-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CtdxbJbRqPVAUcsG/GAmScAjZ1DORK/GEmCDtQv9+fOAu8eBKh3eNABrkIBhOciV +cw03/DWqNXhDoa3cD9Zjw== 0000926236-99-000037.txt : 19990402 0000926236-99-000037.hdr.sgml : 19990402 ACCESSION NUMBER: 0000926236-99-000037 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRINGTON LABORATORIES INC /TX/ CENTRAL INDEX KEY: 0000718007 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 751435663 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10862 FILM NUMBER: 99582061 BUSINESS ADDRESS: STREET 1: 2001 WALNUT HILL LN CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 2145181300 MAIL ADDRESS: STREET 1: PO BOX 168128 CITY: IRVING STATE: TX ZIP: 75016-8128 FORMER COMPANY: FORMER CONFORMED NAME: AVACARE INC DATE OF NAME CHANGE: 19860521 10-K 1 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. EX-10.89 2 EXHIBIT 10.89 MODIFICATION NUMBER THREE Pursuant to the Production Contract dated as of February 13, 1995, between Carrington Laboratories and Oregon Freeze Dry, paragraph two of Article Seven (Minimum Commitments and Take or Pay Guaranty) Subsection C (Take or Pay Guaranty: Minimum Total Commitment) shall be amended to read as follows: In the event Purchaser takes delivery of and pays for, during any month of the term of this Production Contract, less than the monthly Minimum Purchase specified in Subsection C of Article Three, other than by a suspension of production by Purchaser pursuant to Article Eight, Purchaser agrees to pay Seller within normal terms an amount equal to the value of the Product and services not taken and such amount shall be deemed as a pre-payment that may be applied to future orders of Product and services during the term of the Production Contract. Seller will issue an invoice each month for any portion of the $30,000 minimum not taken in Product and services. Debit memos created by Seller will initiate these invoices. Seller will record these pre-payments on the balance sheet, and provide its Sales Department with a monthly balance from the general ledger. When orders are placed by Purchaser which have been pre-paid (that is, when a pre-payment balance exists on the general ledger), Seller will write these orders and price at zero to generate the required packing lists for Distribution. In the event that at the end of the term of the Production Contract there are unapplied pre-payments, Seller shall retain the unapplied pre-payments, if the Total Minimum Commitment has not been met, and the amount retained shall be applied to the Total Minimum Commitment as if it were Product delivered and paid for under the terms of the Production Contract. If the Total Minimum Commitment has been met, then any unapplied payments shall be promptly remitted to Purchaser. This amendment is effective May 1, 1997. IN WITNESS WHEREOF, the undesigned parties have duly executed this modification to their agreement on the date last written below. CARRINGTON LABORATORIES, INC. OREGON FREEZE DRY, INC. By: \s\ Carlton E. Turner By: \s\ Philip A. Unverzagt Title: President & CEO Title: Sr. V.P./CFO Date: March 30, 1998 Date: April 16, 1998 EX-10.90 3 EXHIBIT 10.90 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT (this "Agreement") effective as of October 12, 1998 is by and between CARALOE, INC., a Texas corporation ("Seller"), and One Family, Inc. a Delaware corporation ("Buyer"), WITNESSETH: WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, Caraloe's Manapol[R] Powder (hereinafter referred to under the name "Product") in the quantities, at the price, and upon the terms and conditions hereinafter set forth; and NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Term. The term of this Agreement shall commence on October 12, 1998, and shall end at midnight on October 11, 2006, unless sooner terminated as provided herein (the "Term"). 2. Sale and Purchase. Subject to the terms and conditions of this Agreement, Seller shall sell to Buyer, and Buyer shall purchase from Seller, during each year of the Term, agreed upon monthly quantities equal to all of Buyer's needs for Manapol[R] Powder for the Product. Seller shall, however, not be required to sell monthly quantities in excess of Seller's present plant, farm or manufacturing capacity. The Product specifications shall be mutually agreed upon by the Parties within ninety (90) days from the date of execution of this Agreement. Failure to reach agreement on the specifications within ninety (90) days shall cause this Agreement to terminate unless an extension thereto is mutually agreed upon by the Parties hereto. 3. Quality. Seller warrants to Buyer that all Manapol[R] Powder sold by Seller pursuant to this Agreement will generally conform to the quality specifications set forth in Exhibit A to this Agreement as per Buyer and Seller mutual agreement referenced above. EXCEPT AS PROVIDED IN THIS PARAGRAPH 3, THERE ARE NO WARRANTIES OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A PARTICULAR PURPOSE, MADE WITH RESPECT TO THE MANAPOL[R] POWDER TO BE SOLD HEREUNDER, AND NONE SHALL BE IMPLIED BY LAW. 4. Deliveries. Buyer shall instruct Seller from time to time during the Term, by placing a purchase order with Seller reasonably in advance of the date Buyer desires Manapol[R] Powder to be delivered to it hereunder, (i) as to the quantities of Manapol[R] Powder to be delivered to Buyer, (ii) as to the specific date of delivery, (iii) as to the specific location of delivery and (iv) as to the carrier or particular type of carrier for such delivery. During the Term, Buyer shall provide Seller (a) on an annual basis prior to the beginning of each year of the Term a nonbinding forecast of Buyer's minimum and maximum aggregate delivery requirements for Manapol[R] Powder for such year (provided that such forecast for the second year of the Term shall be provided to Seller by September 1, 1999), and (b) on a quarterly basis at least thirty (30) days prior to the end of each three-month period of the Term a forecast acceptable to Seller (which shall be binding on Buyer) of Buyer's minimum and maximum delivery requirements for Manapol[R] Powder for each month of the next three-month period (provided that such forecast for the initial period of the Term ending on January 30, 1999, shall be provided to Seller by November 1, 1998). The quantities of Manapol[R] Powder ordered by Buyer pursuant to this Agreement from time to time shall be spaced in a reasonable manner, and Buyer shall order such quantities in accordance with Buyer's binding forecasts. In no event shall Seller be required to deliver to Buyer in any three-month period a quantity of Manapol[R] Powder in excess of 125% of the maximum delivery requirement for such period set forth in the binding forecast for such period accepted by Seller. Deliveries of Manapol[R] Powder shall be made by Seller under normal trade conditions in the usual and customary manner being utilized by Seller at the time and location of the particular delivery. The Manapol[R] Powder delivered to Buyer hereunder shall be packaged per agreement of the Parties. All deliveries of Manapol[R] Powder to Buyer hereunder shall be made by Seller F.O.B. at the facilities of Seller or its affiliates located in either Dallas, Texas or Liberia, Costa Rica as agreed upon. 5. Purchase Price. All Manapol[R] Powder to be purchased by Buyer under this Agreement shall be purchased by it, during the first and second years of this Agreement, at a price per Product as set forth on Exhibit B to this Agreement. Thereafter, Buyer and Seller shall meet on a yearly basis to mutually agree upon prices for the upcoming contract year. If prices for the upcoming year cannot be agreed upon the Agreement shall terminate on October 12 of the contract year in question. At delivery point, Buyer shall bear all freight, insurance and similar costs, and all sales taxes, with respect to such purchases from that point forward. The purchase price of Manapol[R] Powder, together with all related freight, insurance and similar costs, and sales taxes, shall be paid by Buyer to Seller within thirty (30) days after the date of invoice. 6. Labels and Advertising (a) FDA Compliance of Labels and Advertising. All labels and advertising relating to the Manapol[R] Powder that reference Carrington Laboratories or Seller sold hereunder must strictly comply with all applicable rules and regulations of the FDA and all other applicable laws, rules and regulations, including but not limited to FDA requirements relating to product ingredients. (b) Claims by One Family, Inc., Unlimited. OFI hereby agrees not to make, or permit any of its employees, agents or distributors to make, any claims of any properties or results relating to Manapol[R] Powder and Carrington Laboratories or Seller, unless such claims have received written approval from the Seller. (c) FDA Approval of Claims. If OFI desires to seek FDA approval as to any specific claims with respect to the Manapol[R] Powder, OFI hereby agrees to (i) notify Caraloe of the claims and the application prior to filing and (ii) to keep informed as to the progress of the application, including but not limited to sending Caraloe copies of all communications or notices to or from the FDA, as applicable. (d) Right to Approve Labels, etc. If Caraloe so requests, OFI shall not use any label, advertisement or marketing material or individual spokesman associated with the Manapol[R] Powder and Carrington Laboratories or Seller, unless such label, advertisement or marketing material or individual spokesman has first been submitted to and approved by Caraloe. Caraloe shall not unreasonably withhold its approval of any such label, advertisement or marketing material. (e) Compliance by Third Parties. OFI shall take all steps reasonably necessary to ensure that its distributors and any other parties to whom it sells any of the Manapol[R] Powder for resale do not relabel, repackage, advertise, sell or attempt to sell the Manapol[R] Powder in a manner that would violate this Agreement if done by OFI. 7. Confidentiality. In the performance of Seller's obligations pursuant to this Agreement, Buyer may acquire from Seller or its affiliates technical, commercial, operating or other proprietary information relative to the business or operations of Seller or its affiliates (the "Confidential Information"). Buyer shall maintain the confidentiality, and take all necessary precautions to safeguard the secrecy, of any and all Confidential Information it may acquire from Seller or its affiliates. Buyer shall not use any of such Confidential Information for its own benefit or for the benefit of anyone else. Buyer shall not publicly disclose the existence of this Agreement or the terms hereof without the prior written consent of Seller. 8. Force Majeure. Seller shall not have any liability hereunder if it shall be prevented from performing any of its obligations hereunder by reason of any factor beyond its control, including, without limitation, fire, explosion, accident, riot, flood, drought, storm, earthquake, lightning, frost, civil commotion, sabotage, vandalism, smoke, hail, embargo, act of God or the public enemy, other casualty, strike or lockout, or interference, prohibition or restriction imposed by any government or any officer or agent thereof ("Force Majeure"), and Seller's obligations, so far as may be necessary, shall be suspended during the period of such Force Majeure and shall be cancelled in respect of such quantities of Manapol[R] Powder as would have been sold hereunder but for such suspension. Seller shall give to Buyer prompt notice of any such Force Majeure, the date of commencement thereof and its probable duration and shall give a further notice in like manner upon the termination thereof. Each party hereto shall endeavor with due diligence to resume compliance with its obligations hereunder at the earliest date and shall do all that it reasonably can to overcome or mitigate the effects of any such Force Majeure upon its obligations under this Agreement. 9. Rights Upon Default. (a) Seller's Rights Upon Default. If Buyer (i) fails to purchase the quantities of Manapol[R] Powder specified for purchase by Buyer hereunder, (ii) fails to make a payment hereunder when due or (iii) otherwise breaches any term of this Agreement, and such failure or breach is not cured to Seller's reasonable satisfaction within 5 days (in the case of a failure to make a payment) or 30 days (in any other case) after receipt of notice thereof by Buyer, or if Buyer fails to perform or observe any covenant or condition on its part to be performed when required to be performed or observed, and such failure continues after the applicable grace period, if any, specified in the Agreement, Seller may refuse to make further deliveries hereunder and may terminate this Agreement upon notice to Buyer and, in addition, shall have such other rights and remedies, including the right to recover damages, as are available to Seller under applicable law or otherwise. If Buyer becomes bankrupt or insolvent, or if a petition in bankruptcy is filed by or against it, or if a receiver is appointed for it or its properties, Seller may refuse to make further deliveries hereunder and may terminate this Agreement upon notice to Buyer, without prejudice to any rights of Seller existing hereunder or under applicable law or otherwise. Any subsequent shipment of Manapol[R] Powder by Seller after a failure by Buyer to make any payment hereunder, or after any other default by Buyer hereunder, shall not constitute a waiver of any rights of Seller arising out of such prior default; nor shall Seller's failure to insist upon strict performance of any provision of this Agreement be deemed a waiver by Seller of any of its rights or remedies hereunder or under applicable law or a waiver by Seller of any subsequent default by Buyer in the performance of or compliance with any of the terms of this Agreement. (b) Buyer's Rights Upon Default. If Seller fails in any material respect to perform its obligations hereunder, and such failure is not cured to Buyer's reasonable satisfaction within 30 days after receipt of notice thereof by Seller, Buyer shall have the right to refuse to accept further deliveries hereunder and to terminate this Agreement upon notice to Seller and, in addition, shall have such other rights and remedies, including the right to recover damages, as are available to Buyer under applicable law or otherwise. Any subsequent acceptance of delivery of Manapol[R] Powder by Buyer after any default by Seller under this Agreement shall not constitute a waiver of any rights of Buyer arising out of such prior default; nor shall Buyer's failure to insist upon strict performance of any provision of this Agreement be deemed a waiver by Buyer of any of its rights or remedies hereunder or under applicable law or a waiver by Buyer of any subsequent default by Seller in the performance of or compliance with any of the terms of this Agreement. 10. Disclaimer and Indemnity. Buyer shall assume all financial and other obligations for Buyer Product, and Seller shall not incur any liability or responsibility to Buyer or to third parties arising out of or connected in any manner with Buyer Product. In no event shall Seller be liable for lost profits, special damages, consequential damages or contingent liabilities arising out of or connected in any manner with this Agreement or Buyer Product. Buyer shall defend, indemnify and hold harmless Seller and its affiliates, and their respective officers, directors, employees and agents, from and against all claims, liabilities, demands, damages, expenses and losses (including reasonable attorneys' fees and expenses) arising out of or connected with (i) any manufacture, use, sale or other disposition of Buyer Product, or any other Product of Buyer, by Buyer or any other party and (ii) any breach by Buyer of any of its obligations under this Agreement. 11. Equitable Relief. A breach by Buyer of the provisions of Paragraph 2(b) shall cause Seller to suffer irreparable harm and, in such event, Seller shall be entitled, as a matter of right, to a restraining order and other injunctive relief from any court of competent jurisdiction, restraining any further violation thereof by Buyer, its officers, agents, servants, employees and those persons in active concert or participation with them. The right to a restraining order or other injunctive relief shall be supplemental to any other right or remedy Seller may have, including, without limitation, the recovery of damages for the breach of such provisions or of any other provisions of this Agreement. 12. Survival. The expiration or termination of the Term shall not impair the rights or obligations of either party hereto which shall have accrued hereunder prior to such expiration or termination. The provisions of Paragraphs 7, 9,10 and 11 hereof, and the rights and obligations of the parties thereunder, shall survive the expiration or termination of the Term. 13. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas. 14. Succession. Neither party hereto may assign or otherwise transfer this Agreement or any of its rights or obligations hereunder (including, without limitation, by merger or consolidation) without the prior written consent of the other party; provided, however, that Seller may assign any of its rights or obligations hereunder to any affiliate of Seller. Subject to the immediately preceding sentence, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 15. E n tire Agreement. This Agreement constitutes the entire agreement between the parties hereto relating to the matters covered hereby and supersede any and all prior understandings, whether written or oral, with respect to such matters. The terms of this Agreement shall prevail over any inconsistent terms contained in any purchase order issued by Buyer and acknowledgment or acceptance thereof issued by Seller. No modification, waiver or discharge of this Agreement or any of its terms shall be binding unless in writing and signed by the party against which the modification, waiver or discharge is sought to be enforced. 16. Notices. All notices and other communications with respect to this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or when duly deposited in the mails, first class mail, postage prepaid, to the address set forth below, or such other address hereafter specified in like manner by one party to the other: If to Seller: Caraloe, Inc. 2001 Walnut Hill Lane Irving, Texas 75038 Attention: President If to Buyer: One Family, Inc. 8160 Blakeland Drive, Unit A Littleton, CO 80125 Attention: President 17. Interpretation. In the event that any provision of this Agreement is illegal, invalid or unenforceable as written but may be rendered legal, valid and enforceable by limitation thereof, then such provision shall be deemed to be legal, valid and enforceable to the maximum extent permitted by applicable law. The illegality, invalidity or unenforceability in its entirety of any provision hereof will not affect the legality, validity or enforceability of the remaining provisions of this Agreement. 18. No Inconsistent Actions. Each party hereto agrees that it will not voluntarily undertake any action or course of action inconsistent with the provisions or intent of this Agreement and, subject to the provisions of Paragraph 8 hereof, will promptly do all acts and take all measures as may be appropriate to comply with the terms, conditions and provisions of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. CARALOE, INC. By: \s\ Bill Pine General Manager ONE FAMILY, INC. By: \s\ Hilton Sher Chief Financial Officer EXHIBIT A ONE FAMILY, INC. PRODUCT SPECIFICATIONS C-200 (Manapol[R] Powder) PRODUCT DESCRIPTION PRODUCT: Aloe vera Gel C-200 CODE: C-200 SOURCE: Aloe barbadensis Miller USES: The pure, stabilized Aloe vera Gel Powder is suitable for use in pharmaceutical and beverage formulations SPECIFICATION SHEET Test Specification Method Appearance Fine white to beige powder Complex > = 30 HPLC(SEC) Carbohydrates (wt. %) Water, wt.% < = 14% TGA Residue on Ignition < = 16% TGA wt.% Microbiological Meets USP Standard USP Purity Fiber, wt.% < = 60% TGA Solubility approx.240 Gel Point CARN Gelization pH Not Adjusted CARN Fiber Enriched CARN Viscosity (cP) approx. 40 CARN 4 mg/ml solution Total Acid Value approx. 