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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, 1998
Commission File Number 0-11997
Carrington Laboratories, Inc.
(Exact name of Registrant as specified in its charter)
Texas 75-1435663
(State of Incorporation) (IRS Employer ID No.)
2001 Walnut Hill Lane, Irving, Texas 75038
(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, 1999, was $29,242,387. (This figure was
computed on the basis of the closing price of such stock on the NASDAQ
National Market on March 24, 1999, 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:
9,357,564 shares of Common Stock, par value $.01 per share, were
outstanding on March 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
shareholders to be held on May 20, 1999 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 carbohydrate and other natural
product therapeutics for the treatment of major illnesses, the dressing
and management of wounds and nutritional supplements. The Company
comprises two business divisions. 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 Wound and Skin Care Division and consumer and bulk
raw material products through its consumer products subsidiary, Caraloe,
Inc. The Company's research and product portfolio are based primarily on
complex carbohydrates isolated from the Aloe vera L plant.
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.
Wound and Skin Care Division
Carrington's Wound and Skin Care 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, managed care organizations, with
wound and skin care products being promoted primarily to physicians and
specialty nurses, e.g., enterostomal therapists. 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 47 employees and independent representatives
engaged in the sales and marketing of the Company's products. The
Company's field sales force currently employs 20 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 Italy.
The Company also uses 4 independent sales companies employing 12 sales
representatives to sell its products on a commission basis. In addition
to this field sales force, the Wound and Skin Care Division employs 2
telemarketers, who focus on alternative care facilities and the home
health care market, and 9 employees in customer service 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 General/Medical("McKesson), Owens & Minor
and Bergen Brunswig. During fiscal 1996, 1997 and 1998, sales of wound
and skin care products to McKesson represented 9%, 12%, and 11%,
respectively, of the Company's total net sales. Sales to Owens & Minor
represented 11%, 11%, and 10%, respectively, of total net sales during
the same periods. Sales to Bergen Brunswig represented 12%, 9%, and 5%,
respectively, of total net sales during the same periods.
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.
In May 1996, the Company entered into an agreement with Trudell Medical
Group ("Trudell) granting Trudell exclusive Canadian distribution rights
for the Company's wound care products. This agreement was canceled by
the Company on March 3, 1999 due to non-performance by Trudell. The
Company now sells into the Canadian market on a non-exclusive basis.
In May 1996, the Company granted Ching Hwa Pharmaceutical Company, Ltd.
("CHP"), exclusive distribution rights to market the Company's wound care
products in the Republic of China (Taiwan). CHP was required to register
the Company's products for sale in Taiwan within a specified time and
failed to do so. The Company has not yet taken action regarding this
failure to comply with the terms of the agreement.
In September 3, 1996, the Company signed an exclusive contract with
Faulding Pharmaceuticals 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 10 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, 1998, 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 10 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 two initial
payments to the Company, the first when the agreement was signed and the
second when the products to be sold were registered, and is obligated to
make an additional payment contingent on the occurrence of certain
events. 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, Hungry, Czech Republic,
Slovak Republic, Romania, Bulgaria, Slovenia and Poland for a period of
ten years.
In 1998, total international sales were $1,260,000 of which $584,000 were
related to the above mentioned international agreements. The Company
presently estimates the expected sales associated with these agreements
in 1999 to be between $800,000 and $1,200,000.
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
efficacy and potency tests are required, and the product's label must
specify that these studies are in progress. 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.
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, worldwide license to use and sell a bulk
pharmaceutical mannan adjuvant for poultry disease. In January 1992,
Solvay received approval from the USDA to market the bulk pharmaceutical
mannan 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 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 ingredients utilizing the Company's
patented complex carbohydrate technology. Attention has been focused on
three goals, the first of which is to sell Caraloe's (Manapol[R] Powder),
a speciality raw material, to manufacturers who desire quality complex
carbohydrate ingredients for their finished products. The second goal is
to develop the contract manufacturing business by providing high quality
products for nutritional and skin care markets, and the third is to
expand Caraloe's Manapol[R] Powder franchise and establish it as a
leading brand in the health food 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. During 1996, 1997 and 1998, sales
of Manapol[R] Powder to Mannatech represented 15%, 15% and 23%,
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. The Company is currently negotiating a
revised sales agreement with Met-Trim.
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 10 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. See Note Six to the consolidated financial statements in
this Annual Report for additional information regarding the Company's
relationship with ACI, the amount of ACI's indebtedness to the Company,
and the Company's creation of valuation reserves for the amounts of its
equity investment in ACI and the indebtedness owed to it by ACI.
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 1997 under this agreement were $167,000. Sales in 1998 were
$197,000, an increase of 18% over 1997.
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. Sales under this agreement
will commence 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. The value of the agreement for the first three years based on
projections is approximately $4,900,000.
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 carbohydrate. 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 $5,927,000, $3,006,000, and $2,589,000
on research and development in fiscal 1996, 1997, and 1998, respectively.
The Company has adopted a focused approach to its research and
development efforts. The Company is planning on returning to the clinic
in April 1999 to conduct a Phase III trial in ulcerative colitis, and as
a result, estimates that in fiscal 1999 it will spend approximately
$5,200,000 on research and development. The Company expects to fund its
1999 research and development costs, including the cost of the Phase III
clinical trial, with cash flows from operations.
The Company initiated a program in 1996 which continued through 1998 to
restructure research and development to meet the challenges and demands
for drug development in the 21st century. This entailed 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.
This approach allows the Company to maximize its opportunities in a
timely and cost effective manner. Currently, the Company's research
staff comprises ten full-time employees. Dr. Robert A. Fildes, a
director of the Company, has served as part-time, interim Executive Vice
President, Research and Development from October 1, 1997 to the present
time, and Dr. 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
1998 was to continue to assess the viability of the ulcerative colitis
program, interact with the FDA and make a decision by mid-year on whether
to proceed to new clinical trials for the indication. Following
extensive preclinical studies, formulation development and evaluation and
interaction with the FDA, the Company made a decision to return to the
clinic with a new dosage form of Aliminase[TM] as a powder for
reconstitution. The Company initiated a new Phase III trial in the first
quarter of 1999, and dosing of patients is scheduled for early April
1999.
Other preclinical studies conducted in the Company's laboratories and in
outside laboratories have shown that certain of the Company's complex
carbohydrates stimulate macrophages and other white blood cells to
produce cytokines, including interleukin-1, interleukin-6, and tumor
necrosis factor alpha which regulate other cells. Interleukin-1
stimulates fibroblasts, which are essential to wound healing. Tumor
necrosis factor alpha acts against tumors in the body. 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. 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.
In 1998, the Company completed an animal preclinical wound healing study
in cooperation with the Scott Ritchie Foundation and Auburn University,
evaluating Carrasyn[R] Freeze-Dried Gel (CarraSorb[TM] M) as compared to
saline. The product demonstrated a significant increase in the early
development of granulation tissue, which is an important early step for
wound healing.
Further processed BPM, including CarraVex[TM] injectable (formerly
CARN 750), are immunomodulating agents that increase circulating levels
of interleukin-1 and tumor necrosis factor alpha. A series of animal
studies conducted at Texas A&M University in 1988 and 1989 indicated that
a single intraperitoneal dose caused significant tumor reduction in a
statistically significant percentage of animals with highly malignant
tumors. This effect in many instances was dramatic, with complete
regression of the tumor and with continuing immunity. Recovered animals
were resistant to syngeneic tumor reimplantation for up to six months
after initial tumor regression.
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 November 1998 for this
purpose. 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, and the Company is planning to produce the
product in pilot scale in 1999. 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.
Human Studies
Evaluation of Aliminase[TM] (formerly CARN 1000) oral capsules 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 is initiating a Phase III trial of
the new dosage form, with the treatment of patients to commence in early
April 1999.
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] for Radiation-Induced Dermatitis. In 1993, a
study was conducted at M.D. Anderson Cancer Center to determine if
Carrasyn[R] hydrogel was of benefit in treating radiation-induced skin
reactions in an animal model. These studies clearly showed that, when
compared to controls, Carrasyn[R] Hydrogel could significantly reduce
radiation-induced inflammation and tissue damage in animals. As a result
of this work, a small clinical trial was performed in 1994, studying the
radiation-sparing effects of Carrasyn[R] Hydrogel wound dressing in four
oncology patients. These studies led to the development of RadiaCare[TM]
Gel for the management of radiation dermatitis.
In 1996, a study was begun at the Texas Oncology Center of Dallas to
determine if RadiaCare[TM] Gel was of benefit in preventing the
development of radiation dermatitis in humans. The 70-patient study was
designed to evaluate the prevention of radiation dermatitis as compared
to another hydrogel. No statistical difference was noted between the
groups.
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 is sponsoring 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 should be known in 1999.
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. Results will be known in
1999.
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 Marketed
Ulcers
Cleansers Wounds Marketed
Anti-fungal Cutaneous Fungal Infection Marketed
Hydrocolloids Wounds Marketed
Alginates Wounds Marketed
Oral
Human
Anti-inflammatory Ulcerative Colitis Phase III
Pain Reduction Mucositis Marketed
Dental
Pain Reduction Aphthous Ulcers, Oral Marketed
Wounds
Injectable
Human
Adjunct for cancer Melanoma, Breast, Prostate, New
Colon, Hypernephroma, and Formulation
Soft Tissue Sarcoma Required
Neutropenia Neutropenia associated with Preclinical
cancer and
Formulation
Development
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. 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. Additional quantities of
harvestable leaves from the Company's farm will become available in the
second quarter of 1999, but will not completely eliminate the Company's
dependence on other sources of leaves. 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 leaf prices from other
sources would result in a $162,000 decrease in 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., a Panamanian corporation
("Aloe & Herbs"), was formed for the purpose of purchasing 5,000 acres of
land in Costa Rica and establishing an Aloe vera 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 plants to be
supplied to the farm and providing know-how in farming Aloe vera plants.
Aloe & Herbs formed a Costa Rican 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 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. However, Rancho
Aloe is not expected to be able to harvest and supply significant
quantities of leaves for another one to two years. 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.
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. Finished oral
and injectable dosage forms 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.
Wound and Skin Care 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 is their quality, and that they are naturally based and
competitively priced. In 1998 the Company began a marketing study to
evaluate ways to clearly separate its products from the perception of a
regular Aloe company. The results of this study should be known in 1999.
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 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 Federal Food, Drug and Cosmetic 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 Federal Food, Drug, and Cosmetic Act (the "FFDC Act")
concerning the composition and labeling of dietary supplements and, in
the judgement 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 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 your 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
whom 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 reformulating, 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. See also "Business -- Legal
Matters" and "-- Regulatory Matters."
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 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 a patent in the United States (U.S. Patent No.
5,760,102, issued on June 2, 1998) and in Taiwan related to the uses of a
denture adhesive (Taiwan Patent No. 89390 issued on August 21, 1997) 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).
Three additional patents concerning various areas of interest were issued
in 1998.
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. The Company believes that its trademarks and trade
names are valuable assets.
