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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-11997
Carrington Laboratories, Inc.
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(Exact name of Registrant as specified in its charter)
Texas 75-1435663
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(State of Incorporation) (IRS Employer ID No.)
2001 Walnut Hill Lane, Irving, Texas 75038
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(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 518-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Preferred Share Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-
affiliates of the Registrant on March 24, 2000, was $31,187,000. (This
figure was computed on the basis of the closing price of such stock on
the NASDAQ National Market on March 24, 2000, using the aggregate
number of shares held on that date by, or in nominee name for,
shareholders who are not officers, directors or record holders of 10%
or more of the Registrant's outstanding voting stock. The
characterization of such officers, directors and 10% shareholders as
affiliates is for purposes of this computation only and should not be
construed as an admission for any other purpose that any of such
persons are, in fact, affiliates of the Registrant.)
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable
date: 9,516,923 shares of Common Stock, par value $.01 per share, were
outstanding on March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual
meeting of shareholders to be held on May 18, 2000 are incorporated by
reference into Part III hereof, to the extent indicated herein.
PART I
ITEM 1. BUSINESS.
General
Carrington Laboratories, Inc. ("Carrington" or the "Company") is a
research-based biopharmaceutical, medical device and raw materials and
nutraceutical company engaged in the development, manufacturing and
marketing of naturally-derived complex carbohydrates 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 Fourteen to the
consolidated financial statements in this Annual Report for financial
information about these business divisions. 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.
The Company was incorporated in Texas in 1973 as Ava Cosmetics, Inc.
In 1986, the Company sold the direct sales business it was then
operating and changed its name to Carrington Laboratories, Inc.
Medical Services Division
Carrington's Medical Services Division offers a comprehensive line of
wound management products to hospitals, nursing homes, alternative care
facilities and the home health care market. The Company's products are
designed to maintain a moist wound environment which aids the healing
process and to maintain the integrity of contiguous healthy skin.
Carrington products are used in a wide range of acute and chronic wound
and skin conditions and for incontinence and ostomy care.
The Company's primary marketing emphasis for its wound and skin care
business is directed toward hospitals and nursing homes, alternate care
facilities, home health care providers and managed care organizations,
with wound and skin care products being promoted primarily to
physicians and specialty nurses, e.g., enterostomal therapists. Many
of these organizations enter into pricing agreements with the Company
based upon purchase volumes or member enrollments. These agreements
allow the Company to promote its products to the group on an exclusive
or non-exclusive basis. As some segments of the market shift from home
health care to nursing homes, the Company has developed and is
marketing a specialized educational and training program to nursing
homes. Opportunities in the growing Internet market are also
addressed through the Company's websites, www.carringtonlabs.com.and
www.woundcare.com.
The Company currently has 48 employees and independent representatives
engaged in the sales and marketing of the Company's products. The
Company's field sales force currently employs 16 sales representatives,
each assigned to a specific geographic area in the United States, 4
regional sales managers, 1 representative in Puerto Rico and 1 in
Belgium. The Company also uses 6 independent sales companies employing
13 sales representatives to sell its products on a commission basis.
In addition to this field sales force, the medical services division
employs 2 telemarketers, who focus on alternative care facilities and
the home health care market, and 11 employees in customer service,
administrative support and executive management.
The Company's products are primarily sold through a network of
distributors. Three of the Company's largest distributors in the
hospital market are McKesson HBOC/General Medical("McKesson"), Owens &
Minor and Bergen Brunswig. During fiscal 1997, 1998 and 1999, sales of
wound and skin care products to McKesson represented 12%, 11%, and 5%,
respectively, of the Company's total net sales. Sales to Owens & Minor
represented 11%, 10%, and 9%, respectively, of total net sales during
the same periods. Sales to Bergen Brunswig represented 9%, 5%, and 4%,
respectively, of total net sales during the same periods.
The Company has over 200 pricing agreements in effect as of December
31, 1999. Many of these are for small purchasing groups, managed care
organizations or facilities or are for a limited number of products.
The Company also has over 30 national pricing agreements which allow
its representatives to make presentations in member facilities
throughout the country. In February 2000, the Company announced the
extension of it's existing purchase agreement with the Veterans
Administration ("VA") for wound and skin cleansers. In March 2000, the
Company announced the award of two new purchase agreements with the VA,
one for it's amorphous hydrogel products and one for it's full line of
incontinence products. All three agreements are for a period of two
years and all are sole-source contracts. The Company also announced in
March 2000 that it was awarded two non-exclusive national contracts
with Novation, a supply cost management company which serves the
purchasing needs of over 6,600 health care organizations nationwide.
One agreement is for wound care products and the other for incontinence
and skin care products. Both agreements are for three year periods,
effective May 1, 2000.
The Company currently has 20 distribution and licensing agreements for
the promotion and sale of its products. In November 1995, the Company
signed a Sales Distribution Agreement with Laboratorios PiSA S.A. de
C.V., a Mexican corporation, for the exclusive distribution rights to
sell the Company's wound care products in Mexico, Guatemala, Nicaragua,
Panama, El Salvador and the Dominican Republic for a period of five
years. On May 15, 1998, the Sales Distribution Agreement was amended
to delete the Dominican Republic from the territories covered by the
agreement.
On September 3, 1996, the Company signed an exclusive contract with
Faulding Pharmaceuticals ("Faulding") to market the Company's wound
care products in Australia and New Zealand. On January 12, 1998,
Faulding and Carrington executed Amendment Number One to the existing
Distribution Agreement between the parties. This Amendment adds the
following countries to the territories covered under that Agreement:
Thailand, Vietnam, Singapore, the Philippines, Malaysia and Myanmar.
Pursuant to the Amendment, products are being shipped on order.
In December 1996, the Company entered into an agreement with Suco
International Corp. ("Suco") whereby the Company appointed Suco as
exclusive distributor of certain of the Company's products in Haiti,
Columbia, Venezuela, Uruguay, Bolivia, Peru, Paraguay and Ecuador for a
five-year term, subject to early termination under certain
circumstances. The agreement requires Suco to register the products
covered by the agreement in each of those countries. On May 15, 1998,
the agreement was amended to include the Dominican Republic as a
territory and to extend the agreement's term for an additional two (2)
years.
In December 1996, the Company and Darrow Laboratories S/A ("Darrow")
entered into a Sales Distribution Agreement whereby the Company
appointed Darrow as a marketer and distributor of certain of the
Company's wound care products for a term of ten years (subject to early
termination under certain circumstances) in Brazil, with a limited
right of first refusal to distribute those products in Argentina,
Uruguay, Paraguay, and Chile. The agreement requires Darrow to
register in the Company's name such of the Company's products as the
Company directs, at the Company's expense, in Brazil and each other
country where Darrow is authorized to distribute such products. As of
December 31, 1999, these registrations were still pending completion.
In December 1996, the Company and its Belgian subsidiary entered into
an agreement with Recordati Industria Chimica & Farmaceutica S.P.A.
("Recordati") whereby the Company and its subsidiary jointly granted
exclusive distribution rights to Recordati for certain of the Company's
products in Italy, Vatican City and San Marino for a term of ten years,
subject to automatic renewal for an additional two years unless either
party elects to terminate the agreement at the end of the initial term,
and subject to early termination under certain circumstances. In
return for the grant of the distribution rights, Recordati made three
initial payments to the Company, the first when the agreement was
signed, the second when the products to be sold were registered, and
the third when the products were initially launched. Under the
agreement, the Company applied for, and was granted in February 1998,
the CE mark, a quality certification recognized by members of the
European Economic Community and certain other countries.
In January 1998, the Company signed a Sales Distribution Agreement with
Henry Schein UK Holdings, Ltd. ("Schein"), a British company, for the
exclusive distribution rights to sell The Carrington[R] Patch in the
United Kingdom and Ireland for a period of ten years. Schein markets
the product under the name UlcerEze[TM].
In January 1998, the Company signed a Sales Distribution Agreement with
Saude 2000 ("Saude"), a Portuguese company, for the exclusive
distribution rights to sell The Carrington[R] Patch in Portugal for a
period of five years. Saude markets the product under the name
PazAftas[TM]. In June 1998, the Company also signed a letter of intent
granting Saude the exclusive distribution rights to sell the Company's
wound care products, including the DiaB[TM] product line, under the
terms of the initial agreement. Pricing for the wound care products is
subject to negotiation.
In March 1998, the Company signed a Sales Distribution Agreement with
Hemofarm, GmbH, a German company, for the exclusive distribution rights
to sell the Company's wound and skin care products and The
Carrington[R] Patch in Yugoslavia for a period of five years.
In March 1998, the Company signed an Exclusive Sales Distribution
Agreement with Vincula International Trade Company for the exclusive
distribution rights to sell the Company's wound and skin care products
and The Carrington[R] Patch in Oman and Saudi Arabia for a period of
five years, with options for other countries in the Middle East to be
negotiated in the future.
In April 1998, the Company signed an Agency and Sales Distribution
Agreement with Egyptian American Medical Industries, Inc. for the
exclusive distribution rights to sell the Company's wound and skin care
products and The Carrington[R] Patch in Egypt for a period of five
years.
In April 1998, the Company signed a Sales Distribution Agreement with
CSC Pharmaceuticals, Ltd., an Austrian company, for the exclusive
distribution rights to sell the Company's DiaB[TM], RadiaCare[TM] and
CarraKlenz[TM] products in Austria, Croatia, Hungary, the Czech
Republic, the Slovak Republic, Romania, Bulgaria, Slovenia and Poland
for a period of ten years. In May 1999, an amendment was made to this
agreement modifying certain performance requirements and product
registration provisions. In February 2000, a second amendment was made
to this agreement modifying certain trademark provisions.
In October 1999, the Company signed a Sales Distribution Agreement with
E-Wha International, Inc., a Korean company, for the exclusive
distribution rights to sell the Company's RadiaCare[TM] products in
Korea for a period of three years.
In 1999, total international sales of wound care products were
$1,160,000, of which $631,000 were related to the above-mentioned
international agreements. The Company presently estimates the expected
sales associated with these agreements in 2000 to be between $800,000
and $1,000,000. The company also sells wound care products into
international markets on a non-contract, purchase order basis. In 1999,
total non-contract, international wound care sales were $529,000 and
included sales into Argentina, Jamaica, Puerto Rico, Singapore and
United Arab Emirates.
The Company also markets Acemannan Immunostimulant, a vaccine adjuvant,
and several wound and skin care products to the veterinary market.
Acemannan Immunostimulant was conditionally approved by the United
States Department of Agriculture ("USDA") in November 1991, for use as
an aid in the treatment of canine and feline fibrosarcoma, a form of
soft tissue cancer that affects dogs and cats. A conditional approval
means that the Company can market the product in limited areas but
additional work must be done. The "conditional" aspect of the approval
is renewed on an annual basis and will be removed upon completion and
acceptance by the USDA of additional potency testing. A submission was
made in December 1998 for this purpose and as of the date of this
report a final response from the USDA has not been received. However,
there can be no assurance that these tests will result in the removal
of the conditional restriction on the USDA's approval of Acemannan
Immunostimulant.
In September 1990, the Company granted Solvay Animal Health, Inc.
("Solvay") an exclusive, world-wide license to use and sell an adjuvant
processed from Aloe vera L. for poultry disease. In January 1992,
Solvay received approval from the USDA to market Acemannan
Immunostimulant as an adjuvant to a vaccine for Marek's disease, a
virus infection that kills chickens or renders them unfit for human
consumption. On March 1, 1997, Fort Dodge Animal Health("Fort Dodge"),
a division of American Home Products Corporation, acquired the business
and assets of Solvay, including the License Agreement dated September
20, 1990 and an Addendum thereto between Carrington and Solvay granting
Solvay an exclusive world-wide field of use license to use and sell
Acemannan Immunostimulant as a component/adjuvant to enhance the
performance of poultry vaccines. Fort Dodge notified Carrington in the
summer of 1997 that, as successor in interest to Solvay, it intended to
terminate the License Agreement. This agreement was terminated
effective February 1, 1999. All sales of this product are now on a non-
exclusive basis.
In March 1996, the Company signed an agreement with Farnam Companies,
Inc., a leading veterinary marketing company, to promote and sell the
CarraVet[R] product line, including Acemannan Immunostimulant. The
CarraVet[R] product line currently consists of eight products.
Consumer Health
Caraloe, Inc., a subsidiary of the Company ("Caraloe"), markets or
licenses consumer products and bulk raw materials utilizing the
Company's patented complex carbohydrate technology into the consumer
health and nutritional products markets. Caraloe's premier product is
Manapol[R] powder, a bulk raw material rich in complex carbohydrates.
Manapol[R] powder is marketed to manufacturers of nutritional products
who desire quality complex carbohydrate ingredients for their finished
products. Caraloe also markets finished products containing Manapol[R]
powder into the health and nutritional products markets through health
food stores and over the Internet at AloeVera.com. Caraloe also offers
contract manufacturing services to the nutritional and skin care
market.
In February 1996, Caraloe signed an agreement with Mannatech, Inc.
("Mannatech") granting it an exclusive license in the United States for
Manapol[R] powder. This agreement, including the grant of the
exclusive license, was terminated by Mannatech effective March 31,
1997, and Caraloe began to market Manapol[R] powder to third parties as
well as use it in Caraloe's products. In August 1997, Caraloe signed a
new, nonexclusive supply agreement with Mannatech to supply Manapol[R]
powder. This agreement is effective through July 2000 and contains
monthly minimum purchase requirements. On January 12, 2000, the
agreement was extended through August 14, 2002. During 1997, 1998 and
1999, sales of Manapol[R] powder to Mannatech represented 15%, 23% and
41%, respectively, of the Company's total consolidated net sales.
In December 1997, Caraloe signed a supply agreement with Met-Trim, Inc.
("Met-Trim"), for the sale of Manapol[R] powder. The agreement was
terminated on January 11, 1999 due to the failure of Met-Trim to meet
first year minimum requirements.
In October 1996, Caraloe made a $200,000 equity investment in Aloe
Commodities International, Inc. ("ACI"). In February 1997, Caraloe
entered into a Supply Agreement with ACI for a term of ten years
(subject to early termination under certain circumstances). The
agreement contemplates that ACI will purchase from Caraloe all of
certain raw materials that ACI needs for drinks and other consumer
products. In December 1997, Caraloe made an additional equity
investment of $400,000 in ACI. Carrington owns less than 10% of the
total outstanding shares of ACI and the entire investment was reserved
in 1998.
In February 1997, Caraloe entered into a Supply Agreement with Light
Resources Unlimited ("LRU"), and effective March 1, 1997, Carrington
entered into a related Trademark License Agreement with LRU. The terms
of the Supply Agreement and the Trademark License Agreement end on May
12, 2002, and May 4, 2002, respectively, and the term of each agreement
is subject to early termination under certain circumstances. The
Supply Agreement provides that LRU will purchase from Caraloe annually
at least the minimum quantities of Manapol[R] powder specified in the
agreement. The Supply Agreement also contemplates that LRU will be
Caraloe's sole distributor of Manapol[R] powder to natural health care
practitioners in the United States and Canada, subject to Caraloe's
right to sell "simple purchase bulk product" to natural health care
practitioners in quantities exceeding certain specified limits. The
Trademark License Agreement grants LRU a non-exclusive license to use
the trademarks AVMP[R] powder and Manapol[R] powder in connection with
the advertising and sale of the LRU brand (Manapol[R] Gold[TM] powder)
to the targeted group. Sales to LRU in 1998 under this agreement were
$197,000. Sales in 1999 were $110,200, a decrease of 44% from 1998.
In October 1998, Caraloe signed a Supply Agreement and a Trademark
License Agreement with One Family, Inc. ("One Family"), a direct sales
company with headquarters located in Colorado. One Family will be
marketing Manapol[R] powder in capsule form. No sales were made under
this agreement in 1999.
In December 1998, Caraloe signed a supply agreement and trademark
license agreement with Eventus International, Inc. ("Eventus"), the
consumer health subsidiary of BeautiControl. Eventus will market a
variety of products containing Manapol[R] powder to promote a natural,
healthy lifestyle. Sales under this agreement in 1999 were $271,000.
In March 1999, Caraloe signed a Supply Agreement and Trademark License
Agreement with For Your Health, Inc. ("For Your Health"), a direct
sales company with headquarters in Seattle, Washington. For Your
Health will be marketing Manapol[R] powder in capsule form.
