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, 2000
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
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(Address of principal executive offices and Zip Code)
972-518-1300
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(Registrant's telephone number, including area code)
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(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. 9,659,087 shares of Common
Stock, $.01 par value, were outstanding at November 10, 2000.
<PAGE>
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 2000 (unaudited) and
December 31, 1999 3
Condensed Consolidated Statements of
Operations for the three and nine
months ended September 30, 2000 and
1999 (unaudited) 4-5
Condensed Consolidated Statements
of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Condensed Consolidated Balance Sheets
(Dollar amounts in 000's)
December 31, September 30,
1999 2000
(unaudited)
------- -------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,453 $ 2,240
Accounts receivable, net 3,690 2,263
Inventories 5,184 4,702
Prepaid expenses 573 428
------- -------
Total current assets 11,900 9,633
Property, plant and equipment, net 10,985 10,546
Other assets 608 400
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Total assets $23,493 $20,579
======= =======
Liabilities and Shareholders' Investment
Notes payable $ 200 $ 763
Accounts payable 1,871 948
Accrued liabilities 1,918 1,422
------- -------
Total current liabilities 3,989 3,133
Shareholders' investment:
Common stock 94 96
Capital in excess of par 51,910 52,285
Deficit (32,500) (34,935)
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Total shareholders' investment 19,504 17,446
------- -------
Total liabilities and
shareholders' investment $23,493 $20,579
======= =======
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,
1999 2000
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<S> <C> <C>
Net sales $ 7,224 $ 4,997
Costs and expenses:
Cost of sales 3,275 3,238
Selling, general and administrative 2,678 2,387
Research and development 632 657
Research and development, Aliminase[TM]
clinical trial 565 -
Other income (47) (34)
Interest, net (24) (23)
------- -------
Income (loss) before income taxes 145 (1,228)
Provision for income taxes 0 0
------- -------
Net income (loss) $ 145 $(1,228)
======= =======
Net income (loss) per share-
basic and diluted $ 0.02 $ (0.13)
======= =======
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,
1999 2000
------- -------
<S> <C> <C>
Net sales $20,872 $17,586
Costs and expenses:
Cost of sales 10,256 9,481
Selling, general and administrative 7,821 7,657
Research and development 1,945 2,164
Research and development, Aliminase[TM]
clinical trial 2,235 623
Charge related to contract with supplier
of freeze-dried products - 223
Other income (47) (58)
Interest, net (84) (69)
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Loss before income taxes (1,254) (2,435)
Provision for income taxes 0 0
------- -------
Net loss $(1,254) $(2,435)
======= =======
Net loss per share-
basic and diluted $ (0.13) $ (0.26)
======= =======
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,
1999 2000
------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,254) $(2,435)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 784 790
Provision for inventory obsolescence 42 135
Changes in assets and liabilities:
Receivables, net (43) 1,427
Inventories (1,228) 495
Prepaid expenses (268) 146
Other assets 52 208
Accounts payable and accrued liabilities 1,007 (1,557)
------- -------
Net cash used by operating activities (908) (791)
Cash flows from investing activities:
Purchases of property, plant
and equipment (586) (352)
------- -------
Net cash used by investing activities (586) (352)
Cash flows from financing activities:
Issuances of common stock 137 377
Proceeds of note payable 200 553
------- -------
Net cash provided by financing activities 337 930
------- -------
Net decrease in cash and cash equivalents (1,157) (213)
Cash and cash equivalents, beginning
of period 3,931 2,453
------- -------
Cash and cash equivalents, end
of period $ 2,774 $ 2,240
======= =======
Supplemental disclosure of cash flow
information
Cash paid during the period for
interest $ 3 $ 18
Cash paid during the period for
federal, state and local income taxes $ 12 $ 28
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, 2000, the
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 1999 and 2000 and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1999
and 2000 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, 2000 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, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
derivative Instruments and Hedging Activities." SFAS 133 requires companies
to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. The adoption of
SFAS 133 is not expected to have a material impact on the financial position
or results of operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain SEC views in applying generally accepted accounting principles to
revenue recognition in financial statements. It is effective not later than
the fourth quarter of fiscal years beginning after December 15, 1999. The
adoption of SAB 101 is not expected to have a material effect on the
Company's results of operations or financial condition.
(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, 1999 and 2000 were 9,368,000 and 9,614,000, respectively. The
weighted average numbers of common shares outstanding for the nine month
periods ended September 30, 1999 and 2000 were 9,357,000 and 9,538,000,
respectively.
In calculating the diluted net loss per share for the three and nine month
periods ended September 30, 2000, 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, 1999 and had no impact on diluted net income per share.