0.7 CARN (As Malic Acid) EXHIBIT B ONE FAMILY, INC. September 4, 1998 Pricing schedule for Manapol[R] Powder 1-99 kg $1,600.00/kg 100-299 kg $1,400.00/kg 300-599 kg $1,200.00/kg All pricing is based on quantity ordered per month. EX-10.91 4 EXHIBIT 10.91 TRADEMARK LICENSE AGREEMENT THIS TRADEMARK LICENSE AGREEMENT ("Agreement"), effective as of October 12, 1998 is made by and between CARALOE, INC. ("Licensor"), a Texas corporation, having its principal place of business at 2001 Walnut Hill Lane, Irving, Texas 75038, and One Family, Inc., ("Licensee"), having its principal place of business at 8160 Blakeland Drive, Unit A, Littleton, CO 80125. W I T N E S S E T H: WHEREAS, Licensor and One Family, Inc., ("OFI") have previously entered into a Supply Agreement (the "Supply Agreement") for the sale by Licensor and purchase by OFI of bulk Aloe vera mucilaginous polysaccharide including one particular product (hereinafter referred to under the product name of Manapol[R] or Manapol[R] Powder) to be used as one of the ingredients in a drink or drinks manufactured by OFI also containing other ingredients and substances (the "OFI Manufactured Products"): WHEREAS, Carrington Laboratories, Inc., a Texas corporation ("Carrington"), is the owner of the Trademark Manapol[R] (the "Mark") and has granted to Licensor a license to use the Mark and to license others to use it on a non-exclusive basis; WHEREAS, Licensee is desirous of obtaining from Licensor, and Licensor is willing to grant to Licensee, a license to use the Trademark Manapol[R] (the "Mark") in connection with the advertising and sale of the OFI Manufactured Products subject to the terms, conditions and restrictions set forth herein; and WHEREAS, Licensor and Licensee are mutually desirous of insuring the consistent quality of all products sold in connection with the Mark; NOW, THEREFORE, in consideration of premises, the mutual covenants, promises and agreement set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby covenant, promise and agree as follows: Article 1 LICENSE 1.1 Terms and Conditions. Licensor hereby grants to Licensee the non-transferable right and non exclusive license to use the Mark and associated product (Manapol[R] powder), in connection with the labeling, advertising and sale of the OFI Manufactured Products manufactured and sold by OFI for Licensee during the term of this Agreement. During the term of this Agreement, Licensee shall have the non exclusive right to use the Mark in connection with the OFI Manufactured Products containing Manapol[R] powder in a drink or drinks that are intended for sale to the ultimate consumer in the U.S. 1.2 License Coterminous With Supply Agreement. The license granted by this Agreement shall run coterminously with the Supply Agreement, and any actions or events which shall operate to extend or terminate the Supply Agreement shall automatically extend or terminate this Agreement simultaneously. 1.3 Sublicenses. Licensee shall not have the right without written permission from Licensor to grant sublicenses with respect to the license granted herein; however, Licensee may engage a third party or parties to make and affix labels for the OFI Manufactured Products in compliance with Articles 2,3, and 4 hereof, and/or to distribute and sell the OFI Manufactured Products in compliance with the terms and conditions of this Agreement. Licensee shall be expressly obligated to ensure full compliance with all terms and conditions of this Agreement. Article 2 CERTAIN OBLIGATIONS OF LICENSEE 2.1 Representations by Licensee. Licensee shall not represent in any manner that it owns any right, title or interest in or to the Mark. Licensee acknowledges that its use of the Mark shall inure to the benefit of Licensor and shall not create in Licensee's favor any right, title or interest in or to the Mark. 2.2 Discontinuation of Use of Mark. Upon the expiration or termination of this Agreement, Licensee will cease and desist from all use of the Mark in any manner and will not adopt or use, without Licensor's prior written consent, any word or mark which is confusingly or deceptively similar to the Mark, except that Licensee may continue to use the Mark under the terms and conditions of this Agreement in connection with any remaining supplies of the Manapol[R] drink or drinks purchased by Licensee from OFI until such supplies are exhausted. 2.3 Standards. All products on which the Mark is used by Licensee shall be of consistent quality and shall meet or exceed all standards set by Licensor, in Licensor's sole discretion, from time to time. Licensee shall have thirty (30) days from the receipt of written notice of any change in the standards to comply with any new requirements. 2.4 Use of Trademark. Licensee shall not use the Mark except as specifically set forth herein. Without limiting the generality of the preceding sentence, Licensee shall not use the Mark in connection with the sale or advertising of any products other than the OFI Manufactured Products. Article 3 MANUFACTURING AND SALE 3.1 Combination With Other Products. Licensee shall not combine or cause to be combined Manapol[R] powder with any product or substance in any manner which would violate any laws, rules or regulations of any state, federal or other governmental body. 3.2 Compliance by Third Parties. Licensee shall take all steps reasonably necessary to ensure that its distributors, if any, and any other parties to whom it sells any of the OFI Manufactured Products for resale do not relabel, repackage, advertise, sell or attempt to sell Manapol[R] powder or any of the OFI Manufactured Products in a manner that would violate this Agreement if done by Licensee. 3.3 Manapol[R] Content. The amount of Manapol[R] powder to be contained in each of the OFI Manufactured Products shall be no less than fifteen milligrams (15mgs) per ounce. The parties shall meet once each year to determine and agree upon the Manapol[R] powder content for existing and proposed OFI Manufactured Products. Article 4 LABELS AND ADVERTISING 4.1 Regulatory Compliance of Labels and Advertising. All labels and advertising relating to the OFI Manufactured Products offered in connection with the Mark must strictly comply with all applicable laws, rules and regulations in the U.S. relating to product ingredients. 4.2 Mandatory Requirements. Licensee shall cause all labels, packaging, advertising and promotional materials used by it in advertising, marketing and selling any product manufactured by or on behalf of Licensee that contains Manapol[R] powder to contain (i) the Mark, (ii) a statement setting forth the concentration of Manapol[R] powder contained in such product, and (iii) the following legend: Manapol[R] powder is a registered trademark of Caraloe, Inc. 4.3 Claims by Licensee. Licensee hereby agrees not to make, or permit any of its employees, agents or distributors to make, any claims of any properties or results relating to Manapol[R] or Manapol[R] powder, unless such claims comply with the applicable laws, rules and regulations of the U.S. Article 5 ROYALTY 5.1 Licensee agrees to pay to Licensor a royalty of fifteen cents ($0.15) per product. 5.2 Licensee shall make the royalty payment to Licensor within thirty (30) days of receipt of an invoice from OFI for products shipped to Licensee. 5.3 All payments hereunder are to be paid in U.S. currency at the address set forth at the beginning of this Agreement. Article 6 NEGATION OF WARRANTIES, DISCLAIMER AND INDEMNITY 6.1 Negation of Warranties, etc. Nothing in this Agreement shall be construed or interpreted as: (a) a warranty or representation by Licensor that any OFI Manufactured Products made, used, sold or otherwise disposed of under the license granted in this Agreement is or will be free of infringement or the like of the rights of third parties; or (b) an obligation by Licensor to bring or prosecute actions or suits against third parties for infringement or the like of the Manapol[R] powder; or (c) granting by implication, estoppel or otherwise any licenses or rights other than those expressly granted hereunder. 6.2 Disclaimer. LICENSOR MAKES NO REPRESENTATIONS, EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A PARTICULAR PURPOSE, AND ASSUMES NO RESPONSIBILITIES WHATSOEVER WITH RESPECT TO THE USE, SALE OR OTHER DISPOSITION BY LICENSEE OR ITS CUSTOMERS, VENDEES OR OTHER TRANSFEREES, WITH RESPECT TO THE MARK OR ANY PRODUCTS MADE OR SOLD BY LICENSEE. 6.3 Liability of Licensee for Products. As between Licensor and Licensee, Licensee shall assume all financial and other obligations for the OFI Manufactured Products made for it and sold by it under this Agreement and Licensor shall not incur any liability or responsibility to Licensee or to third parties arising out of or connected in any manner with Licensee's products made or sold pursuant to this Agreement. In no event shall Licensor be liable for lost profits, special damages, consequential damages or contingent liabilities arising out of or connected in any manner with this Agreement or the OFI Manufactured Products made for or sold by Licensee under this Agreement. 6.4 Indemnity of Licensor. Licensee agrees to defend, indemnify and hold Licensor, its officers, directors, employees and agents, harmless against all claims, liabilities, demands, damages, expenses or losses arising out of or connected with any use, sale or other disposition of Licensee's or OFI s Manufactured Products by Licensee or by any other party. 6.5 Trademark Infringement. Licensor shall, however, defend Licensee against any claims of trademark infringement resulting from Licensee s use of the trademark Manapol[R] in the U.S. Article 7 TERM AND TERMINATION 7.1 Term. Unless terminated earlier as provided for herein, this Agreement shall remain in full force and effect for a three (3)-year period ending at midnight on October 12, 2006. This Agreement may be extended or renewed as provided in Section 1.2, or otherwise by the written agreement of the parties. 7.2 Breach of Agreement. Except as provided otherwise in Section 7.3, if either party breaches any material provision of this Agreement and fails to cure the breach within thirty (30) days after receipt of written notice from the nonbreaching party specifying the breach, then the nonbreaching party may terminate this Agreement upon written notice to the breaching party, which right of termination shall be in addition to, and not in lieu of, all other rights and remedies the nonbreaching party may have against the breaching party under this Agreement, at law or in equity. Failure by Licensor to give notice of termination with respect to any such failure shall not be deemed a waiver of its right at a later date to give such notice if such failure continues or again occurs, or if another failure occurs. A breach by either party of a material provision of the Supply Agreement shall be deemed a breach by such party of a material provision of this Agreement. 7.3 Immediate Termination. Licensor may immediately terminate this Agreement, upon written notice to Licensee, upon the occurrence of any one or more of the following events: (i) Licensee breaches any provision of Articles 2, 3, or 4; (ii) OFI fails to purchase and/or to pay for the Manapol[R] powder that it is obligated to purchase and pay for under the Supply Agreement in accordance with the terms thereof; (iii) Licensee voluntarily seeks protection under any federal or state bankruptcy or insolvency laws; (iv) a petition for bankruptcy or the appointment of a receiver is filed against Licensee and is not dismissed within thirty (30) days thereafter; (v) Licensee makes any assignment for the benefit of its creditors; or (vi) Licensee ceases doing business. 7.4 Survival of Provisions. In the event of termination, cancellation or expiration of this Agreement for any reason, Sections 2.2, 6.1, 6.2, 6.3, 6.4, 6.5 and 8.1 hereof shall survive such termination, cancellation or expiration and remain in full force and effect. Article 8 MISCELLANEOUS 8.1 Equitable Relief. A breach or default by Licensee of any of the provisions of Articles 2, 3 and 4 hereof shall cause Licensor to suffer irreparable harm and, in such event, Licensor shall be entitled, as a matter of right, to a restraining order and other injunctive relief from any court of competent jurisdiction, restraining any further violation thereof by Licensee, its officers, agents, servants, employees and those persons in active concert or participation with them. The right to a restraining order or other injunctive relief shall be supplemental to any other right or remedy Licensor may have, including, without limitation, the recovery of damages for the breach or default of any of the terms of this Agreement. 8.2 Amendment. This Agreement may be changed, modified, or amended only by an instrument in writing duly executed by each of the parties hereto. 8.3 Entire Agreement. This Agreement constitutes the full and complete agreement of the parties hereto and supersedes any and all prior understandings, whether written or oral, with respect to the subject matter hereof. 8.4 No Waiver. The failure of either party to insist upon strict performance of any obligation hereunder by the other party, irrespective of the length of time for which such failure continues, shall not be a waiver of its right to demand strict compliance in the future. No consent or waiver, express or implied, by either party to or of any breach or default in the performance of any obligation hereunder by the other party shall constitute a consent or waiver to or of any other breach or default in the performance of the same or any other obligation hereunder. 8.5 Notices. All notices required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered as properly given or made when personally delivered or when duly deposited in the mails, first class mail, postage prepaid, or when transmitted by prepaid telegram, and addressed to the applicable address first above written or to such other address as the addressee shall have theretofore specified in a written notice to the notifying party. 8.6 Assignment. This Agreement or any of the rights or obligations created herein may be assigned, in whole or in part, by Licensor. However, this Agreement is personal to Licensee, and Licensee may not assign this Agreement or any of its rights, duties or obligations under this Agreement to any third party without Licensor's prior written consent, and any attempted assignment by Licensee not in accordance with this Section 9.6 shall be void. 8.7 Relationship of Parties. Nothing contained herein shall be construed to create or constitute any employment, agency, partnership or joint venture arrangement by and between the parties, and neither of them has the power or authority, express or implied, to obligate or bind the other in any manner whatsoever. 8.8 Remedies Cumulative. Unless otherwise expressly provided herein, the rights and remedies hereunder are in addition to, and not in limitation of, any other rights and remedies, at law or in equity, and the exercise or one right or remedy will not be deemed a waiver of any other right or remedy. 8.9 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, provided, however, that the foregoing shall not be deemed to expand or otherwise affect the limitations on assignment and delegation set forth in Section 7.6 hereof, and except as otherwise expressly provided in this Agreement, no other person or business entity is intended to or shall have any right or interest under this Agreement. 8.10 Governing Law. This Agreement shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of Texas, excluding, however, any conflicts of law rules that would require the application of the laws of any other state or country. 8.11 Headings. The headings used in this Agreement are for convenience of reference only and shall not be used to interpret this Agreement. 8.12 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which will constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. CARALOE, INC. By: \s\ Bill Pine Name: Bill Pine Title: General Manager ONE FAMILY, INC. By: \s\ Hilton Sher Name: Hilton Sher Title: Chief Financial Officer EX-10.92 5 EXHIBIT 10.92 PROMISSORY NOTE $300,000.00 November 23, 1998 FOR VALUE RECEIVED, the undersigned, ALOE & HERBS INTERNATIONAL, INC., a Panama corporation (the "Maker"), hereby promises to pay to the order of CARRINGTON LABORATORIES, INC., a Texas corporation ( the "Payee"), the principal sum of three hundred thousand and no/100 Dollars ($300,000.00), with interest on the unpaid balance thereof from the date of November 23, 1998 until maturity at the rate hereinafter provided, both principal and interest being payable as hereinafter provided in lawful money of the United States of America at 2001 Walnut Hill Lane, Irving, Texas 75038, or at such other place as may be designated from time to time by the holder of this Note. The unpaid principal amount of this Note outstanding from time to time shall bear interest prior to maturity at the rate of eleven percent (11%) per annum or the maximum interest rate permitted under applicable law, whichever is less. All past due principal and/or interest or installments thereof shall bear interest from maturity until paid at the rate of eighteen percent (18%) per annum or the maximum interest rate permitted under applicable law, whichever is less. The principal amount of this Note, together with all interest accrued thereon, shall be due and payable in full on May 23, 2000. The Maker shall have the right to prepay, without penalty, at any time and from time to time prior to maturity, all or any part of the unpaid principal balance of this Note, provided that any such principal thus prepaid is accompanied by accrued interest on such principal. Each payment made on this Note shall be applied first to the payment of accrued interest due on the unpaid principal hereof and the remainder of each such payment shall be applied to the reduction of the unpaid principal balance hereof. It is the intent of the Maker and the Payee, in the execution and acceptance of this Note and all other instruments now or hereafter securing this Note, to contract in strict compliance with applicable usury law. In furtherance thereof, the Maker and the Payee stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest at a rate in excess of the maximum interest rate permitted to be charged by applicable law; that neither the Maker nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the maximum interest rate that may be lawfully charged under applicable law, and that the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith that may be in apparent conflict herewith. The holder of this Note expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note shall be accelerated for any reason, or if the principal of this Note is paid prior to the end of the term of this Note, and as a result thereof the interest received for the actual period of existence of the indebtedness evidenced by this Note exceeds the applicable maximum lawful rate, the holder of this Note shall, at its option, either refund to the Maker the amount of such excess or credit the amount of such excess against the principal balance of this Note then outstanding and thereby shall render inapplicable any and all penalties of any kind provided by applicable law as a result of such excess interest. If the Payee or any other holder of this Note shall collect money that is deemed to constitute interest that would increase the effective interest rate on this Note to a rate in excess of that permitted to be charged by applicable law, an amount equal to interest in excess of the lawful rate shall, upon such determination, at the option of the holder of this Note, be either immediately returned to the Maker or credited against the principal balance of this Note then outstanding, in which event any and all penalties of any kind under applicable law as a result of such excess interest shall be inapplicable. By execution of this Note, the Maker acknowledges that it believes the indebtedness evidenced by this Note to be non-usurious and agrees that if, at any time, the Maker should have reason to believe that such indebtedness is in fact usurious, it will give the holder of this Note notice of such condition, and such holder shall have ninety (90) days from the date such notice is given in which to make appropriate refund or other adjustment in order to correct such condition, if in fact such exists. The term "applicable law," as used in this Note, shall mean the laws of the State of Texas or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. If the indebtedness represented by this Note or any part thereof is collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings, or if this Note is placed in the hands of an attorney for collection after default, the Maker and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note, in addition to the principal and interest due and payable hereon, all the costs and expenses of such holder in enforcing this Note, including without limitation reasonable attorney's fees and legal expenses. The Maker and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of intention to accelerate the maturity of this Note, notice of acceleration, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, and releases or substitutions of security, in whole or in part, with or without notice, before or after maturity. This Note and the rights, duties and liabilities of the parties hereunder and/or arising from or relating in any way to the indebtedness evidenced by this Note or the transaction of which such indebtedness is a part shall be governed by and construed for all purposes in accordance with the laws of the State of Texas and the laws of the United States applicable to transactions within such state. IN WITNESS WHEREOF, the Maker has executed this Note on the date first set forth above. ALOE & HERBS INTERNATIONAL, INC. By: \s\ Bernard Tice Title: President EX-10.93 6 EXHIBIT 10.93 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT (this "Agreement") effective as of December 3, 1998 is by and between CARALOE, INC., a Texas corporation ("Seller"), and EVENTUS INTERNATIONAL, INC., a Delaware corporation ("Buyer"), WITNESSETH: WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, Caraloe's Manapol[R] Powder (hereinafter referred to under the name "Product") in the quantities, at the price, and upon the terms and conditions hereinafter set forth; and NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Term. The term of this Agreement shall commence on December 3, 1998, and shall end at midnight on December 2, 2005, unless sooner terminated as provided herein (the "Term"). 