Employees
As of March 5, 1999, the Company employed 313 persons, of whom 21 were
engaged in the operation and maintenance of its Irving, Texas processing
plant, 201 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, 89 were located in Texas, 201 in Costa Rica and one in Puerto
Rico. In addition, 22 sales personnel were located in 14 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 $1,250,000. As of December 31, 1998, there was no outstanding
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.
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, problems
that may affect the Company as a result 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
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 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 approximately 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 January 2000. 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 whether to extend the lease or move into alternative
facilities.
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 plants and for a processing plant to produce
bulk pharmaceutical and injectable mannans and freeze-dried extracts from
Aloe vera 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 IND's.
This project was completed in the fourth quarter of 1994. In order to
meet demand for new products, a new compounding area and hi-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 November 1997, the Company received a letter from the Texas Department
of Licensing and Regulation (the "TDLR") alleging that the Company's
Walnut Hill Facility in Irving, Texas had been inspected and found in
non-compliance with provisions of the Texas Architectural Barriers Act
(the "Act") and regulations issued thereunder. The Act and the related
regulations contain design requirements to ensure that disabled persons
can make use of public facilities. An inspection report describing the
alleged deficiencies was enclosed with the letter. The letter stated
that the Walnut Hill Facility was required to be brought into compliance
and written verification furnished to the TDLR within 30 days, and that
the Company should contact the TDLR if compliance could not be
accomplished within that time. The letter also stated that failure to
respond to the letter would result in the matter being referred
to the TDLR's Enforcement Division, which could result in a maximum
administrative penalty of $1,000 per violation per day.
The Company subsequently took a number of steps to correct the alleged
deficiencies, obtained extensions for completing the necessary work, and
kept the TDLR informed, orally and in writing, of its plans and its
progress. In June 1998, the Company sent the TDLR a letter describing
the work it had done and proposed to do and explaining why it was not
feasible to correct certain of the alleged deficiencies. Although the
Company expected that the work it proposed to do would be completed by
September 30, 1998, delays in receiving some of the necessary materials
prevented the completion of some of the work by that date. In October
1998, after the Company informed the TDLR that some of the alleged
deficiencies had been corrected, the TDLR sent the Company a letter
listing the remaining alleged deficiencies and informing the Company that
its proposal not to correct certain alleged deficiencies would be treated
as an enforcement issue after all of the work proposed to be done was
completed. By letter dated December 30, 1998, the Company informed the
TDLR that it had completed the remaining work that it had previously said
it would complete. The Company has received no communications from the
TDLR since the date of that letter. As far as the Company is aware, the
TDLR has not turned this matter over to its Enforcement Division or made
any claims for penalties to date.
On January 7, 1999 Parnell Pharmaceuticals, Inc., ("Parnell") a
California corporation, filed a lawsuit styled Parnell Pharmaceuticals,
Inc. v. Carrington Laboratories, Inc. No. C99-0035, in the U.S. District
Court, Northern California District, alleging infringement of their
federally registered trademark, MouthKote[R], and unfair competition
under California law. Parnell sought a permanent injunction banning the
Company from selling or marketing products using the name OraKote[TM].
On March 27, 1999, the Company signed a settlement agreement with Parnell
agreeing to cease using the name OraKote[TM] after May 1, 1999 in
exchange for Parnell's dismissal of the complaint.
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") 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 1997 High Low
----------- ---- ---
First Quarter $8 1/8 $5 1/4
Second Quarter 8 3/4 4 11/16
Third Quarter 6 1/2 4 13/16
Fourth Quarter 6 5/16 3 1/2
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
At March 24, 1999, there were 970 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, 1998, is
derived from the consolidated financial statements of the Company, of
which the years 1994 through 1996, and the month of December 1994, have
been audited by Arthur Andersen LLP, independent public accountants,
and the years 1997 and 1998 have been audited by Ernst & Young LLP,
independent public accountants. The earnings per share amounts prior
to 1997 have been restated as required to comply with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. For further
discussion of earnings per share and the impact of Statement No. 128, see
the notes to the consolidated financial statements beginning on page F-6.
II - 1
Years Ended November 30, 1994,
Month Ended December 31, 1994 and Years
Ended December 31, 1995, 1996, 1997 and 1998
(Dollars and numbers of shares in November 30 December 31
----------- -----------------------------------------
thousands except per share amounts) 1994 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------
OPERATIONS STATEMENT INFORMATION:
Net Sales $25,430 $1,781 $24,374 $21,286 $23,559 $23,625
Cost and Expenses:
Cost of Sales 6,415 516 7,944 10,327 9,530 10,870
Selling, general and
administrative 11,968 985 12,442 10,771 10,814 10,254
Research and development 5,334 327 5,370 5,927 3,006 2,589
Charges related to ACI and
Aloe & Herbs (1) - - - - - 1,750
Interest expense (income), net 133 23 115 (304) (37) (233)
------ ---- ------ ------ ------ ------
Income (loss) before income taxes 1,580 (70) (1,497) (5,435) 246 (1,605)
Provision for income taxes 159 - 131 88 20 10
------ ---- ------ ------ ------ ------
Net Income (loss) $ 1,421 $ (70) $(1,628) $(5,523) $ 226 $(1,615)
====== ==== ====== ====== ====== ======
Net Income (loss) per common
share - basic and diluted (2) $ .18 $(.01) $ (.22) $ (.74) $ .02 $(.17)
====== ==== ====== ====== ====== ======
Weighted average shares used in
per share computations 7,341 7,344 7,933 8,798 8,953 9,320
BALANCE SHEET INFORMATION:
Working capital $ 4,720 $ 4,472 $ 9,095 $13,910 $ 9,484 $ 9,716
Total assets 19,797 18,899 27,934 31,202 25,796 $24,247
Long-term debt, net of current
portion 2,035 1,997 88 - - -
Total shareholders' investment $12,509 $12,439 $22,399 $27,757 $22,826 $21,363
(1) During the fourth quarter of 1998 the Company fully reserved its
investments in and advances to Aloe Commodities International, Inc.,
and Aloe and Herbs International, Inc., and subsidiaries in the amount
of a $1.75 million charge to operations primarily due to substantial
doubt regarding the entities' ability to continue as going concerns.
See Note Six to the consolidated financial statements.
(2) For a description of the calculation of basic and diluted net income
(loss) per share, see Note Two to the consolidated financial
statements.
II - 2
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 carbohydrate and
other natural product therapeutics for the treatment of major illnesses,
the dressing and management of wounds and nutritional supplements. The
Company is comprised of two business segments. See Note 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 wound and skin care division and consumer and bulk raw material
products through its consumer products subsidiary, Caraloe, Inc. The
Company's research and product portfolio are based primarily on complex
carbohydrate isolated from the Aloe vera L. plant.
Liquidity and Capital Resources
At December 31, 1998 and 1997, the Company held cash and cash equivalents
of $3,931,000 and $4,023,000, respectively, a decrease of $92,000. Net
cash provided by operating activities in 1998 was $1,065,000, as compared
to a cash outflow from operating activities in 1997 of $1,899,000.
Significant cash outflows during 1998 included investments in property
and equipment of $1,278,000. Customers with significant accounts
receivable balances at the end of 1998 include Mannatech, Inc.
($693,000), Aloe Commodities International, Inc. ("ACI") ($681,000),
McKesson/General Medical ($340,000); and of these amounts, $748,346
was collected as of March 4, 1999. The ACI balance, which was fully
reserved as of December 31, 1998, was converted to a note receivable on
February 8, 1999 (see Note Six to the consolidated financial statements
for additional discussion of ACI).
As of December 31, 1998, 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 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, 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, and the Company was also granted a five-year
warrant to purchase 300,000 shares of common stock of Aloe & Herbs. The
first shipments of leaves from Rancho Aloe to the Company were made in
March 1999. In the fourth quarter of 1998, the Company fully reserved
all amounts due from Aloe & Herbs.
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 will be used for operating
needs, as required, and is currently being used to secure the letter of
credit described below.
In October 1996, the Company completed a $6,600,000 financing involving
the private placement of Series E Convertible Preferred Stock (the
"Series E Shares") with the intention of using the proceeds from this
sale to fund the Company's clinical research programs. Due to unfavorable
results of the first Phase III trial in the Aliminase[TM] project
and to market conditions creating potential additional dilution to the
outstanding shares of Common Stock, as well as other reasons, 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, a process it completed in May 1997. Amounts paid to
preferred shareholders in excess of par totaled $70,000 more than the
embedded deemed dividend recognized in 1996 and thus, in the earnings
per share calculation in 1997, reduced net income available to common
shareholders.
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 new product launched in the third quarter
of 1997. These payments resulted in increasing other assets of the
Company. As of December 31, 1998, the net book value of this agreement
was $619,000. Additional payments totaling $167,000 will be made to the
supplier as new products are delivered.
In February 1995, the Company entered into a supply agreement with its
supplier of freeze-dried products. The agreement required that the
Company establish a letter of credit equal to 60% of the minimum
purchase commitment of $2,500,000, but allowed for the amount of the
letter of credit to be reduced by 60% of the purchases made under the
agreement. As of December 31, 1998, the letter of credit was $1,250,000.
The supplier 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 still in the early phase
of marketing. The Company had approximately $407,000 of CarraSorb[TM] M
and Carrington[R] (Aphthous Ulcer) Patch inventory on hand as of December
31, 1998.
The supply agreement also requires the Company to make minimum monthly
purchases of $30,000. In February 1998, the supply agreement was amended
to allow for unmet monthly minimum purchase 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. Current sales of both items are lower than the minimum purchase
requirement, but the Company believes that as licensing, acceptance and
demand for the new technology increase, demand will exceed the aggregate
minimum purchase requirement. In December 1998, the supplier agreed to
add a freeze-dried gel product as a listed product under the agreement
and to consider an extension of the term of the agreement. As of March
5, 1999, the Company has purchased products totaling approximately
$610,000 from this supplier. The Company is in full compliance with the
agreement and, as of March 5, 1999, has the available resources to meet
all future minimum purchase requirements.
The Company believes that its available cash resources and expected cash
flows from operations will provide the funds necessary to finance
its current operations and the current Phase III clinical trial for
Aliminase[TM]. 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
have to be raised through equity offerings, borrowings, licensing
arrangements or other means, and there is no assurance that the Company
will be able to obtain such funds on satisfactory terms when they are
needed.
The Company is subject to regulation by numerous governmental authorities
in the United States and other countries. Certain of the Company's
proposed products will require governmental approval prior to commercial
use. The approval process applicable to prescription pharmaceutical
products usually takes several years and typically requires substantial
expenditures. The Company and any licensees may encounter significant
delays or excessive costs in their respective efforts to secure necessary
approvals. Future United States or foreign legislative or administrative
acts could also prevent or delay regulatory approval of the Company's or
any licensees' products. Failure to obtain requisite governmental
approvals or failure to obtain approvals of the scope requested could
delay or preclude the Company or any licensees from marketing their
products, or could limit the commercial use of the products, and thereby
have a material adverse effect on the Company's liquidity and financial
condition.
Impact of Inflation
The Company does not believe that inflation has had a material impact on
its results of operations.
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.
