-
221004, herein represented by its President with full powers of
attorney Mr. BERNARD TICE, of legal age, single, retired, American
citizen, bearer of passport number [ deleted for confidentiality ],
(company hereinafter referred to as "RANCHO ALOE"), and
SABILA INDUSTRIAL, SOCIEDAD ANONIMA, corporate identity number 3-101-
123588, herein represented by its President with full powers of
attorney Mr. CARLTON TURNER, of legal age, married, businessman,
American citizen, bearer of the social security card number 423-
503336, (company hereinafter referred to as "SABILA"), have entered
into the following LEASE AGREEMENT:
FIRST: RANCHO ALOE is the owner of three properties located in
Bagaces, Guanacaste Province, Costa Rica, numbers 20223-000, 35965-000
and 18144-000.
SECOND: RANCHO ALOE leases to SABILA who hereby accepts,
approximately 7 hectares of land of the previously described
properties, (hereinafter referred to as the PROPERTY). Upon mutual
agreement of both parties, the size of the PROPERTY may be subject to
changes to accommodate to SABILA's needs, with SABILA's payments
changed accordingly.
THIRD: The PROPERTY shall be used exclusively for the planting of Aloe
vera plants.
FOURTH: This lease shall be for the term of one year beginning April
26th, 1999 and expiring at midnight on April 25, 2000. This Agreement
shall renew automatically for successive one-year terms until such
time as SABILA'S documented purchase cost of the plants is paid to
SABILA in full by RANCHO ALOE. With the exception of the first six
months of the lease, either party shall be entitled to terminate the
agreement with a one-month written notice to the other party with
compensation for appropriate expenses, such as the purchase cost of
the plants ($74,794 total purchase cost).
FIFTH: The total monthly rent is U.S. SEVEN DOLLARS (U.S.$7.00) per
hectare. Payments are due on the 26th day of each month made payable
to RANCHO ALOE's offices in Bagaces.
<PAGE>
SIXTH: RANCHO ALOE agrees to perform the immediate and adequate
preparation of the PROPERTY for the plantation of Aloe vera. The cost
of the preparation of the terrain shall be covered entirely by RANCHO
ALOE. SABILA shall pay RANCHO ALOE the amount of U.S.$135.00 per
hectare for the labor of to plant Aloe vera plants on the PROPERTY.
Additionally, SABILA shall pay every month that this agreement is in
effect U.S.$122.00 per hectare for the maintenance of the plots and
organic weed and pest control. Any use of non-organic herbicide or
pesticide on the plants or soil other than urea will result in RANCHO
ALOE compensating SABILA for the cost of purchasing and planting in a
comparable site replacement plants of equal size and maturity. Aloe
vera plants cultivated in the leased area shall be maintained by
RANCHO ALOE in the same condition as other plots owned by RANCHO ALOE
in the same farm. SABILA shall not pay for any irrigation during the
term of this agreement, unless specifically requested by SABILA. If
irrigation is requested, it shall be performed according to written
specifications provided by SABILA and SABILA shall pay RANCHO ALOE
every month U.S.$150.00 per hectare. SABILA shall not be responsible
responsibility of RANCHO ALOE to cover all costs in labor hand,
organic fertilizer, electricity, municipal and land taxes and any
other expenses involved in the lease or to necessary to perform the
previously described labors. For all legal purposes, RANCHO ALOE
shall be considered as the sole and responsible employer of all the
workers to be hired necessary for the performance of this agreement.
SEVENTH: At the termination of this agreement, for any reason, RANCHO
ALOE agrees to purchase from SABILA all the plants located in the
plots, for an amount equal to SABILA's documented value, which
includes purchase price of $74,794, transportation, import taxes,
lease, planting, maintenance, irrigation and any other involved costs.
For all legal purposes, SABILA will be considered as the sole and
legal owner of the plants until complete payment is made by RANCHO
ALOE for the total purchase price.
<PAGE>
EIGHTH: RANCHO ALOE shall be liable for any damages, losses or thefts
that any visitor, workers or any third party may produce to the
property of SABILA in the leased area. RANCHO ALOE shall be in
charge of the vigilance and security of the leased area. SABILA shall
not be liable for any accident that may occur in the leased area.
There shall be no harvesting of leaves or de-prepping of the plants
except at the specific instruction of SABILA.
NINTH: The breach, by either party, of any of the terms of this
agreement, shall entitle the affected party, to request the immediate
termination of the agreement and request the payment of any damages
and loss of profit.
In faith of the above stated, we sign this agreement in two originals,
on this 23rd the day of September 1999
By RANCHO ALOE (CR), S.A.
________________________
Bernard Tice
By SABILA INDUSTRIAL, S.A.
________________________
Carlton E. Turner
EXHIBIT 10-3
September 29, 1999
Mr. Scott McKnight
Aloe Commodities International, Inc.
12901 Nicholson, Suite 370
Farmers Branch, TX 75234
Dear Scott:
The purpose of this letter is to convey to you the decision of
Carrington's Board of Directors at their meeting on September 15th to
authorize a 10% finders fee on Carrington sales to Pharmanex/NuSkin.
The Board further authorized that 7% of these finders fees will be
payable to you in cash and 3% will be retained and applied to the debt
that Aloe Commodities International, Inc. owes to Carrington. This
fee will be payable monthly based upon invoiced sales during the month
and we should be able to process the check by the 15th of the
following month.