2. Sale and Purchase. Subject to the terms and conditions of this Agreement, Seller shall sell to Buyer, and Buyer shall purchase from Seller, during each year of the Term, agreed upon monthly quantities equal to all of Buyer's needs for Manapol[R] Powder for the Product. Seller shall, however, not be required to sell monthly quantities in excess of Seller's present plant, farm or manufacturing capacity. The Product specifications shall be mutually agreed upon by the Parties within ninety (90) days from the date of execution of this Agreement. Failure to reach agreement on the specifications within ninety (90) days shall cause this Agreement to terminate unless an extension thereto is mutually agreed upon by the Parties hereto. 3. Quality. Seller warrants to Buyer that all Manapol[R] Powder sold by Seller pursuant to this Agreement will generally conform to the quality specifications set forth in Exhibit A to this Agreement as per Buyer and Seller mutual agreement referenced above. EXCEPT AS PROVIDED IN THIS PARAGRAPH 3, THERE ARE NO WARRANTIES OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A PARTICULAR PURPOSE, MADE WITH RESPECT TO THE MANAPOL[R] POWDER TO BE SOLD HEREUNDER, AND NONE SHALL BE IMPLIED BY LAW. 4. Deliveries. Buyer shall instruct Seller from time to time during the Term, by placing a purchase order with Seller reasonably in advance of the date Buyer desires Manapol[R] Powder to be delivered to it hereunder, (i) as to the quantities of Manapol[R] Powder to be delivered to Buyer, (ii) as to the specific date of delivery, (iii) as to the specific location of delivery and (iv) as to the carrier or particular type of carrier for such delivery. During the Term, Buyer shall provide Seller (a) on an annual basis prior to the beginning of each year of the Term a nonbinding forecast of Buyer's minimum and maximum aggregate delivery requirements for Manapol[R] Powder for such year (provided that such forecast for the second year of the Term shall be provided to Seller by October 1, 1999), and (b) on a quarterly basis at least thirty (30) days prior to the end of each three-month period of the Term a forecast acceptable to Seller (which shall be binding on Buyer) of Buyer's minimum and maximum delivery requirements for Manapol[R] Powder for each month of the next three-month period (provided that such forecast for the initial period of the Term ending on March 31, 1999, shall be provided to Seller by January 4, 1999). The quantities of Manapol[R] Powder ordered by Buyer pursuant to this Agreement from time to time shall be spaced in a reasonable manner, and Buyer shall order such quantities in accordance with Buyer's binding forecasts. In no event shall Seller be required to deliver to Buyer in any three-month period a quantity of Manapol[R] Powder in excess of 125% of the maximum delivery requirement for such period set forth in the binding forecast for such period accepted by Seller. Deliveries of Manapol[R] Powder shall be made by Seller under normal trade conditions in the usual and customary manner being utilized by Seller at the time and location of the particular delivery. The Manapol[R] Powder delivered to Buyer hereunder shall be packaged per agreement of the Parties. All deliveries of Manapol[R] Powder to Buyer hereunder shall be made by Seller F.O.B. at the facilities of Seller or its affiliates located in Irving, Texas. 5. Purchase Price. All Manapol[R] Powder to be purchased by Buyer under this Agreement shall be purchased by it, during the first, second and third years of this Agreement, at a price per Product as set forth on Exhibit B to this Agreement. Thereafter, Buyer and Seller shall meet on a yearly basis to mutually agree upon prices for the upcoming contract year. If prices for the upcoming year cannot be agreed upon the Agreement shall terminate on December 3 of the contract year in question. At delivery point, Buyer shall bear all freight, insurance and similar costs, and all sales taxes, with respect to such purchases from that point forward. The purchase price of Manapol[R] Powder, together with all related freight, insurance and similar costs, and sales taxes, shall be paid by Buyer to Seller within thirty (30) days after the date of invoice. 6. Labels and Advertising (a) FDA Compliance of Labels and Advertising. All labels and advertising relating to the Manapol[R] Powder that reference Carrington Laboratories or Seller sold hereunder must strictly comply with all applicable rules and regulations of the FDA and all other applicable laws, rules and regulations, including but not limited to FDA requirements relating to product ingredients. (b) Claims by Eventus International. Eventus International hereby agrees not to make, or permit any of its employees, agents or distributors to make, any claims of any properties or results relating to Manapol[R] Powder and Caraloe, Inc. or Seller, unless such claims have received written approval from the Seller. (c) FDA Approval of Claims. If Eventus International desires to seek FDA approval as to any specific claims with respect to the Manapol[R] Powder, Eventus International hereby agrees to (i) notify Caraloe of the claims and the application prior to filing and (ii) to keep informed as to the progress of the application, including but not limited to sending Caraloe copies of all communications or notices to or from the FDA, as applicable. (d) Right to Approve Labels, etc. If Caraloe so requests, Eventus International shall not use any label, advertisement or marketing material or individual spokesman associated with the Manapol[R] Powder and Carrington Laboratories or Seller, unless such label, advertisement or marketing material or individual spokesman has first been submitted to and approved by Caraloe. Caraloe shall not unreasonably withhold its approval of any such label, advertisement or marketing material. (e) Compliance by Third Parties. Eventus International shall take all steps reasonably necessary to ensure that its distributors and any other parties to whom it sells any of the Manapol[R] Powder for resale do not relabel, repackage, advertise, sell or attempt to sell the Manapol[R] Powder in a manner that would violate this Agreement if done by Eventus International. 7. Confidentiality. In the performance of Seller's obligations pursuant to this Agreement, Buyer may acquire from Seller or its affiliates technical, commercial, operating or other proprietary information relative to the business or operations of Seller or its affiliates (the "Confidential Information"). Buyer shall maintain the confidentiality, and take all necessary precautions to safeguard the secrecy, of any and all Confidential Information it may acquire from Seller or its affiliates. Buyer shall not use any of such Confidential Information for its own benefit or for the benefit of anyone else. Buyer shall not publicly disclose the existence of this Agreement or the terms hereof without the prior written consent of Seller. 8. Force Majeure. Seller shall not have any liability hereunder if it shall be prevented from performing any of its obligations hereunder by reason of any factor beyond its control, including, without limitation, fire, explosion, accident, riot, flood, drought, storm, earthquake, lightning, frost, civil commotion, sabotage, vandalism, smoke, hail, embargo, act of God or the public enemy, other casualty, strike or lockout, or interference, prohibition or restriction imposed by any government or any officer or agent thereof ("Force Majeure"), and Seller's obligations, so far as may be necessary, shall be suspended during the period of such Force Majeure and shall be cancelled in respect of such quantities of Manapol[R] Powder as would have been sold hereunder but for such suspension. Seller shall give to Buyer prompt notice of any such Force Majeure, the date of commencement thereof and its probable duration and shall give a further notice in like manner upon the termination thereof. Each party hereto shall endeavor with due diligence to resume compliance with its obligations hereunder at the earliest date and shall do all that it reasonably can to overcome or mitigate the effects of any such Force Majeure upon its obligations under this Agreement. 9. Rights Upon Default. (a) Seller's Rights Upon Default. If Buyer (i) fails to purchase the quantities of Manapol[R] Powder specified for purchase by Buyer hereunder, (ii) fails to make a payment hereunder when due or (iii) otherwise breaches any term of this Agreement, and such failure or breach is not cured to Seller's reasonable satisfaction within 5 days (in the case of a failure to make a payment) or 30 days (in any other case) after receipt of notice thereof by Buyer, or if Buyer fails to perform or observe any covenant or condition on its part to be performed when required to be performed or observed, and such failure continues after the applicable grace period, if any, specified in the Agreement, Seller may refuse to make further deliveries hereunder and may terminate this Agreement upon notice to Buyer and, in addition, shall have such other rights and remedies, including the right to recover damages, as are available to Seller under applicable law or otherwise. If Buyer becomes bankrupt or insolvent, or if a petition in bankruptcy is filed by or against it, or if a receiver is appointed for it or its properties, Seller may refuse to make further deliveries hereunder and may terminate this Agreement upon notice to Buyer, without prejudice to any rights of Seller existing hereunder or under applicable law or otherwise. Any subsequent shipment of Manapol[R] Powder by Seller after a failure by Buyer to make any payment hereunder, or after any other default by Buyer hereunder, shall not constitute a waiver of any rights of Seller arising out of such prior default; nor shall Seller's failure to insist upon strict performance of any provision of this Agreement be deemed a waiver by Seller of any of its rights or remedies hereunder or under applicable law or a waiver by Seller of any subsequent default by Buyer in the performance of or compliance with any of the terms of this Agreement. (b) Buyer's Rights Upon Default. If Seller fails in any material respect to perform its obligations hereunder, and such failure is not cured to Buyer's reasonable satisfaction within 30 days after receipt of notice thereof by Seller, Buyer shall have the right to refuse to accept further deliveries hereunder and to terminate this Agreement upon notice to Seller and, in addition, shall have such other rights and remedies, including the right to recover damages, as are available to Buyer under applicable law or otherwise. Any subsequent acceptance of delivery of Manapol[R] Powder by Buyer after any default by Seller under this Agreement shall not constitute a waiver of any rights of Buyer arising out of such prior default; nor shall Buyer's failure to insist upon strict performance of any provision of this Agreement be deemed a waiver by Buyer of any of its rights or remedies hereunder or under applicable law or a waiver by Buyer of any subsequent default by Seller in the performance of or compliance with any of the terms of this Agreement. 10. Disclaimer and Indemnity. Buyer shall assume all financial and other obligations for Buyer Product, and Seller shall not incur any liability or responsibility to Buyer or to third parties arising out of or connected in any manner with Buyer Product. In no event shall Seller be liable for lost profits, special damages, consequential damages or contingent liabilities arising out of or connected in any manner with this Agreement or Buyer Product. Buyer shall defend, indemnify and hold harmless Seller and its affiliates, and their respective officers, directors, employees and agents, from and against all claims, liabilities, demands, damages, expenses and losses (including reasonable attorneys' fees and expenses) arising out of or connected with (i) any manufacture, use, sale or other disposition of Buyer Product, or any other Product of Buyer, by Buyer or any other party and (ii) any breach by Buyer of any of its obligations under this Agreement. 11. Equitable Relief. A breach by Buyer of the provisions of Paragraph 2 shall cause Seller to suffer irreparable harm and, in such event, Seller shall be entitled, as a matter of right, to a restraining order and other injunctive relief from any court of competent jurisdiction, restraining any further violation thereof by Buyer, its officers, agents, servants, employees and those persons in active concert or participation with them. The right to a restraining order or other injunctive relief shall be supplemental to any other right or remedy Seller may have, including, without limitation, the recovery of damages for the breach of such provisions or of any other provisions of this Agreement. 12. Survival. The expiration or termination of the Term shall not impair the rights or obligations of either party hereto which shall have accrued hereunder prior to such expiration or termination. The provisions of Paragraphs 7, 9,10 and 11 hereof, and the rights and obligations of the parties thereunder, shall survive the expiration or termination of the Term. 13. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas. 14. Succession. Neither party hereto may assign or otherwise transfer this Agreement or any of its rights or obligations hereunder (including, without limitation, by merger or consolidation) without the prior written consent of the other party; provided, however, that Seller may assign any of its rights or obligations hereunder to any U.S. Incorporated affiliate of Seller. Subject to the immediately preceding sentence, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 15. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto relating to the matters covered hereby and supersede any and all prior understandings, whether written or oral, with respect to such matters. The terms of this Agreement shall prevail over any inconsistent terms contained in any purchase order issued by Buyer and acknowledgment or acceptance thereof issued by Seller. No modification, waiver or discharge of this Agreement or any of its terms shall be binding unless in writing and signed by the party against which the modification, waiver or discharge is sought to be enforced. 16. Notices. All notices and other communications with respect to this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or when duly deposited in the mails, first class mail, postage prepaid, to the address set forth below, or such other address hereafter specified in like manner by one party to the other: If to Seller: Caraloe, Inc. 2001 Walnut Hill Lane Irving, Texas 75038 Attention: General Manager If to Buyer: Eventus International, Inc. 2121 Midway Road Carrollton, TX 75006 Attention: President 17. Interpretation. In the event that any provision of this Agreement is illegal, invalid or unenforceable as written but may be rendered legal, valid and enforceable by limitation thereof, then such provision shall be deemed to be legal, valid and enforceable to the maximum extent permitted by applicable law. The illegality, invalidity or unenforceability in its entirety of any provision hereof will not affect the legality, validity or enforceability of the remaining provisions of this Agreement. 18. No Inconsistent Actions. Each party hereto agrees that it will not voluntarily undertake any action or course of action inconsistent with the provisions or intent of this Agreement and, subject to the provisions of Paragraph 8 hereof, will promptly do all acts and take all measures as may be appropriate to comply with the terms, conditions and provisions of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. CARALOE, INC. By: /s/ Bill Pine General Manager EVENTUS INTERNATIONAL, INC. By: /s/ Richard A. Howard President EXHIBIT A EVENTUS INTERNATIONAL, INC. PRODUCT SPECIFICATIONS C-200 (Manapol[R] Powder) PRODUCT DESCRIPTION PRODUCT: Aloe vera Gel C-200 CODE: C-200 SOURCE: Aloe barbadensis Miller USES: The pure, stabilized Aloe vera Gel Powder is suitable for use in pharmaceutical and beverage formulations SPECIFICATION SHEET Test Specification Method Appearance Fine white to beige powder Complex > = 30 HPLC(SEC) Carbohydrates (wt. %) Water, wt.% < = 14% TGA Residue on Ignition < = 16% TGA wt.% Microbiological Meets USP Standard USP Purity Fiber, wt.% < = 60% TGA Solubility approx.240 Gel Point CARN Gelization pH Not Adjusted CARN Fiber Enriched CARN Viscosity (cP) approx. 40 CARN 4 mg/ml solution Total Acid Value approx. 0.7 CARN (As Malic Acid) EXHIBIT B EVENTUS INTERNATIONAL, INC. Product Prices Manapol[R] Powder (Bulk) 1 to 1,200 kg $1,250.00 / kg 1,201 to 3,600 kg $1,225.00 / kg 3,601 to 5,000 kg $1,200.00 / kg Eventus International guarantees to purchase a minimum of 1,200 kg of Manapol[R] powder each 12 months of the term of this contract. Purchases will comply with a forecast provided by Eventus International. The above pricing is based on annual volume. Prices F.O.B. Irving, TX. Terms are Net 30 days with approved credit. EX-10.94 7 EXHIBIT 10.94 TRADEMARK LICENSE AGREEMENT THIS TRADEMARK LICENSE AGREEMENT ("Agreement"), effective as of December 3, 1998 is made by and between CARALOE, INC. ("Licensor"), a Texas corporation, having its principal place of business at 2001 Walnut Hill Lane, Irving, Texas 75038, and EVENTUS INTERNATIONAL, INC., ("Licensee"), having its principal place of business at 2121 Midway Road., Carrollton, TX 75006. W I T N E S S E T H: WHEREAS, Licensor and Eventus International, Inc., ("EI") have previously entered into a Supply Agreement (the "Supply Agreement") for the sale by Licensor and purchase by EI of bulk Aloe vera mucilaginous polysaccharide including one particular product (hereinafter referred to under the product name of Manapol[R] or Manapol[R] Powder) to be used as one of the ingredients in a product or products manufactured by or a manufacturer designated by EI also containing other ingredients and substances (the "EI Manufactured Products"): WHEREAS, Carrington Laboratories, Inc., a Texas Corporation ("Carrington"), is the owner of the trademark Manapol[R] (the "Mark") and has granted to Licensor a license to use the Mark and to license others to use it on a non-exclusive basis; WHEREAS, Licensee is desirous of obtaining from Licensor, and Licensor is willing to grant to Licensee, a license to use the trademark Manapol[R] (the "Mark") in connection with the advertising and sale of the EI Manufactured Products subject to the terms, conditions and restrictions set forth herein; and WHEREAS, Licensor and Licensee are mutually desirous of insuring the consistent quality of all products sold in connection with the Mark; NOW, THEREFORE, in consideration of premises, the mutual covenants, promises and agreement set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby covenant, promise and agree as follows: Article 1 LICENSE 1.1 Terms and Conditions. Licensor hereby grants to Licensee the non-transferable right and non exclusive license to use the Mark and associated product (Manapol[R] powder), in connection with the labeling, advertising and sale of the EI Manufactured Products or products manufactured for and sold by EI for Licensee during the term of this Agreement. During the term of this Agreement, Licensee shall have the non exclusive right to use the Mark in connection with the EI Manufactured Products containing Manapol[R] powder in a product or products that are intended for sale to the ultimate consumer in the U.S. or other countries as agreed to under separate agreement by Licensee and Licensor. 