In April 1999, Caraloe signed an Exclusive Sales Representative
Agreement with Classic Distributing Company ("Classic") of San
Fernando, California. Classic will be acting as Caraloe's exclusive,
independent marketing representative in the state of California.
In April 1999, Caraloe also signed an Exclusive Sales Representative
Agreement with Glenn Corporation ("Glenn") of St. Paul, Minnesota.
Glenn will be acting as Caraloe's exclusive, independent representative
in 24 states in the central and northern portions of the country.
In June 1999, Caraloe signed a Sales and Trademark License Agreement
with Nutra Vine ("Nutra Vine"), a direct sales company with
headquarters in Spring, Texas. Nutra Vine will be marketing Manapol[R]
powder in capsule form.
Caraloe also sells products into international markets on a non-
contract, purchase order basis. In 1999, total international sales for
Caraloe were $266,000 and included sales into Australia, Japan and
South Africa
Research and Development
General
Carrington has developed a proprietary process for purifying a material
that has been designated bulk pharmaceutical mannan ("BPM"). This
material is a natural product mixture which contains a high percentage
of complex carbohydrates. The Company intends to seek approval of the
Food and Drug Administration (the "FDA") and other regulatory agencies
to sell drugs and/or medical devices derived from BPM-based materials
in the United States and in foreign countries. For a more
comprehensive listing of the type, indication and status of products
currently under development by the Company, see "Research and
Development - Summary " below. The regulatory approval process, both
domestically and internationally, can be protracted and expensive, and
there is no assurance that the Company will obtain approval to sell its
products for any treatment or use (see "Governmental Regulation"
below).
The Company expended approximately $3,006,000, $2,589,000 and
$5,300,000 on research and development in fiscal 1997, 1998, and 1999,
respectively. The Company has adopted a focused approach to its
research and development efforts. The Company returned to the clinic
in April 1999 to conduct a Phase III trial in ulcerative colitis, and
as a result expenditures for fiscal 1999 were increased 105% over 1998.
The Company continued in 1999 with its efforts to structure research
and development to meet the challenges and demands for drug development
in the 21st century. In addition to establishing a strong nucleus or
infrastructure for chemistry, assay development and formulation
development, with outsourcing capabilities for high-throughput drug
screening, and preclinical and clinical drug and device development,
the Company also strengthened its documentation and product
development activities. This approach is intended to enable the
Company to maximize its opportunities in a timely and cost-effective
manner. Currently, the Company's research staff comprises 14 full-time
employees. Dr. Robert A. Fildes, a director of the Company, continues
to serve as part-time Executive Vice President, Research and
Development as he has since October 1, 1997. Dr. Kenneth (Bill) Yates
was promoted to Vice President, Research and Development in January
1999.
Preclinical Research
The Company's main preclinical research and development objective for
1999 was to initiate and support the ulcerative colitis program. The
Company returned to the clinic in April 1999, treating patients with
a new dosage form of Aliminase[TM] as a powder for reconstitution.
Patient treatment was completed in February 2000. Final results were
announced at the end of March 2000 and no significant differences were
found to support a therapeutic drug effect.
Other preclinical studies conducted in the Company's laboratories and
in outside laboratories have shown that certain of the Company's
complex carbohydrates enhance macrophages and other cell types to
produce cytokines, which regulate other cells. In addition, laboratory
experiments conducted by the Company have shown that some compounds
from Aloe vera L. have pro- or anti-inflammatory actions as shown in
animal models of wound healing and in inflammation of the lung, colon,
joint and ear. The Company believes that its products' pharmacological
actions and lack of toxicity make them excellent candidates for further
development as therapeutic agents for the treatments and uses for which
the Company intends to seek regulatory approvals. The preclinical
efforts for the future will focus on supporting existing business
developing "proof of concept" data for potential pharmaceutical
partners. There is no assurance, however, that the Company will be
successful in its efforts.
The Company sponsors a research and development laboratory at Texas A&M
University in association with the College of Veterinary Medicine to
expand preclinical research in various wound healing applications and
mechanisms of action. Pursuant to this arrangement, the Company has
access to leading authorities in immunology, as well as facilities and
equipment to engage in experimentation and analysis at the basic
research level.
Further processed BPM, including CarraVex[TM] injectable (formerly CARN
750), are immunomodulating agents that have the potential to be used in
the treatment of neutropenia or as an adjunct in the treatment of
cancer.
In 1991, the USDA granted the Company conditional approval to market an
injectable form of a complex carbohydrate as an aid to surgery in the
treatment of canine and feline fibrosarcoma, a form of soft tissue
cancer, under the name Acemannan Immunostimulant. The product was
conditionally approved based on safety and efficacy studies. The
Company continues to work on developing a suitable, cost-effective
potency assay that will meet USDA requirements for the purpose of
removal of the conditional status. A submission was made in December
1998 for this purpose and as of the date of this report a final
response from the USDA has not been received. Of course, there can
be no assurance as to whether or when the USDA will remove the
conditional restriction on its approval of this product.
An extensive series of animal studies was initiated in 1997 to assess
the direct and adjunct effects of CarraVex[TM] and Acemannan
Immunostimulant. The primary purpose of these studies was to identify
a suitable model to evaluate new product formulations (see "Human
Studies" below). These studies were completed successfully in 1998,
and models have been identified to assess future drug candidates.
In 1998, a new and unique pectin (complex carbohydrate) was isolated
from the cell walls of the inner gel of Aloe vera L. Basic research is
continuing on this material. Pilot scale production of this material
was postponed in 1999 to allow for additional efforts to be placed in
support of ulcerative colitis. The product has near-term utility as a
product to be used in wound healing, and other future potential
applications are being explored. Two patent applications covering this
invention were filed in July 1998, and the first of the two resulted in
the issuance of a patent in July 1999.
In 1999, the Company, in conjunction with Baylor College of Dentistry,
completed a series of ex vivo studies evaluating the adherence of
Radiacare[TM] and Salicept[TM] Oral Wound Rinse to epithelial cells and
keratin associated with the mouth in support of a pain reduction claim
for the products. A florescent labeled material was applied to mucosal
scrapings and then examined microscopically. Adherence to both keratin
and epithelial cells was shown, demonstrating the coating and
protecting effects of the product.
Human Studies
Evaluation of Aliminase[TM] (formerly CARN 1000) in the Treatment of
Ulcerative Colitis. In late 1996, the Company placed on hold its
testing of Aliminase[TM] oral capsules for the treatment of ulcerative
colitis. The Company has reformulated the product into a single unit
dose powder for reconstitution. (See "Preclinical Research" above and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.) The Company initiated a Phase III trial
of the new dosage form, with the treatment of patients beginning on
April 5, 1999. Patient enrollment was completed in December 1999,
and final results were announced at the end of March 2000 and
no significant differences were found to support a therapeutic drug
effect. The program will be discountinued.
Evaluation of CarraVex[TM] Injectable (formerly CARN 750) in the
Treatment of Solid Tumors in Humans. In 1993, the Company completed a
Phase I safety study in normal volunteers using CarraVex[TM], which led
to a Phase I clinical trial in disease patients using CarraVex[TM]
injectable in certain solid tumor indications. The trial began in the
United States in late 1995 and continued until mid-1997. Eighteen
patients completed the study, with no safety concerns noted. The
product required filtration at the bedside, which the Company believes
is not the best delivery approach for CarraVex[TM]. A program for
improving the formulation is in progress, and a decision on future
clinical trials will be made once a suitable formulation is developed.
Evaluation of Carrasyn[R] Freeze-Dried Gel (CarraSorb[TM] M) in Wound
Healing. Following the submission of a 510(k) pre-market notification
for a preservative-free, freeze-dried gel for wound care, the FDA
cleared Carrington to market CarraSorb[TM] M, and it was launched in
early 1996. The Company sponsored a small pilot clinical study at
the University of Wales to evaluate the effect of CarraSorb[TM] M on
wound macrophages. The results of this study showed that seven out of
nine patients with previously non-healing wounds showed some degree of
wound closure, with two wounds progressing to near or complete healing.
An association between the healing effects and macrophage activity was
not established.
Evaluation of RadiaCare[TM] Oral Wound Rinse. In March 1997, the FDA
cleared Carrington to market RadiaCare[TM] Oral Wound Rinse for the
management and relief of pain associated with mucositis and all types
of oral wounds. The Company is sponsoring individual case studies and
co-sponsoring a pilot study of 50 patients in a placebo-controlled,
double-blind trial in radiation-induced mucositis. This trial
continues, and results should be known by the end of 2000. Two market
studies evaluating patient acceptance and pain relief associated with
use of the product were completed in August 1999. In these trials,
which involved 28 patients, 93% reported some pain relief associated
with its use of the product.
Summary. The following table outlines the status of the products and
potential indications of the Company's aloe-based products developed,
planned or under development. There is no assurance of successful
development, completion or regulatory approval of any product not yet
on the market.
PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED,
PLANNED OR UNDER DEVELOPMENT
PRODUCT OR POTENTIAL
POTENTIAL INDICATION MARKET APPLICATIONS STATUS
-------------------- ------------------- ------
Topical
-------
Dressings Pressure and Vascular Ulcers Marketed
Dressings Diabetic Ulcers Marketed
Cleansers Wounds Marketed
Anti-fungal Cutaneous Fungal Infection Marketed
Hydrocolloids Wounds Marketed
Alginates Wounds Marketed
Skin Protectants Incontinence Care Marketed
Oral
----
Human
Anti-inflammatory Ulcerative Colitis Discontinued
Pain Reduction Mucositis Marketed
Dental
Pain Reduction Aphthous Ulcers, Oral Wounds Marketed
Injectable
----------
Human
Adjunct for cancer Neutropenia associated with Preclinical
Neutropenia cancer and
Formulation
Development
Underway
Veterinary
Adjunct for cancer Fibrosarcoma Marketed
Vaccine Adjuvant
----------------
Veterinary
Poultry Vaccines Marek's Disease Marketed
Licensing Strategy
The Company expects that prescription pharmaceutical products
containing certain defined drug substances will require a substantial
degree of development effort and expense. Before governmental approval
to market any such product is obtained, the Company may license these
products for certain indications to other pharmaceutical companies in
the United States or foreign countries and require such licensees to
undertake the steps necessary to obtain marketing approval for specific
indications or in a particular country.
Similarly, the Company intends to license third parties to market
products containing defined chemical entities for certain human
indications when it lacks the expertise or financial resources to
market effectively. If the Company is unable to enter into such
agreements, it may undertake to market the products itself for such
indications. The Company's ability to market these products for
specific indications will depend largely on its financial condition at
the time and the results of related clinical trials. There is no
assurance that the Company will be able to enter into any license
agreements with third parties or that, if such license agreements are
concluded, they will contribute to the Company's overall profits.
Raw Materials and Processing
The principal raw material used by the Company in its operations is the
leaf of the plant Aloe barbadensis Miller, popularly known as Aloe vera
L. Through patented processes, the Company produces bulk
pharmaceutical and injectable mannans and freeze-dried aloe extract
from the central portion of the Aloe vera L. leaf known as the gel. A
basic bulk pharmaceutical mannan (acemannan), in the form of a
hydrogel, is used as an ingredient in certain of the Company's wound
and skin care products. Through additional processing, bulk mannans
may be produced in both oral and injectable dosage forms.
In May 1990, the Company purchased a 405-acre farm in the Guanacaste
province of northwest Costa Rica which currently has approximately 125
acres planted with Aloe vera L. The Company's current need for leaves
exceeds the supply of harvestable leaves from the Company's farm,
requiring the purchase of leaves from other sources in Central and
South America at considerably higher prices. Due to economic and
political instability in the Central American region, the supply of
imported leaves cannot be guaranteed. A 10% increase in Aloe vera L.
leaf prices from other sources would result in a 2% decrease in the
Company's gross profit. The Company's sensitivity analysis of the
effects of changes in leaf prices does not factor in a potential change
in sales levels or a change in the percentage of leaves purchased from
other sources. The Company has been exploring other options to obtain
leaves to meet its projected requirements at lower costs.
In May 1998, Aloe and Herbs International, Inc. ("Aloe & Herbs"), a
Panamanian corporation was formed for the purpose of purchasing 5,000
acres of land in Costa Rica and establishing an Aloe vera L. farm. The
Company received 1.5 million shares of Aloe & Herbs common stock for
agreeing to make certain loans to Aloe & Herbs, arranging for Aloe vera
L. plants to be supplied to the farm and providing know-how in farming
Aloe vera L. plants. Aloe & Herbs formed a Costa Rica subsidiary,
Rancho Aloe (C.R.), S.A. ("Rancho Aloe"), which owns and operates the
farm. The Company purchased the initial plants for the farm on behalf
of Rancho Aloe in exchange for unsecured notes and accounts receivable.
In March 1998, prior to the incorporation of Aloe & Herbs, the
Company's Caraloe subsidiary signed a letter of intent with one of the
organizers of Aloe & Herbs to enter into a supply agreement with Aloe &
Herbs to purchase, at mutually agreeable, locally competitive prices,
all of the Aloe vera L. leaves that Caraloe needs, to the extent its
needs exceed the leaves available from the Company's farm plus up to
200,000 kilograms of leaves per month from another local source. At
the date of this report, no such supply agreement has been negotiated
or entered into, but in March 1999, the Company began receiving
approximately eight percent of its monthly requirements of leaves from
Rancho Aloe.
In September 1999, the Company leased 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 L. plants on 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.
As of December 31, 1999, Rancho Aloe was providing an average of 52% of
the Company's monthly requirement of leaves. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note Six to the
consolidated financial statements for further information regarding the
Company's relationship with Aloe & Herbs.
Manufacturing
During the last quarter of 1994 and the first three quarters of 1995,
the Company moved its wound and skin care product manufacturing
operations from a leased facility in Dallas, Texas to the Company's
headquarters in Irving, Texas. In connection with this move, the
Company upgraded and expanded its manufacturing capacity by installing
higher capacity equipment and upgraded its capabilities to produce
injectable-grade pharmaceutical products. The Company believes that
the plant's capacity will provide sufficient capacity for the present
line of products and accommodate new products and sales growth. Final
packaging of certain of the Company's wound care products is completed
by outside vendors. The Company's calcium alginates, films,
hydrocolloids, foam dressings, gel sheets, tablets, capsules, and
freeze-dried products are being provided by third parties. In 1998,
the Company engaged Elemco, a consulting firm, to review and modernize
the Company's manufacturing and quality control processes and make
recommendations for process improvements. During 1999, Elemco
consultants made a number of recommendations which were implemented,
resulting in increased factory throughput and reduced product cost.
All of the Company's bulk pharmaceutical mannans, bulk injectable
mannans and freeze-dried Aloe vera L. extracts are produced in its
processing plant in Costa Rica. This facility has the ability to
supply the bulk aloe raw materials requirements of the Company's
current product lines and bulk material contracts for the foreseeable
future. A process improvement program was initiated in late 1998 and
continued through 1999 to further meet requirements for a "product by
process." Finished oral and injectable dosage forms of products will
be produced by outside vendors until in-house production becomes
economically justified.
Competition
Research and Development. The biopharmaceutical field is expected to
continue to undergo rapid and significant technological change.
Potential competitors in the United States are numerous and include
pharmaceutical, chemical and biotechnology companies. Many of these
companies have substantially greater capital resources, research and
development staffs, facilities and expertise (in areas including
research and development, manufacturing, testing, obtaining regulatory
approvals and marketing) than the Company. This competition can be
expected to become more intense as commercial applications for
biotechnology and pharmaceutical products increase. Some of these
companies may be better able than the Company to develop, refine,
manufacture and market products which have application to the same
indications as bulk pharmaceutical mannans and bulk injectable mannans.
The Company understands that certain of these competitors are in the
process of conducting human clinical trials of, or have filed
applications with government agencies for approval to market, certain
products that will compete with the Company's products both in its
present wound care market and in markets associated with products the
Company currently has under development.
Medical Services Division and Caraloe, Inc. The Company competes
against many companies that sell products which are competitive with
the Company's products, with many of its competitors using very
aggressive marketing efforts. Many of the Company's competitors are
substantially larger than the Company in terms of sales and
distribution networks and have substantially greater financial and
other resources. The Company's ability to compete against these
companies will depend in part on the expansion of the marketing network
for its products. The Company believes that the principal competitive
factors in the marketing of its products are their quality, and that
they are naturally based and competitively priced.