<PAGE>
(3) Reportable Segments:
The Company operates in two reportable segments: human and veterinary
products sold through its Medical Services Division, and bulk raw materials,
consumer beverages, nutritional products and skin care products sold through
its consumer products subsidiary, Caraloe, Inc.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes.
Corporate Losses 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.
<TABLE>
Reportable Segments (in thousands)
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Quarter Ended Medical Caraloe,
September 30, 1999 Services Inc. Corporate Total
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<S> <C> <C> <C> <C>
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
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Quarter Ended Medical Caraloe,
September 30, 2000 Services Inc. Corporate Total
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Sales to unaffiliated customers $ 2,946 $2,051 $ - $ 4,997
Income (loss) before income taxes (677) 8 (559) (1,228)
Identifiable assets 10,983 1,782 7,814 20,579
Capital expenditures 21 - 122 143
Depreciation and amortization 140 - 116 256
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Nine Months Ended Medical Caraloe,
September 30, 1999 Services Inc. Corporate Total
------------------------------------------------------------------------------
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
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Nine Months Ended Medical Caraloe,
September 30, 2000 Services Inc. Corporate Total
------------------------------------------------------------------------------
Sales to unaffiliated customers $9,642 $ 7,944 $ - $17,586
Income (loss) before income taxes (1,535) 1,468 (2,368) (2,435)
Capital expenditures 59 - 293 352
Depreciation and amortization 443 - 347 790
</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,
1999, and September 30, 2000, 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, 1999, the Company had net
operating loss carryforwards of approximately $41,400,000 for federal income
tax purposes, which expire beginning in 2000, and research and development
tax credit carryforwards of approximately $748,000, which expire beginning
in 2000, all of which are available to offset federal income taxes due in
future periods. The entire benefit from the third quarter 2000 loss was
offset by an increase in the valuations allowance.
(5) Commitments and Contingencies:
In February 1995, the Company entered into a commitment to purchase $2.5
million of freeze-dried products from its principal supplier over a 66-month
period ending in August 2000. In the fourth quarter of 1999, the Company
determined that it was unlikely to sell the quantities of products it was
obligated to pay for under the minimum purchase requirements of the
agreement, and thus the Company established a reserve of $1,042,000 for
estimated losses under this contract. Of this amount, $698,000 is recorded
in accrued liabilities and $344,000 offsets the aforementioned prepayments.
At June 30, 2000, the Company increased the reserve by $223,000. The
agreement terminated in August 2000, at which time the Company funded the
remaining $563,000 obligation under the contract.
(6) Subsequent Event:
The Company and Medline Industries, Inc. ("Medline") entered into a
Distributor and License Agreement dated November 3, 2000, under which the
Company granted to Medline the exclusive right, subject to certain limited
exceptions, to distribute all of the Company's wound and skin care products
(the "Products") in the United States, Canada, Puerto Rico and the Virgin
Islands for a term of five years beginning December 1, 2000 (the "Effective
Date"). The agreement provides that Carrington will sell its existing
inventory of salable Products to Medline on the Effective Date at specified
prices. Thereafter, the Company will continue to manufacture the Products
that it currently manufactures and will sell them to Medline at those same
prices, which are generally firm for the first two years of the contract
term and are thereafter subject to adjustment not more than once each year
to reflect increases in manufacturing cost.
The agreement also grants Medline a nonexclusive license to use certain of
the Company's trademarks in connection with the marketing of the Products.
In addition, it permits Medline, if it so elects, to use those trademarks in
connection with the marketing of various Medline products and other products
not manufactured by the Company (collectively, "Other Products").
<PAGE>
The agreement requires Medline to pay the Company a base royalty totaling
$12,500,000 in quarterly installments that begin on December 1, 2000. The
quarterly installments are $875,000 each during the first year of the term
and decline annually thereafter. In addition to the base royalty, if
Medline elects to market any of the Other Products under any of the
Company's trademarks, Medline must pay the Company a royalty of between one
percent and five percent of Medline's aggregate annual net sales of the
Products and the Other Products, depending on the amount of the net sales,
except that the royalty on certain high volume commodity products will be
two percent.
The agreement also calls for Medline to offer employment to such members of
the Company's sales staff as Medline determines.
This summary does not describe all of the terms of the agreement or of two
related agreements that the Company entered into with Medline. For
additional and more precise information, see Exhibits 10.1, 10.2 and 10.3 to
this report.
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, 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
Medical Services 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.
Liquidity and Capital Resources:
At December 31, 1999 and September 30, 2000, the Company held cash and cash
equivalents of $2,453,000 and $2,240,000, respectively.
The Company has invested in inventory to support sales of bulk products to
Mannatech, Inc. Receivables from this customer totaled $665,000 as of
September 30, 2000. As of October 31, 2000 all of this balance has been
collected.
As of September 30, 2000, the Company had no material capital commitments.