Of the 1998 Caraloe sales, $6,424,000 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 which expires in August 2000. Sales to Mannatech increased
from $3,547,000 in 1997 to $5,508,000 in 1998. In October 1998, Caraloe
also signed supply and license agreements with One Family, Inc., allowing
One Family to purchase Manapol[R] Powder and market it in capsule form.
Sales under this agreement will commence in 1999. 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. Estimated
sales during the first three years of these agreements are approximately
$4,900,000. Caraloe also continued to develop its contract manufacturing
business during 1998. 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 to be manufactured include gels and creams
utilizing formulas developed by SkinCeuticals. Caraloe also has
arrangements to contract manufacture beverage products for Deynique
Cosmetics, GmbH.
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. In
addition, the market is heavily influenced by government reimbursement
programs. The home health care segment of the market in particular
experienced significant turmoil in 1998 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 1998, 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 the uncertainty in this segment of the market,
the Company developed its Smart Outcomes System[TM] program, designed
to educate nursing home administrators about the regulatory changes
and to promote the Company's products.
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 1998 were $1,260,000. Included
in this amount were sales of $685,000 of wound care products, which
was $546,000 over 1997.
Sales of the Company's oral technology products, which were launched late
in 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.
Selling, general and administrative ("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.
Research and development ("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. The Company continued its efforts in basic research during
1998 and discovered 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. Basic research on this material is ongoing. 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]. The Company will return to the clinic
with a Phase III trial of Aliminase[TM] in April 1999.
Beginning in the second quarter of 1998, the Company began to make
strategic investments into Aloe & Herbs and its subsidiary Rancho Aloe,
an aloe farm close to the Company's existing farm in Costa Rica. The
Company obtained a 19.3% equity interest in the farming venture in
return for agreement to provide farming expertise, working capital
and Aloe vera plants. The Company expects Aloe & Herbs, upon reaching
full production, to have the potential of reducing the Company's cost of
aloe leaves, which is a significant component of the Company's cost of
sales. Additionally, the Company expects that when the farm reaches full
production it will provide a supply of leaves to meet the Company's
growing demand in the raw materials product lines and expected future
demand if the Company receives FDA approval of Aliminase[TM]. Further,
the Company believes this supply will reduce the Company's dependence
upon leaves from other countries where consistency and quality of
supplies are uncertain.
During the second and fourth quarters of 1998 the Company invested a
total of approximately $.5 million in Aloe & Herbs, generally in the
form of notes receivable. Aloe & Herbs has had difficulty acquiring the
additional financing required to complete its business plans and, based
upon the review of the financial statements of Aloe & Herbs, the Company
believes there is substantial doubt regarding Aloe & Herbs' ability
to remain a going concern without obtaining additional financing. Aloe
& Herbs has substantial capital requirements during 1999 and 2000 for
debt payments, ongoing investments in aloe plants and other general
start-up costs. The Company has not committed to provide the amount of
additional capital Aloe & Herbs requires. Consequently, the Company
has fully reserved the $.5 million invested in Aloe & Herbs due to the
risk and uncertainty of Aloe & Herb's ability to repay the amounts due
the Company. The Company continues to believe that strategies to reduce
the overall cost of leaves while increasing the supply and quality of
leaves for raw materials production are essential.
The Company had reserved approximately $.1 million at December 31, 1997
to cover potential exposures on the approximately $1.1 million of
investments in and notes and accounts receivable from ACI. The Company
continued to monitor its relationship with ACI and gradually increased
the reserve over the first three quarters of 1998 by approximately
$.1 million. In the fourth quarter of 1998 the Company obtained the
1997 audited financial statements and the October 1998 year-to-date
unaudited financial statements of ACI, which indicated a substantial
doubt regarding ACI's ability to continue as a going concern. In
addition, ACI had been unsuccessful in raising capital needed for its
operations. Consequently, 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 such amounts
related to ACI.
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
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.
Fiscal 1997 Compared to Fiscal 1996
Net sales were $23,559,000 in 1997, compared with $21,286,000 in 1996.
This increase of $2,273,000, or 10.7%, resulted from an increase of
$1,750,000, or 47.4%, in sales of Caraloe, Inc., the Company's consumer
products subsidiary, and an increase of $688,000, or 4.0%, in sales of
the Company's wound and skin care products. Total sales of the Company's
wound and skin care products in 1997 were $17,990,000, as compared to
$17,302,000 in 1996. New products introduced in 1997 accounted for
$682,000 in wound and skin care sales during 1997. Caraloe sales to
Mannatech increased from $3,273,000 to $3,547,000. Of the 1997 Caraloe
sales, $4,102,000 was related to the sale of bulk Manapol[R] Powder.
Sales of the Company's veterinary products decreased from $283,000 to
$125,000, primarily due to the Company's inability to supply Acemannan
Immunostimulant during part of the year.
Cost of sales decreased from $10,327,000 to $9,530,000, or 7.7%. As a
percentage of sales, cost of sales decreased from 42.2%, after adjusting
for period cost write-offs (discussed below), to 40.5%. The decrease in
cost of goods sold was largely attributable to volume-related
manufacturing efficiencies realized in Costa Rica due to the increased
Caraloe Manapol[R] Powder sales. The benefits of these manufacturing
efficiencies were partially offset by the lower profit margins earned on
Manapol[R] Powder as compared to wound care products. Cost of goods
sold in 1996 included $1,396,000 of additional expenses which consisted
of a $630,000 inventory valuation decrease on June 30, 1996, as described
below, and period costs of $766,000. The period costs were related to
the annual shutdown of the facility in Costa Rica for routine
maintenance and inventory reduction programs.
As a result of the implementation of programs to reduce operating and
production costs, several changes were implemented at the Company's Costa
Rica production facility in early 1996. This facility produces all of the
Company's freeze-dried Aloe vera raw materials. Among these changes
were a restructuring of the work force as well as improvements in
efficiencies in the manufacturing process. The implementation of
these changes significantly reduced the cost of Costa Rica production
in the second quarter of 1996. As a result of these reductions in cost,
the actual cost of production under FIFO as of June 30, 1996 was
approximately 18% lower than the Company's standard cost, which was
equal to the FIFO cost of production at December 31, 1995 and March 31,
1996. The Company determined that the standard cost should be reset to
the then-current actual cost of production. This reduction in standard
FIFO cost decreased inventory valuation by $630,000. This amount
represented the change in the accumulated value of all items in inventory
as of June 30, 1996 that were produced in Costa Rica as well as those
finished goods that contain component items produced in Costa Rica. This
decrease in inventory value was expensed in 1996 as a period cost and was
included in cost of sales.
S G & A expenses increased to $10,814,000 from $10,771,000, or 0.4%.
Partially offsetting the increase was approximately $242,000 in one-time
charges incurred in 1996 which were not incurred in 1997. These one-time
charges included approximately $150,000 in additional costs related to
the launch of three new product types and a one-time write-off of
approximately $92,000 of bank and legal charges related to the early
retirement of all bank debt in 1996. Also contributing to the modest size
of the increase in SG&A expenses were the ongoing benefits received
from cost reduction programs put in place in 1996 and the restructuring
of the sales force, also put in place in 1996, which were continued in
1997.
R&D expenses decreased to $3,006,000 from $5,927,000, or 49.3%. This
decrease was primarily the result of discontinuing the Phase III clinical
program for the testing of Aliminase[TM] oral capsules in October 1996,
due to unfavorable results. The Company has since reformulated
Aliminase[TM] into a reconstitutable powder and will return to the clinic
with a Phase III in April 1999. Approximately $317,000 of expenses for
the 1996 clinical program was incurred in 1997.
Net interest income of $37,000 was realized in 1997, versus $304,000 in
1996, due to having less excess cash to invest resulting from repurchase
of the remainder of the Series E Preferred Stock in May 1997.
Provision for income taxes was $20,000 in 1997 as compared to $80,000 in
1996. The tax provision on 1997 was less than the statutory rate due to
the Company's ability to utilize tax loss carryforwards. 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 offset.
Net income for 1997 was $226,000, versus a net loss of $5,523,000 for
1996. This change is a result of increased volume in Caraloe, Inc.
sales, increased production volumes in Costa Rica resulting in the
realization of manufacturing efficiencies and the full absorption of
production, and decreased R&D expenditures related to the termination
of the Phase III Aliminase[TM] study. Net income per share was $.02 in
1997, compared to a loss per share of $.74 in 1996.
Year 2000 Issues
Like many other organizations, the Company faces the prospect of what
will happen to computers and other microprocessor-controlled equipment
using two digit data fields when they encounter dates beyond 1999,
as they may recognize the "00" of the Year 2000 as the year 1900. This
phenomenon, known as the Year 2000 or Y2K issue, may impact the Company
in some manner, although the extent of any impact cannot be fully
determined at this time. The Company has undertaken considerable efforts
to assess its situation in areas that are determinable at this time.
With respect to information technology systems, the Company has
historically followed a policy of purchasing or licensing commercially
available computer software packages for use in operating its business.
These packages are typically maintained by their developers, and newer
releases of the packages are periodically made available to the users of
the packages for purchase or license or as part of annual maintenance
programs. The Company typically installs these packages with little or no
custom modification to the programs contained therein. Accordingly, the
Company expects to incur little, if any, cost for custom-developed
software. The Company's primary business application software used in its
Costa Rica facility was found during 1998 not to be ready for the Year
2000, and the Company subsequently acquired a newer release of the
software package which is Y2K-ready. This upgrade will be installed
during the first or second quarter of 1999. The cost incurred to date
to replace or upgrade software packages are approximately $30,000.
With respect to non-information technology systems, the Company has
initiated efforts to assess its exposure due to the Y2K impact on
the portions of its production and laboratory equipment which are
microprocessor-controlled. The Company has determined that there are no
significant pieces of equipment in its U.S. facilities that are not Year
2000-ready. The identified non-conforming equipment will be upgraded or
replaced at an estimated cost of $20,000, and the target date for
completing this task is the second quarter of 1999. A Y2K review of the
manufacturing and laboratory equipment in the Company's Costa Rica
facility should be completed early in the second quarter of 1999.
Remedial action required, if any, would be targeted for completion by the
end of the second quarter of 1999.
With respect to third parties, the Company has undertaken to assess the
potential impact to its operations of its vendors and customers not being
prepared for the Year 2000 impact on their systems. The Company surveyed
all of its vendors from whom the Company made purchases totaling $5,000
or more in a recent 12-month period. To date, the Company has received
responses from approximately 83% of the vendors surveyed, and the
majority of vendors responding indicated that they were addressing the
issue but were not yet fully ready. The Company made specific oral
inquiries of local U.S. utility companies (electric, gas, water and
telephone), each of which indicated it has made significant strides
toward readiness but is not yet fully ready. Because of the material
effect that the failure of any one of these utilities, particularly the
electric company, to provide service to the Company as a result of Year
2000 unreadiness could have on the Company, and because of the
uncertain responses that these utility companies have provided, the
Company cannot provide assurance that its operations will not be
materially affected by the Year 2000 issue, nor can it quantify the
impact that a failure of one of these utilities to provide service would
cause. The Company has met with representatives of the Costa Rica utility
company providing service to its facility in Costa Rica, who indicated
that the utility's operational equipment, much of which is older
analog equipment, has not been tested, but is backed up by redundant
manual/mechanical systems. Newer digital equipment is being certified as
Y2K compliant as installed. The Company also met with officials of the
National Bank of Costa Rica, who presented a detailed plan for Y2K
compliance and testing. The bank officials indicated that approximately
80-90% of their systems have been tested and found compliant.