Governmental Regulation
The production and marketing of the Company's products, and the
Company's research and development activities, are subject to
regulation for safety, efficacy and quality by numerous governmental
authorities in the United States and other countries. In the United
States, drugs for human use are subject to rigorous FDA regulation.
The Federal Food, Drug and Cosmetic Act, as amended,(the "FFDC Act"),
the regulations promulgated thereunder, and other federal and state
statutes and regulations govern, among other things, the testing,
manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. For
marketing outside the United States, the Company is subject to foreign
regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement may
vary widely from country to country.
Food and Drug Administration. The contents, labeling and advertising
of many of the Company's products are regulated by the FDA. The
Company is required to obtain FDA approval before it can study or
market any proposed prescription drugs and may be required to obtain
such approval for proposed nonprescription products. This procedure
involves extensive clinical research, and separate FDA approvals are
required at various stages of product development. The approval
process requires, among other things, presentation of substantial
evidence to the FDA, based on clinical studies, as to the safety and
efficacy of the proposed product.
In order to initiate human clinical trials on a product, extensive
basic research and development information must be submitted to the FDA
in an investigational new drug ("IND") application. The IND
application contains a general investigational plan, a copy of the
investigator's brochure (a comprehensive document provided by the drug
manufacturer), copies of the initial protocol for the first study, a
review of the chemistry, manufacturing and controls information for the
drug, pharmacology and toxicology information, any previous human
experience with the drug, results of preclinical studies and any other
information requested by the FDA.
If permission is obtained to proceed to clinical trials based on the
IND application, initial trials, usually categorized as Phase I, are
instituted. The initial or Phase I trials typically involve the
administration of small, increasing doses of the investigational drug
to healthy volunteers, and sometimes patients, in order to determine
the general overall safety profile of the drug and how it is
metabolized.
Once the safety of the drug has been established, Phase II efficacy
trials are conducted in which the expected therapeutic doses of the
drug are administered to patients having the disease for which the drug
is indicated, and a therapeutic response is sought as compared to the
expected progression of the underlying disease or compared to a
competitive product or placebo. Information also is sought on any
possible short-term side effects of the drug.
If efficacy and safety are observed in the Phase II trials, Phase III
trials (usually two trials) are undertaken on an expanded group in
which the patients receiving the drug are compared to a different group
receiving either a placebo or some form of accepted therapy in order to
establish the relative safety and efficacy of the new drug compared
with the control group. Data are also collected to provide an adequate
basis for future physician prescribing information.
If Phases I through III are successfully completed, the data from these
trials are compiled into a new drug application ("NDA"), which is filed
with the FDA in an effort to obtain marketing approval. In general, an
NDA will include a summary of the components of the IND application, a
clinical data section reviewing in detail the studies from Phases I
through III and the proposed description of the benefits, risks and
uses, or labeling, of the drug, and how both the drug substance and
drug product will be manufactured and controlled.
In general, a more comprehensive NDA and a more prolonged review
process are required for drugs not previously approved for marketing by
the FDA. If a second indication for an already approved product is
sought, since many of the components of the review process are the
same, a shortened review process generally can be anticipated.
However, the FDA gives high priority to novel drugs providing unique
therapeutic benefits and a correspondingly lower priority to drugs
similar to or providing comparable benefits to others already on the
market.
In addition to submitting safety and efficacy data derived from
clinical trials for FDA approval, NDA approval requires the
manufacturer of the drug to demonstrate the identity, potency, quality
and purity of the active ingredients of the product involved, the
stability of these ingredients and compliance of the manufacturing
facilities, processes and quality control with the FDA's current Good
Manufacturing Practices regulations. After approval, manufacturers
must continue to expend time, money and effort in production and
quality control to assure continual compliance with the current Good
Manufacturing Practices regulations. Also, under the new program for
harmonization between Europe and the U.S. and the ISO 9001
Certification Program, a company can, under certain circumstances after
application, have a new drug approved under a process known as
centralization rather than having to go through a country-by-country
approval in the European Union.
Certain of the Company's wound and skin care products are registered
with the FDA as "devices" pursuant to the regulations under Section
510(k) of the FFDC Act as amended. A device is a product used for a
particular medical purpose, such as to cover a wound, with respect to
which no pharmacological claim can be made. A device which is
"substantially equivalent" to another device existing in the market
prior to May 1976 can be registered with the FDA under Section 510(k)
and marketed without further testing. A device which is not
"substantially equivalent" is subject to an FDA approval process
similar to that required for a new drug, beginning with an
Investigational Device Exemption and culminating in a Premarket
Approval. The Company has sought and obtained all its device approvals
under Section 510(k). With respect to certain of its wound and skin
care products, the Company intends to develop claims for which IND and
NDA submissions will be required. The Company currently markets seven
(7) products which require a prescription as medical devices.
Department of Agriculture. Certain products being developed by the
Company for animal health indications must be approved by the USDA.
The procedure involves extensive clinical research, and USDA approvals
are required at various stages of product development. The approval
process requires, among other things, presentation of substantial
evidence to the USDA as to the safety and efficacy of the proposed
product. Furthermore, even if approval to test a product is obtained,
there is no assurance that ultimate approval for marketing the product
will be granted. USDA approval procedures can be protracted.
Other Regulatory Authorities. The Company's advertising and sales
practices are subject to regulation by the Federal Trade Commission
(the "FTC"), the FDA and state agencies. The Company's processing and
manufacturing plants are subject to federal, state and foreign laws and
to regulation by the Bureau of Alcohol, Tobacco and Firearms of the
Department of the Treasury and by the Environmental Protection Agency
(the "EPA"), as well as the FDA.
The Company believes that it is in substantial compliance with all
applicable laws and regulations relating to its operations, but there
is no assurance that such laws and regulations will not be changed.
Any such change may have a material adverse effect on the Company's
operations.
The manufacturing, processing, formulating, packaging, labeling and
advertising of products of the Company's subsidiary, Caraloe, are also
subject to regulation by one or more federal agencies, including the
FDA, the FTC, the USDA and the EPA. These activities are also
regulated by various agencies of the states, localities and foreign
countries to which Caraloe's products are distributed and in which
Caraloe's products are sold. The FDA, in particular, regulates the
formulation, manufacture and labeling of vitamin and other nutritional
supplements.
On October 25, 1994, the President signed into law the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"). This new law
revised the provisions of the FFDC Act concerning the composition and
labeling of dietary supplements and, in the judgment of the Company, is
favorable to the dietary supplement industry. The legislation created
a new statutory class of "dietary supplement." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for
human use to supplement the diet, and the legislation grandfathers,
with certain limitations, dietary ingredients on the market before
October 15, 1994. A dietary supplement which contains a new dietary
ingredient, one not on the market before October 15, 1994, will require
evidence of a history of use or other evidence of safety establishing
that it will reasonably be expected to be safe. The majority of the
products marketed by Caraloe are classified as dietary supplements
under the FFDC Act.
Both foods and dietary supplements are subject to the Nutrition
Labeling and Education Act of 1990 (the "NLEA"), which prohibits the
use of any health claim for foods, including dietary supplements,
unless the health claim is supported by significant scientific
agreement and is either pre-approved by the FDA or the subject of
substantial government scientific publications and a notification to
the FDA. To date, the FDA has approved the use of only limited health
claims for dietary supplements. However, among other things, the DSHEA
amends, for dietary supplements, the NLEA by providing that "statements
of nutritional support" may be used in labeling for dietary supplements
without FDA preapproval if certain requirements, including prominent
disclosure on the label of the lack of FDA review of the relevant
statement, possession by the marketer of substantiating evidence for
the statement and post-use notification to the FDA, are met. Such
statements may describe how particular nutritional supplements affect
the structure, function or general well-being of the body (e.g.,
"promotes cardiovascular health").
The FDA issued final dietary supplement labeling regulations in 1997
that required Caraloe to revise most of its product labels by 1999, and
Caraloe completed the revisions required for compliance with these
regulations in January 1999. In compliance with these regulations,
Caraloe maintains supporting documentation on file for its "statement
of nutritional support."
Advertising and label claims for dietary supplements and conventional
foods have been regulated by state and federal authorities under a
number of disparate regulatory schemes. There can be no assurance that
a state will not interpret claims presumptively valid under federal law
as illegal under that state's regulations, or that future FDA
regulations or FTC decisions will not restrict the permissible scope of
such claims.
Governmental regulations in foreign countries where Caraloe plans to
commence or expand sales may prevent or delay entry into the market or
prevent or delay the introduction, or require the reformulation, of
certain of Caraloe's products. Compliance with such foreign
governmental regulations is generally the responsibility of Caraloe's
distributors for those countries. These distributors are independent
contractors over which the Company has limited control.
As a result of Caraloe's efforts to comply with applicable statutes and
regulations, Caraloe has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its
sales and marketing program. Caraloe cannot predict the nature of any
future laws, regulations, interpretations or applications, nor can it
determine what effect additional governmental regulations or
administrative orders, when and if promulgated, would have on its
business in the future. They could, however, require the reformulation
of certain products to meet new standards, the recall or discontinuance
of certain products not capable of reformulation, additional record
keeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any
or all of such requirements could have a material adverse effect on the
Company's results of operations and financial condition.
Compliance with the provisions of national, state and local
environmental laws and regulations has not had a material adverse
effect upon the capital expenditures, earnings, financial position,
liquidity or competitive position of the Company.
Patents and Proprietary Rights
As is industry practice, the Company has a policy of using patents,
trademarks and trade secrets to protect the results of its research and
development activities and, to the extent it may be necessary or
advisable, to exclude others from appropriating the Company's
proprietary technology. The Company's policy is to protect
aggressively its proprietary technology by seeking and enforcing
patents in a worldwide program.
The Company has obtained patents or filed patent applications in the
United States and approximately 26 other countries in three series
regarding the compositions of acetylated mannan derivatives, the
processes by which they are produced and the methods of their use. The
first series of patent applications, relating to the compositions of
acetylated mannan derivatives and certain basic processes of their
production, was filed in a chain of United States patent applications
and its counterparts in the other 26 countries. The first United
States patent application in this first series, covering the
composition claims of acetylated mannan derivatives, matured into
United States Patent No. 4,735,935 (the "935 Patent"), which was issued
on April 5, 1988. United States Patent No. 4,917,890 (the "890
Patent") was issued on April 17, 1990 from a divisional application to
the 935 Patent. This divisional application pertains to most of the
remaining claims in the original application not covered by the 935
Patent. The 890 Patent generally relates to the basic processes of
producing acetylated mannan derivatives, to certain specific examples
of such processes and to certain formulations of acetylated mannan
derivatives. Two other divisional applications covering the remaining
claims not covered by the 890 Patent matured into patents, the first on
September 25, 1990, as United States Patent No. 4,959,214, and the
second on October 30, 1990, as United States Patent No. 4,966,892.
Foreign patents that are counterparts to the foregoing United States
patents have been granted in some of the member states of the European
Economic Community and several other countries.
The second series of patent applications related to preferred processes
for the production of acetylated mannan derivatives. One of them
matured into United States Patent No. 4,851,224, which was issued on
July 25, 1989. This patent is the subject of a Patent Cooperation
Treaty application and national foreign applications in several
countries. An additional United States patent based on the second
series was issued on September 18, 1990, as United States Patent
No. 4,957,907.
The third series of patent applications, relating to the uses of
acetylated mannan derivatives, was filed subsequent to the second
series. Three of them matured into United States Patent
Nos. 5,106,616, issued on April 21, 1992, 5,118,673, issued on June 2,
1992, and 5,308,838, issued on May 3, 1994. The Company has filed a
number of divisional applications to these patents, each dealing with
specific uses of acetylated mannan derivatives. Patent Cooperation
Treaty applications based on the parent United States applications have
been filed designating a number of foreign countries where the
applications are pending. In addition, the Company has also obtained a
patent in the United States relating to a wound cleanser, U.S. Patent
No. 5,284,833, issued on February 8, 1994.
The Company has obtained a patent in the United States relating to a
therapeutic device made from freeze-dried complex carbohydrate hydrogel
(U.S. Patent No. 5,409,703, issued on April 25, 1995). A Patent
Cooperation Treaty application based on the parent United States
application has been filed designating a number of foreign countries
where the applications are pending.
The Company has obtained patents in the United States (U.S. Patent No.
5,760,102, issued on June 2, 1998) and Taiwan (Taiwan Patent No. 89390,
issued on August 21, 1997) related to the uses of a denture adhesive
and also a patent in the United States relating to methods for the
prevention and treatment of infections in animals (U.S. Patent No.
5,703,060, issued on December 30, 1997).
Additional patents concerning various areas of interest were issued in
1999.
The Company obtained a patent in the United States (U.S. Patent
No.5,902,796, issued on May 11, 1999) related to the process for
obtaining bioactive material from Aloe vera L.
The Company obtained an additional patent in the United States (U.S.
Patent No. 5,929,051, issued on July 27, 1999) related to the
composition and process for a new complex carbohydrate (pectin)
isolated from Aloe vera L. Also obtained was a United States patent
(U.S. Patent No. 5,925,357, issued on July 20, 1999) related to the
process for a new Aloe vera L. product that maintains the complex
carbohydrates with the addition of other substances normally provided
by "Whole Leaf Aloe."
Additionally, the Company obtained a Japanese letters-patent (Patent
No. 2888249, having a Patent Registration Date of February 19, 1999)
for the use of acemannan (a) in a vaccine product; (b) in enhancing
natural kill cell activity and in enhancing specific tumor cell lysis
by white cells and/or antibodies; (c) in correcting malabsorption and
mucosal cell maturation syndromes in man or animals; and (d) in
reducing symptoms associated with multiple sclerosis.
The Company also received the grant of European Patent Application
under No. 0611304, having the date of publication and mention of the
grant of the patent of September 15, 1999. This European Letters
Patent claims the use of acetylated mannan for the regulation of blood
cholesterol levels and for the removal of plaque in blood vessels.
The Company has filed and intends to file patent applications with
respect to subsequent developments and improvements when it believes
such protection is in the best interest of the Company. Although the
scope of protection which ultimately may be afforded by the patents and
patent applications of the Company is difficult to quantify, the
Company believes its patents will afford adequate protection to conduct
the business operations of the Company. However, there can be no
assurance that (i) any additional patents will be issued to the Company
in any or all appropriate jurisdictions, (ii) litigation will not be
commenced seeking to challenge the Company's patent protection or such
challenges will not be successful, (iii) processes or products of the
Company do not or will not infringe upon the patents of third parties
or (iv) the scope of patents issued to the Company will successfully
prevent third parties from developing similar and competitive products.
It is not possible to predict how any patent litigation will affect
the Company's efforts to develop, manufacture or market its products.
The Company also relies upon, and intends to continue to rely upon,
trade secrets, unpatented proprietary know-how and continuing
technological innovation to develop and maintain its competitive
position. The Company typically enters into confidentiality agreements
with its scientific consultants, and the Company's key employees have
entered into agreements with the Company requiring that they forbear
from disclosing confidential information of the Company and assign to
the Company all rights in any inventions made while in the Company's
employ relating to the Company's activities. Accordingly, the Company
believes that its valuable trade secrets and unpatented proprietary
know-how are adequately protected.
The technology applicable to the Company's products is developing
rapidly. A substantial number of patents have been issued to other
biopharmaceutical companies. In addition, competitors have filed
applications for, or have been issued, patents and may obtain
additional patents and proprietary rights relating to products or
processes competitive with those of the Company. To the Company's
knowledge, acetylated mannan derivatives do not infringe any valid,
enforceable United States patents. A number of patents have been
issued to others with respect to various extracts of the Aloe vera L.
plant and their uses and formulations, particularly in respect to skin
care and cosmetic uses. While the Company is not aware of any existing
patents which conflict with its current and planned business
activities, there can be no assurance that holders of such other Aloe
vera L.-based patents will not claim that particular formulations and
uses of acetylated mannan derivatives in combination with other
ingredients or compounds infringe, in some respect, on these other
patents. In addition, others may have filed patent applications and
may have been issued patents relating to products and technologies
potentially useful to the Company or necessary to commercialize its
products or achieve their business goals. There is no assurance that
the Company will be able to obtain licenses of such patents on
acceptable terms.