1.2 License Coterminous With Supply Agreement. The license granted by this Agreement shall run coterminously with the Supply Agreement, and any actions or events which shall operate to extend or terminate the Supply Agreement shall automatically extend or terminate this Agreement simultaneously. 1.3 Sublicenses. Licensee shall not have the right without written permission from Licensor to grant sublicenses with respect to the license granted herein; however, Licensee may engage a third party or parties to make Products and affix labels for the EI Manufactured Products in compliance with Articles 2,3, and 4 hereof, and/or to distribute and sell the EI Manufactured Products in compliance with the terms and conditions of this Agreement. Licensee shall be expressly obligated to ensure full compliance with all terms and conditions of this Agreement. Article 2 CERTAIN OBLIGATIONS OF LICENSEE 2.1 Representations by Licensee. Licensee shall not represent in any manner that it owns any right, title or interest in or to the Mark. Licensee acknowledges that its use of the Mark shall inure to the benefit of Licensor and shall not create in Licensee's favor any right, title or interest in or to the Mark. 2.2 Discontinuation of Use of Mark. Upon the expiration or termination of this Agreement, Licensee will cease and desist from all use of the Mark in any manner and will not adopt or use, without Licensor's prior written consent, any word or mark which is confusingly or deceptively similar to the Mark, except that Licensee may continue to use the Mark under the terms and conditions of this Agreement in connection with any remaining supplies of the Manapol[R] product or products purchased by Licensee from EI until such supplies are exhausted. 2.3 Standards. All products on which the Mark is used by Licensee shall be of consistent quality and shall meet or exceed all standards as agreed to by EI and Licensor. 2.4 Use of Trademark. Licensee shall not use the Mark except as specifically set forth herein. Without limiting the generality of the preceding sentence, Licensee shall not use the Mark in connection with the sale or advertising of any products other than the EI Manufactured Products. Article 3 MANUFACTURING AND SALE 3.1 Combination With Other Products. Licensee shall not combine or cause to be combined Manapol[R] powder with any product or substance in any manner which would violate any laws, rules or regulations of any state, federal or other governmental body. 3.2 Compliance by Third Parties. Licensee shall take all steps reasonably necessary to ensure that its distributors, if any, and any other parties to whom it sells any of the EI Manufactured Products for resale do not relabel, repackage, advertise, sell or attempt to sell Manapol[R] powder or any of the EI Manufactured Products in a manner that would violate this Agreement if done by Licensee. 3.3 Manapol[R] Powder Content. The amount of Manapol[R] powder to be contained in each of the EI Manufactured Products shall be no less than fifteen milligrams (15mgs) per ounce or recommended dose. The parties shall meet once each year to determine and agree upon the Manapol[R] powder content for existing and proposed EI Manufactured Products. Article 4 LABELS AND ADVERTISING 4.1 Regulatory Compliance of Labels and Advertising. All labels and advertising relating to the EI Manufactured Products offered in connection with the Mark must strictly comply with all applicable laws, rules and regulations in the U.S. relating to product ingredients. 4.2 Mandatory Requirements. Licensee shall cause all labels, packaging, advertising and promotional materials used by it in advertising, marketing and selling any product manufactured by or on behalf of Licensee that contains Manapol[R] powder to contain (i) the Mark, (ii) a statement setting forth the concentration of Manapol[R] powder contained in such product, and (iii) the following legend: Manapol[R] powder is a registered trademark of Caraloe, Inc. 4.3 Claims by Licensee. Licensee hereby agrees not to make, or permit any of its employees, agents or distributors to make, any claims of any properties or results relating to Manapol[R] or Manapol[R] powder, unless such claims comply with the applicable laws, rules and regulations of the U.S. Article 5 ROYALTY 5.1 Licensee agrees to pay to Licensor a royalty of ten cents ($0.10) per bottle or container of product. 5.2 Licensee shall make the royalty payment to Licensor within thirty (30) days of receipt of an invoice from EI for products shipped to Licensee. The manufacturer will provide Licensor with manifest of bottles or containers shipped. 5.3 All payments hereunder are to be paid in U.S. currency at the address set forth at the beginning of this Agreement. 5.4 Licensee guarantees to a minimum of 4 million units over thirty-six months from the initial date of this agreement which will be invoiced at $0.10 per unit. The next one million units will be invoiced at $0.09 per unit and all additional units over that will be invoiced at $0.08 per unit. Article 6 NEGATION OF WARRANTIES, DISCLAIMER AND INDEMNITY 6.1 Negation of Warranties, etc. Nothing in this Agreement shall be construed or interpreted as: (a) a w arranty or representation by Licensor that any EI Manufactured Products made, used, sold or otherwise disposed of under the license granted in this Agreement is or will be free of infringement or the like of the rights of third parties; or (b) an obligation by Licensor to bring or prosecute actions or suits against third parties for infringement or the like of the Manapol[R] powder; or (c) granting by implication, estoppel or otherwise any licenses or rights other than those expressly granted hereunder. 6.2 Disclaimer. LICENSOR MAKES NO REPRESENTATIONS, EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS AND FITNESS FOR A PARTICULAR PURPOSE, AND ASSUMES NO RESPONSIBILITIES WHATSOEVER WITH RESPECT TO THE USE, SALE OR OTHER DISPOSITION BY LICENSEE OR ITS CUSTOMERS, VENDEES OR OTHER TRANSFEREES, WITH RESPECT TO THE MARK OR ANY PRODUCTS MADE OR SOLD BY LICENSEE. 6.3 Liability of Licensee for Products. As between Licensor and Licensee, Licensee shall assume all financial and other obligations for the EI Manufactured Products made for it and sold by it under this Agreement and Licensor shall not incur any liability or responsibility to Licensee or to third parties arising out of or connected in any manner with Licensee's products made or sold pursuant to this Agreement. In no event shall Licensor be liable for lost profits, special damages, consequential damages or contingent liabilities arising out of or connected in any manner with this Agreement or the EI Manufactured Products made for or sold by Licensee under this Agreement. 6.4 Indemnity of Licensor. Licensee agrees to defend, indemnify and hold Licensor, its officers, directors, employees and agents, harmless against all claims, liabilities, demands, damages, expenses or losses arising out of or connected with any use, sale or other disposition of Licensee's or EI's Manufactured Products by Licensee or by any other party. 6.5 Trademark Infringement. Licensor shall, however, defend Licensee against any claims of trademark infringement resulting from Licensee's use of the trademark Manapol[R] in the U.S. or other countries as agreed to under separate agreement by Licensee and Licensor. Article 7 TERM AND TERMINATION 7.1 Term. Unless terminated earlier as provided for herein, this Agreement shall remain in full force and effect for a six (6) year period ending at midnight on December 2, 2005. This Agreement may be extended or renewed as provided in Section 1.2, or otherwise by the written agreement of the parties. 7.2 Breach of Agreement. Except as provided otherwise in Section 7.3, if either party breaches any material provision of this Agreement and fails to cure the breach within thirty (30) days after receipt of written notice from the nonbreaching party specifying the breach, then the nonbreaching party may terminate this Agreement upon written notice to the breaching party, which right of termination shall be in addition to, and not in lieu of, all other rights and remedies the nonbreaching party may have against the breaching party under this Agreement, at law or in equity. Failure by Licensor to give notice of termination with respect to any such failure shall not be deemed a waiver of its right at a later date to give such notice if such failure continues or again occurs, or if another failure occurs. A breach by either party of a material provision of the Supply Agreement shall be deemed a breach by such party of a material provision of this Agreement. 7.3 Immediate Termination. Licensor may upon thirty (30) days written notice to Licensee terminate this Agreement, upon written notice to Licensee, upon the occurrence of any one or more of the following events: (i) Licensee breaches any provision of Articles 2, 3, or 4; (ii) EI fails to purchase and/or to pay for the Manapol[R] powder that it is obligated to purchase and pay for under the Supply Agreement in accordance with the terms thereof; (iii) Licensee voluntarily seeks protection under any federal or state bankruptcy or insolvency laws; (iv) a petition for bankruptcy or the appointment of a receiver is filed against Licensee and is not dismissed within thirty (30) days thereafter; (v) Licensee makes any assignment for the benefit of its creditors; or (vi) Licensee ceases doing business. 7.4 Survival of Provisions. In the event of termination, cancellation or expiration of this Agreement for any reason, Sections 2.2, 6.1, 6.2, 6.3, 6.4, 6.5 and 8.1 hereof shall survive such termination, cancellation or expiration and remain in full force and effect. Article 8 MISCELLANEOUS 8.1 Equitable Relief. A breach or default by Licensee of any of the provisions of Articles 2, 3 and 4 hereof shall cause Licensor to suffer irreparable harm and, in such event, Licensor shall be entitled, as a matter of right, to a restraining order and other injunctive relief from any court of competent jurisdiction, restraining any further violation thereof by Licensee, its officers, agents, servants, employees and those persons in active concert or participation with them. The right to a restraining order or other injunctive relief shall be supplemental to any other right or remedy Licensor may have, including, without limitation, the recovery of damages for the breach or default of any of the terms of this Agreement. 8.2 Amendment. This Agreement may be changed, modified, or amended only by an instrument in writing duly executed by each of the parties hereto. 8.3 Entire Agreement. This Agreement constitutes the full and complete agreement of the parties hereto and supersedes any and all prior understandings, whether written or oral, with respect to the subject matter hereof. 8.4 No Waiver. The failure of either party to insist upon strict performance of any obligation hereunder by the other party, irrespective of the length of time for which such failure continues, shall not be a waiver of its right to demand strict compliance in the future. No consent or waiver, express or implied, by either party to or of any breach or default in the performance of any obligation hereunder by the other party shall constitute a consent or waiver to or of any other breach or default in the performance of the same or any other obligation hereunder. 8.5 Notices. All notices required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered as properly given or made when personally delivered or when duly deposited in the mails, first class mail, postage prepaid, or when transmitted by prepaid telegram, and addressed to the applicable address first above written or to such other address as the addressee shall have theretofore specified in a written notice to the notifying party. 8.6 Assignment. This Agreement or any of the rights or obligations created herein may be assigned, in whole or in part, by Licensor. However, this Agreement is personal to Licensee, and Licensee may not assign this Agreement or any of its rights, duties or obligations under this Agreement to any third party without Licensor's prior written consent, and any attempted assignment by Licensee not in accordance with this Section 9.6 shall be void. 8.7 Relationship of Parties. Nothing contained herein shall be construed to create or constitute any employment, agency, partnership or joint venture arrangement by and between the parties, and neither of them has the power or authority, express or implied, to obligate or bind the other in any manner whatsoever. 8.8 Remedies Cumulative. Unless otherwise expressly provided herein, the rights and remedies hereunder are in addition to, and not in limitation of, any other rights and remedies, at law or in equity, and the exercise or one right or remedy will not be deemed a waiver of any other right or remedy. 8.9 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, provided, however, that the foregoing shall not be deemed to expand or otherwise affect the limitations on assignment and delegation set forth in Section 7.6 hereof, and except as otherwise expressly provided in this Agreement, no other person or business entity is intended to or shall have any right or interest under this Agreement. 8.10 Governing Law. This Agreement shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of Texas, excluding, however, any conflicts of law rules that would require the application of the laws of any other state or country. 8.11 Headings. The headings used in this Agreement are for convenience of reference only and shall not be used to interpret this Agreement. 8.12 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which will constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. CARALOE, INC. By: /s/ Bill Pine Name: Bill Pine Title: General Manager EVENTUS INTERNATIONAL, INC. By: /s/ Richard A. Howard Name: Richard A. Howard Title: President EX-10.95 8 EXHIBIT 10.95 Amendment Number One to Supply Agreement dated December 3, 1998 between Caraloe Inc., and Eventus International, inc. In reference to the Supply Agreement (the "Agreement") dated December 3, 1998, between Caraloe, Inc. and Eventus International, Inc., both parties to the Agreement now desire to amend the Agreement and hereby agree that Section 2 of the Agreement shall be amended to read as follows: 2. Sale and Purchase. Subject to the terms and conditions of the Agreement, Seller shall sell to Buyer, and Buyer shall purchase from Seller, during each year of the Term, agreed upon monthly quantities equal to all of Buyer's needs for Manapol[R] Powder for the Product. Seller shall, however, not be required to sell monthly quantities in excess of Seller's present plant, farm or manufacturing capacity. The Product specifications shall be as set forth on Exhibit A to this Agreement. Both parties further agree that Exhibit B to the Agreement is hereby amended to read in its entirety in the form of Exhibit B attached hereto. This amendment shall be effective as of December 3, 1998. All other terms and conditions of the Agreement remain unchanged. AGREED TO AND ACCEPTED BY: CARALOE, INC. /s/ Robert W. Schnitzius Name: Robert W. Schnitzius Title: Chief Financial Officer Date: February 26, 1999 EVENTUS INTERNATIONAL, INC. _______________________________________ Name: ______________________________ Title: _______________________________ Date: February 26, 1999 EXHIBIT B EVENTUS INTERNATIONAL, INC. Product Prices Manapol[R] Powder (Bulk) 1 to 1,200 kg $1,250.00 / kg 1,201 to 3,600 kg $1,225.00 / kg 3,601 to 5,000 kg $1,200.00 / kg Eventus International intends to purchase 1,200 kg of Manapol[R] Powder each 12 months of the first three years of the term of this contract. If the first three annual purchase amounts are not completed as intended, Eventus International will purchase the total of 3,600 kg of Manapol[R] Powder within five (5) years of the effective date of the agreement. Purchases will comply with a forecast provided by Eventus International, Inc. The above pricing is based on annual volume. Prices F.O.B. Irving, TX. Terms are Net 30 days with approved credit. EX-10.96 9 EXHIBIT 10.96 CLINICAL RESEARCH SERVICES AGREEMENT This agreement ("Agreement") is made this 25th day of January, 1999, by and between Carrington Laboratories, Inc., with its principal executive offices located at 2001 Walnut Hill Lane, Irving, Texas 75038 ("Sponsor"or "Carrington"), and PPD Pharmaco, Inc., a Texas corporation with its principal executive offices located at 3151 17th Street Extension, Wilmington, North Carolina 28412 USA ("PPD Pharmaco"). WHEREAS, Sponsor is engaged in the development, manufacture, distribution, and sale of pharmaceutical products; and WHEREAS, PPD Pharmaco is a contract research organization engaged in the business of managing clinical research programs; and WHEREAS, Sponsor wishes to retain the services of PPD Pharmaco to perform clinical research services in connection with the clinical research Study entitled "A Double-Blind, Randomized, Placebo-Controlled Study Of The Safety And Efficacy Of Three Dose Regimens Of Oral Aliminase In The Treatment Of Active Ulcerative Colitis" ("Study") to be conducted pursuant to Sponsor's Study Protocol #9084 incorporated herein by reference ("Protocol"); and WHEREAS, PPD Pharmaco is willing to provide such services to Sponsor in accordance with the terms and conditions of this Agreement; NOW, THEREFORE, for good and valuable consideration contained herein, the exchange, receipt and sufficiency of which are acknowledged, the parties agree as follows: 1. Services. 1.1 - PPD Pharmaco shall perform services as set forth in the Statement of Services and Description of Services attached as Exhibit A and incorporated herein by reference ("Services"). PPD Pharmaco shall provide said Services in compliance with the Protocol, this Agreement, the written instructions of Sponsor, PPD Pharmaco's Standard Operating Procedures ("SOPs"), and all applicable laws, rules, and regulations. SOPs are subject to revision by PPD Pharmaco in which case PPD Pharmaco shall notify Sponsor of revision. If any such SOP revision can be reasonably expected to affect the budget or timelines for the Study, PPD Pharmaco shall submit to Sponsor revised cost estimates or timelines for the relevant Services which will become a part of this Agreement upon written approval by Sponsor. The current SOPs for conducting and monitoring clinical trials are available for review upon request by Sponsor. Upon mutual agreement in writing, the parties may conduct the Study under Sponsor's SOPs. In such case, Sponsor shall provide prompt and reasonable training to any PPD Pharmaco personnel subject to such SOPs at Sponsor's expense. 1.2 - To the extent that any of Sponsors obligations under 21 C.F.R. 312.52 consist of Services that are to be performed by PPD Pharmaco under this Agreement, such obligations are hereby transferred by Sponsor to PPD Pharmaco for purposes of 21 C.F.R. Section 312.52. 1.3 - In the event that PPD Pharmaco is requested or required to perform services beyond those which are specifically set forth in this Agreement, any such additional services and a compensation schedule therefor must be mutually agreed upon by the parties in writing prior to the provision of said services. Said mutually agreed upon writing shall be an addendum to this Agreement and the services set forth therein shall be deemed to be Services as the term is used in this Agreement. 