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 for operating needs, as required.
As of September 30, 2000 there was $763,000 outstanding under this credit
facility. The balance drawn under this line of credit includes $563,000
which was used to fund the amount due under the freeze-dried products supply
contract. See Note 5 to the condensed consolidated financial statements.
<PAGE>
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 continued to exceed both the current and the normal production
capacity of its farm. Therefore it has been necessary for the Company to
purchase Aloe vera leaves from other sources at costs that are sometimes
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.
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. In April 2000, Aloe & Herbs refinanced its
mortgage, removing the financial uncertainty. Therefore, the Company will
recognize as other income all principal payments collected from Aloe & Herbs
relating to this debt. As of September 30, 2000, the Company had collected
$28,243 from Aloe & Herbs as payment on the debt.
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 its current cash
resources to be sufficient to finance the major clinical studies and the
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.
Regulation
The Company is subject to regulation by numerous governmental authorities in
the United States and other countries. Some 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.
<PAGE>
Third Quarter of 2000 Compared With Third Quarter of 1999
Net sales were $4,997,000 in the third quarter of 2000, a decrease of
$2,227,000, or 30.8%, compared with $7,224,000 in the third quarter of 1999.
Sales from Caraloe, Inc., the Company's consumer products subsidiary,
decreased $3,321,000 to $2,051,000. Caraloe sales to Mannatech, Inc., which
are primarily Manapol[R] powder, decreased from $2,965,000 in the third
quarter of 1999 to $1,721,000 in the third quarter of 2000. Sales of the
Company's wound and skin care products decreased 24.5%, due to product mix
and intense downward pricing pressure, to $2,946,000 in the third quarter of
2000 as compared to $3,903,000 in the third quarter of 1999.
Cost of sales decreased from $3,275,000 to $3,238,000, or 1.1%. As a
percentage of sales, cost of sales increased from 45.3% in the third quarter
of 1999 to 64.8% in the third quarter of 2000. This was due to lower sales
volumes and decreased activity at the Company's Costa Rica operations, along
with a decrease in prices of the Company's wound care products without a
corresponding decrease in cost of sales.
Selling, general and administrative expenses decreased from $2,678,000 in
the third quarter of 1999 to $2,387,000 in 2000, which was primarily due to
reduced commission payments on domestic and international sales.
Research and development expenses decreased to $657,000 from $1,197,000, or
55%. Excluding Aliminase[TM] costs, research and development expenses
in the third quarter of 1999 were $565,000. All costs related to the
conclusion of the Aliminase[TM] trial were included in the quarter ended
March 31, 2000.
Other income of $34,000 in the third quarter 2000, as compared to $47,000 in
1999, was primarily derived from royalty income.
Net interest income decreased to $23,000 in the third quarter of 2000
compared to net interest income of $24,000 in the third quarter of 1999.
Net loss for the third quarter of 2000 was $1,228,000, compared with net
income of $145,000 during the third quarter of 1999. Assuming dilution, the
net loss for the third quarter of 2000 was $0.13 per share, compared to net
income of $0.02 per share for the same quarter of 1999.
First Nine Months of 2000 Compared With First Nine Months of 1999
Net sales were $17,586,000 in the first nine months of 2000, compared with
$20,872,000 in the first nine months of 1999. This decrease of $3,286,000,
or 15.7%, resulted from an decrease of $1,390,000 in sales of Caraloe, Inc.,
the Company's consumer products subsidiary, and a decrease in wound
care sales of $1,896,000. Caraloe's sales decreased from $9,334,000 to
$7,944,000, or 14.9%. Caraloe's sales to Mannatech, Inc., which were
primarily Manapol[R] powder, decreased from $8,452,000 in 1999 to $6,798,000
in 2000.
Sales of the Company's wound and skin care products decreased from
$11,538,000 in 1999 to $9,642,000 in 2000, or 16.4%. Decreased wound care
sales were 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.
<PAGE>
Cost of sales decreased from $10,256,000 to $9,481,000, or 7.6%. As a
percentage of sales, cost of sales increased from 49.1% in the first nine
months of 1999 to 53.9% in the first nine months of 2000. This was due
primarily 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 $7,657,000 from
$7,821,000, primarily due to reduced commissions paid on domestic and
international sales.
Research and development expenses decreased to $2,787,000 in 2000 from
$4,180,000 in 1999, or 33%. This decrease was primarily due to the
cessation of the clinical trial of Aliminase[TM] in the first quarter of
2000. Expenses from the clinical trial totaled $623,000 in the first nine
months of 2000 versus $2,235,000 in the first nine months of 1999.
Other income consisted primarily of royalty income for the nine months ended
September 30, 2000 and 1999.