The Company has given the trade name Carrasyn[R] to certain of its
products containing acetylated mannans. The Company has filed a
selected series of domestic and foreign trademark applications for the
marks Manapol[R] powder, Carrisyn[R] and Carrasyn[R]. Further, the
Company has registered the trademark AVMP[R] Powder and the trade name
Carrington[R] in the United States. In 1999, the Company obtained four
additional registered trademarks in Brazil. The Company believes that
its trademarks and trade names are valuable assets.
The Company has filed a petition with the United States Patent and
Trademark Office to cancel the registration of the mark CURAKLENSE by
The Kendall Company of Mansfield, Massachusetts.
Employees
As of January 31, 2000, the Company employed 336 persons, of whom 29
were engaged in the operation and maintenance of its Irving, Texas
processing plant, 221 were employed at the Company's facility in Costa
Rica and the remainder were executive, research, quality assurance,
manufacturing, administrative, sales, and clerical personnel. Of the
total number of employees, 95 were located in Texas, 221 in Costa Rica
and one in Puerto Rico. In addition, 19 sales personnel were located
in 15 other states. The Company considers relations with its employees
to be good. The employees are not represented by a labor union.
Financing
In November 1997, the Company entered into a financing arrangement with
Comerica Bank-Texas ("Comerica"). The agreement was composed of a
$3,000,000 line of credit structured as a demand note without
expiration with an interest rate equal to the Comerica prime rate. The
line of credit is collateralized by the Company's accounts receivable
and inventory. This credit facility will be used for operating needs,
as required, and is currently being used to secure a letter of credit
in the amount of $1,100,000. As of December 31, 1999, there was a
$200,000 balance owed to Comerica under the terms of the financing
agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources"
for information regarding a supply agreement between the Company and
its supplier of freeze-dried products that obligates the Company to
purchase more of such products than it is currently able to sell, and
the use of the above-mentioned letter of credit to secure the Company's
obligations under that agreement.
Year 2000 Issues
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000 Issues" for information regarding the
Company's efforts to assess, and to deal with the effects of, the types
of Year 2000 issues described in that discussion.
ITEM 2. PROPERTIES.
The Company believes that all its farming property, manufacturing and
laboratory facilities, as described below, and material farm,
manufacturing and laboratory equipment are in satisfactory condition
and are adequate for the purposes for which they are used, although the
farm is not adequate to supply all of the Company's needs for Aloe vera
L. leaves. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information regarding the
Company's arrangements to purchase Aloe vera L. leaves.)
Walnut Hill Facility. The Company's corporate headquarters and
principal U.S. manufacturing facility occupy all of the 35,000 square
foot office and manufacturing building (the "Walnut Hill Facility"),
which is situated on an approximate 6.6 acre tract of land located in
the Las Colinas area of Irving, Texas. The Company owns the land and
the building. The manufacturing operations occupy approximately 19,000
square feet of the facility, and administrative offices occupy
approximately 16,000 square feet.
Laboratory Facility. The Company leases 24,000 square feet of office,
manufacturing and laboratory space (the "Laboratory Facility") in
Irving, Texas pursuant to a lease that expires in July 2001. The
Company's in-house research and development and quality assurance
activities are conducted at the Laboratory Facility for the production
of injectable dosage forms of Acemannan Immunostimulant. The Company
is currently evaluating alternative facility sites.
Warehouse and Distribution Facility. Since September 1994, the
Company's warehouse and distribution center has been located in a
35,050 square foot facility that the Company leases in Irving, Texas,
near the Walnut Hill Facility. The warehouse and distribution center
occupies approximately 27,000 square feet of the leased facility, and
the remaining space is used for offices. The lease expires in October
2001.
Costa Rica Facility. The Company owns approximately 405 acres of land
in the Guanacaste province of northwest Costa Rica. This land is being
used for the farming of Aloe vera L. plants and for a processing plant
to produce bulk pharmaceutical and injectable mannans and freeze-dried
extracts from Aloe vera L. used in the Company's operations.
Construction of the processing plant was completed during the second
quarter of 1993, and the plant became operational in June 1993. In
1994, the Company upgraded the production plant to meet regulatory
requirements for the production of bulk pharmaceutical oral and
injectable mannans as required for INDs. This project was completed in
the fourth quarter of 1994. In order to meet demand for new products,
a new compounding area and high-speed filling line were constructed as
an addition to the Costa Rica facility during 1998. Also, other new
equipment was installed in January 1999 to refine the BPM manufacturing
process.
ITEM 3. LEGAL PROCEEDINGS.
In October 1998, the Company was served with a Summons and Notice by
the Chapter 7 Trustee for the estates of FoxMeyer Corporation and
certain related companies ("FoxMeyer"), in Case Nos. 96-1329 (SB)
through 96-1334 (HSB) in the U.S. Bankruptcy Court for the District of
Delaware, regarding an alleged claim of $28,159.69. In July 1998, the
Company's counsel advised FoxMeyer that the Company believed that the
October 1998 claim had been settled in the July 1998 settlement. As of
the date of this report, FoxMeyer has not contradicted the Company's
position, nor has it formally confirmed that it will release the
October 1998 claim. If FoxMeyer fails to acknowledge that the October
1998 claim was previously settled, or if FoxMeyer asserts that the
October 1998 claim was not covered by the July 1998 settlement, the
Company intends to vigorously defend the October 1998 claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of security holders
during the fourth quarter of the fiscal year covered by this Annual
Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol "CARN." The following table sets forth the high and
low sales prices per share of the Common Stock for each of the periods
indicated.
Fiscal 1998 High Low
----------- ---- -----
First Quarter $5 1/2 $4
Second Quarter 6 7/16 4
Third Quarter 5 3/8 2 1/2
Fourth Quarter 3 5/8 2
Fiscal 1999 High Low
----------- ---- -----
First Quarter $4 1/4 $2 1/8
Second Quarter 3 3/16 2 1/2
Third Quarter 3 1 13/16
Fourth Quarter 2 3/4 1 1/2
At March, 16, there were 946 holders of record (including brokerage
firms) of Common Stock.
The Company has not paid any cash dividends on the Common Stock and
presently intends to retain all earnings for use in its operations.
Any decision by the Board of Directors of the Company to pay cash
dividends in the future will depend upon, among other factors, the
Company's earnings, financial condition and capital requirements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data below should be read in
conjunction with the consolidated financial statements of the Company
and notes thereto and "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected
consolidated financial information for the five years ended December
31, 1999, is derived from the consolidated financial statements of the
Company, of which the years 1995 and 1996, have been audited by Arthur
Andersen LLP, independent public accountants, and the years 1997
through 1999 have been audited by Ernst & Young LLP, independent public
accountants.
Years ended December 31,
(Dollars and numbers of shares in ----------------------------------------
thousands except per share amounts) 1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
OPERATIONS STATEMENT INFORMATION:
Net sales $24,374 $21,286 $23,559 $23,625 $28,128
Costs and expenses:
Cost of sales 7,944 10,327 9,530 10,870 13,640
Selling, general and
administrative 12,442 10,771 10,814 10,254 10,346
Research and development 4,662 3,762 3,006 2,589 2,434
Research and development,
Aliminase[TM] clinical trial
expenses 708 2,165 - - 2,866
Charges related to ACI and
Aloe & Herbs - - - 1,750 -
Charges related to Oregon
Freeze Dry, Inc. - - - - 1,042
Interest expense (income), net 115 (304) (37) (233) (105)
Other income - - - - (62)
------ ------ ----- ------ ------
Income (loss) before income taxes (1,497) (5,435) 246 (1,605) (2,033)
Provision for income taxes 131 88 20 10 -
------ ------ ----- ------ ------
Net income (loss) $(1,628) $(5,523) $ 226 $(1,615) $(2,033)
====== ====== ===== ====== ======
Net income (loss) per common
share - basic and diluted(1) $ (0.22) $ (0.74) $ 0.02 $ (0.17) $ (0.22)
====== ====== ===== ====== ======
Weighted average shares used in
per share computations 7,933 8,798 8,953 9,320 9,376
BALANCE SHEET INFORMATION
(as of December 31):
Working capital $ 9,095 $13,910 $ 9,484 $ 9,716 $ 7,911
Total assets 27,934 31,202 25,796 24,247 23,493
Long-term debt, net of current
portion 88 - - - -
Total shareholders' investment $22,399 $27,757 $22,826 $21,363 $19,504
(1) For a description of the calculation of basic and diluted net income
(loss) per share, see Note Thirteen to the consolidated financial
statements.
ITEM 7. 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 carbohydrates
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 Fourteen to the 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 1998, the Company held cash and cash
equivalents of $2,453,000 and $3,931,000, respectively, a decrease of
$1,478,000. Net cash used by operating activities in 1999 was
$889,000, as compared to cash provided by operating activities in 1998
of $1,065,000. Significant cash outflows during 1999 included
investments in property and equipment of $963,000 and expenses related
to the Aliminase[TM] clinical trial of $2,866,000. Customers with
significant accounts receivable balances at the end of 1999 included
Mannatech, Inc. ($1,144,000) and McKesson/General Medical ($571,000);
and of these amounts, $1,533,000 had been collected as of March 8,
2000.
As of December 31, 1999, the Company had no material capital
commitments other than its leases and agreements with suppliers. In
March 1998, the Company, with four other investors, formed Aloe and
Herbs International, Inc., a Panamanian corporation, 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 L. 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 Rica corporation, which acquired the
land in April 1998. The Company received 1,500,000 shares of Aloe &
Herbs common stock, which represents a 19.3% ownership position, which
was increased to 28.2% in 1999, in exchange for providing expertise in
farming aloe plants and providing a cash advance to Rancho Aloe to be
used for the purchase of aloe plants. This cash advance of $187,000 is
evidenced by a note receivable, payable in installments, with the final
payment due in June 2000. The Company also advanced $300,000 to Aloe &
Herbs in November 1998 for the acquisition of an irrigation system to
improve production on the farm and allow harvesting of leaves year-
round. This advance was evidenced by a note receivable which is
payable in full in May 2000. The Company was also granted a five-year
warrant to purchase 300,000 shares of common stock of Aloe & Herbs. In
the fourth quarter of 1998, the Company fully reserved all amounts owed
to it by Aloe & Herbs, in the total amount of $487,000, due to the
start-up nature of the business. In 1999, the Company received
payments totaling $18,000 from Aloe & Herbs against the amount due.
The first shipment of leaves from Rancho Aloe to the Company was made
in March 1999 and the Company purchased a total of $364,000 of Aloe
vera L. leaves from Rancho Aloe during the remainder of the year.
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 had an outstanding
balance of $200,000 at December 31, 1999 to fund operating needs and
is being used to secure the letter of credit described below.
In November 1995, the Company signed a licensing agreement with a
supplier of calcium alginates and other wound care products. Under the
agreement, the Company has exclusive marketing rights for ten years to
advanced calcium alginate products for North and South America and in
the People's Republic of China. Under the agreement, the Company made
an up-front payment to the supplier of $500,000 in November 1995. 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 product launched in the third quarter of
1997. These payments resulted in an increase to other assets of the
Company. As of December 31, 1999, the net book value of this agreement
was $528,000. Additional payments totaling $167,000 are to be made to
the supplier as new products are delivered.
In February 1995, the Company entered into a supply agreement with
Oregon Freeze Dry, Inc. ("OFD"), 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 purchases made under the agreement. As of December 31, 1999, the
letter of credit was $1,100,000. OFD currently produces the
CarraSorb[TM] M Freeze-Dried Gel and The Carrington[R] (Aphthous Ulcer)
Patch for the Company. Both of these products represent new technology
and are in the early phase of marketing. The Company had approximately
$364,000 of CarraSorb[TM] M and Carrington[R] (Aphthous Ulcer) Patch
inventory on hand as of December 31, 1999.
The supply agreement also required 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 requirements 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. In December 1999, OFD agreed to add a
freeze-dried gel product as a listed product under the agreement. The
Company is continuing its effort to develop the market for its freeze-
dried products. Due to the unique technology of these products, the
effort has taken longer than was initially expected.
The current agreement expires in August 2000. The Company no longer
believes that it can satisfy the minimum purchase requirements of this
agreement and has established a reserve of $1,042,000 to cover its
estimated liability to OFD under the agreement. The Company is
currently negotiating with OFD regarding purchase arrangements beyond
the term of the current agreement.
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 future major
clinical studies and costs of filing new drug applications necessary to
develop its products to their full commercial potential. Additional
funds, therefore, may need to be raised through equity offerings,
borrowings, licensing arrangements or other means, and there is no
assurance that the Company will be able to obtain such funds on
satisfactory terms when they are needed.
The Company is subject to regulation by numerous governmental
authorities in the United States and other countries. Certain of the
Company's proposed products will require governmental approval prior to
commercial use. The approval process applicable to prescription
pharmaceutical products usually takes several years and typically
requires substantial expenditures. The Company and any licensees may
encounter significant delays or excessive costs in their respective
efforts to secure necessary approvals. Future United States or foreign
legislative or administrative acts could also prevent or delay
regulatory approval of the Company's or any licensees' products.
Failure to obtain requisite governmental approvals or failure to obtain
approvals of the scope requested could delay or preclude the Company or
any licensees from marketing their products, or could limit the
commercial use of the products, and thereby have a material adverse
effect on the Company's liquidity and financial condition.
Impact of Inflation
The Company does not believe that inflation has had a material impact
on its results of operations.
Fiscal 1999 Compared to Fiscal 1998
Net sales were $28,128,000 in 1999, compared with $23,625,000 in 1998.
Sales of Manapol[R] by Caraloe in the form of raw materials and
consumer nutritional products, increased 77.3%, from $7,187,000 in 1998
to $12,739,000 in 1999. This increase in Caraloe sales was offset by a
decrease in wound care sales of 6.4%. Total sales of the Company's
wound and skin care products in 1999 were $15,389,000 as compared to
$16,438,000 in 1998.
Of the 1999 total Manapol[R] sales, $11,982,000 was related to
the sale of bulk Manapol[R] powder. Caraloe currently sells bulk
Manapol[R] powder to Mannatech under a three-year, non-exclusive
supply and licensing agreement. The current agreement, which expires
in August 2000, was extended in January 2000 to August 2002. Sales to
Mannatech increased from $5,508,000 in 1998 to $11,422,000 in 1999.
In March 1999, Caraloe signed a supply and license agreement with For
Your Health, Inc., allowing For Your Health to purchase Manapol[R]
powder and market it in capsule form. In June 1999, Caraloe signed a
sales and license agreement with Nutra Vine also allowing Nutra Vine to
purchase Manapol[R] powder and market it in capsule form. In December
1998, Caraloe signed supply and license agreements with Eventus
International, Inc., allowing Eventus to market a variety of products
containing Manapol[R] powder to promote a natural, healthy lifestyle.
Sales to Eventus during the first year of this agreement were $271,000.
In July 1999, Caraloe launched its new AloeCeuticals[TM] line of
immune enhancing dietary supplements containing Manapol[R], which are
available in liquid capsule and tablet forms. These products will
be sold directly to health and nutrition stores or through
broker/distributors. They will also be sold through the Company's
Internet sites. Sales of these products in 1999 totaled $131,000.
Caraloe also continued to develop its contract manufacturing business
during 1999. In September 1998, Caraloe began to manufacture products
on a contract manufacturing basis for SkinCeuticals, Inc., a direct
sales company selling skin care products through licensed
professionals. Products manufactured include gels and creams utilizing
formulas developed by SkinCeuticals. In September 1999, Caraloe began
to produce nutritional beverages for NuSkin International, Inc., a
direct sales company selling nutritional products through a multi-level
sales organization. Total contract manufacturing sales in 1999 under
the agreements with SkinCeuticals and NuSkin were $292,000.
The Company's wound and skin care products are marketed domestically to
hospitals, nursing homes, home health care agencies and acute care
providers. This market has continued to be very competitive and price
sensitive as a result of pressures to control health care costs and has
become increasingly commodity oriented. In addition, the market is
heavily influenced by government reimbursement programs. The home
health care segment of the market again experienced significant turmoil
in 1999 as many of the Company's customers either went out of business
or postponed buying decisions due to changes in government
reimbursement programs. This had a negative impact on the Company's
wound care sales to that segment. Nursing homes were also impacted by
government regulations in 1999, as government-mandated reimbursement
changes due to go into effect in January 1999 were postponed until the
year 2000. Many nursing home facilities and the dealers who supply
them postponed buying decisions and liquidated inventory in
anticipation of the regulations taking effect. In response to these
market trends, the Company pursued a strategy to move its wound care
line of products toward value-added specialty products which focus more
on product performance rather than price alone, such as the
RadiaCare[TM] line of products for the management of the side effects
of cancer therapy.