1.4 - Sponsor may audit PPD Pharmaco and/or one or more investigational sites participating in the Study, provided Sponsor gives prior written notice of any such audit to PPD Pharmaco and any investigational site to be audited. PPD Pharmaco shall cooperate fully in any such audit provided said audits are performed during PPD Pharmaco regular working hours. 2. Compensation and Payment. 2.1 - For its performance of Services under this Agreement, PPD Pharmaco shall receive compensation as set forth in the Payment Schedule attached as Exhibit B and incorporated herein by reference. 2.2 - PPD Pharmaco shall submit to Sponsor an invoice describing the indirect pass through costs and expenses incurred during a particular month on a monthly basis and Sponsor shall pay said invoices within thirty (30) days of receipt. Investigator initiation costs and central lab costs will be invoiced upfront and shall be due upon sponsor s receipt of invoice. 2.3 - In the event this Agreement is terminated pursuant to Section 3 below, PPD Pharmaco shall be compensated for all fees and costs due pursuant to the Payment Schedule as of the effective date of termination. Additionally, Sponsor shall reimburse PPD Pharmaco for any and all amounts that it pays to third parties for uncancellable obligations that PPD Pharmaco made with respect to the Study and with the approval of Sponsor; provided however, that the preceding portion of this sentence shall not be applicable if this Agreement is terminated (i) by PPD Pharmaco without cause or (ii) by either party because PPD Pharmaco is the subject of any of the events specified in Section 3.3 or (iii) by Sponsor with cause. Any funds held by PPD Pharmaco which shall be shown by Sponsor to be unearned at the date of termination shall be returned to Sponsor within forty-five (45) days of termination of this Agreement. 2.4 - In the event the Study is terminated early or reduced in scope, in addition to any and all other compensation and reimbursement due under this Agreement, Sponsor shall pay to PPD Pharmaco an amount, as determined by PPD Pharmaco in good faith, to represent costs and expenses incurred as a result of said early termination or reduction in scope, including by way of example but not limited to, unforeseen down time and reassignment of PPD Pharmaco dedicated Study personnel ("Termination Expenses"). Said Termination Expenses shall not exceed 15% of the total fees (excluding pass through expenses and any fee payments already made to PPD Pharmaco) PPD Pharmaco would have received pursuant to this Agreement had the Study continued full scope until completion. The foregoing provisions of this Section 2.4 shall not be applicable if the Study is terminated early because of a termination of this Agreement (i) by PPD Pharmaco without cause or (ii) by either party because PPD Pharmaco is the subject of any of the events specified in Section 3.3 or (iii)by Sponsor with cause, or because the Food & Drug Administration ("FDA") withdraws its authorization and approval to perform the Study, or because any adverse reaction or side effect resulting form the use of the Study drug is of such magnitude or incidence as to warrant termination of the Study in the sole opinion of the Sponsor. 2.5 - Payments to PPD Pharmaco shall be made to: PPD Pharmaco, Inc. P.O. Box 75468 Charlotte, North Carolina 28275-5468 Tax ID# 74-2325267 2.6 - Taxes (and any penalties thereon) imposed on any payment made by Sponsor to PPD Pharmaco shall be the responsibility of PPD Pharmaco. 3. Term and Termination. 3.1 - The term of this Agreement shall commence as of the date hereof and end upon completion of the Services unless earlier terminated in accordance with this Section 3. 3.2 - This Agreement may be terminated with or without cause by either party upon thirty (30) days prior written notice. 3.3 - This Agreement may be terminated by either party upon fifteen (15) days prior written notice if the other party becomes insolvent, is dissolved or liquidated, makes a general assignment for the benefit of its creditors, files or has filed against it (and does not obtain a dismissal within ninety (90) days) a petition in bankruptcy, or has a receiver appointed for it or a substantial part of its assets. 3.4 - In the event of a material breach of this Agreement by either party, the other party may terminate this Agreement, either immediately or as of a future date, by giving the breaching party written notice of termination, which notice shall state the effective date of termination of this Agreement. Any such termination shall constitute a termination with cause. 3.5 - Upon termination of this Agreement, PPD Pharmaco shall cooperate with Sponsor to provide for an orderly wind-down of the Services provided by PPD Pharmaco hereunder. 3.6 - The obligations of the parties contained in Sections 2.6, 3.5, 3.6, 5, 6, 7, 8, 11, 13, and 21 hereof shall survive termination of this Agreement. 4. Personnel. 4.1 - The Services with respect to the Study shall be performed by PPD Pharmaco under the direction of the person identified as the Project Manager or such other person acceptable to Sponsor as PPD Pharmaco may from time to time designate the Project Manager. 4.2 - PPD Pharmaco shall be obligated at all times to provide a sufficient number of trained clinical research personnel to meet the demands of the Study. 4.3 - PPD Pharmaco shall not subcontract or assign any Services without the prior written consent of Sponsor, such consent not to be unreasonably withheld. 4.4 - During the period in which the Study is being conducted, neither party shall recruit, hire or employ any personnel of the other who is material to the performance of the particular Study without the prior written consent of the other party. 5. Confidentiality. 5.1 - PPD Pharmaco agrees to treat any confidential information obtained from Sponsor or gathered or generated by PPD Pharmaco as a direct and sole result of performing the Services under this Agreement, including, without limitation, confidential commercial, scientific, medical and technical information and data relating to Sponsor, a Study drug or the Study (all such data and information together with any information derived therefrom, exclusive of computer software or code developed by PPD Pharmaco unless specifically included, to be referred to herein as the "Information"), as the confidential and exclusive property of Sponsor. 5.2 - PPD Pharmaco agrees that it will use any Information only to provide the Services and for no other purpose without the prior written consent of Sponsor. PPD Pharmaco agrees not to disclose any of the Information to any third party without first obtaining the written consent of Sponsor. PPD Pharmaco further agrees to take all reasonable steps to ensure that the Information shall not be used by its directors, officers, employees, agents, representatives and advisors, except on like terms of confidentiality as aforesaid, and that it shall be kept fully private and confidential by them. The above provisions of confidentiality shall not apply to that part of the Information which PPD Pharmaco is able to demonstrate by documentary evidence: a) was fully in PPD Pharmaco's possession prior to receipt from Sponsor; or b) was in the public domain at the time of receipt from Sponsor; or becomes part of the public domain through no fault of PPD Pharmaco, its directors, officers, employees, agents, representatives or advisors; or c) is lawfully received by PPD Pharmaco from some third party having a right of further disclosure; or d) is developed by PPD Pharmaco independent of the Information and the Study; or e) is required by law to be disclosed. 5.3 - PPD Pharmaco agrees that upon termination of this Agreement or, at Sponsor's request, it shall return to Sponsor all Information provided by Sponsor in documentary form, as well as all Information gathered or generated by PPD Pharmaco in connection with the Study, and return or destroy any copies thereof made by or for PPD Pharmaco. Notwithstanding the foregoing, PPD Pharmaco may retain copies of any such Information as is reasonably necessary for regulatory or insurance purposes or as PPD Pharmaco deems necessary to demonstrate the satisfaction of its obligations hereunder, all subject to the ongoing obligation to maintain the confidentiality of such Information. 5.4 - PPD Pharmaco acknowledges that disclosure or distribution of the Information or use of the Information contrary to the terms of this Agreement may cause irreparable harm for which damages at law may not be an adequate remedy, and agrees that the provisions of this Agreement prohibiting disclosure or distribution of the Information or use contrary to the provisions hereof may be specifically enforced by a court of competent jurisdiction in addition to any and all other remedies available at law or in equity. 6. Intellectual Property. 6.1 - PPD Pharmaco hereby assigns to Sponsor all rights PPD Pharmaco or its directors, officers, employees, agents or representatives may have in any invention, technology, know-how or other intellectual property directly and solely resulting from PPD Pharmaco's provision of the Services hereunder and agrees to assist Sponsor, at Sponsor's expense, in obtaining or extending protection therefor, provided, however, that such assignment shall not pertain to computer software or code unless specifically agreed upon herein. PPD Pharmaco represents that it has and will continue to have agreements with its directors, officers, employees, agents and representatives to effectuate the terms of this Section and shall enforce such agreements to provide Sponsor with the benefit of this Section. 6.2 - Neither anything contained herein nor the delivery of any Information to PPD Pharmaco shall be deemed to grant PPD Pharmaco any right or licenses under any patents or patent applications or to any know-how, technology or inventions of Sponsor. 6.3 - PPD Pharmaco agrees that Sponsor will own and have unrestricted free right to use for all purposes the material, data and information generated or created directly and solely as part of the Services, provided, however, that such unrestricted free right to use shall not pertain to computer software or code unless specifically agreed upon herein. PPD Pharmaco represents and warrants that it is entitled to deliver the material, data and information to be delivered as part of the Services hereunder for Sponsor's free use. 7. Publication. 7.1 - PPD Pharmaco may not publish any articles or make any presentations relating to the Services or referring to data, information or materials generated as part of the Services, in whole or in part, without the prior written consent of Sponsor. PPD Pharmaco shall not disclose publicly or utilize in any advertising or promotional materials the existence of this Agreement or PPD Pharmaco's association with Sponsor or use Sponsor's name or the name of any of its divisions, products or investigations except with Sponsor's prior written consent. 7.2 - Sponsor may use, refer to and disseminate reprints of scientific, medical and other published articles that disclose the name of PPD Pharmaco consistent with U.S. copyright laws, provided that such use does not constitute an endorsement of any commercial product or service by PPD Pharmaco. 8. Indemnification. 8.1 - Sponsor shall indemnify PPD Pharmaco, its directors, officers, employees, and agents for any and all damages, costs, expenses and other liabilities, including reasonable attorney's fees and court costs, incurred in connection with any third-party claim, action or proceeding arising from this Agreement or PPD Pharmaco's connection to the Study, provided however, that Sponsor shall have no obligation hereunder with respect to any claim, action or proceeding based on or arising from the negligence or intentional misconduct on the part of PPD Pharmaco or any of its directors, officers, employees, agents or representatives or breach by PPD Pharmaco of any of its obligations under this Agreement or any agreement between PPD Pharmaco and any third party. 8.2 - PPD Pharmaco shall indemnify Sponsor, its directors, officers and employees for any and all damages, costs, expenses and other liabilities, including reasonable attorney's fees and court costs, incurred in connection with any third-party claim, action or proceeding based or arising from the negligence or intentional misconduct of PPD Pharmaco or any of its directors, officers, employees, agents or representatives or breach of PPD Pharmaco of any of its obligations under this Agreement. 8.3 - Any party liable to provide indemnification hereunder shall be entitled, at its option, to control the defense and settlement of any claim on which it is liable, provided that the indemnifying party shall act reasonably and in good faith with respect to all matters relating to the settlement or disposition of the claim as the disposition or settlement relates to the party being indemnified. The indemnified party shall reasonably cooperate in the investigation, defense and settlement of any claim for which indemnification is sought hereunder and shall provide prompt notice of any such claim or reasonably expected claim to the indemnifying party. 9. Independent Contractor Relationship. The parties hereto are independent contractors and nothing contained in this Agreement shall be construed to place them in the relationship of partners, principal and agent, employer/employee or joint venturer. Both parties agree that they shall neither have the power or right to bind or obligate the other, nor shall either hold itself out as having such authority. 10. Conflicts. PPD Pharmaco represents and warrants to Sponsor that PPD Pharmaco is not a party to any agreement which would prevent it from fulfilling its obligations under this Agreement. During the term of this Agreement, PPD Pharmaco (i) will not enter into any agreement that would in any way restrict its ability to provide Services under this Agreement and (ii) will not enter into any other agreements to provide study services in connection with ulcerative colitis that would adversely affect its ability to meet the timelines established for Sponsor's Study. 11. Publicity. Except as required by law, neither party shall use the name of the other party nor of any employee of the other party in connection with any publicity without the prior written approval of the other party. 12. Force Majeure / Delays. 12.1 - In the event either party shall be delayed or hindered in or prevented from the performance of any act required hereunder by reasons of strike, lockouts, labor troubles, restrictive government or judicial orders, or decrees riots, insurrection, war, Acts of God, inclement weather or other similar reason or a cause beyond such party's control, then performance of such act shall be excused for the period of such delay. Notice of the start and stop of any such force majeure shall be provided to the other party. 12.2 - To the extent either party is delayed for reasons as set forth above or for other reasons beyond the control of the affected party, any timeline or milestone obligations of said party shall be extended for a period of time equal to the number of days of the delay. 13. Record Storage. 13.1 - During the term of this Agreement, PPD Pharmaco shall maintain all materials and all other data obtained or generated by PPD Pharmaco in the course of providing the Services hereunder, including all computerized records and files, in a secure area reasonably protected from fire, theft and destruction. PPD Pharmaco shall cooperate with any internal review or audit by Sponsor and make available to Sponsor for examination and duplication, during normal business hours and at mutually agreeable times, all documentation, data and information relating to the Study. 13.2 - At the expiration or termination of this Agreement and upon written instruction of Sponsor, all materials and all other data and information obtained or generated by PPD Pharmaco in the course of providing the Services hereunder shall, at Sponsor's option, be (i) delivered to Sponsor at its Research and Development offices in Irving, TX in such form as is then currently in the possession of PPD Pharmaco, (ii) retained by PPD Pharmaco for Sponsor for a period of three years, or (iii) disposed of, at the direction and written request of Sponsor, unless such materials are otherwise required to be stored or maintained by PPD Pharmaco as a matter of law or regulation. Sponsor shall have sole responsibility for the costs of shipping of the materials referred to herein. Sponsor shall retain and be responsible for the performance of any carrier designated by Sponsor for the shipping of materials. In no event shall PPD Pharmaco dispose of any materials or data or other information obtained or generated by PPD Pharmaco in the course of providing the Services hereunder without first giving Sponsor sixty (60) days prior written notice of its intent to do so. Notwithstanding the foregoing, PPD Pharmaco may retain copies of any of the materials referred to herein as are deemed reasonably necessary, in PPD Pharmaco s sole reasonable discretion, for regulatory or insurance purposes or to demonstrate the performance of its obligations hereunder, subject to its ongoing obligation to maintain the confidentiality of such materials. 14. Debarment. 14.1 - PPD Pharmaco hereby certifies that it has not been debarred, and has not been convicted of a crime which could lead to debarment, under the Generic Drug Enforcement Act of 1992, 21 United States Code ss306(a) and (b). In the event that PPD Pharmaco or any of its officers, directors, or employees under contract to perform Services under the Study becomes debarred or receives notice of action or threat of action with respect to its debarment, PPD Pharmaco shall notify Sponsor immediately. If PPD Pharmaco is the subject of such debarment or threatened debarment, Sponsor shall have the option of terminating this Agreement with cause, either immediately or as of a future date selected by Sponsor, by giving PPD Pharmaco written notice of termination, which notice shall state the effective date of termination of this Agreement. If one or more individuals are the subject of such debarment or threatened debarment, PPD Pharmaco shall, if Sponsor so requests, terminate the participation of such individual(s) in the Study. 14.2 - PPD Pharmaco hereby certifies that it has not utilized, and will use its reasonable best efforts not to utilize, the services of any individual or entity in the performance of services under this Agreement that has been debarred or that has been convicted of a crime which could lead to debarment under the Generic Drug Enforcement Act of 1992, 21 United States Code ss306(a) and (b). In the event that PPD Pharmaco receives notice of the debarment or threatened debarment of any such individual or entity, PPD Pharmaco shall notify Sponsor immediately and shall, if Sponsor so requests, terminate the participation of such individual or entity in the Study. 15. Notices. Any notice required or permitted to be given hereunder by either party hereunder shall be in writing and shall be deemed given on the date received if delivered personally or by fax or five (5) days after the date postmarked if sent by registered or certified U.S. mail, return receipt requested, postage prepaid to the following applicable address: If to PPD Pharmaco: PPD Pharmaco, Inc. 3151 17th Street Extension Wilmington, North Carolina 28412 Attention: CEO Tel: (910) 251-0081 Fax: (910)762-5820 If to Sponsor: Carrington Laboratories, Inc. 2001 Walnut Hill Lane Irving, Texas 75038 Attention: Dr. Bill Yates Tel: (972) 650-7312 Fax: (972) 717-0997 16. Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by the laws of the State of Texas. 17. Severance. If any one or more provisions of this Agreement shall be found to be illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, provided the surviving agreement materially comports with the parties original intent. 18. Waiver. Waiver or forbearance by either party or the failure by either party to claim a breach of any provision of this Agreement or exercise any right or remedy provided by this Agreement or applicable law, shall not be deemed to constitute a waiver with respect to any subsequent breach of any provision hereof. 