The most reasonably likely worst case scenario for the Company is a
disruption in power to its manufacturing plants, as discussed above.
As part of its contingency plan for dealing with these material
uncertainties, the Company has initiated an inventory program designed
to have several months of inventory of its core wound care and raw
material products on hand by the end of the third quarter of 1999. The
cost of this inventory program is estimated not to exceed $500,000.
The Company will also be sending a similar survey to its significant
customers early in the second quarter of 1999 in order to assess their
Y2K readiness. The disruption in a customer's business due to this issue
could also have a negative impact on the Company's sales and
profitability, although the impact to the Company cannot be determined at
this time.
The costs of the Company's Y2K remediation programs are being funded with
cash flows from operations and are not expected to exceed $100,000,
excluding inventory buildup. Some of these costs relate solely to the
upgrade of existing functionality. In total, these costs are not expected
to be substantially different from the normal recurring costs of systems
and equipment upgrades and therefore are not expected to have a material
adverse effect on the Company's overall results of operations or cash
flows.
Forward Looking Statements
All statements other than statements of historical fact contained in this
report, including but not limited to statements in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(and similar statements contained in the Notes to Consolidated Financial
Statements) concerning the Company's financial position, liquidity,
capital resources and results of operations, its prospects for the future
and other matters, are forward-looking statements. Forward-looking
statements in this report generally include or are accompanied by
words such as "anticipate", "believe", "estimate", "expect", "intend" or
words of similar import. Such forward-looking statements include, but
are not limited to, statements regarding the Company's plan or ability
to achieve growth in demand for or sales of products, to reduce expenses
and manufacturing costs and increase gross margin on existing sales,
to initiate, continue or complete clinical and other research programs,
to obtain financing when it is needed, to fund its operations from
revenue and other available cash resources, to enter into licensing
agreements, to develop and market new products and increase sales of
existing products, to obtain government approval to market new products,
to sell all of the freeze-dried, calcium alginate and certain other
wound care products that it is required to purchase under its existing
agreements with the suppliers of those products, to purchase sufficient
supplies of Aloe vera leaves at reasonable prices, and to properly assess
its situation with respect to Y2K issues and avoid any material adverse
effects of the Y2K problem, as well as various other matters.
Although the Company believes that the expectations reflected in its
forward-looking statements are reasonable, no assurance can be given that
such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in
such forward-looking statements include but are not limited to the
possibilities that the Company may be unable to obtain the funds needed
to carry out large scale clinical trials and other research and
development projects, that the results of the Company's clinical trials
may not be sufficiently positive to warrant continued development and
marketing of the products tested, that new products may not receive
required approvals by the appropriate government agencies or may not
meet with adequate customer acceptance, that the Company may not be
able to obtain financing when needed, that the Company may not be able
to obtain appropriate licensing agreements for products that it wishes to
market or products that it needs assistance in developing, that the
Company's efforts to improve its sales and reduce its costs may not
be sufficient to enable it to fund its operating costs from revenues
and available cash resources, that one or more of the customers that
the Company expects to purchase significant quantities of products from
the Company or Caraloe may fail to do so, that competitive pressures
may require the Company to lower the prices of or increase the discounts
on its products, that the Company's sales of products it is contractually
obligated to purchase from suppliers may not be sufficient to enable
and justify its fulfillment of those contractual purchase obligations,
that other parties who owe the Company substantial amounts of money may
be unable to pay what they owe the Company, that the Company may suffer
adverse effects from Y2K problems affecting the Company or its vendors
(including utility companies) or customers, and that the Company may be
unable to produce or obtain, or may have to pay excessive prices for, the
raw materials or products it needs.
All forward-looking statements in this report are expressly qualified in
their entirety by the cautionary statements in the two immediately
preceding paragraphs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency
The Company's manufacturing operation in Costa Rica accounted for 57% of
cost of sales for the year ended December 31, 1998. As a result, the
Company's financial results could be significantly affected by factors
such as changes in foreign currency exchange rates or weak economic
conditions in Costa Rica. When the U.S. Dollar strengthens against the
Costa Rican Col n, the cost of sales decreases. During the year ended
1998, the exchange rate from U.S. Dollars to Costa Rican Colon
increased by 10% to 269 at December 31, 1998. The effect of a 10%
strengthening in the value of the U.S. Dollar relative to the Costa
Rican Colones would result in a increase in gross profit of $208,000. 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 1998.
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 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.
Effective March 19, 1997, the Company appointed the accounting firm of
Ernst & Young LLP as the Company's independent public accountants for
fiscal 1997 to replace Arthur Andersen LLP, which resigned on that same
date. The Company's Board of Directors approved the selection of Ernst &
Young LLP as independent public accountants upon the recommendation of
the Board's independent Audit Committee comprised of outside directors.
During 1996 and the period from January 1, 1997 through March 18, 1997,
there were no disagreements with Arthur Andersen LLP on any matter of
accounting principle or practice, financial statement disclosure or
auditing scope or procedures or any reportable events. Arthur Andersen
LLP's report on the financial statements for the year 1996 contained no
adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
The Company provided Arthur Andersen LLP with a copy of this disclosure
and requested that Arthur Andersen LLP furnish it with a letter addressed
to the Securities and Exchange Commission (the "Commission") stating
whether it agreed with the above statements. A copy of Arthur Andersen
LLP's letter to the Commission, dated April 7, 1997, was filed as Exhibit
16.1 to the Company's Form 10-K/A amendment to its Form 10-K Annual
Report for the year ended December 31, 1996, which amendment was filed
with the Commission on April 7, 1997.
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 1999 annual meeting of shareholders, which will
be filed pursuant to Regulation 14A within 120 days after the Company's
fiscal year ended December 31, 1998.
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
1999 annual meeting of shareholders, which will be filed pursuant to
Regulation 14A within 120 days after the Company's fiscal year ended
December 31, 1998.
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 1999 annual meeting of
shareholders, which will be filed pursuant to Regulation 14A within 120
days after the Company's fiscal year ended December 31, 1998.
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
1999 annual meeting of shareholders, which will be filed pursuant to
Regulation 14A within 120 days after the Company's fiscal year ended
December 31, 1998.
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.
(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-12 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, 1998.
CARRINGTON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets --
December 31, 1997 and 1998 F - 2
Consolidated Statements of Operations -- years ended
December 31, 1996, 1997 and 1998 F - 3
Consolidated Statements of Shareholders' Investment --
years ended December 31, 1996, 1997 and 1998 F - 4
Consolidated Statements of Cash Flows -- years ended
December 31, 1996, 1997 and 1998 F - 5
Notes to Consolidated Financial Statements F - 6
Financial Statement Schedule
Valuation and Qualifying Accounts F - 19
Report of Ernst & Young LLP, Independent Public Accountants F - 20
Report of Arthur Andersen LLP, Independent Public F - 21
Accountants
Consolidated Balance Sheets
(Dollar amounts in thousands, except share amounts)
December 31, December 31,
1997 1998
-------- -------
ASSETS:
Current Assets:
Cash and cash equivalents $ 4,023 $ 3,931
Accounts receivable, net of allowance for
doubtful accounts of $478 and $922, 1997
and 1998, respectively 3,090 2,961
Inventories 5,003 4,969
Prepaid expenses 328 739
-------- --------
Total current assets 12,444 12,600
Property, plant and equipment, net 10,815 11,050
Other assets 2,537 597
-------- --------
Total assets $ 25,796 $ 24,247
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable $ 1,143 $ 1,369
Accrued liabilities 1,827 1,515
-------- --------
Total current liabilities 2,970 2,884
Commitments and contingencies
SHAREHOLDERS INVESTMENT:
Common stock, $.01 par value, 30,000,000 shares
authorized, 9,306,462 and 9,350,064 shares
issued and outstanding at December 31, 1997
and 1998, respectively 93 94
Capital in excess of par value 51,585 51,736
Deficit (28,852) (30,467)
-------- --------
Total shareholders' investment 22,826 21,363
-------- --------
Total liabilities and shareholders' investment $ 25,796 $ 24,247
======== ========
The accompanying notes are an integral part of these balance sheets.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Years Ended December 31,
------------------------------------
1996 1997 1998
------- ------- --------
Net Sales $ 21,286 $ 23,559 $ 23,625
Cost and expenses:
Cost of sales 10,327 9,530 10,870
Selling, general and administrative 10,771 10,814 10,254
Research and development 5,927 3,006 2,589
Charges related to ACI and
Aloe & Herbs - - 1,750
Interest expense 88 6 3
Interest income (392) (43) (236)
------- ------- --------
Income (loss) before income taxes (5,435) 246 (1,605)
Provision for income taxes 88 20 10
------- ------- --------
Net Income (loss) (5,523) 226 (1,615)
Dividends and income attributed to
preferred shareholders (1,023) (70) -
------- ------- --------
Net income (loss) available to common
shareholders $ (6,546) $ 156 $ (1,615)
======= ======= ========
Net income (loss) available to common
shareholders per share - basic and
diluted $ (.74) $ .02 $ (.17)
======= ======= ========
The accompanying notes are an integral part of these statements.
Consolidated Statements of Shareholders' Investment
For the Years Ended December 31, 1996, 1997 and 1998
(Dollar amounts and share amounts in thousands)
Capital in Total
Preferred Common Excess of Shareholders'
Stock Stock Par Value Deficit Investment
-------------- ------------- --------- ------- ----------
Shares Amount Shares Amount
------ ----- ------ ------
Balance,
January 1, 1996 12 $1,167 8,379 $84 $44,666 $(23,518) $22,399
Issuance of common stock
upon exercise of stock
options, warrants and
employee stock purchase
plan - - 316 3 4,604 - 4,607
Dividends on preferred
stock (Series C) - 35 - - - (37) (2)
Conversion of preferred to
common stock (Series C) (12) (1,202) 175 2 1,200 - -
Sales of convertible
preferred stock (Series E),
$100 Par, net of issuance
costs of $324 1 66 - - 6,210 - 6,276
Net loss and comprehensive
loss - - - - - (5,523) (5,523)
--------------------------------------------------------------------------------------------
Balance,
December 31, 1996 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
====== ====== ====== ==== ====== ======= ======
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flow
(Dollar amounts in thousands)
Years Ended December 31,
-------------------------------
1996 1997 1998
------ ------ ------
Cash flows from (used in) operating activities:
Net income (loss) $(5,523) $ 226 $(1,615)
Adjustments to reconcile income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 1,273 1,196 1,043
Charge related to ACI investments - - 600
Provision for inventory obsolescence 545 523 53
Changes in assets and liabilities:
Accounts receivable, net 315 (1,545) 129
Inventories 1,067 (1,903) (19)
Prepaid expenses 490 40 (411)
Other assets (1,534) (360) 1,340
Accounts payable and accrued liabilities 949 (76) (55)
------ ------ ------
Net cash provided (used) by
operating activities (2,418) (1,899) 1,065
Cash flows from investing activities:
Purchases of property, plant and equipment (242) (295) (1,278)
------ ------ ------
Net cash used by investing activities (242) (295) (1,278)
Cash flows from financing activities:
Issuances of common stock 4,607 2,628 152
Issuance (retirement) of preferred stock 6,276 (7,785) -
Payments of short and long-term debt (2,999) - -
Principal payments of capital lease
obligations (40) (32) (31)
------ ------ ------
Net cash provided (used) by financing
activities 7,844 (5,189) 121
------ ------ ------
Net increase (decrease) in cash and cash
equivalents 5,184 (7,383) (92)
Cash and cash equivalents at beginning of year 6,222 11,406 4,023
------ ------ ------
Cash and cash equivalents at end of year $11,406 $ 4,023 $ 3,931
Supplemental Disclosure of Cash Flow ====== ====== ======
Information
Cash paid during the year for interest $ 87 $ 10 $ 3
Cash paid during the year for income taxes 13 - 44
Supplemental Disclosure of Non-Cash
Financing Activities:
Equipment acquired through capital leases 39 - -
The accompanying notes are an integral part of these statements.