The Company also sells its wound care products to international
distributors, primarily in Italy, Australia, Singapore, Mexico and
Argentina, with lesser sales to a number of Central and South American
countries. Total international sales in 1999 were $1,423,000.
Included in this amount were sales of $1,160,000 of wound care
products, which was an increase of $475,000 over 1998.
Sales of the Company's oral technology products increased from $278,000
in 1998 to $374,000 in 1999. Included in this line are products for
the management of oral mucositis/stomatitis and oral lesions and
ulcers. Sales of the Company's veterinary products decreased from
$146,000 in 1998 to $47,000 in 1999. These products were marketed on
behalf of the Company in 1999 by Farnam Companies, Inc., a leading
marketer of veterinary products.
Cost of sales increased from $10,870,000 to $13,640,000, or 25.5%. As
a percentage of sales, cost of sales increased from 46.0% to 48.5%.
The increase in cost of goods sold was largely attributable to product
mix, as sales in 1999 of Caraloe products were a greater percentage of
total sales than in 1998, 45.3% as compared to 30.4%. Caraloe products
have historically had a higher cost as a percentage of sales than wound
care products.
Selling, general and administrative expenses ("SG&&A") increased to
$10,346,000 from $10,254,000, or .9%. Selling expenses related to
wound care sales in 1999 were trimmed by $354,000 from the 1998 level
as the Company reduced expenditures in response to the changing market
conditions. Partially offsetting the decrease was an increase in the
selling and marketing expenses for Caraloe products of $297,000. This
increase primarily represents the costs for the development of
marketing materials supporting the launch of the AloeCeuticals[TM]
brand of Manapol[R] immune enhancing products.
Research and development ("R&D") expenses increased to $5,300,000 from
$2,589,000, or 104.7%. This increase was primarily the result of the
expenditure of $2,866,000 for the unsuccessful Aliminase[TM] clinical
trial. The Company continued its efforts in basic research during
1999, including work on a new and unique pectin in the inner gel of
Aloe vera L. which has potential near-term utility as a product to be
used in wound healing. Also included in the total R&D activities
during 1999 were various small clinical trials designed to collect data
in support of the Company's products.
In the fourth quarter of 1999, the Company determined that it could no
longer satisfy the minimum purchase requirements of its agreement with
Oregon Freeze Dry, Inc. and thus established a reserve of $1,042,000 to
cover its estimated liability to OFD.
In 1998, the Company established a reserve of $1,250,000 against its
investment in and notes and accounts receivable from ACI. In December
1999, ACI transferred to the Company 700,000 shares of Aloe & Herbs
common stock, previously pledged by ACI to secure one of its notes to
the Company, in satisfaction of the balance of $695,000 of principal
and interest owed on that note. In 1998, the Company also established
a reserve of $500,000 against its loans to Aloe & Herbs. During 1999,
the Company received $18,000 in repayment of these loans and
established a repayment program with Aloe & Herbs for the repayment of
the entire debt. See Note Six to the consolidated financial statements
for additional discussion of the ACI and Aloe & Herbs transactions.
Net interest income of $105,000 was realized in 1999, versus $233,000
in 1998, with the variance primarily due to lower cash balances in
1999.
There was no provision for income taxes in 1999 as compared to $10,000
in 1998. A tax benefit was not recognized in 1999 due to the Company's
recording an offsetting deferred tax asset valuation allowance. The
Company has provided a valuation allowance against all deferred tax
asset balances at December 31, 1999 and 1998 due to uncertainty
regarding realization of the asset.
The Company's net loss for 1999 was $2,033,000, versus a net loss of
$1,615,000 for 1998. The 1999 net loss was primarily due to the
$2,866,000 of costs for the Aliminase[TM] clinical trial plus the
effect of reserving $1,042,000 for the OFD contract. The 1998 net loss
was primarily due to the $1,750,000 in charges related to ACI and Aloe
& Herbs. The net loss per share was $.22 in 1999, compared to a net
loss per share of $.17 in 1998. Excluding the clinical trial expenses
in 1999 and reserves in 1999 and 1998, the net income for 1999 was $1.9
million, or $.20 per share, as compared to a net income in 1998 of
$135,000, or $.01 per share.
Fiscal 1998 Compared to Fiscal 1997
Net sales were $23,625,000 in 1998, compared with $23,559,000 in 1997.
Sales of consumer nutritional products by Caraloe, Inc., the Company's
consumer products subsidiary, increased 32.0%, from $5,444,000 in 1997
to $7,187,000 in 1998. This increase in Caraloe sales was offset by a
decrease in wound care sales of 9.4%. Total sales of the Company's
wound and skin care products in 1998 were $16,292,000 as compared to
$17,990,000 in 1997. Sales to Mannatech increased from $3,547,000 in
1997 to $5,508,000 in 1998.
Sales of the Company's oral technology products, which were launched in
late 1997, were $278,000 in 1998. Included in this line are products
for the management of oral mucositis/stomatitis and oral lesions and
ulcers. Sales of the Company's veterinary products increased from
$125,000 in 1997 to $146,000 in 1998. These products were marketed on
behalf of the Company in 1998 by Farnam Companies, Inc., a leading
marketer of veterinary products.
Cost of sales increased from $9,530,000 to $10,870,000, or 14.1%. As a
percentage of sales, cost of sales increased from 40.5% to 46.0%. The
increase in cost of goods sold was largely attributable to product mix,
as sales in 1998 of Caraloe products were a greater percentage of total
sales than in 1997, 30.4% as compared to 23.1%, and Caraloe products
have a higher cost as a percentage of sales than wound care products.
SG&A expenses decreased to $10,254,000 from $10,814,000, or 5.2%.
Selling expenses related to wound care sales in 1998 were trimmed by
$753,000 from the 1997 level as the Company reduced expenditures in
response to the changing market conditions. Partially offsetting the
decrease was an increase in Caraloe selling and marketing expenses of
$310,000. This increase primarily represented costs for additional
personnel for sales and formulation development in support of Caraloe's
raw material and contract manufacturing efforts.
R&D expenses decreased to $2,589,000 from $3,006,000, or 13.9%. This
decrease was primarily the result of the completion of the Company's
preclinical pharmacology studies in early 1998. Included in the total
R&D activities during 1998 were various small clinical trials designed
to collect data in support of the Company's products, including the
reformulation of Aliminase[TM].
In 1998, the Company established a reserve of $1,250,000 against its
investment in and notes and accounts receivable from ACI and a reserve
of $500,000 against its loans to Aloe & Herbs. See Note Six to the
consolidated financial statements for additional discussion of the ACI
and Aloe & Herbs transactions.
Net interest income of $233,000 was realized in 1998, versus $37,000 in
1997, with the variance primarily due to the costs associated with the
repurchase of the Series E Preferred Stock in 1997.
Provision for income taxes was $10,000 in 1998 as compared to $20,000
in 1997. A tax benefit was not recognized in 1998 due to the Company's
recording an offsetting deferred tax asset valuation allowance. The
Company had provided a valuation allowance against all deferred tax
asset balances at December 31, 1998 and 1997 due to uncertainty
regarding realization of the asset.
The Company's net loss for 1998 was $1,615,000, versus net income of
$226,000 for 1997. This change was primarily the result of charges
related to ACI and Aloe & Herbs in the amount of $1,750,000. Net loss
per share was $.17 in 1998, compared to net income per share of $.02 in
1997. Net income per share in 1998, excluding the charges related to
ACI and Aloe & Herbs, was $.01.
Year 2000 Issues
Like many organizations, the Company faced the prospect of what would
happen to computers and other microprocessor-controlled equipment using
two-digit data fields when they encountered the Year 2000, which could
be mistaken as the Year 1900. This was known as the Year 2000 issue.
With respect to this issue, the Company undertook efforts to assess
the impact on its information technology systems, non-information
technology systems, such as production and laboratory equipment, and
third-party business partners such as vendors and customers. The
results of this assessment, which included analysis and compliance
testing, showed that virtually all of the Company's internal systems,
as well as the systems of almost all of its vendors and customers, were
prepared to handle the Year 2000 issue without interruption of sales or
service. Nevertheless, the Company prepared an assessment of its most
reasonably likely worst-case scenario for dealing with Year 2000
related disruptions and estimated that it would spend approximately
$100,000 on equipment and software remediation and approximately
$500,000 on a buildup of inventory.
The Company did find several minor instances of software programs which
needed upgrading, and several equipment items which needed upgrading or
replacing, in order to be Year 2000 ready. The Company spent
approximately $34,000 on the upgrading or replacement of such programs
and equipment.
The Company spent approximately $500,000 on its inventory buildup
program, but did not experience any unusual levels of order demand in
the fourth quarter of 1999 relating to Year 2000 concerns. The Company
has subsequently been reducing its inventory to normal levels excluding
this buildup.
The Company did not experience any significant disruptions to its
business systems or equipment as a result of Year 2000 issues, nor does
it expect to experience any such disruptions to its systems in the
future. The Company also did not experience any disruptions in the
delivery of products or services obtained from its vendors as a result
of Year 2000 issues.
Forward Looking Statements
All statements other than statements of historical fact contained in
this report, including but not limited to statements in this
Management's Discussion and Analysis of Financial Condition and Results
of Operations (and similar statements contained in the Notes to
Consolidated Financial Statements) concerning the Company's financial
position, liquidity, capital resources and results of operations, its
prospects for the future and other matters, are forward-looking
statements. Forward-looking statements in this report generally
include or are accompanied by words such as "anticipate", "believe",
"estimate", "expect", "intend" or words of similar import. Such
forward-looking statements include, but are not limited to, statements
regarding the Company's plan or ability to achieve growth in demand for
or sales of products, to reduce expenses and manufacturing costs and
increase gross margin on existing sales, to initiate, continue or
complete clinical and other research programs, to obtain financing when
it is needed, to fund its operations from revenue and other available
cash resources, to enter into licensing agreements, to develop and
market new products and increase sales of existing products, to obtain
government approval to market new products, to sell all of the freeze-
dried, calcium alginate and certain other wound care products that it
is required to purchase under its existing agreements with the
suppliers of those products, to purchase sufficient supplies of Aloe
vera L. leaves at reasonable prices, and to properly assess its
situation with respect to Year 2000 issues and avoid any material
adverse effects of the Year 2000 problem, as well as various other
matters.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, no assurance can be given
that such expectations will prove correct. Factors that could cause
the Company's results to differ materially from the results discussed
in such forward-looking statements include but are not limited to the
possibilities that the Company may be unable to obtain the funds needed
to carry out large scale clinical trials and other research and
development projects, that the results of the Company's clinical trials
may not be sufficiently positive to warrant continued development and
marketing of the products tested, that new products may not receive
required approvals by the appropriate government agencies or may not
meet with adequate customer acceptance, that the Company may not be
able to obtain financing when needed, that the Company may not be able
to obtain appropriate licensing agreements for products that it wishes
to market or products that it needs assistance in developing, that the
Company's efforts to improve its sales and reduce its costs may not be
sufficient to enable it to fund its operating costs from revenues and
available cash resources, that one or more of the customers that the
Company expects to purchase significant quantities of products from the
Company or Caraloe may fail to do so, that competitive pressures may
require the Company to lower the prices of or increase the discounts on
its products, that the Company's sales of products it is contractually
obligated to purchase from suppliers may not be sufficient to enable
and justify its fulfillment of those contractual purchase obligations,
that other parties who owe the Company substantial amounts of money may
be unable to pay what they owe the Company, that the Company may suffer
adverse effects from Year 2000 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency
The Company's manufacturing operation in Costa Rica accounted for 62%
of cost of sales for the year ended December 31, 1999. As a result,
the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or economic
conditions in Costa Rica. When the U.S. Dollar strengthens against the
Costa Rica Colon, the cost of sales decreases. During 1999, the
exchange rate from U.S. Dollars to Costa Rica Colones increased by 10%
to 297 at December 31, 1999. The effect of an additional 10%
strengthening in the value of the U.S. Dollar relative to the Costa
Rica Colones would result in an increase of $315,000 in gross profit.
The Company's sensitivity analysis of the effects of changes in foreign
currency rates does not factor in a potential change in sales levels or
local currency prices.
Sales of products to foreign markets comprised 5% of sales for 1999.
These sales are generally denominated in U.S. Dollars. The Company
does not believe that changes in foreign currency exchange rates or
weak economic conditions in foreign markets in which the Company
distributes its product would have a significant effect on operating
results. If sales to foreign markets increase in future periods, the
effects could become significant.
For quantitative and qualitative disclosures about market risk related
to the supply of Aloe vera L. leaves, see "Business."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to Item 8 is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with the Company's
independent public accountants on accounting matters or financial
disclosure during 1998, 1999 or 2000 (to the date of filing of this
report).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Form 10-K is hereby incorporated
by reference from the information appearing under the captions
"Election of Directors," "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive
Proxy Statement relating to its 2000 annual meeting of shareholders,
which will be filed pursuant to Regulation 14A within 120 days after
the Company's fiscal year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K is hereby incorporated
by reference from the information appearing under the caption
"Executive Compensation" in the Company's definitive Proxy Statement
relating to its 2000 annual meeting of shareholders, which will be
filed pursuant to Regulation 14A within 120 days after the Company's
fiscal year ended December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 of Form 10-K is hereby incorporated
by reference from the information appearing under the captions
"Security Ownership of Management" and "Principal Shareholders" in the
Company's definitive Proxy Statement relating to its 2000 annual
meeting of shareholders, which will be filed pursuant to Regulation 14A
within 120 days after the Company's fiscal year ended December 31,
1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Form 10-K is hereby incorporated
by reference from the information appearing under the caption "Certain
Transactions" in the Company's definitive Proxy Statement relating to
its 2000 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the Company's fiscal year ended
December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a)(1) Financial Statements.
Reference is made to the index on page F-1 for a list of all
financial statements filed as a part of this Annual Report.
Other schedules have been omitted because the information
required to be set forth therein is not applicable or is
shown in the financial statements or notes thereto.
(2) Financial Statement Schedules.
Reference is made to the index on page F-1 for a list of all
financial statement schedules filed as a part of this Annual
Report.
(3) Exhibits.
Reference is made to the Index to Exhibits on pages E-1
through E-9 for a list of all exhibits filed as a part of
this Annual Report.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the last
quarter of its fiscal year ended December 31, 1999.
CARRINGTON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets - December 31, 1998 and 1999 F - 2
Consolidated Statements of Operations - years ended
December 31, 1997, 1998 and 1999 F - 3
Consolidated Statements of Shareholders' Investment - years
ended December 31, 1997, 1998 and 1999 F - 4
Consolidated Statements of Cash Flows - years ended
December 31, 1997, 1998 and 1999 F - 5
Notes to Consolidated Financial Statements F - 6
Financial Statement Schedule Valuation and
Qualifying Accounts F - 18
Report of Ernst & Young LLP, Independent Public F - 19
Accountants
Consolidated Balance Sheets
(Amounts in thousands, except share amounts)
December 31,
1998 1999
------- -------
ASSETS:
Current Assets:
Cash and cash equivalents $ 3,931 $ 2,453
Accounts receivable, net of allowance
for doubtful accounts of $922 and $304
in 1998 and 1999, respectively 2,961 3,690
Inventories 4,969 5,184
Prepaid expenses 739 573
------- -------
Total current assets 12,600 11,900
Property, plant and equipment, net 11,050 10,985
Other assets 597 608
------- -------
Total assets $ 24,247 $ 23,493
======= =======
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Note payable $ - $ 200
Accounts payable 1,369 1,871
Accrued liabilities 1,515 1,918
------- -------
Total current liabilities 2,884 3,989
Commitments and contingencies
SHAREHOLDERS' INVESTMENT:
Common stock, $.01 par value, 30,000,000
shares authorized, 9,350,064 and 9,440,921
shares issued and outstanding at December
31, 1998 and 1999, respectively 94 94
Capital in excess of par value 51,736 51,910
Deficit (30,467) (32,500)
------- -------
Total shareholders' investment 21,363 19,504
------- -------
Total liabilities and shareholders' investment $ 24,247 $ 23,493
======= =======
The accompanying notes are an integral part of these balance sheets.