19. Changes and Modification. No changes or modifications of this Agreement shall be deemed effective unless in writing and executed by the parties hereto. 20. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party, provided, however, either party may assign this Agreement to a successor to such party's business interests. 21. Arbitration. In the event that any dispute arises hereunder or with respect to the Services to be provided as set forth herein, the parties agree to submit such dispute to binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association in Austin, Texas. The parties shall be entitled to conduct reasonable discovery, in accordance with the Federal Rules of Civil Procedure, prior to the arbitration hearing and the Federal Rules of Evidence The decision of the arbitrators shall be final and binding and enforceable by any court of competent jurisdiction. 22. Entire Agreement. This Agreement represents the complete and entire understanding between the parties regarding the subject matter hereof and supersedes all prior negotiations, representations or agreements, either written or oral, regarding this subject matter. IN WITNESS THEREOF, this Agreement has been executed by the parties hereto through their duly authorized officers as of the date set forth above. ACCEPTED: PPD Pharmaco, Inc. Carrington Laboratories, Inc. By /s/ Paul S. Covington, M.D. By: /s/ Carlton E. Turner, Ph.D. Name: Paul S. Covington, M.D. Name: Carlton E. Turner, Ph.D. Title: Sr. VP Med Affairs/C.S.O. Title: President/CEO Date: January 21, 1999 Date: January 25, 1999 EXHIBIT A A Double-Blind, Randomized, Placebo-Controlled Study Of The Safety And Efficacy Of Three Dose Regimens Of Oral Aliminase[TM] In The Treatment Of Active Ulcerative Colitis Protocol: 9084 Prepared For: Dr. Kenneth (Bill) Yates Carrington Laboratories, Inc. 1300 E. Rochelle Irving, TX 75062 October 29, 1998 1st Revision: November 6, 1998 2nd Revision: November 19, 1998 3rd Revision: December 9, 1998 4th Revision: January 4, 1999 5th Revision: January 19, 1999 Confidential B&C# 8388 OVERVIEW Ulcerative colitis (UC) is an inflammatory disease of the colon that affects about 0.05 to 0.1% of the general population. Lifelong sporadic flare-ups with fever, cramps, weight loss and persistent rectal bleeding and diarrhea with severe inflammation of the colon characterize ulcerative colitis. The cause of UC is unknown and although mild to moderate disease usually can be managed with prednisone, mesalamine or sulfasalazine; there is no cure. Aliminase[TM] is an investigational compound under development by Carrington Laboratories, Inc. Aliminase[TM] is extracted from the gel of the aloe barbadensis plant. When applied topically, acemannan has been demonstrated to have an anti-inflammatory effect in an animal model. A pharmacokinetic Study in dogs, demonstrated that orally administered Aliminase[TM] coats the entire GI tract. In sufficient quantities, Aliminase[TM] could coat the mucosa of the colon and produce a localized anti-inflammatory effect. Subsequent studies in Dextran Sulphate-induced colitis in a mouse model confirmed that Aliminase[TM] reduced colonic damage in a dose-dependent manner that was at least as, if not more, effective than Sulfasalazine or Cyclosporin. An open-label clinical trial in which patients with active UC were treated with either 800 mg or 1600 mg of oral acemannan/day demonstrated statistically significant improvements in the disease activity index (DAI) and signs and symptoms evaluations in patients treated for four (4) weeks, no significant adverse events occurred during the trial. These results were sufficient to encourage further clinical investigation in the treatment of UC patients with Aliminase[TM] capsules. A large scale multi-center controlled trial was performed in 311 patients with active UC who were randomized to either placebo, 30 mg, 600 mg or 1200 mg of Aliminase[TM] capsules for 6 weeks. This Study, possibly due to variable and inconsistent dissolution of capsules, failed to show any significant differences between the groups in efficacy endpoints. With this in mind, Carrington Laboratories, Inc. has designed a clinical trial entitled: "A Double-Blind, Randomized, Placebo-Controlled Study Of The Safety And Efficacy Of Three Dose Regimens Of Oral Aliminase[TM] In The Treatment Of Active Ulcerative Colitis" Carrington and PPD Pharmaco agree that PPD Pharmaco shall manage and monitor this clinical trial. Additionally, PPD Pharmaco shall be responsible for handling the data management and biostatistics portion of the Study. This Study is a 6-week, double blind, randomized, placebo-controlled Study in which approximately 280 patients who are experiencing acutely active or relapsing UC will be treated with either oral placebo or oral Aliminase[TM]. The trial will be conducted in approximately 40 centers. STUDY OBJECTIVES The objectives of the Study are to assess the safety and effectiveness of three dose regimens of Aliminase[TM] in the treatment of active UC. Safety will be measured by laboratory tests and documentation of adverse events. Efficacy will be measured by the following parameters: Disease Activity Index (DAI) and quality of life according to the Inflammatory Bowel Disease Questionnaire (IBDQ). Sigmoidoscopic examinations will be performed at screening and at week 6 or at withdrawal, at which time DAI scores will be recorded. IBDQ will be assessed and scores recorded at screening and at week 6 or at withdrawal. Remainder of this page left blank PROJECT ASSUMPTIONS 1. PPD Pharmaco will manage and monitor the Study according to GCPs and PPD Pharmaco SOPs. 2. Carrington will be responsible for the Study design and will write the Protocol. 3. PPD Pharmaco will assist in the development of the case report form (CRF). 4. PPD Pharmaco will print and distribute the CRF. 5. PPD Pharmaco will design a standard template informed consent. 6. PPD Pharmaco will provide drug logs for site use. 7. The final review and resolution of all changes to the informed consent form will be the responsibility of PPD Pharmaco subject to Carrington approval. 8. PPD Pharmaco will prepare and set-up original investigator files per Carrington instructions. PPD Pharmaco will prepare and set-up investigator file copies per PPD Pharmaco SOPs. 9. Randomization will begin no more than 2.5 months after the Protocol and informed consent form are finalized. 10. There will be 40 investigative sites. 11. At least 80% of investigational sites will use a Central IRB. 12. The enrollment rate is anticipated to be .9 patients per site per month. 13. Interim monitoring visits will occur at 6-week intervals, intervals may be compressed or expanded due to enrollment at a Study site. 14. Each patient's CRFs will be retrieved only as a completed set. Patient data (CRFs) will not be retrieved as independent pages. 15. The total PPD Pharmaco time commitment is expected to be approximately 16 months. 16. Carrington will have final authority to approve investigators. 17. The delivery format of the database is assumed to be SAS datasets, where PPD Pharmaco has specified the variable names. 18. SAS programs and interim datasets produced as part of the analysis are not deliverable. These could be provided but would need some additional effort for documentation. 19. It is assumed that there will be 1 test transfer and 1 final data transfer. There will be no interim data transfers. 20. The Integrated Clinical Statistical Report (ICSR) price is based on the following assumptions: * The report will be written using a template or format agreed upon by Carrington Labs and PPD Pharmaco. Any changes in the format after specifications have been reviewed and approved by Carrington may result in additional costs. * The report will be written from tables and listings provided by PPD Pharmaco * The Sponsor will receive one draft for review and one final version of the report * The Sponsor will submit all review comments simultaneously 21. Central Laboratories price is based on the following assumptions: * Clear View Pregnancy test kits will be sent to each site and performed on 50% of subjects at Screening Visit * Hematology panel includes an automated differential * Federal Express cost will be directly passed on to the Sponsor * Electronic transmission of management reports to Sponsor and CRO: $25.00 per transmission * Proposal does not include unscheduled/repeat visits, confirmation, or additional testing ordered by the Investigator, and as approved by the medical monitor 22. Biostatistical assumptions concerning productions of tables, listings and graphs: * A select initial subset of the summary tables, listings and graphs (TLGs) not to exceed 25 will be finalized within 4 weeks of database lock. The timing for these will be: * Week 1: Print and final validation * Week 2: QC review, correct and ship to Sponsor for review * Week 3: Sponsor review * Week 4: Revise, revalidate and ship final TLGs to Sponsor and give to medical writing * For the rest of the TLGs the following schedule will be followed: * Week 1: Print * Week 2&3: Final validation and corrections * Week 4: QC Review, correct and ship to Sponsor for review * Week 5: Sponsor Review * Week 6&7: Revise, revalidate and give remaining final TLGs to medical writing 23. This Agreement does not include data entry of CRF pages for screen failures. PROJECT SPECIFICATIONS Protocol Title: A Double-Blind, Randomized, Placebo-Controlled Study Of The Safety And Efficacy Of Three Dose Regimens Of Oral Aliminase In The Treatment Of Active Ulcerative Colitis Protocol No. 9084 Study Specifications Protocol Number 9084 Carrington Contact Kenneth (Bill) Yates, D.V.M. PPD Pharmaco Contact Patty Pasley, Director, Business Development Compound Aliminase Indication Active Ulcerative Colitis Program Phase II Study Design Double-Blind, Randomized, Placebo- Controlled, Safety & Efficacy Study Number of Screened Patients 350 Number of Enrolled Patients 280 Number of Completed Patients 280 Number of Investigators 40 Investigators Meeting Yes, 94 attending Approximate Number of Qualification Visits 40 Type of IRB Local & Central Number of Initiation Visits 40 Approximate Number Patients Per Site 9 Enrollment Period 7.7 Months Enrollment Rate .9 Patients/Month Duration of Patient Participation 1.5 Months Interim Monitoring Frequency Q6-8 Weeks Number of Interim Visits (excluding closeout visits) 7 Per Site (280 total) Number of Close Out Visits 40 Estimated Number of Case Report Form (CRF) Pages Per Patient 26 Estimated Number of Unique Pages Per CRF 16 Estimated Number of CRF Pages for Data Entry 7,280 Number of Statistical Tables 38 Number of Statistical Listings 26 Number of Statistical Figures 2 Deliverable Clinical Statistical Report PROJECT TIMELINES Project Milestone Periods The program timeline is summarized in the table below. Activity Study Initiation Jan. 1, 1999 - Mar. 30, 1999 Investigator Meeting February 1999 Enrollment Period * Mar. 31, 1999 - Nov. 25, 1999 Treatment Period Mar. 31, 1999 - Jan. 10, 1999 Study Closeout Jan. 11, 1999 - Feb. 10, 2000 Biostatistics Feb. 11, 2000 - Mar. 25, 2000 Clinical Statistical Report Mar. 26, 1999 - May 5, 2000 Total PPD Pharmaco Commitment -16.2 Months * Any extension to the enrollment period will result in contract modifications. STATEMENT OF SERVICES The following lists the specific responsibilities assigned to Carrington () or PPD Pharmaco (). TASK LIST Carrington PPD Pharmaco A. IND/IDE 1. Prepare IND/IDE sections 2. Review IND/IDE applications 3. Submit IND/IDE to FDA 4. Prepare Investigator Brochure B. Protocol 1. Design Study 2. Write Protocol 3. Approve Protocol 4. Prepare template informed consent C. Case Report Form (CRF) 1. Design and draft CRFs 2. Finalize CRFs 3. Print and bind CRFs 4. Distribute CRFs to sites 5. Write CRF instruction guide D. Site/Investigator Identification and Qualification 1. Develop list of potential sites/investigators 2. Select Study sites/investigators 3. Conduct site qualification visits 4. Provide written site evaluation reports 5. Discuss grant payments and contract with sites 6. Negotiate investigator grants, LOA, LOI 7. Prepare investigator contract E. Pre-Study Activities 1. Collect regulatory documents (CVs, IRB approval, 1572) 2. Obtain IRB approval 3. Review & evaluate for completeness all elements of informed consents for all sites 4. Contract with central laboratory 5. Set up project tracking system via RTMS F. Test Article Management 1. Provide Study drug 2. Package Study drug 3. Label Study drug 4. Distribute Study drug to site 5. Store Study drug 6. Develop Drug Log 7. Manage Drug Records 8. Perform post-Study Study drug accountability 9. Destroy Study drug 10. Return unused supplies/Study drug to Carrington G. Communications Management 1. Establish and test e-mail link 2. Attend Sponsor meetings H. Investigators Meeting 1. Plan investigators meeting(s) 2. Prepare start-up information binders 3. Approve start-up information binders 4. Conduct investigators meeting(s) 5. Present at investigators meeting(s) I. Study Initiation 1. Conduct site initiation visits 2. Provide and maintain site training of personnel 3. Review source documents - CRFs, Drug Records, etc. J. Patient Recruitment 1. Develop and execute advertising plan N/A 2. Refer potential patients to sites N/A K. Project Management 1. Provide weekly updates via RTMS[TM] 2. Contribute Study information for monthly newsletter 3. Produce and distribute monthly newsletter to sites 4. Coordinate with central laboratory 5. Establish and maintain toll-free "Hot Line" N/A N/A 6. Establish and maintain 24 hour SAE phone line 7. Administer Investigator payments 8. Develop/Maintain Protocol Deviation database 9. Train the project team L. On-Site Monitoring 1. Conduct interim on-site monitoring visits 2. Review & verify 100% of available source documentation on all CRFs 3. Review Drug Records 4. Maintain site training of personnel 5. Conduct Study closeout visits 6. Provide written site monitoring reports M. Site Management 1. Maintain phone log of clinical questions 2. Maintain phone log of questions regarding CRFs/logistics 3. Participate in scheduled conference calls 4. Provide document control of CRFs - log, track, archive 5. Perform pre-clinical review of CRFs N/A N/A 6. Perform clinical review of CRFs 7. Perform records management N. Database Design 1. Design data collection system 2. Develop data collection system 3. Validate data collection system O. Data Entry 1. Design data collection system 2. Develop data collection system 3. Validate data collection system 4. Enter and verify data P. Data Management 1. Develop data cleaning system 2. Validate data cleaning system 3. Run edit system 4. Resolve edit questions 5. Document corrections to CRFs 6. Perform DM audits on data - electronic data compared to paper CRFs 7. Provide drug dictionary 8. Code laboratory values 9. Code concomitant drugs 10. Provide adverse event dictionary 11. Code adverse events 12. Integrate/merge lab data Q. Data Transfers 1. Format data according to Carrington format (SAS datasets) 2. Perform test data transfer 3. Perform final data transfer R. Statistical Analysis 1. Provide Analysis Plan (mock tables, listings & graphs) 2. Produce and validate tables, listings and figures 3. Provide final analysis S. Clinical/Statistical Reports 1. Provide draft Study report 2. Provide final Study report 3. Approve Study reports 4. Provide annual report 5. Retain final electronic data 6. Retain final electronic Study report (Carrington) T. Regulatory Activities 1. Conduct GCP site audit(s) 2. Archive final Study documents 3. Record and process SAEs U. Safety 1. Perform adverse event investigation 2. Assign adverse event causality 3. Maintain unblinding responsibility 4. Prepare SAEs reports for reporting to regulatory agency submission 5. Report serious adverse events to regulatory agency PROJECT TEAMS * Clinical Project Team PPD Pharmaco's clinical team (1 Project Manager, and 4 Clinical Research Associates) will be dedicated to this project. The following staffing chart for clinical management and monitoring of this Study is based on the assumptions provided in the request for proposal dated 15- October-1998. This staffing will be in effect from the initiation through the closeout of the Study, providing the information contained in the Request for Proposal is consistent with forecasted project specifics. Should the proposal assumptions change, staffing will be reviewed and modified accordingly, after appropriate discussions with Carrington. Proposed Clinical Project Team for Protocol 9084: * Data Management Project Team PPD Pharmaco will provide a full data management project team complete with a project leader. The project leader acts as the primary contact person for all data management aspects of this project. Proposed Data Management Project Team for Protocol 9084: DESCRIPTION OF SERVICES Please refer to the Statement of Services for those activities to be conducted by PPD Pharmaco. Should Carrington require, PPD Pharmaco would be pleased to provide a cost estimate for additional services. Protocol * Preparation of Protocol Should assistance be required, PPD Pharmaco has an experienced team of individuals who are available to provide Protocol preparation/finali- zation for Carrington. * Informed Consent PPD Pharmaco will provide Carrington with a draft Informed Consent form containing all 14 required elements for their review and approval prior to submission to Ethics Committee by the Investigator. Case Report Form (CRF) * CRF Design PPD Pharmaco in collaboration with Carrington will design and draft the CRF for Protocol 9084. A clinical project leader, biostatistician and CDM manager will be consulted on the design and content. The CRFs will be designed to capture all pertinent information in a format that allows for rapid review and data entry. * Print CRF Following a final review by Carrington, PPD Pharmaco will print the copies of the Case Report Form on 3-ply NCR paper and ship to the investigator sites prior to initiation of the Study. Site/Investigator Identification and Evaluation * Site/Investigator Identification PPD Pharmaco maintains an active Investigator Recruitment Database (IRDB) consisting of more than 16,500 investigators worldwide. The information collected on each investigator includes: site demographics, professional profile, specialty certifications, research profile, staff personnel, facilities on site, data management experience, practice setting, research experience/interest and previous clinical trial experience. Post Study evaluations are also on file for investigators who have worked with PPD Pharmaco. The Study Monitor and the Project Manager complete these evaluations. This is a dynamic database that is continually expanded and updated. It is from this database, as well as from Sponsor lists and other external sources, that PPD Pharmaco derives a list of potential investigators for any particular Study. PPD Pharmaco will work closely with Carrington on all aspects of identifying the most appropriate investigators. Some of the areas of Physician Specialty and the number of investigators in our database include: Allergy/Immunology 240; Anesthesiology 300; Cardiology 493; Dermatology 436; Endocrinology 184; Family Practice 508; Gastroenterology 466; Geriatric Medicine 96; Infectious Disease 261; Internal Medicine 3,473; Medical Oncology 276; Neurology 479; OB/GYN 347; Orthopedic Surgery 104; Pediatrics 413; Psychiatry 623; Surgery 305; and Urology 150. The type and number of practice settings include: University Hospital 1,071; Other Hospital 742; Private, Solo, Group and Multi-Specialty combined 3,675; Nursing Home 135; VA/Military 351; TMO 446; Student Health Center 85; Urgent Care Center 124; Rehabilitation Hospital/Clinic 135; Mental Health Mental Retardation 87; Managed Health Care 243; and Surgical Center 159. PPD Pharmaco will identify investigators with a proven clinical Study record in managing and overseeing ulcerated colitis. Investigators will be chosen on their ability to provide both the necessary patient population and the appropriate Study staffing. Upon Carrington s approval, PPD Pharmaco will select 40 sites, and each site will recruit approximately 9 patients during the 7.7months of anticipated enrollment, an average of 1.2 patients/site/month. * Select Study Sites/Investigators When the list of potential investigators has been compiled and passed through appropriate review by Project Management and Carrington, our project monitors will begin the process of recruiting the