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 Wound and skin care 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 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 leaves used for manufacturing the
Company's products are grown on a Company-owned farm in Costa Rica. The
remaining leaves are purchased from independent 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. Certain prior
year amounts have been reclassified to conform with 1998 presentation.
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 cost equivalents unless otherwise
restricted.
INVENTORY Inventories are recorded at lower of first-in, first-out cost
or market.
DEPRECIATION AND AMORTIZATION 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. For the majority of the Company's sales, this occurs at
the time of shipment.
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.
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 1996, 1997, or 1998.
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.
OPERATING SEGMENTS In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"), which is effective for years beginning after December
15, 1997. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The
Company adopted the new requirements retroactively in 1998. The adoption
of the new requirements did not impact the operating results of the
Company.
NOTE THREE. INVENTORIES
The following summarizes the components of inventory at December 31, 1997
and 1998, in thousands:
1997 1998
-------------------------------------------------------------------------
Raw materials and supplies $1,438 $1,135
Work-in-process 1,296 1,182
Finished goods 2,269 2,652
-------------------------------------------------------------------------
Total $5,003 $4,969
-------------------------------------------------------------------------
The inventory balances are net of $516,000 and $525,000 of reserves for
obsolete and slow moving inventory at December 31,1997 and 1998,
respectively.
NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1997 and 1998, in thousands:
Estimated
1997 1998 Useful Lives
-------------------------------------------------------------------------
Land and improvements $ 1,389 $ 1,389
Buildings and improvements 8,086 8,862 7 to 25 years
Furniture and fixtures 892 930 4 to 8 years
Machinery and equipment 7,836 8,165 3 to 10 years
Leasehold improvements 793 928 1 to 3 years
Equipment under capital
leases 150 150 4 years
------ ------
Total 19,146 20,424
-------------------------------------------------------------------------
Less accumulated
depreciation and
amortization 8,331 9,374
-------------------------------------------------------------------------
Property, plant and
equipment, net $10,815 $ 11,050
====== =======
The Company's net investment in property, plant and equipment and other
assets in Costa Rica at December 31, 1997 and 1998 was $3,738,000 and
$4,310,000, respectively.
NOTE FIVE. ACCRUED LIABILITIES
The following summarizes significant components of accrued liabilities at
December 31, 1997 and 1998, in thousands:
1997 1998
-------------------------------------------------------------------------
Accrued payroll $ 232 $ 213
Accrued sales commissions 238 185
Accrued taxes 633 377
Other 724 740
-------------------------------------------------------------------------
Total $1,827 $1,515
-------------------------------------------------------------------------
NOTE SIX. CHARGES RELATED TO ACI AND ALOE & HERB
The Company invested $200,000 in Aloe Commodities International, Inc.
("ACI"), in exchange for 200,000 shares of ACI common stock in October
1996 and invested an additional $400,000 in exchange for 400,000 shares
of ACI common stock in December 1997. These investments were made in
anticipation of a possible acquisition of ACI which never materialized.
In addition, the Company also sells liquid aloe gel and Manapol[R] Powder
to ACI through its Caraloe subsidiary. Sales to ACI in 1997 and 1998
were $929,000 and $561,000, respectively. Separately, during 1998, the
Company loaned ACI $200,000 as part of the funding for the Aloe
and Herbs International, Inc. venture (described below). The loan was
evidenced by an unsecured note receivable with an initial maturity date
in August 1998. The maturity date on the note was extended to February
1999, at which time it was replaced by a note with a maturity date of
February 4, 2000. At December 31, 1998, ACI also owed the Company
$681,000 on open account. On February 4, 1999, the Company converted
the entire open account balance into a separate note receivable with a
maturity date of February 4, 2000.
The Company had reserved approximately $.1 million at December 31, 1997
to cover potential exposures on the approximately $1.1 million of
investments in and notes and accounts receivable from ACI. The Company
continued to monitor its relationship with ACI and gradually increased
the reserve over the first three quarters of 1998 by approximately
$.1 million. In the fourth quarter of 1998 the Company obtained the
1997 audited financial statements and the October 1998 year-to-date
unaudited financial statements of ACI, which indicated a substantial
doubt regarding ACI's ability to continue as a going concern. In
addition, ACI had been unsuccessful in raising capital needed for its
operations. Consequently, the Company increased the reserves against
its investment and notes and accounts receivable balances related to ACI
by approximately $1.2 million in the fourth quarter to fully reserve all
such amounts related to ACI.
Beginning in the second quarter of 1998, the Company began to make
strategic investments into 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 agreement to provide farming
expertise, working capital and Aloe vera plants. The Company expects Aloe
& Herbs, upon reaching full production, to have the potential of
reducing the Company's cost of aloe leaves which is a significant
component of the Company's cost of sales. Additionally, the Company
expects that when the farm reaches full production it will provide a
supply of leaves to meet the Company's growing demand in the raw
materials product lines and expected future demand if the Company
receives the FDA approval of the Company's ulcerative colitis complex
carbohydrate-based drug. Further, the Company believes this supply will
reduce the Company's dependence upon leaves from other countries where
consistency and quality of supplies are uncertain.
During the second and fourth quarters of 1998 the Company invested a
total of approximately $.5 million in Aloe & Herbs, generally in the form
of notes receivable. Aloe & Herbs has had difficulty acquiring the
additional financing required to complete its business plans and based
upon the review of the financial statements of Aloe & Herbs, the Company
believes there is substantial doubt regarding Aloe & Herbs' ability to
remain a going concern without obtaining additional financing. Aloe &
Herbs has substantial capital requirements during 1999 and 2000 for debt
payments, ongoing investments in aloe plants and other general start-up
costs. The Company has not committed to provide the amount of additional
capital Aloe & Herbs requires. Consequently, the Company has fully
reserved the $.5 million invested in Aloe & Herbs due to the risk and
uncertainty of Aloe & Herbs' ability to repay the amounts due the
Company. The Company continues to believe that strategies to reduce the
overall cost of leaves while increasing the supply and quality of leaves
for raw materials production are essential.
NOTE SEVEN. LINE OF CREDIT
In November 1997, the Company entered into an agreement with a bank for a
$3,000,000 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 to replace a certificate of deposit
of $1,250,000 at December 31, 1997 (included in other assets)
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, 1998 there was no
balance outstanding on the credit line.
NOTE EIGHT. PREFERRED STOCK
SERIES C SHARES The Series C Shares were convertible into common
stock of the Company at a price of $7.58 per share; were callable by the
Company after January 14, 1996; and provided for dividend payments to be
made only through the issuance of additional Series C Shares. Dividends
of $140,000 and $37,000 were recorded in 1995 and 1996 on the Series C
Shares. In January 1996, all of the outstanding Series C shares were
converted to 174,935 shares of the Company's common stock, and related
warrants to purchase 55,000 shares of common stock at $15 per share were
exercised.
SERIES E SHARES In October 1996, the Company sold 660 shares of
Series E Convertible Preferred Stock (the "Series E Shares") for
$6,600,000 before offering fees and costs of $324,000. The Series E
Shares 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) or 87% of the
market price immediately preceding the conversion date. Each Series E
Share was convertible into the number of whole shares of common stock
determined by dividing $10,000 by the conversion price. Because the
preferred stock was convertible into common stock at a conversion rate
that was the lower of a rate fixed at issuance or a fixed discount from
the common stock market price at the time of conversion, the discounted
amount was considered to be an assured incremental yield to the preferred
shareholders which had to be recognized as a deemed preferred dividend
over the period from issuance to the date when the preferred stock
first became convertible. Accordingly, a deemed dividend of $986,000, or
$0.11 per share, was recognized in the net income (loss) per share
calculation for 1996 as a reduction in earnings available to common
shareholders.
On October 31, 1996, the Company announced the unfavorable results of the
first Phase III trial of Aliminase[TM] oral capsules, and the
Aliminase[TM] project was placed on hold. This event resulted in
significant changes in the Company's planned uses of and need for these
funds. In addition, the decline in the market price of the Company's
common stock had increased the extent of the dilution that would have
occurred if all of the Series E Shares then outstanding had been
converted into common stock. For these and other reasons, 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
above 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, 1998, 136,646 shares had been purchased by employees at
prices ranging from $1.81 to $29.54 per share.
STOCK OPTIONS The Company has an incentive stock option plan which was
approved by the shareholders in 1995 upon expiration of the 1985 plan
under which incentive stock options and nonqualified stock options may be
granted to certain 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 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, 1998 options to purchase 143,967 shares
were available for future grants under the Plan.
The following summarizes stock option activity for each of the three
years ended December 31, 1996, 1997 and 1998 (shares in thousands):
Weighted Average
Exercise
Shares Price Per Share Price
-------------------------------------------------------------------------
Balance, January 1, 1996 836 $ 6.25 to $35.25 $18.82
Granted 141 $24.25 to $47.75 $32.69
Lapsed or canceled (109) $11.25 to $28.75 $23.81
Exercised (201) $ 6.25 to $29.00 $15.33
-------------------------------------------------------------------------
Balance, December 31, 1996 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
-------------------------------------------------------------------------
Options exercisable at
December 31, 1998 417 $ 2.50 to $28.75 $ 5.71
-------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------ --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
-------------------------------------------------------------------------
$ 2.50 to $ 5.25 1,186 9.3 years $3.77 303 $ 3.41
$ 6.00 to $28.75 202 6.1 years $9.36 114 $11.82
--------------- ----- --------- ----- --- ------
$ 2.50 to $28.75 1,388 8.8 years $4.58 417 $ 5.71
=============== ===== ========= ===== === ======
In 1998, the Company offered all option holders the opportunity
to exchange their outstanding options for new options. Employees who
accepted the Company's offer received new 10-year options granted on
January 30, 1998 for the same numbers of shares as the options
surrendered, with an exercise price of $4.81 per share and a vesting
schedule of 25% per year beginning on the first anniversary of the grant
date. Non-employee directors, all of whom accepted the Company's offer,
received new, fully-vested, four-year options granted on May 14, 1998
for the same numbers of shares as the options surrendered, with an
exercise price of $5.25 per share. Options for a total of 671,547 shares
were surrendered with exercise prices between $5.31 and $47.75 in
exchange for new options for the same number of shares.