F-2
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Years Ended December 31,
1997 1998 1999
------- ------- -------
Net sales $ 23,559 $ 23,625 $ 28,128
Costs and expenses:
Cost of sales 9,530 10,870 13,640
Selling, general and administrative 10,814 10,254 10,346
Research and development 3,006 2,589 2,434
Research and development,
Aliminase[TM] clinical trial expenses - - 2,866
Charges related to ACI and Aloe & Herbs - 1,750 -
Charges related to Oregon Freeze Dry, Inc. - - 1,042
Interest income, net (37) (233) (105)
Other income - - (62)
------- ------- -------
Income (loss) before income taxes 246 (1,605) (2,033)
Provision for income taxes 20 10 -
------- ------- -------
Net income (loss) 226 (1,615) (2,033)
Dividends and income attributed to
preferred shareholders (70) - -
Net income (loss) available to common
shareholders $ 156 $ (1,615) $(2,033)
======= ======= =======
Net income (loss) available to common
shareholders per share - basic and
diluted $ 0.02 $ (0.17) $ (0.22)
======= ======= =======
The accompanying notes are an integral part of these statements.
F-3
Consolidated Statements of Shareholders' Investment
For the Years Ended December 31, 1997, 1998 and 1999
(Amounts in thousands)
Capital in Total
Preferred Common Excess of Shareholders'
Stock Stock Par Value Deficit Investment
Shares Amount Shares Amount
------ ------ ------ ------ --------- ------- ----------
Balance,
January 1, 1997 1 $ 66 8,870 $ 89 $56,680 $(29,078) $27,757
Issuance of common stock for
employee stock purchase plan - - 21 - 153 - 153
Sale of common stock net of
issuance costs of $21 - - 415 4 2,471 - 2,475
Repurchase of convertible
preferred stock (Series E),
$100 Par (1) (66) - - (7,719) - (7,785)
Net income and comprehensive
income - - - - - 226 226
---------------------------------------------------------------------------------------------
Balance,
December 31, 1997 - - 9,306 93 51,585 (28,852) 22,826
Issuance of common stock for
employee stock purchase plan - - 44 1 151 - 152
Net loss and comprehensive
loss - - - - - (1,615) (1,615)
---------------------------------------------------------------------------------------------
Balance,
December 31, 1998 - - 9,350 94 51,736 (30,467) 21,363
Issuance of common stock for
employee stock purchase plan - - 81 - 149 - 149
Issuance of common stock for
employee stock option plan - - 10 - 25 - 25
Net loss and comprehensive
loss - - - - - (2,033) (2,033)
---------------------------------------------------------------------------------------------
Balance,
December 31, 1999 - $ - 9,441 $ 94 $51,910 $(32,500) $19,504
The accompanying notes are an integral part of these statements.
F-4
Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended December 31,
1997 1998 1999
------ ------ ------
Cash flows provided by (used in)
operating activities:
Net income (loss) $ 226 $(1,615) $(2,033)
Adjustments to reconcile income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,196 1,043 1,028
Charge related to ACI investment - 600 -
Charge related to Oregon Freeze Dry, Inc. - - 1,042
Provision for inventory obsolescence 523 53 -
Changes in assets and liabilities:
Accounts receivable, net (1,545) 129 (729)
Inventories (1,903) (19) (215)
Prepaid expenses 40 (411) (177)
Other assets (360) 1,340 (11)
Accounts payable and accrued liabilities (76) (55) 206
------ ------ ------
Net cash provided by (used in)
operating activities (1,899) 1,065 (889)
Cash flows used in investing activities:
Purchases of property, plant and equipment (295) (1,278) (963)
------ ------ ------
Net cash used in investing activities (295) (1,278) (963)
Cash flows provided by (used in)
financing activities:
Issuances of common stock 2,628 152 174
Retirement of preferred stock (7,785) - -
Proceeds of short-term debt - - 200
Principal payments of capital lease
obligations (32) (31) -
------ ------ ------
Net cash provided by (used in) financing
activities (5,189) 121 374
------ ------ ------
Net decrease in cash and cash
equivalents (7,383) (92) (1,478)
Cash and cash equivalents at beginning of year 11,406 4,023 3,931
------ ------ ------
Cash and cash equivalents at end of year $ 4,023 $ 3,931 $ 2,453
====== ====== ======
Supplemental Disclosure of Cash Flow
Information
Cash paid during the year for interest $ 10 $ 3 $ 7
Cash paid during the year for income taxes - 44 -
The accompanying notes are an integral part of these statements.
F-5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. BUSINESS
Carrington Laboratories, Inc. (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 carbohydrates and other natural product
therapeutics for the treatment of major illnesses, the dressing and
management of wounds, and nutritional supplements.
The Company's Medical Services Division offers a comprehensive line of
human wound management products to hospitals, nursing homes, alternative
care facilities and the home health care market and also offers vaccines
and wound and skin care products to the veterinary market. Sales are
primarily in the United States through a network of distributors.
Caraloe, Inc., a subsidiary, markets or licenses consumer products and
bulk raw material products. Principal sales of Caraloe, Inc., are bulk
raw material products which are sold to United States manufacturers who
include the high quality extracts from Aloe vera L. in their finished
products.
The Company's products are produced at its plants in Irving, Texas and in
Costa Rica. A portion of the Aloe vera L. leaves used for manufacturing
the Company's products are grown on a Company-owned farm in Costa Rica.
The remaining leaves are purchased from producers in Costa Rica, Mexico,
Venezuela and Central America.
NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of Carrington Laboratories, Inc., and its
subsidiaries, all of which are wholly owned. All intercompany accounts
and transactions have been eliminated in consolidation.
CASH EQUIVALENTS The Company's policy is that all highly liquid
investments purchased with a maturity of three months or less at date of
acquisition are considered to be cash equivalents unless otherwise
restricted.
INVENTORY Inventories are recorded at the lower of cost (first-in, first-
out) or market.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are
recorded at cost less accumulated depreciation. Land improvements,
buildings and improvements, furniture and fixtures and machinery and
equipment are depreciated on the straight-line method over their
estimated useful lives. Leasehold improvements and equipment under
capital leases are amortized over the terms of the respective leases.
LONG-LIVED ASSETS The Company regularly reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying amounts of the assets may not be recoverable.
Recoverability is based on whether the carrying amount of the asset
exceeds the current and anticipated undiscounted cash flows related to
the asset.
TRANSLATION OF FOREIGN CURRENCIES The functional currency for
international operations (primarily Costa Rica) is the U.S. Dollar.
Accordingly, such foreign entities translate monetary assets and
liabilities at year-end exchange rates, while non-monetary items are
translated at historical rates. Revenue and expense accounts are
translated at the average rates in effect during the year, except for
depreciation and cost of sales, which are translated at historical rates.
Translation adjustments and transaction gains or losses are recognized
in the consolidated statement of operations in the year of occurrence.
REVENUE RECOGNITION The Company recognizes revenue when title to the
goods transfers and collectability is reasonably assured. For the
majority of the Company's sales, this occurs at the time of shipment.
The Company has rebate arrangements with certain distributors. These
rebates are estimated and recorded at the time of sale.
FEDERAL INCOME TAXES Deferred income taxes reflect the tax effect of
temporary differences between the amount of assets and liabilities
recognized for financial reporting and tax purposes. These deferred
taxes are measured by applying currently enacted tax laws. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are provided against net deferred tax assets when
realization is not reasonably assured.
RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred. Certain laboratory and test equipment determined to have
alternative future uses in other research and development activities has
been capitalized and is depreciated as research and development expense
over the life of the equipment.
ADVERTISING Advertising expense is charged to operations in the
year in which such costs are incurred. Advertising expense has not been
significant for 1997, 1998 or 1999.
STOCK-BASED COMPENSATION The Company has elected to follow APB Opinion
No. 25, "Accounting for Stock Issued to Employees", in the primary
financial statements and to provide supplementary disclosures required by
FASB Statement No. 123, "Accounting for Stock-Based Compensation" (see
Note Nine).
NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is based
on the weighted average number of shares of common stock outstanding
during the year and excludes any dilutive effects of options, warrants
and convertible securities. Diluted net income (loss) per share includes
the effects of options, warrants and convertible securities unless the
effect is antidilutive.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE THREE. INVENTORIES
The following summarizes the components of inventory at December 31, 1998
and 1999, in thousands:
1998 1999
------------------------------------------------------------------
Raw materials and supplies $1,135 $2,011
Work-in-process 1,182 673
Finished goods 2,652 2,500
------------------------------------------------------------------
Total $4,969 $5,184
------------------------------------------------------------------
The inventory balances are net of $525,000 and $430,000 of reserves for
obsolete and slow moving inventory at December 31, 1998 and 1999,
respectively.
NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1998 and 1999, in thousands:
Estimated
1998 1999 Useful Lives
--------------------------------------------------------------------
Land and improvements $ 1,389 $ 1,389
Buildings and improvements 8,862 8,692 7 to 25 years
Furniture and fixtures 930 873 4 to 8 years
Machinery and equipment 8,165 9,505 3 to 10 years
Leasehold improvements 928 349 1 to 3 years
Equipment under capital leases 150 150 4 years
--------------------------------------------------------------------
Total 20,424 20,958
Less accumulated depreciation
and amortization 9,374 9,973
--------------------------------------------------------------------
Property, plant and
equipment, net $11,050 $10,985
====== ======
The Company's net investment in property, plant and equipment in Costa
Rica at December 31, 1998 and 1999 was $4,310,000 and $4,518,000,
respectively.
NOTE FIVE. ACCRUED LIABILITIES
The following summarizes significant components of accrued liabilities at
December 31, 1998 and 1999, in thousands:
1998 1999
---------------------------------------------------------------
Accrued payroll $ 213 $ 231
Accrued sales commissions 185 36
Accrued taxes 377 200
Oregon Freeze Dry Reserve (see Note Ten) - 698
Other 740 753
---------------------------------------------------------------
Total $1,515 $1,918
---------------------------------------------------------------
NOTE SIX. CHARGES RELATED TO ACI AND ALOE & HERBS
The Company had reserved approximately $0.1 million at December 31, 1997
to cover potential exposures on approximately $1.1 million of investment
in and notes and accounts receivable from ACI. In 1998, the Company
increased the reserves against its investment and notes and accounts
receivable balances related to ACI by approximately $1.2 million to fully
reserve all amounts related to ACI. During 1999, ACI paid $40,000 on its
obligations to the Company. Additionally, in 1999, ACI assigned 700,000
shares in Aloe & Herbs in repayment of $695,000 of principal and interest
on its obligations to the Company.
Beginning in 1998, the Company invested a total of approximately $0.5
million in Aloe & Herbs and its subsidiary Rancho Aloe (collectively
"Aloe & Herbs"), an aloe farm close to the Company's existing farm in
Costa Rica. The Company obtained a 19.3% equity interest in Aloe & Herbs
in return for agreeing to provide farming expertise, working capital and
Aloe vera L. plants. The Company's ownership in Aloe & Herbs was
increased to 28.2% through the assignment of shares by ACI. The Company
accounts for its investment in the Common Stock of Aloe & Herbs under the
equity method, however, as of December 31, 1999 Aloe & Herbs had not
generated net income and thus the investment remains at a zero carrying
amount (see below).
Aloe & Herbs faced substantial capital requirements during 1999 and 2000
for debt payments, ongoing investments in aloe plants and other general
start-up costs. Consequently, in 1998 the Company fully reserved the $0.5
million in notes and accounts receivable due from Aloe & Herbs due to the
risk and uncertainty of Aloe & Herbs' ability to repay the amounts due
the Company. Aloe & Herbs successfully met the third party debt
obligations that it owed in 1999, and is currently seeking to refinance
its remaining third party debt obligation. The Company received
repayments of $18,000 during 1999 for amounts due from Rancho Aloe and
has established a repayment program with Aloe & Herbs for the repayment
of the entire debt.
NOTE SEVEN. LINE OF CREDIT
The Company has an agreement with a bank for a $3 million line of credit,
collateralized by accounts receivable and inventory. This credit
facility is available for operating needs and was used to issue a letter
of credit in the amount of $1.1 million at December 31, 1999
collateralizing a supply agreement with the Company's supplier of freeze-
dried products (see Note Ten). The interest rate on this credit facility
is equal to the bank's prime rate. As of December 31, 1999 there was
$200,000 outstanding on the credit line. There was no balance
outstanding at December 31, 1998.
NOTE EIGHT. PREFERRED STOCK
SERIES E SHARES The Series E Shares, issued in October 1996, were
convertible into shares of the Company's common stock beginning on
December 20, 1996, and prior to October 21, 1999, at a conversion price
per share equal to the lower of $25.20 (120% of the market price per
share of the Company's common stock as determined at the time of issuance
of the Series E Shares) or 87% of the market price immediately preceding
the conversion date. In early 1997, the Company's Board of Directors
concluded that it was in the best interest of the Company and its
shareholders that the Company repurchase the Series E Shares. In March
1997, the Company completed a repurchase of 50% of the Series E Shares
for $3,832,000, a premium of 13% over the original purchase price. In
May 1997, the Company repurchased the remaining shares of its Series E
Shares for a total cash purchase price of $3,852,000. For both
transactions, amounts paid to preferred shareholders in excess of par
totaled $70,000 more than the embedded deemed dividend of $986,000
recognized in 1996. This additional deemed dividend was used in the net
income (loss) per share calculation in 1997 to reduce net income
available to common shareholders.
NOTE NINE. COMMON STOCK
PRIVATE PLACEMENT OF COMMON STOCK In June 1997, the Company sold 415,000
shares of common stock at a price of $6.00 per share. Total proceeds,
net of issuance costs, were $2,454,000.
SHARE PURCHASE RIGHTS PLAN The Company has a share purchase rights
plan which provides, among other rights, for the purchase of common stock
by certain existing common stockholders at significantly discounted
amounts in the event a person or group acquires or announces the intent
to acquire 20% or more of the Company's common stock. The rights expire
in 2001 and may be redeemed at any time at the option of the Board of
Directors for $.01 per right.
EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase
Plan under which employees may purchase common stock at a price equal to
the lesser of 85% of the market price of the Company's common stock on
the last business day preceding the enrollment date (defined as January
1, April 1, July 1 or October 1 of any plan year) or 85% of the market
price on the last business day of each month. A maximum of 500,000
shares of common stock was reserved for purchase under this Plan. As of
December 31, 1999, a total of 222,226 shares had been purchased by
employees at prices ranging from $1.65 to $29.54 per share.
STOCK OPTIONS The Company has an incentive stock option plan which was
approved by the shareholders in 1995 under which incentive stock options
and nonqualified stock options may be granted to employees, consultants
and non-employee directors. Options are granted at a price no less than
the market value of the shares on the date of the grant, except for
incentive options to employees who own more than 10% of the total voting
power of the Company's common stock, which are granted at a price no less
than 110% of the market value. Employee options are normally granted for
terms of 10 years. Options granted prior to December 1998 normally
vested at the rate of 25% per year beginning on the first anniversary of
the grant date. Options granted in or subsequent to December 1998
normally vest at the rate of 33-1/3% per year beginning on the first
anniversary of the grant date, but certain options granted in December
1998 and 1999 were 25%, 50% or 100% vested on the grant date, with the
remainder of each option vesting in equal installments on the first,
second and third anniversaries of the grant date. Options to non-
employee directors have terms of four years and are 100% vested on the
grant date. The Company has reserved 1,500,000 shares of common stock
for issuance under the this Plan. As of December 31, 1999 options to
purchase 114,926 shares were available for future grants under the Plan.