investigators. Rigorous telephone screening of potential investigators is performed by monitors prior to the on-site evaluation visits to determine their interest in, and suitability for, performing the Study. These telephone calls to prospective sites will allow an initial screening via assessment of critical factors such as availability, staff, facilities, patient population and clinical trial experience in the appropriate therapeutic area. The success of most programs is dependent upon the ability to identify the most qualified investigators who will be able to enroll a sufficient number of patients who meet criteria as specified by the Study Protocol and to provide quality data. PPD Pharmaco, in collaboration with Carrington, will use reasonable efforts and due diligence to ensure that each investigator selected is qualified to perform the services required. * Site Qualification Visits Clinical research associates (CRAs) on the project team who have site evaluation experience will conduct comprehensive on-site visits to further evaluate the investigative site, meet with the Study personnel, review the Protocol, develop the patient recruitment plan, visit all the facilities required by the Protocol and review any other site qualifications deemed critical to the successful completion of the Study. The evaluator will then make final recommendations to the project team. PPD Pharmaco will perform the site qualification visits. The purpose of each visit will be to assess the Study facilities, the staff and the Principal Investigator for actual Protocol competency. During the visit, the PPD Pharmaco project team will ensure the following: * The Principal Investigator's expertise * The availability of knowledgeable support staff * The adequacy of the facility to conduct a clinical trial * The availability of the appropriate subject population * The Principal Investigator's understanding of the regulatory obligations as outlined on the FDA Form 1572 and specified by Carrington and PPD Pharmaco Written trip reports will be prepared and submitted to Carrington with the monthly status reports. * Investigator Grants Coordination PPD Pharmaco will, in accordance with the investigator contract previously approved by Carrington, make all necessary payments to the investigator. Prior to payment, the Project Manager will verify the patient enrollment status at the site to ensure all payments are accurate and reflective of Study site activity. Pre-Study Activities * Regulatory Document Collection PPD Pharmaco will collect and review all regulatory documents required under the United States Code of Federal Regulations (CFR) for each participating investigator. Critical documents for each site include the following: * Protocol agreement page * IRB approval letter together with a list of IRB members * A copy of the IRB-approved informed consent form to be used in the Study * A signed FDA Form 1572 * Curriculum vitae for the principal and sub-investigators * Laboratory certification and normal values Regulatory packets will be assembled and delivered to Carrington. Carrington shall submit all regulatory packets to the FDA. Once the appropriate regulatory documents have been submitted to the FDA, then Carrington will authorize shipment of the Study drug to each individual site. PPD Pharmaco would be happy to provide regulatory review of documents for authorization of Study drug shipment and submission of regulatory packet to the FDA. Should this service be requested, PPD Pharmaco would provide an estimate of these costs. * Central Laboratory Coordination PPD Pharmaco will coordinate with the central laboratory, which will be ACM Medical Laboratory as designated by Carrington. Miscellaneous Clinical Supplies Management * Miscellaneous Clinical Supplies Management PPD Pharmaco assumes Carrington will coordinate the purchase and distribution of clinical supplies to each individual site. Communications Management * Communications Management PPD Pharmaco can provide electronic communications for e-mail, file transfer and direct system access to meet a wide variety of Sponsor needs. Internally all PPD Pharmaco employees have Internet access via a gateway to the Internet for external e-mail and file transfer connectivity. PPD Pharmaco can provide dial-in or dial-out solution using 28.8 modems either to our LAN environment or directly to our DEC systems. A secured Sponsor intranet is also available to access specific project status information can be developed using Internet technology. In addition similar facilities can be provided using Internet technology, or Lotus Notes for those Sponsors with such capabilities. Site/Investigators Identification and Evaluation * Investigators Meeting PPD Pharmaco will organize and conduct an investigators meeting scheduled for a date to be determined. PPD Pharmaco will train the investigators and Study coordinators on key aspects of the Study Protocol and data collection on the CRFs. PPD Pharmaco anticipates sending a project team of 9 members to the investigators meeting. Moreover, PPD Pharmaco forecasts that approximately 5 members from Carrington will attend this investigators meeting. PPD Pharmaco has based the cost estimate to execute this investigators meeting on a per attendee fee of $1,750.00. This per attendee fee includes all travel expenses related to the meeting, actual on-site meeting expenses and all service fees incurred for the planning and executing of the meeting. Payment for this service is due in full prior to the investigators meeting and is included in the Study Payment Schedule as a separate line item. Study Initiation * Site Initiation Visits PPD Pharmaco will perform an initiation visit at each site. The following areas will be reviewed with site personnel during the initiation visit: * Background information, including the Investigator Brochure for the Study drug and/or the product package insert(s) * Protocol, Study procedures and associated forms * Interim monitoring visit schedule * Regulatory requirements * CRF and source documentation * CRF completion instructions * Adverse event (AE) reporting * Study drug accountability Training of all relevant site personnel will occur at this visit and on an ongoing basis throughout the trial. Carrington agrees that training shall be the primary responsibility of PPD Pharmaco. A total of 40 initiation visits will be conducted. Trip reports will be prepared within two weeks after each visit and sent to Carrington. Project Management * Project Management A Project Manager will be assigned for the duration of the project and will serve as the central contact person. The Project Manager s responsibilities will include managing the technical and administrative aspects of the Study as defined by Carrington. The Project Manager will coordinate the organization, implementation and management of the Study. In addition, the Project Manager will interact directly with the Clinical Project Director, Medical Director, Project CRAs, Quality Assurance personnel, Data Management personnel, Medical Writing personnel and Biostatistics to ensure the effective and timely completion of the Study. The Project Manager will also perform the following project-specific activities: * Project planning * Preparation of the Study Operations Manual * Coordination and assistance with personnel training * Coordination of the investigator meeting, to include travel and agenda planning * Provision of monthly status reports to include: - Regulatory document collection - Site start-up status - Enrollment status - Monitor visit reports - Site drug inventories - Serious Adverse Events (SAEs) - Number of CRFs retrieved * Review and sign timesheets, expense reports, and travel authorization * Review travel itinerary, trip reports, external correspondence and telephone reports, internal correspondence, follow-up letters, monthly travel calendars/plans and project staffing and utilization * Assure all tracking logs are updated by the CRAs weekly * Facilitate all financial and contractual matters between Carrington and PPD Pharmaco (i.e. prepare Study specific invoices for payment at milestones met by PPD Pharmaco) This Agreement does not include the cost of travel of project team members to Carrington's offices for meetings during the conduct of this Study. Travel costs for these meetings will be billed at invoice total plus a nominal administration fee. At Carrington's request an estimate will be provided. On-Site Monitoring * On-Site Monitoring Carrington requests that PPD Pharmaco perform all interim monitoring visits for this Study. Given the anticipated Study length of 1.5 months per patient, an enrollment period of 7.7 months and a monitoring frequency 6-8 weeks, PPD Pharmaco will be required to perform approximately 7 interim monitoring visits of 1-2 days duration per site. The CRA will perform the following tasks during each interim visit: * Compare 100% of the CRFs to the source documents * Review the CRFs and source documents for serious adverse events * Perform drug accountability * Ensure appropriate signed informed consent form exists for each Study participant * Review investigator Study files for completeness * Ensure investigator compliance to the Study Protocol A total of 280 interim visits will be conducted. Trip reports will be prepared after each visit and sent to Carrington. * Closeout Visits A final closeout visit will be conducted after all subjects have completed or have been discontinued from the Study and after all queries have been resolved. Each visit will include: * Review and retrieval of all outstanding CRFs * Study drug accountability and preparation for the shipment of Study drug to Carrington * Review of investigator's Study file for completeness * Review of record retention per FDA requirements A total of 40 closeout visits will be conducted. Closeout visit reports will be prepared within two weeks after each visit and sent to Carrington. * Total Number of Visits Site Visits Per Site Total Qualification 1 40 Initiation 1 40 Interim Monitoring 7 280 Closeout 1 40 TOTAL 13 400 Site Management * In-House Site Management by Clinical Project Team Between monitoring visits, investigators will be called weekly to verify patient enrollment status, review Study progress, answer Protocol questions, discuss CRF completion and ensure the Study proceeds in a timely manner. Site contact reports will become part of the investigator file located at PPD Pharmaco. Additionally the PPD Pharmaco CRAs will be responsible for: * Tracking and ordering Study drug and other supplies * Tracking regulatory document revisions * Writing trip reports * Writing follow-up letters * Providing query resolution * Performing in-house second review of CRF s * Participating in scheduled conference calls with Carrington * Tracking Protocol violations, CRF progression at site and PPD Pharmaco and tracking of query resolution * Conducting audit of investigator files at PPD Pharmaco * Developing newsletter materials and distributing the newsletter to sites PPD Pharmaco will be responsible for all follow-up on action items identified during the monitoring visits. * Clinical Review of CRFs and Query Resolution The CRF will be forwarded to the Clinical Project Manager or their designee who will evaluate the following elements: * Accurate and appropriate documentation of AEs * Overall subject Study drug and Protocol compliance * Proper identification and documentation of potential Protocol deviations or violations * Accurate completion of inclusion/exclusion criteria * Accurate transcription of CRF data * Appropriate use of medical terminology * Correlation of all clinical information * Accuracy of any medication dosages The findings of the clinical review will be documented and forwarded to the Project CRAs for resolution. Data Management * Data Management Plan The CDM Project Manager will compile a Data Management Plan that describes the processes and specifications to be used in the project. This includes documentation on the data dictionary; coding dictionaries to be used; the logic and processes for data review and validation; critical timelines and milestones; and timing and types of management reports. This Plan will be reviewed and finalized with input from Carrington and will be updated during the course of the project. * Database Development Unless otherwise requested, the project database will be set up using ORACLE 7/Clintrial 3.3. The CRF and Protocol will be used to develop the specifications for this database. Panel definitions and field specifications will be produced by an experienced data manager utilizing the PPD Pharmaco standard Clintrial dictionary. Carrington's database specifications will be used if so desired. Specifications will be independently reviewed prior to installation. * Data Entry Data entry screens and multiforms will be developed in Clintrial against the standard data dictionary, but customized to the Study CRF requirements. Independent, double data entry will be performed. The entry of the data from each CRF into the database will take place as CRFs are retrieved, to keep the database as current as possible. All data entry discrepancies will be resolved by PPD Pharmaco data management staff. Reports regarding data entry status and the database will be available as needed. * Data Validation Validation (edit) checks and derivation procedures will be developed by PPD Pharmaco using SQL, RPL, or SAS procedures. The validation specifications will be developed taking into account the requirements of the analysis plan, a review of the Protocol and general experience. The validation specifications will be forwarded to Carrington for review and approval. The results from the validation process will be reviewed and queries will be generated for resolution. * Importing Electronic Data Electronic data from central laboratories or other sources and any associated ranges will be imported and integrated into the Study database. PPD Pharmaco will provide validation checks as required and produce flagged listings as part of the data management and statistical reporting process. * Coding of Drugs and Diseases Unless otherwise requested by Carrington, PPD Pharmaco will provide the coding dictionaries required for coding adverse events and concomitant medications. COSTART will be used to code adverse events and WHODRUG will be used to code concomitant medications. PPD Pharmaco will use its ORACLE-based autoencoding system to identify appropriate codes and insert them into the appropriate tables. The PPD Pharmaco autoencoding system maintains a synonym dictionary so as not to compromise Carrington's dictionaries. This synonym dictionary also contains multi-lingual coding translations. Efficient support of international and cross-national coding schemes is provided. Validation checks on the synonym code lists can be imposed to insure that coding meets Sponsor criteria. A final clinical review will be conducted of all codes to ensure accuracy and consistency. * Data Query Resolution Process Queries arising from data entry, validation and dictionary coding will be reviewed and, if possible, resolved by Data Management personnel, according to the rules documented in the Data Management Plan. Where necessary, queries will be passed to PPD Pharmaco CRAs for resolution or forwarded to the investigator. Review and correction of data will occur on an ongoing basis. Edits resulting from the responses to query forms will be updated and verified before being stored in the database. Queries and corrections will be tracked electronically for each CRF. * Status Reports PPD Pharmaco will provide Carrington with standard monthly status reports indicating the progress made on the project. This report can be customized to meet Carrington's specifications. The report will include such information as number of patients entered, number of completed patients, number of ongoing patients and metrics on key processes. * Data Management Auditing To ensure accuracy, PPD Pharmaco will carry out a 100% review of all key safety and efficacy variables. In addition, a random 10% of the CRFs will undergo a 100% verification against the database throughout the Study. Various patient listings are also produced and reviewed to additionally assure data quality and consistency. * Final Database A final quality assurance (QA) audit will be performed on 10% of the patients on the final database after the quality control measures have been completed. A written report of the QA audit will be prepared and sent to Carrington reporting discrepancies that are found. PPD Pharmaco standard database delivery is in a SAS format; however, it will be provided in another format if Carrington so chooses. The program code will remain with PPD Pharmaco at the conclusion of the Study. CRFs and supporting documentation will be returned to Carrington at the conclusion of the project. * Data Transfers * Format and Test. PPD Pharmaco will require data transfer specifications (i.e. file layouts, formats) before initiating program development for data transformation. PPD Pharmaco recommends at least one preliminary transfer to test the transfer mechanisms prior to the final database transfer. * Final. PPD Pharmaco will provide Carrington with computer files containing the project database(s) along with complete documentation. Statistical Analysis * Biostatistics Project Team Within the Biostatistics department, a Lead Biostatistician will oversee all analyses and production of tables and listings. This person will be responsible for providing the appropriate analysis, instructing the team on key data issues and interacting with the Sponsor as well as other PPD Pharmaco groups, and/or regulatory authorities. Support Statisticians will work closely with the Lead Statistician to assure compliance with the analysis plan. PPD Pharmaco will also identify a Lead Statistical Programmer who will oversee the resourcing of tables, figures and listings in production. Furthermore, validation efforts under the direction of a primary Validator will insure the accuracy of the results. All results will be reviewed by a QC Auditor prior to release to the Sponsor. This core team will provide the Sponsor with a dedicated team to efficiently implement the statistical analysis. * Biostatistics Services Overview The proposed biostatistics workscope for this programs includes collaboration with data management on CRFs and edit checks, a statistical analysis plan, 1 interim analysis, a final statistical a n alysis and biostatistical collaboration on a final clinical statistical report. All of PPD Pharmaco's statistical services and procedures are designed for compliance with the ICH Draft Guideline on Statistical Principles for Clinical Trials (Federal Register, Vol. 62, No. 90, 9 May 1997). The proposed services and deliverables are described in greater detail in the following sections. * Biostatistics Collaboration with Data Management PPD Pharmaco's Biostatistics team will begin to access data to create the analysis datasets once a sufficient amount of data has been entered. In addition to standard validation checks that are programmed by the Data Management group, exploration of data problems or issues that affect statistical analysis will be considered. Statisticians will work closely with the Data Managers and Clinical Project Leaders to discuss relevant issues to improve ongoing data collection efforts. * Analysis Plans In collaboration with the Sponsor's assigned clinical and statistical scientists, PPD Pharmaco will develop one analysis plan for the Study. Any analysis strategy features unique to the Study will be explained in the analysis plan in detail. The analysis plan will model the final Study reports; the introduction, background, objectives and statistical methodology sections will be written in sufficient detail for the final reports. This advance writing and planning promotes earlier, more detailed, critical thinking about the analysis needs and reduces writing time and costs for the final reports. The analysis plan will include shells for the final Study report tables, figures and listings. The shells will be developed based on Protocol objectives, the analysis strategy and collaborative input from the Sponsor's clinical and statistical scientists. The shells will show concisely how statistical summaries are to be presented on the page. Each custom table layout will be designed to promote a complete, consistent and concise representation of analysis for the Study's results. The cost of the