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:
-------------------------------------------------------------------------
1996 1997 1998
-------------------------------------------------------------------------
Net income (loss)
(in thousands):
As reported $(5,523) $226 $(1,615)
Pro forma (8,022) (2,199) (4,155)
Diluted net income (loss)
available to common shareholders
per share:
As reported $(0.74) $.02 $(.17)
Pro forma (1.03) (.25) (.96)
-------------------------------------------------------------------------
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 in 1996, 1997, and 1998,
respectively: risk-free interest rates of 6.47%, 6.13% and 5.38%,
expected volatility of 63.0%, 57.0% and 54.7%, expected lives of 5.0,
5.0 and 2.4 years on options granted to employees. The Company used
the following weighted-average assumptions for grants in 1996, 1997 and
1998: expected dividend yields of 0% and expected lives of 4.0 years
on grants to directors. The weighted average fair value of options
granted were $18.70, $6.84 and $1.05 in 1996, 1997, and 1998,
respectively.
STOCK WARRANTS From time to time, the Company has granted warrants to
purchase common stock to the Company's research consultants and certain
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, 1996, 1997
and 1998, (shares in thousands):
Weighted
Average
Shares Price Per Share Exercise
Price
-------------------------------------------------------------------------
Balance, January 1, 1996 129 $ 9.75 to $20.13 $13.99
Lapsed or canceled (3) $12.13 $12.13
Exercised (75) $12.75 to $15.00 $13.35
-------------------------------------------------------------------------
Balance, December 31, 1996
and 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
-------------------------------------------------------------------------
Warrants exercisable at
December 31, 1998 41 $13.00 to $20.13 $16.32
-------------------------------------------------------------------------
Warrants outstanding at December 31, 1998 had a weighted average
remaining contractual life of one year.
COMMON STOCK RESERVED At December 31, 1998 the Company had reserved a
total of 1,936,472 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 over the next four years. 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, 1998, are as
follows, in thousands:
Years Ending December 31,
-------------------------------------------------------------------------
1999 $ 439
2000 182
2001 131
2002 5
-------------------------------------------------------------------------
Total minimum lease payments $757
-------------------------------------------------------------------------
Total rental expenses under operating leases were $451,000, $465,000 and
$451,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
In February 1995, the Company entered into a commitment to purchase $2.5
million of freeze-dried products from its principal supplier over a 66
month period ending in August 2000. The commitment, which also provides
for monthly minimum purchases, is required to be supported to the extent
of 60% of the remaining commitment by a letter of credit from a bank or a
pledged certificate of deposit (see Note Seven). The Company has made
purchases pursuant to this commitment of $255,000, $245,000 and $95,000
in 1996, 1997 and 1998, respectively. At December 31, 1998 the Company
had made prepayments of $360,000 toward future deliveries under the
commitment. Although management believes that new products which the
Company began to actively market in late 1997, additional products to be
developed and outsourcing of a portion of its freeze drying requirements
to this supplier will result in no losses pursuant to this commitment,
the Company could incur significant losses if it is not able to meet the
minimum purchase commitments.
NOTE ELEVEN. INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1996, 1997 and 1998
are as follows, in thousands:
1996 1997 1998
-------------------------------------------------------------------------
Net operating loss carryforward $ 12,875 $ 12,468 $ 12,182
Research and development
and other credits 839 858 867
Property, plant and equipment 184 225 259
Patents 318 318 318
Inventory 249 315 250
Other, net 285 430 753
Bad Debt Reserve 72 162 662
Less - Valuation allowance (14,822) (14,776) (15,291)
-------- ------- -------
$ 0 $ 0 $ 0
======== ======= =======
The Company has provided a valuation allowance against the entire
deferred tax asset at December 31, 1996, 1997 and 1998 due to the
uncertainty as to the realization of the asset.
The provisions for income taxes for the years ended December 31, 1996,
1997 and 1998 consisted of the following, in thousands:
1996 1997 1998
-------------------------------------------------------------------------
Current provision $ 88 $ 20 $ 10
Deferred provision, net - - -
-------------------------------------------------------------------------
Total provision $ 88 $ 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:
1996 1997 1998
-------------------------------------------------------------------------
Statutory tax rate (34.0%) 34.0% (34.0%)
State income taxes .5 - -
Unrecognized deferred tax
benefit/change in valuation
allowance 34.9 (20.8) 34.0
Expenses related to foreign
operations - - -
Other .2 (4.9) -
-------------------------------------------------------------------------
Effective tax rate 1.6% 8.3% 0.0%
-------------------------------------------------------------------------
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $35,830,000 for federal income tax purposes, which expire
beginning in 1999, and research and development tax credit carryforwards
of approximately $839,000, which expire beginning in 1999, all of which
are available to offset federal income taxes due in future periods.
Additionally, 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/General Medical
accounted for 9%, 12% and 11%; Owens & Minor accounted for 11%, 11% and
10%; and Bergen Brunswig, which acquired Durr Medical and Colonial
Healthcare in December 1996, accounted for 12%, 9% and 5% of the
Company's net sales in 1996, 1997 and 1998. Sales by Caraloe, Inc.,
to Mannatech, Inc., accounted for 15%, 15% and 23% of the Company's net
sales in 1996, 1997 and 1998, respectively. Accounts receivable from
Mannatech represented 17% of gross accounts receivable December 31,
1998. 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 8,798,000,
8,953,000 and 9,320,000 in 1996, 1997, and 1998, respectively.
In calculating the diluted net loss available to common shareholders per
share for 1996 and 1998, 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 wound care division and Caraloe, Inc., a
consumer products subsidiary, which sells bulk ingredients, consumer
beverages, and nutritional and skin care products.
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes. The accounting policies of
the reportable segments are the same as those described in the Summary of
Significant Accounting Polices (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)
Wound Caraloe,
1997 Care Inc. Corporate Total
-------------------------------------------------------------------------
Sales to unaffiliated
customers $18,115 $5,444 $ - $23,559
Income(loss) before
income taxes 1,480 1,381 (2,615) 246
Identifiable assets 15,718 1,426 8,652 25,796
Capital expenditures 135 - 160 295
Depreciation and
amortization 849 - 347 1,196
-------------------------------------------------------------------------
1998
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
NOTE FIFTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The unaudited selected quarterly financial data below reflect the fiscal
years ended December 31, 1997, and 1998, respectively.
(Dollar amounts in thousands, except shares and per share amounts)
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------------------------------------------------------
Net sales $ 6,083 $ 5,121 $ 6,229 $ 6,126
Gross profit 3,576 3,234 3,653 3,566
Net income (loss) 83 (531) 463 211
Diluted income (loss)
available to common
shareholders per
share $ .00 $ (.05) $ .05 $ .02
Weighted average
common shares 8,870,000 8,896,000 9,239,000 9,293,000
-------------------------------------------------------------------------
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] (1,928)
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
[1] After a charge of $1,750,000 for ACI and Aloe & Herbs as
described in Note Six.
Financial Statement Schedule
Valuation and Qualifying Accounts
(In thousands)
Description Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
of Period Expenses Accounts Deductions of Period
------------------------------------------------------------------------------
1996
Bad Debt Reserve $227 $ 82 $ - $ 96 $213
Inventory Reserve 218 545 - 441 322
Rebates 82 90 - 36 136
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 - 44 535
Rebates 342 3,499 - 3,437 404
ACI and Aloe &
Herbs non-current
notes and
investments
included in other
Assets 0 1,350 - 0 1,350
----------------------------------------------------------------------------
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, 1998
and 1997 and the related consolidated statements of operations,
shareholders' investment and cash flows for the two years in the period
then ended. 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. The accompanying
consolidated financial statements of Carrington Laboratories, Inc., and
subsidiaries for the year ended December 31, 1996 were examined by other
independent accountants whose report thereon, dated February 7, 1997
(except with respect to certain matters as to which the dates were April
25, 1997 and March 4, 1997), contained no qualifications.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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 1998 and 1997 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, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles. 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 26, 1999
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
Carrington Laboratories, Inc. and Subsidiaries:
We have audited the consolidated statement of operations, shareholders'
investment and cash flows of Carrington Laboratories, Inc. (a Texas
corporation) and subsidiaries for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the results of operations and
cash flows of Carrington Laboratories, Inc. and subsidiaries for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule on page
F-20 of this form 10-K, as it relates to 1996, is presented for the
purpose of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This
schedule, as it relates to 1996, has been subjected to the auditing
procedures applied in our audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas,
February 7, 1997 (except with respect
to certain matters discussed in Note 8,
as to which the date is April 25, 1997)
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 31, 1999 By: /s/ Carlton E. Turner
-------------------------
Carlton E. Turner, Ph.D., 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 March 31, 1999
Carlton E. Turner, Ph.D. Executive Officer and
Director
(principal executive
officer)
/s/ Robert W. Schnitzius Chief Financial Officer March 31, 1999
Robert W. Schnitzius (principal financial and
accounting officer)
/s/ R. Dale Bowerman Director March 31, 1999
R. Dale Bowerman
/s/ George DeMott Director March 31, 1999
George DeMott
/s/ Robert A. Fildes, Ph.D. Director March 31, 1999
Robert A. Fildes, Ph.D.
/s/ Thomas J. Marquez Director March 31, 1999
Thomas J. Marquez
/s/ James T. O Brien Director March 31, 1999
James T. O Brien
/s/ Selvi Vescovi Director March 31, 1999
Selvi Vescovi
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- ----
3.1 Restated Articles of Incorporation of Carrington
Laboratories, Inc., (incorporated herein by reference
to Exhibit 3.1 to Carrington's 1988 Annual Report on
Form 10-K).
3.2 Statement of Cancellation of Redeemable Shares of
Carrington Laboratories, Inc., dated June 9, 1989
(incorporated herein by reference to Exhibit 3.2 to
Carrington's 1991 Annual Report on Form 10-K).
3.3 Statement of Change of Registered Office and
Registered Agent of Carrington Laboratories, Inc.,
(incorporated herein by reference to Exhibit 3.1 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1991).
3.4 Statement of Resolution Establishing Series D
Preferred Stock of Carrington Laboratories, Inc.,
(incorporated herein by reference to Exhibit 3.1 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1991).
3.5 Statement of Resolution Establishing Series E
Convertible Preferred Stock of Carrington
Laboratories, Inc., (incorporated herein by reference
to Exhibit 3.1 to Carrington's Form 8-K Current Report
dated October 21, 1996).
3.6 Statement of Cancellation of Treasury Shares, dated
July 17, 1997 (incorporated herein by reference to
Exhibit 3.6 to Carrington's 1997 Annual Report on Form
10-K).
3.7 Statement of Resolution Eliminating Four Series of
Preferred Stock, dated July 17, 1997 (incorporated
herein by reference to Exhibit 3.7 to Carrington's
1997 Annual Report on Form 10-K).
3.8 By-laws 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).
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- ----
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).