Net interest income of $69,000 was realized in the first nine months of
2000, versus net interest income of $84,000 in the first nine months of
1999. The lower investment income was primarily due to lower cash balances
invested, which was partially offset by increased yields on cash balances.
Net loss for the first nine months of 2000 was $2,435,000, compared with net
loss of $1,254,000 for the first nine months of 1999. Assuming dilution,
the net loss for the first nine months of 2000 was $0.26 per share, compared
to net loss of $0.13 per share for the same period in 1999.
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 reduce its cost of Aloe vera L.
leaves significantly by purchasing such leaves from Rancho Aloe, to obtain
financing when it is needed and to fund its operations from revenue and
other available cash resources.
<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 the Company may
not be able to resolve the matters described under "legal procedings" below
in a manner satisfactorily to the Company, that other parties who owe the
Company substantial amounts of money may be unable to pay what they owe the
Company, 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 L. leaves has not
13
changed materially from its exposure at December 31, 1999, as described in
the Company's Form 10-K Annual Report for the year then ended.
Part II OTHER INFORMATION
Item 1. Legal Proceedings:
The Company markets a wound care product named CarraKlenz[TM]. In its
Form 10-K report for the year ended December 31, 1999, the Company reported
that it had filed a petition with the United States Patent and Trademark
Office (the "USPTO") to cancel the registration of the trademark CuraKlense
by The Kendall Company of Mansfield, Massachusetts. On July 18, 2000, Tyco
International (US) Inc., successor-in-interest to The Kendall Company, filed
with the USPTO a voluntary surrender for cancellation of U.S. Registration
No. 1,965,949 covering the trademark CuraKlense. Following that surrender,
the Company requested that the USPTO lift its suspension of the Company's
application to register its trademark CarraKlenz[TM].
<PAGE>
The Company markets a line of wound care products under the name
RadiaCare[TM]. On October 16, 2000, the Company received notice from
attorneys for Bionix Development Corporation ("Bionix") claiming that Bionix
is the owner of a registered trademark for RadiaCare covering certain
radiation therapy equipment, alleging that the Company's use of its
RadiaCare[TM] mark constitutes trademark infringement, and demanding that
the Company cease using that mark. The Company and Bionix are currently
attempting to negotiate an amicable resolution of this dispute.
On September 12, 2000, Nutraceutical Solutions, Inc., a Company formed in
March 2000, (the "Plaintiff") filed a lawsuit (Cause No. 00-4973-A in the
28th Judicial District Court of Nueces County, Texas) against the Company
and one of its employees, who never worked for Nutraceutical Solutions,
Inc., (the "Defendants") alleging numerous causes of action relating to the
Company's manufacturing and marketing of a product known as B-Complete[TM].
The Plaintiff alleges, among other things, that the Defendants began to
market B-Complete[TM], which the Plaintiff alleges is identical to a product
it acquired in May 2000 as part of the purchase of assets from a separate
company in bankruptcy proceedings and infringes intellectual property rights
that the Plaintiff acquired as part of the asset purchase.
In addition to seeking to recover unspecified damages from the Defendants,
the lawsuit seeks a temporary restraining order and temporary and permanent
injunctions prohibiting the Defendants from selling, distributing or
marketing B-Complete[TM] and from contacting the existing clientele of
Plaintiff, whose first sale of the product it acquired was in June 2000. A
temporary restraining order to that effect was served on the Defendants on
September 14, 2000, and they are currently complying with it.
The Company believes the Plaintiff's claims are without merit and intends to
defend the lawsuit vigorously.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 Distributor and License Agreement dated November 3, 2000
between Carrington Laboratories, Inc. and Medline Industries,
Inc. (Exhibits A, B and C to this agreement have been
excluded pursuant to a request for confidential treatment
submitted by the registrant to the Securities and Exchange
Commission.)
10.2 Supply Agreement dated November 3, 2000 between Carrington
Laboratories, Inc. and Medline Industries, Inc. (Exhibit A
to this agreement has been excluded pursuant to a request for
confidential treatment submitted by the registrant to the
Securities and Exchange Commission.)
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, 2000.
<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 14, 2000 By: /s/ Carlton E. Turner
Carlton E. Turner,
President and C.E.O.
(principal executive officer)
Date: November 14, 2000 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 Distributor and License Agreement dated November 3, 2000 between
Carrington Laboratories, Inc. and Medline Industries, Inc.
(Exhibits A, B and C to this agreement have been excluded
pursuant to a request for confidential treatment submitted by the
registrant to the Securities and Exchange Commission.)
10.2 Supply Agreement dated November 3, 2000 between Carrington
Laboratories, Inc. and Medline Industries, Inc. (Exhibit A to
this agreement has been excluded pursuant to a request for
confidential treatment submitted by the registrant to the
Securities and Exchange Commission.)
27.1 Financial Data Schedule