The following summarizes stock option activity for each of the three
years ended December 31, 1997, 1998 and 1999 (shares in thousands):
Weighted
Average
Exercise
Shares Price Per Share Price
-------------------------------------------------------------------
Balance, Janurary 1, 1997 667 $ 6.25 to $47.75 $21.99
Granted 470 $ 5.31 to $ 7.50 $ 6.84
Lapsed or canceled (178) $ 7.50 to $47.75 $18.38
-------------------------------------------------------------------
Balance, December 31, 1997 959 $ 5.31 to $47.75 $15.19
Granted 678 $ 2.50 to $13.13 $ 3.26
Lapsed or canceled (249) $ 4.63 to $35.25 $11.02
-------------------------------------------------------------------
Balance, December 31, 1998 1,388 $ 2.50 to $28.75 $ 4.58
Granted 345 $ 2.06 to $ 3.63 $ 2.41
Lapsed or canceled 316 $ 2.50 to $27.00 $ 4.71
Exercised 10 $ 2.50 to $ 2.50 $ 2.50
-------------------------------------------------------------------
Balance, December 31, 1999 1,407 $ 2.06 to $28.75 $ 4.05
-------------------------------------------------------------------
Options exercisable at
December 31, 1999 553 $ 2.50 to $28.75 $ 4.68
-------------------------------------------------------------------
Options exercisable at
December 31, 1998 417 $ 2.50 to $28.75 $ 5.71
-------------------------------------------------------------------
Options exercisable at
December 31, 1997 314 $ 7.50 to $47.75 $20.87
-------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------ -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
---------------------------------------------------------------------
$2.06 $ 5.25 1,258 8.83 years $3.48 455 $3.60
6.00 28.75 149 6.61 8.94 98 9.67
---------------------------------------------------------------------
$2.06 $28.75 1,407 8.60 years $4.05 553 $4.68
---------------------------------------------------------------------
The Company accounts for employee stock-based compensation under APB
Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost been determined based on the fair value of
options at their grant dates consistent with the method of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net income (loss) and diluted
net income (loss) available to common shareholders per share would have
been the following pro forma amounts:
-------------------------------------------------------------------
1997 1998 1999
-------------------------------------------------------------------
Net income (loss)
(in thousands):
As reported $ 226 $(1,615) $(2,033)
Pro forma (2,199) (4,155) (3,411)
Diluted net income (loss) available
to common shareholders per share:
As reported $ 0.02 $ (0.17) (0.22)
Pro forma (0.25) (0.96) (0.36)
-------------------------------------------------------------------
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the pro forma compensation
cost may not be representative of the pro forma cost to be expected in
future years.
The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants to employees in 1997,
1998, and 1999, respectively: risk-free interest rates of 6.13%, 5.38%
and 6.00%, expected volatility of 57.0%, 54.7% and 29.8% and expected
lives of 5.0, 2.4 and 2.9 years. The Company used the following
weighted-average assumptions for grants to directors in 1997, 1998 and
1999: expected dividend yields of 0% and expected lives of 4.0 years.
The weighted average fair values of options granted were $6.84, $1.05
and $0.64 in 1997, 1998, and 1999, respectively.
STOCK WARRANTS From time to time, the Company has granted warrants to
purchase common stock to the Company's research consultants and other
persons rendering services to the Company. The exercise price of
such warrants was normally the market price or in excess of the
market price of the common stock at date of issuance. The following
summarizes warrant activity for each of the periods ending December
31, 1997, 1998, and 1999 (shares in thousands):
Weighted
Average
Shares Price Per Share Exercise
Price
-------------------------------------------------------------------
Balance, January 1, 1997 51 $ 9.75 to $20.13 $15.03
-------------------------------------------------------------------
Balance, December 31, 1997 51 $ 9.75 to $20.13 $15.03
Lapsed or canceled 10 $ 9.75 $ 9.75
-------------------------------------------------------------------
Balance, December 31, 1998 41 $13.00 to $20.13 $16.32
Issued 50 $ 3.50 $ 3.50
Lapsed or canceled (26) $16.00 to $19.75 $16.87
-------------------------------------------------------------------
Balance, December 31, 1999 65 $ 3.50 to $20.13 $ 6.24
-------------------------------------------------------------------
Warrants exercisable at
December 31, 1999 65 $ 3.50 to $20.13 $ 6.24
Warrants outstanding at December 31, 1999 had a weighted average
remaining contractual life of 3.88 years.
COMMON STOCK RESERVED At December 31, 1999 the Company had reserved
a total of 1,864,892 common shares for future issuance relating to the
employee stock purchase plan, stock option plans and stock warrants,
disclosed above.
NOTE TEN. COMMITMENTS AND CONTINGENCIES
The Company conducts a significant portion of its operations from an
office/ warehouse/distribution facility and an office/laboratory
facility under operating leases that expire in 2001. In addition,
the Company leases certain office equipment under operating leases that
expire over the next three years. The Company's commitments under
noncancellable operating leases as of December 31, 1999 are as follows,
in thousands:
Years Ending December 31,
-------------------------------------------------------------------
2000 $ 654
2001 467
2002 53
2003 53
-------------------------------------------------------------------
Total minimum lease payments $1,227
-------------------------------------------------------------------
Total rental expense under operating leases was $465,000, $451,000
and $455,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
In February 1995, the Company entered into a commitment to purchase
$2.5 million of freeze-dried products from Oregon Freeze Dry, Inc.
("OFD") 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 (see Note
Seven). The Company has made purchases pursuant to this commitment of
$245,000, $95,000 and $54,000 in 1997, 1998 and 1999, respectively. At
December 31, 1999, the Company had made prepayments of $672,000 toward
future deliveries under the commitment.
In the fourth quarter of 1999, the Company determined that it could no
longer satisfy the minimum purchase requirements of the agreement and
thus the Company has 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. The Company is currently negotiating with OFD regarding
purchase arrangements beyond the term of the current agreement.
NOTE ELEVEN. INCOME TAXES
The tax effects of temporary differences that gave rise to deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1999 were
as follows, in thousands:
1998 1999
---------------------------------------------------------------
Net operating loss carryforward $ 14,391 $ 14,090
Research and development
and other credits 867 748
Property, plant and equipment 259 307
Patents 285 270
Inventory 401 368
Other, net 244 600
Bad debt reserve 568 549
Oregon Freeze Dry reserve - 354
Less - Valuation allowance (17,015) (17,286)
------- -------
$ 0 $ 0
======= =======
The Company has provided a valuation allowance against the entire
deferred tax asset at December 31, 1998 and 1999 due to the uncertainty
as to the realization of the asset.
The provisions for income taxes for the years ended December 31, 1997,
1998 and 1999 consisted of the following, in thousands:
1997 1998 1999
-------------------------------------------------------------------
Current provision $ 20 $ 10 $ -
Deferred provision, net - - -
-------------------------------------------------------------------
Total provision $ 20 $ 10 $ -
-------------------------------------------------------------------
The differences (expressed as a percentage of pre-tax income or loss)
between the statutory and effective income tax rates are as follows:
1997 1998 1999
-------------------------------------------------------------------
Statutory tax rate 34.0% (34.0%) (34.0%)
Unrecognized deferred tax
benefit/change in valuation allowance (20.8) 34.0 34.0
Other (4.9) - -
-------------------------------------------------------------------
Effective tax rate 8.3% 0.0% 0.0%
-------------------------------------------------------------------
At December 31, 1999, the Company had net operating loss carryforwards
of approximately $41.4 million for federal income tax purposes, which
began to expire in 1999, and research and development tax credit
carryforwards of approximately $748,000, which began to expire in 1999,
all of which are available to offset federal income taxes due in future
periods. The Company had a $6 million net operating loss carryforward
expire during the year ended December 31, 1999. Additionally, $15,000
in research and development tax credits expired in 1999. The Company
has approximately $28,000 in alternative minimum tax credits which do
not expire.
NOTE TWELVE. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customers are not concentrated in any
specific geographic region but are concentrated in the health care
industry. Significant sales were made to three customers. McKesson
HBOC/General Medical accounted for 12%, 11% and 5%; and Owens & Minor
accounted for 11%, 10% and 9%; of the Company's net sales in 1997,
1998 and 1999, respectively. Sales to Mannatech, Inc., accounted for
15%, 23% and 41% of the Company's net sales in 1997, 1998 and 1999,
respectively. Accounts receivable from Mannatech represented 28% of
gross accounts receivable at December 31, 1999. The Company performs
ongoing credit evaluations of its customers' financial condition and
establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers and historical trends
and other information.
NOTE THIRTEEN. NET INCOME (LOSS) PER SHARE
Basic net income (loss) available to common shareholders per share was
computed by dividing net income (loss) available to common shareholders
by the weighted average number of common shares outstanding of
8,953,000, 9,320,000 and 9,376,000 in 1997, 1998, and 1999,
respectively.
In calculating the diluted net loss available to common shareholders
per share for 1998 and 1999, no effect was given to options, warrants
or convertible securities, because the effect of including these
securities would have been antidilutive. In 1997, diluted net income
available to common shareholders per share was also based only on the
weighted average number of common shares outstanding. There was no
additional dilution related to options whose exercise price was below
the average market price due to the application of the treasury stock
method. Remaining options and warrants to purchase 885,000 shares at
an average exercise price of $16.84 per share were excluded because
their exercise price exceeded the average market price and were,
therefore, antidilutive.
NOTE FOURTEEN. REPORTABLE SEGMENTS
The Company operates in two reportable segments: human and veterinary
products sold through its Medical Services Division and Caraloe, Inc.,
a consumer products subsidiary, which sells bulk raw materials,
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. The accounting
policies of the reportable segments are the same as those described in
the Summary of Significant Accounting Policies (Note Two).
Corporate Income Before Income Taxes set forth in the following table
includes research and development expenses which were related to the
development of pharmaceutical products not associated with the
reporting segments. Assets which are used in more than one segment are
reported in the segment where the predominant use occurs. The
Company's production facility in Costa Rica, which provides bulk
ingredients for all segments, and total cash for the Company are
included in the Corporate Assets figure.
Reportable Segments (in thousands)
Medical Caraloe,
1998 Services Inc. Corporate Total
-----------------------------------------------------------------
>C>
Sales to unaffiliated
customers $16,438 $7,187 $ - $23,625
Income(loss) before
income taxes 1,023 854 (3,482) (1,605)
Identifiable assets 14,319 1,923 8,005 24,247
Capital expenditures 344 - 934 1,278
Depreciation and
amortization 737 - 306 1,043
-----------------------------------------------------------------
1999
-----------------------------------------------------------------
Sales to unaffiliated
customers $15,389 $12,739 $ - $28,128
Income(loss) before
income taxes (775) 3,247 (4,505) (2,033)
Identifiable assets 12,623 2,019 8,851 23,493
Capital expenditures 405 - 558 963
Depreciation and
amortization 679 - 349 1,028
-----------------------------------------------------------------
NOTE FIFTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The unaudited selected quarterly financial data below reflect the fiscal year
ended December 31, 1998 and 1999, respectively.
(Dollar amounts in thousands, except shares and per share amounts)
--------------------------------------------------------------------------
1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Net sales $ 5,788 $ 6,027 $ 6,003 $ 5,807
Gross profit 3,208 3,428 3,237 2,882
Net income (loss) 152 60 101 (1,928)(1)
Diluted income (loss)
available to common
shareholders per share $ .02 $ .00 $ .01 $ (.21)
Weighted average
common shares 9,306,000 9,315,000 9,330,000 9,343,000
--------------------------------------------------------------------------
1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
Net sales $ 6,898 $ 6,750 $ 7,224 $ 7,256
Gross profit 3,287 3,380 3,949 3,872
Net income (loss) (1,005) (394) 145 (779)(2)
Diluted income (loss)
available to common
shareholders per share $ (0.11) $ (0.04) $ 0.02 $ (0.08)
Weighted average
common shares 9,351,000 9,358,000 9,368,000 9,424,000
(1) After a charge of $1,750,000 for ACI and Aloe & Herbs as described
in Note Six.
(2) After a charge of $1,042,000 for OFD as described in Note Ten.
Financial Statement Schedule
Valuation and Qualifying Accounts
(In thousands)
Description Additions
----------------
Balance Charged Charged
at to to Balance
Beginning Cost and Other at End
of Period Expenses Accounts Deductions of Period
---------------------------------------------------------------------------
1997
---------------------------------------------------------------------------
Bad debt reserve $ 213 $ 280 $ - $ 15 $ 478
Inventory reserve 322 523 - 329 516
Rebates 136 331 - 125 342
---------------------------------------------------------------------------
1998
---------------------------------------------------------------------------
Bad debt reserve $ 478 $ 564 $ - $ 120 $ 922
Inventory reserve 516 53 - 44 525
Rebates 342 3,499 - 3,437 404
ACI and Aloe & Herbs
non-current notes and
investments included
in other assets - 1,350 - - 1,350
---------------------------------------------------------------------------
1999
---------------------------------------------------------------------------
Bad debt reserve $ 922 $ 107 $ - $ 726 $ 303
Inventory reserve 525 - - 95 430
Rebates 404 2,058 - 2,122 340
ACI and Aloe & Herbs
non-current notes and
investments included
in other assets 1,350 - - 58 1,292
Oregon Freeze Dry, Inc. - 1,042 (343) - 699
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Carrington Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of
Carrington Laboratories, Inc. and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at item 14(a) for
the same periods. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on
our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Carrington Laboratories, Inc. and subsidiaries as of
December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas
February 21, 2000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARRINGTON LABORATORIES, INC.
Date: March 29, 2000 By: /s/ Carlton E. Turner
---------------------
Carlton E. Turner, Ph.D.,D.Sc. President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signatures Title Date
------------------------- ----------------------------- --------------
/s/ Carlton E. Turner President, Chief Executive March 29, 2000
Carlton E. Turner, Ph.D., Officer and Director
D.Sc. (principal executive officer)
/s/ Robert W. Schnitzius Chief Financial Officer March 29, 2000
Robert W. Schnitzius (principal financial and
accounting officer)
/s/ R. Dale Bowerman Director March 29, 2000
R. Dale Bowerman
/s/ George DeMott Director March 29, 2000
George DeMott
/s/ Robert A. Fildes, Ph.D. Director March 29, 2000
Robert A. Fildes, Ph.D.
/s/ Thomas J. Marquez Director March 29, 2000
Thomas J. Marquez
/s/ Selvi Vescovi Director March 29, 2000
Selvi Vescovi
INDEX TO EXHIBITS
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
3.1* Restated Articles of Incorporation of Carrington
Laboratories, Inc.
3.2* Statement of Change of Registered Office and
Registered Agent of Carrington Laboratories, Inc.
3.3* Statement of Resolution Establishing Series D
Preferred Stock of Carrington Laboratories, Inc.
3.4 Bylaws of Carrington Laboratories, Inc., as amended
through March 3, 1998 (incorporated herein by
reference to Exhibit 3.8 to Carrington's 1997
Annual Report on Form 10-K).
4.1 Form of certificate for Common Stock of Carrington
Laboratories, Inc. (incorporated herein by
reference to Exhibit 4.5 to Carrington's
Registration Statement on Form S-3 (No. 33-57360)
filed with the Securities and Exchange Commission
on January 25, 1993).
4.2* Rights Agreement dated as of September 19, 1991
between Carrington Laboratories, Inc. and
Ameritrust Company National Association.
4.3 Amendment No. 1 to Rights Agreement dated October
21, 1998 (incorporated herein by reference to
Exhibit 4 to the Company's Form 8/A/A Post-
Effective Amendment No. 1).
10.1H Retirement and Consulting Agreement dated August
14, 1997 between Carrington Laboratories, Inc. and
David Shand (incorporated herein by reference to
Exhibit 4.1 to Carrington's quarterly report on
Form 10-Q for the quarter ended September 30,
1997).
10.2H First Amendment to Retirement and Consulting
Agreement dated September 30, 1997 between
Carrington Laboratories, Inc. and David G. Shand
(incorporated herein by reference to Exhibit 4.2 to
Carrington's quarterly report on Form 10-Q for the
quarter ended September 30, 1997).
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.3* Contract Research Agreement dated as of August 8,
1991 between Carrington Laboratories, Inc. and
Texas Agriculture Experimental Station, as agent
for the Texas A&M University System (incorporated
herein by reference to Exhibit 10.55 to
Carrington's 1991 Annual Report on Form 10-K).
10.4* Lease Agreement dated as of August 30, 1991 between
Carrington Laboratories, Inc. and Western Atlas
International, Inc.
10.5* First Lease Amendment dated April 16, 1992 between
Carrington laboratories, Inc. and Western Atlas
International, Inc.
10.6* Second Lease Amendment dated September 23, 1993
between Carrington Laboratories, Inc. and Western
Atlas International, Inc.
10.7* Third Lease Amendment dated December 1, 1994
between Carrington Laboratories, Inc. and Western
Atlas International, Inc.