4.23 Rights Agreement dated as of September 19, 1991,
between Carrington Laboratories, Inc., and Ameritrust
Company National Association (incorporated herein by
reference to Exhibit 1 to Carrington's Report on Form
8-K dated September 19, 1991).
10.1** 1985 Stock Option Plan of Carrington Laboratories,
Inc., as amended through April 28, 1994 (incorporated
herein by reference to Exhibit 4.1 to Carrington's
Form S-8 Registration Statement (No. 33-64407) filed
with the Securities and Exchange Commission on
November 17, 1995).
10.2** Form of Nonqualified Stock Option Agreement for
employees, as amended, relating to Carrington's 1985
Stock Option Plan (incorporated herein by reference to
Exhibit 4.2 to Carrington's Registration Statement on
Form S-8 (No. 33-50430) filed with the Securities and
Exchange Commission on August 4, 1992).
10.3** Form of Nonqualified Stock Option Agreement for non-
employee directors, as amended, relating to
Carrington's 1985 Stock Option Plan (incorporated
herein by reference to Exhibit 4.3 to Carrington's
Registration Statement on Form S-8 (No. 33-64407)
filed with the Securities and Exchange Commission on
November 17, 1995).
10.4 License Agreement dated September 20, 1990, between
Carrington Laboratories, Inc., and Solvay Animal
Health, Inc. (incorporated herein by reference to
Exhibit 10.1 to Carrington's Quarterly Report on Form
10-Q for the quarter ended August 31, 1990).
10.5 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).
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- ----
10.6 Lease Agreement dated as of August 30, 1991, between
Carrington Laboratories, Inc., and Western Atlas
International, Inc. (incorporated herein by reference
to Exhibit 10.59 to Carrington's 1991 Annual Report on
Form 10-K).
10.7** Employee Stock Purchase Plan of Carrington
Laboratories, Inc., as amended through June 15, 1995
(incorporated herein by reference to Exhibit 10.29 to
Carrington's 1995 Annual Report on Form 10-K).
10.8** Employment Agreement dated July 6, 1993, between
Carrington Laboratories, Inc., and Luiz F. Cerqueira
(incorporated herein by reference to Exhibit 10.43 to
Carrington's 1993 Annual Report on Form 10-K).
10.9 Common Stock Purchase Warrant dated September 14,
1993, issued by Carrington Laboratories, Inc., to E.
Don Lovelace (incorporated herein by reference to
Exhibit 10.44 to Carrington's 1993 Annual Report on
Form 10-K).
10.10 Common Stock Purchase Warrant dated September 14,
1993, issued by Carrington Laboratories, Inc., to
Jerry L. Lovelace (incorporated herein by reference to
Exhibit 10.45 to Carrington's 1993 Annual Report on
Form 10-K).
10.11** Agreement Regarding Termination of Employment and Full
and Final Release dated February 16, 1994, between
Carrington Laboratories, Inc., and David A. Hotchkiss
(incorporated herein by reference to Exhibit 10.49 to
Carrington's 1993 Annual Report on Form 10-K).
10.12 License Agreement dated March 18, 1994, between
Carrington Laboratories, Inc., and Societe Europeenne
de Biotechnologie (incorporated herein by reference to
Exhibit 10.53 to Carrington's 1994 Annual Report on
Form 10-K).
10.13 Agreement dated March 28, 1994, between Carrington
Laboratories, Inc., and Keun Wha Pharmaceutical Co.,
Ltd., (incorporated herein by reference to Exhibit
10.54 to Carrington's 1994 Annual Report on Form 10-
K).
10.14 Lease Agreement dated June 15, 1994, between DFW Nine,
a California limited partnership, and Carrington
Laboratories, Inc., (incorporated herein by reference
to Exhibit 10.55 to Carrington's 1994 Annual Report on
Form 10-K).
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- ----
10.15 Lease Amendment dated August 23, 1994, amending Lease
Agreement listed as Exhibit 10.14 (incorporated herein
by reference to Exhibit 10.57 to Carrington's 1994
Annual Report on Form 10-K).
10.16 License Agreement dated September 29, 1994, between
Carrington Laboratories, Inc., and Immucell
Corporation (incorporated herein by reference to
Exhibit 10.58 to Carrington's 1994 Annual Report on
Form 10-K).
10.17 Third Lease Amendment dated December 1, 1994, amending
Lease Agreement listed as Exhibit 10.6 (incorporated
herein by reference to Exhibit 10.60 to Carrington's
1994 Annual Report on Form 10-K).
10.18 Production Contract dated February 13, 1995, between
Carrington Laboratories, Inc., and Oregon Freeze Dry,
Inc. (incorporated herein by reference to Exhibit
10.63 to Carrington's 1994 Annual Report on Form 10-
K).
10.19** Management Compensation Plan (incorporated herein by
reference to Exhibit 10.64 to Carrington's 1994 Annual
Report on Form 10-K).
10.20 Research Agreements dated June 24, 1994, September 16,
1994, and February 2, 1995, between Southern Research
Institute and Carrington Laboratories, Inc.,
(incorporated herein by reference to Exhibit 10.65 to
Carrington's 1994 Annual Report on Form 10-K).
10.21 Trademark License Agreement between Caraloe, Inc.
(Licensor), and Emprise International, Inc.
(Licensee), dated March 31, 1995 (incorporated herein
by reference to Exhibit 10.2 to Carrington's Second
Quarter 1995 Report on Form 10-Q).
10.22 Supply Agreement between Caraloe, Inc. (Seller), and
Emprise International, Inc. (Buyer), dated March
31,1995 (incorporated herein by reference to Exhibit
10.3 to Carrington's Second Quarter 1995 Report on
Form 10-Q).
10.23 Sales Distribution Agreement between the Chinese
Academy of Sciences and Carrington Laboratories, Inc.,
dated August 16, 1995 (incorporated herein by
reference to Exhibit 10.1 to Carrington's Third
Quarter 1995 Report on Form 10-Q).
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------- ----
10.24 Sales Distribution Agreement between the Chinese
Academy of Sciences and Carrington Laboratories, Inc.,
dated August 16, 1995 (incorporated herein by
reference to Exhibit 10.2 to Carrington's Third
Quarter 1995 Report on Form 10-Q).
10.25 Sales Distribution Agreement between the Chinese
Academy of Sciences and Carrington Laboratories, Inc.,
dated August 16, 1995 (incorporated herein by
reference to Exhibit 10.3 to Carrington's Third
Quarter 1995 Report on Form 10-Q).
10.26 Supply and Distribution Agreement between Medical
Polymers, Inc., and Carrington Laboratories, Inc.,
dated September 15, 1995 (incorporated herein by
reference to Exhibit 10.4 to Carrington's Third
Quarter 1995 Report on Form 10-Q).
10.27 Clinical Services Agreement between Pharmaceutical
Products Development, Inc., and Carrington
Laboratories, Inc., dated July 10, 1995 (incorporated
herein by reference to Exhibit 10.5 to Carrington's
Third Quarter 1995 Report on Form 10-Q).
10.28 Non-exclusive Sales and Distribution Agreement between
Innovative Technologies Limited and Carrington
Laboratories, Inc., dated August 22, 1995
(incorporated herein by reference to Exhibit 10.6 to
Carrington's Third Quarter 1995 Report on Form 10-Q).
10.29 Supplemental Agreement to Non-exclusive Sales and
Distribution Agreement between Innovative Technologies
Limited and Carrington Laboratories, Inc., dated
October 16, 1995 (incorporated herein by reference to
Exhibit 10.7 to Carrington's Third Quarter 1995 Report
on Form 10-Q).
10.30 Product Development and Exclusive Distribution
Agreement between Innovative Technologies Limited and
Carrington Laboratories, Inc., dated November 10, 1995
(incorporated herein by reference to Exhibit 10.8 to
Carrington's Third Quarter 1995 Report on Form 10-Q).
10.31** Resignation Agreement and Full and Final Release dated
February 24, 1995, between Carrington Laboratories,
Inc., and Bill H. McAnalley (incorporated herein by
reference to Exhibit 10.68 to Carrington's 1995 Annual
Report on Form 10-K).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.32** Revised and Restated Resignation Agreement dated March
14, 1995, between Carrington Laboratories, Inc., and
Karl H. Meister (incorporated herein by reference to
Exhibit 10.69 to Carrington's 1995 Annual Report on
Form 10-K).
10.33 Common Stock Purchase Warrant dated August 4, 1995,
issued by Carrington Laboratories, Inc., to Clifford
T. Kalista (incorporated herein by reference to
Exhibit 10.70 to Carrington's 1995 Annual Report on
Form 10-K).
10.34 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).
10.35 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).
10.36 Supply and Distribution Agreement between Farnam
Companies, Inc., and Carrington Laboratories, Inc.,
dated March 22, 1996 (incorporated herein by reference
to Exhibit 10.76 to Carrington's 1995 Annual Report on
Form 10-K).
10.37 Placement Agent Agreement between Carrington
Laboratories, Inc., and First Granite Securities, Inc.
(incorporated herein by reference to Exhibit 10.1 to
Carrington's Current Report on Form 8-K dated October
21, 1996).
10.38 Indemnification Agreement between the Carrington
Laboratories, Inc., and First Granite Securities, Inc.
(incorporated herein by reference to Exhibit 10.2 to
Carrington's Current Report on Form 8-K dated October
21, 1996).
10.39 Joint Escrow Instructions from Carrington
Laboratories, Inc., and accepted by Krieger & Prager,
Esqs., as escrow agent (incorporated herein by
reference to Exhibit 10.3 to Carrington's Current
Report on Form 8-K dated October 21, 1996).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.40 Stock Purchase Agreement between Carrington
Laboratories, Inc., and each of the purchasers of
shares of the Registrant's Series E Convertible
Preferred Stock (incorporated herein by reference to
Exhibit 10.4 to Carrington's Current Report on Form 8-
K dated October 21, 1996).
10.41 Amendment to the Stock Purchase Agreement between
Carrington Laboratories, Inc., and each of the
purchasers of shares of Carrington's Series E
Convertible Preferred Stock, dated October 15, 1996
(incorporated herein by reference to Exhibit 10.5 to
Carrington's Current Report on Form 8-K dated October
21, 1996).
10.42 Registration Rights Agreement between Carrington
Laboratories, Inc., and each of the purchasers of
shares of Carrington's Series E Convertible Preferred
Stock (incorporated herein by reference to Exhibit
10.6 to Carrington's Current Report on Form 8-K dated
October 21, 1996).
10.43 Distribution Agreement between Carrington
Laboratories, Inc., and Ching Hwa Pharmaceutical Co.,
Ltd., dated March 1, 1996 (incorporated herein by
reference to Exhibit 10.1 to Carrington's First
Quarter 1996 Report on Form 10-Q).
10.44 Fourth Amendment to Credit Agreement and Term Note
between Carrington Laboratories, Inc., and NationsBank
of Texas, N.A., dated May 1, 1996 (incorporated herein
by reference to Exhibit 10.2 to Carrington's First
Quarter 1996 Report on Form 10-Q).
10.45 Assignment of Certificate of Deposit to NationsBank of
Texas, N.A., dated May 1, 1996 (incorporated herein by
reference to Exhibit 10.3 to Carrington's First
Quarter 1996 Report on Form 10-Q).