In addition to the 3% retention, the Board also made it very clear
that they expect to continue to receive payments under the debt
repayment schedule which you provided in your correspondence of
February 25, 1999. As a reminder, that schedule called for a payment
of $50,000 in the third quarter of this year of which we have received
nothing to date.
We look forward to working with you under this fee arrangement and to
the timely receipt of your quarterly debt payment.
Very truly yours,
Robert W. Schnitzius
Chief Financial Officer
RWS:met
cc: Dr. Carlton E. Turner
I hereby agree to receive the 10% finders fee with 3% withheld and
applied to debt, as described above, for the life of NuSkin's business
with Carrington.
/s/ L. Scott McKnight
EXHIBIT 10.4
FOURTH LEASE AMENDMENT
STATE OF TEXAS
COUNTY OF DALLAS
This Fourth Lease Amendment (this "Amendment") is made and entered
into by and WESTERN ATLAS INTERNATIONAL, INC., a Delaware corporation
("Landlord"), and CARRINGTON LABORATORIES, INC., a Texas corporation
("Tenant"), effective as of August 31, 1999 (the "Effective Date").
Capitalized Terms used herein and not otherwise defined shall have the
meanings assigned to such terms in the Lease (hereinafter defined).
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Lease
Agreement dated effective August 30, 1991 (as amended, the "Lease'),
pursuant to which Landlord agreed to lease to Tenant and Tenant agreed
to Lease from Landlord approximately 21,733 square feet of space (the
"Premises") in the building located at 1300 East Rochelle Boulevard.
Irving, Texas (the "Building"); and
WHEREAS; the Lease was previously amended by that certain First
Lease Amendment between Landlord and Tenant dated April 16, 1992,
increasing the area of the Premises to approximately 23,284 square
feet of space; and
WHEREAS, the Lease was previously amended by that certain Second
Lease Amendment between Landlord and Tenant dated September 23, 1993,
increasing the area of the Premises to approximately 24,146 square
feet of space; and
WHEREAS, the Lease was previously amended by that certain Third
Lease Amendment between Landlord and Tenant dated December 1, 1994,
extending the term of the Lease to January 31, 2000, and making
certain other changes to the original Lease;
WHEREAS, the Lease currently contains an option to extend the term
for a period of five (5) calendar years from February 1, 2000, through
January 31, 2005, which was recently exercised by Tenant; and
WHEREAS, Landlord and Tenant have agreed to amend the Lease to
reduce the length of the renewal term to eighteen (18) months and to
set the amount of Minimum Rent applicable during the renewal term; and
WHEREAS, Landlord and Tenant have agreed to make certain other
changes in the terms and provisions of the Lease as hereafter provided
and desire to execute this Amendment to set forth in writing all such
changes;
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS:
THAT, for and in consideration of the premises and of Ten and
No/100 Dollars ($10.00) and other good and valuable consideration paid
by Tenant to Landlord. The receipt and sufficiency of which are
hereby acknowledged, Landlord and Tenant do hereby covenant and agree
as follows:
<PAGE>
1. Notwithstanding anything contained in the Lease or Tenant's
prior election to extend the Lease Term for five (5) years, the Term of
the Lease is hereby amended so that the Lease Term shall end on July
31, 2001. Landlord and Tenant hereby agree that Tenant shall have no
further right to extend the Lease Term beyond July 31, 2001, and Tenant
hereby waives any and all such rights.
2. Minimum Rent for the Premises during period from February 1,
2000, through July3l, 2001, shall be Forty Thousand Two Hundred Forty
and 33/100 Dollars per month.
3. Commencing February 1, 2000, there shall no longer be a "Base
Year" under the Lease and Tenant shall no longer be responsible for
payment of Operating.Costs. Accordingly, Section 8 of the Lease is
hereby deleted in its entirety and the Lease is hereby amended to
delete all references therein to a "Base Year" or "Operating Costs."
4. Section 30. of the Lease is hereby amended by deleting the
phrase "150% of the monthly rent" contained in the fifth line thereof
and replacing it with the phrase "300% of the monthly rent."
5. During the remainder of the Term, Tenant agrees to use "best
management practices" with respect to the hazardous waste and hazardous
materials that it handles in the Premises, as such term is used and
prescribed by the U.S. Environmental Protection Agency, the Texas
Natural Resources Conservation Commission, the National Fire Protection
Association and the U.S. Occupational Safety and Health Administration.
As hereby expressly amended, the Lease is ratified and confirmed
to be in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment
effective as of the date first set forth above.
WESTERN ATLAS INTERNATIONAL, INC.
By: \s\ G.S. Finley
Title: Vice President
CARRINGTON LABORATORIES, INC.
By: \s\ Carlton E. Turner, Ph.D.
Title: President & Chief Executive Officer
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,774
<SECURITIES> 0
<RECEIVABLES> 3,336
<ALLOWANCES> 333
<INVENTORY> 6,155
<CURRENT-ASSETS> 12,940
<PP&E> 20,585
<DEPRECIATION> 9,732
<TOTAL-ASSETS> 24,338
<CURRENT-LIABILITIES> 4,092
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 20,152
<TOTAL-LIABILITY-AND-EQUITY> 24,338
<SALES> 20,872
<TOTAL-REVENUES> 21,003
<CGS> 10,256
<TOTAL-COSTS> 12,001
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,254)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