10.8* Fourth Lease Amendment dated August 31, 1999
between Western Atlas International, Inc. and
Carrington Laboratories, Inc.
10.9H* Employee Stock Purchase Plan of Carrington
Laboratories, Inc., as amended through June 15,
1995.
10.10* Common Stock Purchase Warrant dated September 14,
1993 issued by Carrington Laboratories, Inc. to E.
Don Lovelace.
10.11* Common Stock Purchase Warrant dated September 14,
1993, issued by Carrington Laboratories, Inc., to
Jerry L. Lovelace.
10.12* Lease Agreement dated June 15, 1994 between DFW
Nine, a California limited partnership, and
Carrington Laboratories, Inc.
10.13* Lease Amendment dated August 23, 1994 amending
Lease Agreement listed as Exhibit 10.12.
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.14* Production Contract dated February 13, 1995 between
Carrington Laboratories, Inc. and Oregon Freeze
Dry, Inc.
10.15* Modification Number One dated February 19, 1996 to
the Production Contract dated February 13, 1995
between Carrington Laboratories, Inc. and Oregon
Freeze Dry, Inc.
10.16* Modification Number Two dated November 11, 1996 to
the Production Contract dated February 13, 1995
between Carrington Laboratories, Inc. and Oregon
Freeze Dry, Inc.
10.17 Modification Number Three to the Production
Contract dated February 13, 1995 between Carrington
Laboratories, Inc. and Oregon Freeze Dry, Inc.
(incorporated herein by reference to Exhibit 10.89
to Carrington's 1998 Annual Report on Form 10-K).
10.18H 1995 Management Compensation Plan (incorporated
herein by reference to Exhibit 4.1 to Form S-8
Registration Statement No. 33-64403 filed with the
Commission on November 17, 1995).
10.19 Trademark License Agreement dated August 14, 1997
between Caraloe, Inc. and Mannatech, Inc.
(incorporated herein by reference to Exhibit 10.2
to Carrington's quarterly report on Form 10-Q for
the quarter ended September 30, 1997).
10.20 Supply Agreement dated August 14, 1997 between
Caraloe, Inc. and Mannatech, Inc.(incorporated
herein by reference to Exhibit 10.3 to Carrington's
quarterly report on Form 10-Q for the quarter ended
September 30, 1997).
10.21* Letter of Agreement dated January 12, 2000
extending Trademark License Agreement and Supply
Agreement between Caraloe, Inc. and Mannatech,
Inc..
10.22 Trademark License and Product Supply Agreement
dated July 22, 1997 between Caraloe, Inc., and Nu
Skin International, Inc. (incorporated herein by
reference to Exhibit 10.1 to Carrington's quarterly
report on Form 10-Q for the quarter ended September
30, 1997).
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.23 Non-exclusive Sales and Distribution Agreement
dated August 22, 1995 between Innovative
Technologies Limited and Carrington Laboratories,
Inc. (incorporated herein by reference to Exhibit
10.6 to Carrington's Third Quarter 1995 Report on
Form 10-Q).
10.24 Supplemental Agreement dated October 16, 1995 to
Non-exclusive Sales and Distribution Agreement
between Innovative Technologies Limited and
Carrington Laboratories, Inc.(incorporated herein
by reference to Exhibit 10.7 to Carrington's Third
Quarter 1995 Report on Form 10-Q).
10.25 Product Development and Exclusive Distribution
Agreement dated November 10, 1995 between
Innovative Technologies Limited and Carrington
Laboratories, Inc.(incorporated herein by reference
to Exhibit 10.8 to Carrington's Third Quarter 1995
Report on Form 10-Q).
10.26 Form of Stock Purchase Agreement dated April 5,
1995 between Carrington Laboratories, Inc. and
persons named in Annex I thereto (incorporated
herein by reference to Exhibit 2.1 to Carrington's
Registration Statement 33-60833 on Form S-3).
10.27 Form of Registration Rights Agreement dated June
20, 1995 between Carrington Laboratories, Inc. and
persons named in Annex I thereto (incorporated
herein by reference to Exhibit 2.2 to Carrington's
Registration Statement 33-60833 on Form S-3).
10.28 Supply and Distribution Agreement dated March 22,
1996 between Farnam Companies, Inc. and Carrington
Laboratories, Inc. (incorporated herein by
reference to Exhibit 10.76 to Carrington's 1995
Annual Report on Form 10-K).
10.29 Distribution Agreement dated March 1, 1996 between
Carrington Laboratories, Inc. and Ching Hwa
Pharmaceutical Co., Ltd. (incorporated herein by
reference to Exhibit 10.1 to Carrington's First
Quarter 1996 Report on Form 10-Q).
10.30H Carrington Laboratories, Inc. 1995 Stock Option
Plan, As Amended and Restated Effective January 15,
1998 (incorporated herein by reference to Exhibit
10.3 to Carrington's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.31H Form of Nonqualified Stock Option Agreement with
Outside Director, relating to the Registrant's 1995
Stock Option Plan, as amended (incorporated herein
by reference to Exhibit 10.3 to Carrington's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
10.32H Form of Incentive Stock Option Agreement for
Employees (incorporated herein by reference to
Exhibit 4.4 to Carrington's Second Quarter 1996
Report on Form 10-Q).
10.33 Sales Distribution Agreement dated September 30,
1996 between Faulding Pharmaceuticals Laboratories
and Carrington Laboratories, Inc.(incorporated
herein by reference to Exhibit 10.1 to Carrington's
Third Quarter 1996 Report on Form 10-Q).
10.34 Amendment Number One to Sales Distribution
Agreement dated January 12, 1998 between Carrington
Laboratories, Inc., and Faulding
Pharmaceuticals/David Bull Laboratories
(incorporated herein by reference to Exhibit 10.75
to Carrington's 1997 Annual Report on Form 10-K).
10.35 Sales Distribution Agreement dated December 1, 1996
between Suco International Corp. and Carrington
Laboratories, Inc. (incorporated by reference to
Exhibit 10.54 to Carrington's 1996 Annual Report on
Form 10-K).
10.36 Sales Distribution Agreement dated December 20,
1996 between Recordati, S.P.A. and Carrington
Laboratories, Inc. and Carrington Laboratories
Belgium N.V.(incorporated by reference to Exhibit
10.55 to Carrington's 1996 Annual Report on Form
10-K).
10.37 Nonexclusive Distribution Agreement dated November
15, 1996 between Polymedica Industries, Inc. and
Carrington Laboratories, Inc. (incorporated by
reference to Exhibit 10.56 to Carrington's 1996
Annual Report on Form 10-K).
10.38 Sales Distribution Agreement dated December 24,
1996 between Gamida-Medequip Ltd. and Carrington
Laboratories, Inc. (incorporated by reference to
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
Exhibit 10.57 to Carrington's 1996 Annual Report on
Form 10-K).
10.39 Sales Distribution Agreement dated December 24,
1996 between Gamida For Life BV and Carrington
Laboratories, Inc. (incorporated by reference to
Exhibit 10.58 to Carrington's 1996 Annual Report on
Form 10-K).
10.40 Sales Distribution Agreement dated December 4, 1996
between Darrow Laboratorios S/A and Carrington
Laboratories, Inc. (incorporated by reference to
Exhibit 10.59 to Carrington's 1996 Annual Report on
Form 10-K).
10.41* Independent Sales Representative Agreement dated
June 1, 1998 between Meares Medical Sales
Associates and Carrington Laboratories, Inc..
10.42 Supply Agreement dated February 13, 1997 between
Aloe Commodities International, Inc. and Caraloe,
Inc. (incorporated by reference to Exhibit 10.63 to
Carrington's 1996 Annual Report on Form 10-K).
10.43 Trademark License Agreement dated March 1, 1997
between Light Resources Unlimited and Carrington
Laboratories, Inc. (incorporated by reference to
Exhibit 10.64 to Carrington's 1996 Annual Report on
Form 10-K).
10.44 Supply Agreement dated February 13, 1997 between
Light Resources Unlimited and Caraloe, Inc.
(incorporated by reference to Exhibit 10.65 to
Carrington's 1996 Annual Report on Form 10-K).
10.45 Sales Distribution Agreement dated December 27,
1996 between Penta Farmaceutica, S.A. and
Carrington Laboratories, Inc. (incorporated by
reference to Exhibit 10.66 to Carrington's 1996
Annual Report on Form 10-K).
10.46 Sales Distribution Agreement dated November 1, 1995
between Laboratories PiSA S.A. DE C.V. and
Carrington Laboratories, Inc. (incorporated by
reference to Exhibit 10.70 to Carrington's 1996
Annual Report on Form 10-K).
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.47 Sales Distribution Agreement dated January 1, 1998
between Carrington Laboratories, Inc. and
Carrington Laboratories Belgium N.V. and Henry
Schein U.K. Holdings, Ltd., (incorporated herein by
reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1998).
10.48 Sales Distribution Agreement dated January 5, 1998
between Carrington Laboratories, Inc. and
Carrington Laboratories Belgium N.V. and Saude 2000
(incorporated herein by reference to Exhibit 10.2
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).
10.49 Sales Distribution Agreement dated March 27, 1998
between Carrington Laboratories, Inc. and
Carrington Laboratories Belgium N.V. and Hemopharm
GmbH (incorporated herein by reference to Exhibit
10.4 to Carrington's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).
10.50 Sales Distribution Agreement dated March 27, 1998
between Carrington Laboratories, Inc. and
Carrington Laboratories Belgium N.V. and Vincula
International Trade Company (incorporated herein by
reference to Exhibit 10.5 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1998).
10.51 Agency and Sales Distribution Agreement dated April
13, 1998 between Carrington Laboratories, Inc. and
Carrington Laboratories Belgium N.V. and Egyptian
American Medical Industries, Inc. (incorporated
herein by reference to Exhibit 10.1 to Carrington's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
10.52 Sales Distribution Agreement dated April 24, 1998
between Carrington Laboratories, Inc. and
Carrington Laboratories Belgium N.V. and CSC
Pharmaceuticals Ltd. Dublin (incorporated herein by
reference to Exhibit 10.2 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998).
10.53 Amendment Number One dated May 27, 1999 to the
Sales Distribution Agreement dated April 17, 1998
between Carrington Laboratories, Inc. and
Carrington Laboratories, Belgium, NV and CSC
Pharmaceuticals, Ltd., Dublin (incorporated herein
by reference to Exhibit 10.5 to Carrington's
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
10.54 Promissory Note of Aloe Commodities International,
Inc.,dated June 17, 1998, payable to the order of
the Registrant in the principal amount of $200,000
(incorporated herein by reference to Exhibit 10.4
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
10.55 Letter agreements dated September 30, 1998 and
November 4, 1998 between Aloe Commodities
International, Inc. and the Registrant amending due
date of Promissory Note dated June 17, 1998 from
Aloe Commodities International, Inc. to the
Registrant (incorporated herein by reference to
Exhibit 10.2 to Carrington's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1998).
10.56 Letter Agreement dated February 4, 1999 between
Aloe Commodities International, Inc. and the
Registrant amending due date of Promissory Note
dated June 17, 1998 from Aloe Commodities
International, Inc. to the Registrant (incorporated
herein by reference to Exhibit 10.98 to
Carrington's 1998 Annual Report on Form 10-K).
10.57 Promissory Note dated July 1, 1998 of Rancho Aloe,
(C.R.) S.A. payable to the order of the Registrant
in the principal amount of $186,655.00
(incorporated herein by reference to Exhibit 10.1
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998).
10.58 Wound and Skin Care Purchase Agreement dated August
27, 1998 between American Association for Homes &
Services for the Aging and Carrington Laboratories,
Inc. (incorporated herein by reference to Exhibit
10.2 to Carrington's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.59 Purchase Agreement dated October 1, 1998 between
Vencor, Inc. and Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit 10.3
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998).
10.60 Supply Agreement dated October 12, 1998 between
Caraloe, Inc. and One Family, Inc. (incorporated
herein by reference to Exhibit 10.90 to
Carrington's 1998 Annual Report on Form 10-K).
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.61 Trademark License Agreement dated October 12, 1998
between Caraloe, Inc. and One Family, Inc.
(incorporated herein by reference to Exhibit 10.91
to Carrington's 1998 Annual Report on Form 10-K).
10.62 Promissory Note of Aloe & Herbs International, Inc.
dated November 23, 1998 payable to the order of the
Registrant in the principal amount of $300,000
(incorporated herein by reference to Exhibit 10.92
to Carrington's 1998 Annual Report on Form 10-K).
10.63 Supply Agreement dated December 3, 1998 between
Caraloe, Inc. and Eventus International, Inc.
(incorporated herein by reference to Exhibit 10.93
to Carrington's 1998 Annual Report on Form 10-K).
10.64 Trademark License Agreement dated December 3, 1998
between Caraloe, Inc. and Eventus International,
Inc. (incorporated herein by reference to Exhibit
10.94 to Carrington's 1998 Annual Report on Form
10-K).
10.65 Amendment Number One dated December 3, 1998 to
Supply Agreement between Caraloe, Inc. and Eventus
International, Inc. (incorporated herein by
reference to Exhibit 10.95 to Carrington's 1998
Annual Report on Form 10-K).
10.66 Clinical Services Agreement dated January 25, 1999
between Carrington Laboratories, Inc. and PPD
Pharmaco, Inc. (incorporated herein by reference to
Exhibit 10.96 to Carrington's 1998 Annual Report on
Form 10-K).
10.67 Common Stock Purchase Warrant dated November 23,
1998, issued by Aloe and Herbs International, Inc.
to Carrington Laboratories, Inc. (incorporated
herein by reference to Exhibit 10.99 to
Carrington's 1998 Annual Report on Form 10-K).
10.68 Supply Agreement dated March 5, 1999 between
Caraloe, Inc. and For Your Health, Inc.
(incorporated herein by reference to Exhibit 10.1
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999).
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.69 Trademark License Agreement dated March 5, 1999
between Caraloe, Inc. and For Your Health, Inc.
(incorporated herein by reference to Exhibit 10.2
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999).
10.70 Letter dated February 25, 1999 from Aloe
Commodities, Inc. to Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit 10.3
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999).
10.71 Exclusive Sales Representative Agreement dated
April 13, 1999, between Caraloe, Inc. and Classic
Distributing Company (incorporated herein by
reference to Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999).
10.72 Exclusive Sales Representative Agreement dated
April 13, 1999, between Caraloe, Inc. and Glenn
Corporation (incorporated herein by reference to
Exhibit 10.2 to Carrington's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
10.73 Terms Sheet for Lease of Rancho Aloe Farm Land to
Sabila Industrial dated April 20, 1999
(incorporated herein by reference to Exhibit 10.3
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999).
10.74 Terms Sheet for Maintenance of Sabila Industrial
Plants on Leased Land dated April 20, 1999
(incorporated herein by reference to Exhibit 10.4
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999).
10.75 Exclusive Sales and Trademark Agreement dated June
11, 1999, between Caraloe, Inc. and Nutra Vine
(incorporated herein by reference to Exhibit 10.1
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999).
10.76 Lease Agreement dated September 23, 1999 between
Rancho Aloe and Sabila Industrial, S.A.
(incorporated herein by reference to Exhibit 10.2
to Carrington's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999).
Exhibit Sequentially
Number Exhibit Numbered Page
------ --------------------------------------------------- -------------
10.77 Letter Agreement dated September 29, 1999 between
Aloe Commodities International, Inc. and Carrington
Laboratories, Inc. (incorporated herein by
reference to Exhibit 10.3 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1999).
10.78* Sales Distribution Agreement dated October 26,
1999. between Carrington Laboratories, Inc. and E-
Wha International, Inc.
10.79* Amendment Number Two dated February 14, 2000 to the
Sales Distribution Agreement dated April 17, 1998
between Carrington Laboratories, Inc. and
Carrington Laboratories, Belgium, NV and CSC
Pharmaceuticals, Ltd. Dublin.
10.80* Supplier Agreement dated August 6, 1999 between
Novation, LLC and Carrington Laboratories, Inc.
MS 91022
10.81* Supplier Agreement dated August 6, 1999 between
Novation, LLC and Carrington Laboratories, Inc.
MS 91032
21.1* Subsidiaries of Carrington.
23.1* Consent of Independent Public Accountants
27.1* Financial Data Schedule
* Filed herewith.
H Management contract or compensatory plan.