10.46 Release of Liens agreement between Carrington
Laboratories, Inc., and NationsBank of Texas, N.A.,
dated May 1, 1996 (incorporated herein by reference to
Exhibit 10.4 to Carrington's First Quarter 1996 Report
on Form 10-Q).
10.47** Form of Nonqualified Stock Option Agreement for
Employees (incorporated herein by reference to Exhibit
4.1 to Carrington's Second Quarter 1996 Report on Form
10-Q).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.48** 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).
10.49** 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).
10.50** 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).
10.51 Sales Distribution Agreement between Faulding
Pharmaceuticals Laboratories and Carrington
Laboratories, Inc., dated September 30, 1996
(incorporated herein by reference to Exhibit 10.1 to
Carrington's Third Quarter 1996 Report on Form 10-Q).
10.52 Sales Distribution Agreement between Trudell Medical
Marketing Limited and Carrington Laboratories, Inc.,
dated May 15, 1996 (incorporated herein by reference
to Exhibit 10.2 to Carrington's Third Quarter 1996
Report on Form 10-Q).
10.53 Clinical Research Agreement between ICON and
Carrington Laboratories, Inc., dated July 15, 1996
(incorporated herein by reference to Exhibit 10.3 to
Carrington's Third Quarter 1996 Report on Form 10-Q).
10.54 Sales Distribution Agreement between Suco
International Corp. and Carrington Laboratories, Inc.,
dated December 1, 1996 (incorporated by reference to
Exhibit 10.54 to Carrington's 1996 Annual Report on
Form 10-K).
10.55 Sales Distribution Agreement between Recordati,
S.P.A., and Carrington Laboratories, Inc., and
Carrington Laboratories Belgium N.V., dated December
20, 1996 (incorporated by reference to Exhibit 10.55
to Carrington's 1996 Annual Report on Form 10-K).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.56 Nonexclusive Distribution Agreement between Polymedica
Industries, Inc., and Carrington Laboratories, Inc.,
dated November 15, 1996 (incorporated by reference to
Exhibit 10.56 to Carrington's 1996 Annual Report on
Form 10-K).
10.57 Sales Distribution Agreement between Gamida-Medequip
Ltd., and Carrington Laboratories, Inc., dated
December 24, 1996 (incorporated by reference to
Exhibit 10.57 to Carrington's 1996 Annual Report on
Form 10-K).
10.58 Sales Distribution Agreement between Gamida For Life
BV, and Carrington Laboratories, Inc., dated December
24, 1996 (incorporated by reference to Exhibit 10.58
to Carrington's 1996 Annual Report on Form 10-K).
10.59 Sales Distribution Agreement between Darrow
Laboratorios S/A and Carrington Laboratories, Inc.,
dated December 4, 1996 (incorporated by reference to
Exhibit 10.59 to Carrington's 1996 Annual Report on
Form 10-K).
10.60 Independent Sales Representative Agreement between
Vision Medical and Carrington Laboratories, Inc.,
dated October 1, 1996 (incorporated by reference to
Exhibit 10.60 to Carrington's 1996 Annual Report on
Form 10-K).
10.61 Independent Sales Representative Agreement between
Think Medical, Inc., and Carrington Laboratories,
Inc., dated October 1, 1996 (incorporated by reference
to Exhibit 10.61 to Carrington's 1996 Annual Report on
Form 10-K).
10.62 Independent Sales Representative Agreement between
Meares Medical Sales Associates and Carrington
Laboratories, Inc., dated October 1, 1996
(incorporated by reference to Exhibit 10.62 to
Carrington's 1996 Annual Report on Form 10-K).
10.63 Supply Agreement between Aloe Commodities
International, Inc., and Caraloe, Inc., dated February
13, 1997 (incorporated by reference to Exhibit 10.63
to Carrington's 1996 Annual Report on Form 10-K).
10.64 Trademark License Agreement between Light Resources
Unlimited and Carrington Laboratories, Inc., dated
March 1, 1997 (incorporated by reference to Exhibit
10.64 to Carrington's 1996 Annual Report on Form 10-
K).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.65 Supply Agreement between Light Resources Unlimited and
Caraloe, Inc., dated February 13, 1997 (incorporated
by reference to Exhibit 10.65 to Carrington's 1996
Annual Report on Form 10-K).
10.66 Sales Distribution Agreement between Penta
Farmaceutica, S.A., and Carrington Laboratories, Inc.,
dated December 27, 1996 (incorporated by reference to
Exhibit 10.66 to Carrington's 1996 Annual Report on
Form 10-K).
10.67 Stock Subscription Offer of Aloe Commodities, Inc.,
and Caraloe, Inc., dated October 30, 1996
(incorporated by reference to Exhibit 10.67 to
Carrington's 1996 Annual Report on Form 10-K).
10.68 Modification Number Two to the Production Contract
dated February 13, 1995, between Carrington
Laboratories, Inc., and Oregon Freeze Dry, Inc.,
listed as Exhibit 10.18, dated November 19, 1996
(incorporated by reference to Exhibit 10.68 to
Carrington's 1996 Annual Report on Form 10-K).
10.69 Offer and Agreement of Sale and Purchase of
Convertible Preferred Series E Stock between holders
of Carrington Laboratories, Inc., Convertible
Preferred Series E Stock and Carrington Laboratories,
Inc., dated February 26, 1997 (incorporated by
reference to Exhibit 10.69 to Carrington's 1996 Annual
Report on Form 10-K).
10.70 Sales Distribution Agreement between Laboratories PiSA
S.A. DE C.V., and Carrington Laboratories, Inc., dated
November 1, 1995 (incorporated by reference to Exhibit
10.70 to Carrington's 1996 Annual Report on Form 10-
K).
10.71 Termination Acknowledgment between China Academy of
Sciences and Carrington Laboratories, Inc., dated
February 12, 1996, regarding the three agreements
listed as Exhibits 10.23, 10.24 and 10.25
(incorporated by reference to Exhibit 10.71 to
Carrington's 1996 Annual Report on Form 10-K).
10.72 Letter from Immucell Corporation to Carrington
Laboratories, Inc., dated February 7, 1996, canceling
the License Agreement listed as Exhibit 10.16
(incorporated by reference to Exhibit 10.72 to
Carrington's 1996 Annual Report on Form 10-K).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.73 Supply Agreement between Met-Trim, LLC and Caraloe,
Inc., dated December 1, 1997 (incorporated herein by
reference to Exhibit 10.73 to Carrington's 1997 Annual
Report on Form 10-K).
10.74 Trademark License Agreement between Met-Trim, LLC and
Caraloe, Inc., dated December 1, 1997 (incorporated
herein by reference to Exhibit 10.74 to Carrington's
1997 Annual Report on Form 10-K).
10.75 Amendment Number One to Sales Distribution Agreement
between Carrington Laboratories, Inc., and Faulding
Pharmaceuticals/David Bull Laboratories, dated January
12, 1998 (incorporated herein by reference to Exhibit
10.75 to Carrington's 1997 Annual Report on Form 10-
K).
10.76 Sales Distribution Agreement between Carrington
Laboratories, Inc. and Carrington Laboratories Belgium
N.V., and Henry Schein U.K. Holdings, Ltd., dated
January 1, 1998 (incorporated herein by reference to
Exhibit 10.1 to Carrington's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).
10.77 Sales Distribution Agreement between Carrington
Laboratories, Inc. and Carrington Laboratories Belgium
N.V., and Saude 2000, dated January 5, 1998
(incorporated herein by reference to Exhibit 10.2 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.78 Sales Distribution Agreement between Carrington
Laboratories, Inc. and Carrington Laboratories Belgium
N.V., and Hemopharm GmbH, dated March 27, 1998
(incorporated herein by reference to Exhibit 10.4 to
Carrington's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.79 Sales Distribution Agreement between Carrington
Laboratories, Inc. and Carrington Laboratories Belgium
N.V., and Vincula International Trade Company, dated
March 27, 1998 (incorporated herein by reference to
Exhibit 10.5 to Carrington's Quarterly Report on Form
10-Q for the quarter
ended March 31, 1998).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.80** Separation Agreement and Full and Final Release dated
May 1, 1998 between Carrington Laboratories, Inc. and
Christopher S. Record (incorporated herein by
reference to Exhibit 10.6 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1998).
10.81 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).
10.82 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).
10.83 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).
10.84** Resignation and Consulting Agreement effective May 31,
1998 between Carrington Laboratories, Inc., and Luiz
F. Cerqueira (incorporated herein by reference to
Exhibit 4.1 to Carrington's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.85 Promissory Note of Rancho Aloe, (C.R.) S.A., dated
July 1, 1998 payable to the order of the Registrant in
the principal amount of $186,655.00 (incorporated
herein by reference to Exhibit 10.1 to Carrington's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.86 Wound and Skin Care Purchase Agreement dated August
27th, 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).
Exhibit Sequentially
Number Numbered
Exhibit Page
10.87 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).
10.88 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).
10.89* Modification Number Three to the Production Contract
dated February 13, 1995, between Carrington
Laboratories, Inc., and Oregon Freeze Dry, Inc.,
listed as Exhibit 10.89, dated March 30, 1998.
10.90* Supply Agreement dated October 12, 1998 between
Caraloe, Inc. (Seller) and One Family, Inc.(Buyer)
10.91* Trademark License Agreement between Caraloe, Inc.
(Licensor), and One Family, Inc. (Licensee), dated
October 12, 1998.
10.92* Promissory Note of Aloe & Herbs International, Inc.
dated November 23, 1998 payable to the order of the
Registrant in the principal amount of $300,000.00.
10.93* Supply Agreement dated December 3, 1998 between
Caraloe, Inc. (Seller) and Eventus International, Inc.
(Buyer)
10.94* Trademark License Agreement between Caraloe, Inc.
(Licensor), and Eventus International, Inc.
(Licensee), dated December 3, 1998.
10.95* Amendment Number One dated December 3, 1998 to Supply
Agreement between Caraloe, Inc. and Eventus
International, Inc.
10.96* Clinical Services Agreement between Carrington
Laboratories, Inc., and PPD Pharmaco, Inc. dated
January 25, 1999.
10.97* Promissory Note of Aloe Commodities International,
Inc., dated February 4, 1999 payable to the order of
the Registrant in the principal amount of $681,730.43.
Exhibit Sequentially
Number Numbered
Exhibit Page
10.98* 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 Internationa1, Inc. to the
Registrant.
10.99* Common Stock Purchase Warrant dated November 23,
1998, issued by Aloe and Herbs International, Inc.,
to Carrington Laboratories, Inc.
16.1 Letter dated March 21, 1997 from Arthur Andersen LLP
to the Securities and Exchange Commission
(incorporated herein by reference to Exhibit 16.1 to
Carrington's Form 10-K/A amendment to its Form 10-K
Annual Report for the year ended December 31, 1996,
which amendment was filed on April 7, 1997).
21.1* Subsidiaries of Carrington.
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Ernst & Young LLP
27.1* Financial Data Schedule
* Filed herewith.
** Management contract or compensatory plan.