Analysis Plan is based on the following assumptions: * One draft version and one final version of the analysis plan text and shells are budgeted. * The Analysis Plan will include each unique table template and with each template, the list of tables that are to be based on that template. Also included will be listing and figure shells. * Analysis and Reporting Databases PPD Pharmaco will develop an analysis and reporting database, based on written specifications developed by the biostatistics team. The written specifications for the analysis database will include a detailed description of each component analysis file, including information about how the file relates to other files in the database, a dictionary of included variables (showing assigned formats and labels) and detailed specifications for each created variable included in the file. The specifications for each created variable include the following components: variable name, format, label, a prose description of the variable, the source variables required for its creation, and the logic algorithms used in its creation. * Statistical Analysis and Tables Production Analogous to the specifications for the analysis database, PPD Pharmaco will develop detailed specifications for the statistical analyses and tables production. PPD Pharmaco will design, create and validate SAS? programs that perform the analyses described in the analysis plan and the summary tables and listings. The internal documentation components for the analysis and table production will include the analysis plan, tables and listings specifications, documented SAS? analysis programs, resulting SAS? output for the analyses and documentation of the validation/QC of the tables and listings. PPD Pharmaco will provide documentation of all created variables used in any analysis or data summary. Where practical, PPD Pharmaco will use SAS? macros to facilitate consistent application of the analysis strategy across all Protocols. Some proprietary SAS? macros will be used as well, particularly for summaries of safety information and for table formatting. While proprietary macros will not be made available to the Sponsor, a description of their design intent can be provided for any audit review. All SAS? programs used or generated for this project will remain the property of PPD Pharmaco. The cost of the statistical analyses and tables production is based on the following assumptions: * The estimated counts for tables, listings and figures are summarized as follows: Counts Uniques Repeats Total Tables 22 16 38 Listings 23 3 26 Figures 2 0 2 * Additional unique tables will be provided at a cost of $2,000 per table and additional listings will be provided at a cost of $1,000 per listing. * Table production costs will be based on the approved analysis plan and table shells. * Any Sponsor-requested changes after analysis plan approval should be communicated in writing through the project director. Discussions about the changes may precede the written authorization, as needed, to clarify and cost the request in advance. Sponsor- requested changes made after the approval may require additional costs and may affect the production timetable. * The scope of this bid allows for one review of draft tables. * Statistics Report A statistical report will be prepared which contains a brief review of the clinical trial methodology and will report the statistical findings of the analysis. The report will also contain a description of the statistical methodology suitable for inclusion in the statistical methods section of the final report as well as a technical statistical methodology write up for inclusion in the statistical appendix of the final report. Regulatory activities * Good Clinical Practice (GCP) Audits PPD Pharmaco will conduct 4 trial site regulatory compliance audits. The purpose of each trial site audit is to determine the trial site s adherence to the Study Protocol and Good Clinical Practices (GCP) guidelines and Federal Regulations; to ensure integrity of scientific data; to determine that the rights and welfare of human research subjects are being or have been adequately protected; and to ensure that PPD Pharmaco and the Sponsor have monitored the trial site in accordance with GCPs, Federal Regulations, and standard operating procedures. Trial site selection will be based on several Study variables: sites with high or rapid enrollment, sites with a significant number of Protocol violations, sites with a frequent change in Study personnel, or sites with noticeably better/worse efficacy and safety data compared to other investigators within the Study. Normally, 10% to 20% of trial sites participating in a clinical Study are audited to ensure general regulatory compliance. Each trial site audit will involve an audit of the following: a 100% review of regulatory documents; a 100% review of all signed informed consents; a 100% review of investigational material accountability; a 100% review of reported serious adverse events; an investigator and/or Study coordinator interview; facilities inspection; and a 100% revalidation of subject source documentation to case report forms for 15% to 25% of the subjects enrolled at a site. The number of subject records reviewed at each trial site will depend upon the completion of case report forms at the time of the audit. Clinical/Statistical Reports * Integrated Clinical and Statistical Reports PPD Pharmaco will write a complete Integrated Clinical and Statistical Report (ICSR) for the Study, in accordance with Sponsor specifications and current ICH guidelines. In initial preparation of the ICSR, prior to completion of the final analyses, PPD Pharmaco will create a report shell using the Study Protocol and records of Study conduct. The Sponsor has the option to review and approve the shell. When the final analysis results are available, PPD Pharmaco project management, medical writers, biostatisticians, therapeutic experts and the Sponsor will interact to discuss the interpretation of the data and to develop the discussion section of the ICSR. The results will then be incorporated into the shell and PPD Pharmaco will provide a draft report for review by the Sponsor. Following review by the Sponsor, a round table discussion of the report may be held. The goal of the round table is to achieve consensus on and ensure a complete understanding of Sponsor comments prior to finalization of the ICSR. If a round table discussion is not held, the Sponsor must provide only one set of comments to PPD Pharmaco for incorporation into the final ICSR. When the round table discussion has concluded, or when Sponsor comments have been received by PPD Pharmaco, the final version of the ICSR will be generated and submitted to the Sponsor for approval. All ICSRs written by PPD Pharmaco will undergo a complete internal review by a Quality Control Coordinator, the project statistician, the project manager, the project physician, and a Quality Assurance Auditor prior to release to the Sponsor. This review will consist of a review of format against the Sponsor style guide, verification of compliance with ICH guidelines, a 100% comparison of data, both tabular and in text, against listings and tables, and a medical/scientific review of data interpretation. One draft of the ICSR will be provided to the Sponsor for review and comment. Additional review cycles will result in delays in finalization and increased costs. Review of the draft by the Sponsor should not exceed two weeks time. Any time beyond this period will result in an equal delay in finalization of the report. Safety * Serious Adverse Event Reporting and Monitoring Investigative sites will report all serious adverse events (SAEs) directly to PPD Pharmaco. PPD Pharmaco will ensure that each event has been properly recorded on the SAE form. Once initial review has been completed, PPD Pharmaco will fax the SAE report to Carrington. The procedure should be completed within one working day of receipt of an SAE report. It is understood that Carrington's medical monitors will review all SAEs and determine causality. PPD Pharmaco's Medical Monitor will be responsible for reviewing the SAE report for accuracy and completeness and for answering routine clinical questions. PPD Pharmaco's MA/PVG group will be responsible for preparing patient SAE narratives for IND Safety Report. All patient narratives will be in a format acceptable to both PPD Pharmaco and Carrington. It is assumed that narratives will undergo only one review cycle by Carrington. Carrington will be billed for this activity based on the actual number of SAE narratives completed. PROJECT BUDGET BUDGET SUMMARY FOR Carrington PROTOCOL 9084: TASK 1. Clinical*** 1,212,061 2. Data Management 164,335 3. Biostats* 93,447 4. Medical Writing 40,731 5. Regulatory: File & Site Audits 84,203 6. Medical Monitoring 7. 46,207 SAE Narratives will be separately invoiced at the rate of $875.00 each 7. IS Support 17,707 Total Direct Costs $1,658,690 Investigator Meeting Preparation 153,000 Investigator Grants** 773,640 IRB Reimbursement 18,850 Central Labs 29,921 Travel - Monitoring 415,833 Travel - Site Audits 6,152 CRF Printing and Shipping 5,459 Miscellaneous 431 Total Indirect Costs $1,403,287 Project Grand Total $3,061,977 * Additional unique tables or figures will be provided at a cost of $2,000 per table or figure and additional listings or repeat tables or repeat figure will be provided at a cost of $1,000 each. ** Sponsor will be billed an additional $1,448 for each screening failure. *** Figure includes additional labor expenses incurred due to the delay in the availability of drug. EX-10.97 10 EXHIBIT 10.97 PROMISSORY NOTE $681,730.43 Dallas County, Texas February 4, 1999 FOR VALUE RECEIVED, the undersigned, ALOE COMMODITIES INTERNATIONAL, INC., a Texas corporation (the "Maker"), hereby promises to pay to the order of CARRINGTON LABORATORIES, INC., a Texas corporation (the "Payee"), the principal sum of Six Hundred Eighty-One Thousand Seven Hundred Thirty and 43/100 Dollars ($681,730.43), with interest on the unpaid balance thereof from the date hereof until maturity at the rate or rates hereinafter provided, both principal and interest being payable as hereinafter provided in lawful money of the United States of America at 2001 Walnut Hill Lane, Irving, Texas 75038, or at such other place as may be designated from time to time by the holder of this Note. The unpaid principal of this Note outstanding from time to time shall bear interest prior to maturity at the rate of ten percent (10%) per annum or the maximum interest rate permitted under applicable law, whichever is less; provided, however, that no interest shall accrue or be payable on any part of the principal of this Note that is paid on or before June 4, 1999. All past due principal of and/or interest on this Note shall bear interest from maturity until paid at the rate of eighteen percent (18%) per annum or the maximum interest rate permitted under applicable law, whichever is less. The principal of and interest on this Note shall be due and payable on February 4, 2000 (the "Final Due Date"), on which date all unpaid principal of and accrued interest on this Note shall be due and payable. The Maker shall have the right to prepay, without penalty, at any time and from time to time prior to maturity, all or any part of the unpaid principal balance of this Note, provided that any such principal prepaid after June 4, 1999 shall be accompanied by the interest accrued on such principal. The Maker hereby pledges and assigns to the Payee and grants to the Payee a continuing security interest in 700,000 shares of capital stock, par value $0.05 U.S. per share, of Aloe and Herbs International Inc., a Panamanian corporation, and all proceeds thereof, to secure the full and timely payment of all sums now or hereafter owed by the Maker under this Note. The Payee shall have all rights and remedies available to it under the Texas Uniform Commercial Code. It is the intent of the Maker and the Payee, in the execution and acceptance of this Note and all other instruments now or hereafter securing this Note, to contract in strict compliance with applicable usury law. In furtherance thereof, the Maker and the Payee stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest at a rate in excess of the maximum interest rate permitted to be charged by applicable law; that neither the Maker nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the maximum interest rate that may be lawfully charged under applicable law; and that the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith that may be in apparent conflict herewith. The holder of this Note expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note shall be accelerated for any reason, or if the principal of this Note is paid prior to the end of the term of this Note, and as a result thereof the interest received for the actual period of existence of the indebtedness evidenced by this Note exceeds the applicable maximum lawful rate, the holder of this Note shall, at its option, either refund to the Maker the amount of such excess or credit the amount of such excess against the principal balance of this Note then outstanding and thereby shall render inapplicable any and all penalties of any kind provided by applicable law as a result of such excess interest. If the Payee or any other holder of this Note shall collect money that is deemed to constitute interest that would increase the effective interest rate on this Note to a rate in excess of that permitted to be charged by applicable law, an amount equal to interest in excess of the lawful rate shall, upon such determination, at the option of the holder of this Note, be either immediately returned to the Maker or credited against the principal balance of this Note then outstanding, in which event any and all penalties of any kind under applicable law as a result of such excess interest shall be inapplicable. By execution of this Note, the Maker acknowledges that it believes the indebtedness evidenced by this Note to be non-usurious and agrees that if, at any time, the Maker should have reason to believe that such indebtedness is in fact usurious, it will give the holder of this Note notice of such condition, and such holder shall have ninety (90) days from the date such notice is given in which to make appropriate refund or other adjustment in order to correct such condition, if in fact such exists. The term "applicable law," as used in this Note, shall mean the laws of the State of Texas or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. If the indebtedness represented by this Note or any part thereof is collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings, or if this Note is placed in the hands of an attorney for collection after default, the Maker and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note, in addition to the principal and interest due and payable hereon, all the costs and expenses of such holder in enforcing this Note, including without limitation reasonable attorney's fees and legal expenses. The Maker and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of intention to accelerate the maturity of this Note, notice of acceleration, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, and releases or substitutions of security, in whole or in part, with or without notice, before or after maturity. This Note and the rights, duties and liabilities of the parties hereunder and/or arising from or relating in any way to the indebtedness evidenced by this Note or the transaction of which such indebtedness is a part shall be governed by and construed for all purposes in accordance with the laws of the State of Texas and the laws of the United States applicable to transactions within such state. IN WITNESS WHEREOF, the Maker has executed this Note on the date first set forth above. ALOE COMMODITIES INTERNATIONAL, INC. By: /s/ L. Scott McKnight L. Scott McKnight President EX-10.98 11 EXHIBIT 10.98 February 4, 1999 Aloe Commodities International, Inc. 12901 Nicholson, Suite 370 Farmers Branch, Texas 75234 Gentlemen: Reference is made to the Promissory Note dated June 17, 1998 of Aloe Commodities International, Inc., a Texas corporation (the "Maker"), payable to the order of Carrington Laboratories, Inc., a Texas corporation (the "Payee"), in the original principal amount of $200,000 (the "Note"), as amended by three letter agreements between the Maker and the Payee dated September 30, 1998, November 4, 1998 and January 15, 1999 (collectively, the "Prior Amendments"), the last of which extended the Final Due Date of the Note to February 5, 1999. The Maker and the Payee now desire to amend the Note in the additional respects set forth below. Accordingly, the Maker and the Payee hereby agree as follows: 1. The third paragraph on the first page of the Note is hereby amended, effective as of June 17, 1998, to read in its entirety as follows: The principal of and interest on this Note shall be due and payable on February 4, 2000 (the "Final Due Date"), on which date all unpaid principal of and accrued interest on this Note shall be due and payable. 2. The Note is further amended, effective as of the date of this letter agreement, by inserting on the first page thereof, between the fourth and fifth paragraphs, a new paragraph which shall read in its entirety as follows: The Maker hereby pledges and assigns to the Payee and grants to the Payee a continuing security interest in 200,000 shares of capital stock, par value $0.05 U.S. per share, of Aloe and Herbs International Inc., a Panamanian corporation, and all proceeds thereof, to secure the full and timely payment of all sums now or hereafter owed by the Maker under this Note. The Payee shall have all rights and remedies available to it under the Texas Uniform Commercial Code. Aloe Commodities International, Inc. February 4, 1999 Page 2 3. This letter agreement shall supersede the Prior Amendments, and the Note shall remain in full force and effect as originally written, except as amended by this letter agreement. Please indicate your agreement to the terms of this letter agreement by signing the enclosed copy of this letter in the space provided below and returning that copy to the undersigned. CARRINGTON LABORATORIES, INC. By: \s\ Robert W. Schnitzius Robert W. Schnitzius Treasurer and Chief Financial Officer Agreed to in all respects: ALOE COMMODITIES INTERNATIONAL, INC. By: \s\ L. Scott McKnight L. Scott McKnight President EX-10.99 12 EXHIBIT 10.99 ALOE AND HERBS INTERNATIONAL INC. STOCK PURCHASE WARRANT granted to CARRINGTON LABORATORIES, INC. November 23, 1998 TABLE OF CONTENTS Page ---- 1. Manner of Exercise; Issuance of Certificates; Payment for Shares . 1 2. Period of Exercise . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Certain Representations and Agreements of the Company . . . . . . 2 (a) Corporate Organization . . . . . . . . . . . . . . . . . . . 2 (b) Authorized and Outstanding Capital Stock . . . . . . . . . . 2 (c) Shares to be Fully Paid . . . . . . . . . . . . . . . . . . . 3 (d) Reservation of Shares . . . . . . . . . . . . . . . . . . . . 3 (e) Continued Existence; Certain Actions Prohibited . . . . . . 3 (f) Corporate Authority . . . . . . . . . . . . . . . . . . . . . 3 (g) Noncontravention . . . . . . . . . . . . . . . . . . . . . . 3 (h) Governmental Approvals . . . . . . . . . . . . . . . . . . . 4 (I) Registration . . . . . . . . . . . . . . . . . . . . . . . . 4 (j) Financial Statements . . . . . . . . . . . . . . . . . . . . 4 (k) Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (l) Inspection . . . . . . . . . . . . . . . . . . . . . . . . . 5 (m) Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (n) Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4. Upward Adjustment in Exercise Price . . . . . . . . . . . . . . . 5 5. Antidilution Provisions . . . . . . . . . . . . . . . . . . . . . 6 (a) Stock Dividends; Subdivisions and Combinations . . . . . . . 6 (b) Extraordinary Dividends and Distributions . . . . . . . . . . 6 (c) Issuance of Capital Stock . . . . . . . . . . . . . . . . . . 7 (d) Computation of Market Price . . . . . . . . . . . . . . . . . 7 (e) Record Date Adjustments . . . . . . . . . . . . . . . . . . . 7 (f) Minimum Adjustment of Exercise Price . . . . . . . . . . . . 8 (g) Reorganization, Reclassification, Consolidation, Merger, or Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (h) No Fractional Shares . . . . . . . . . . . . . . . . . . . . 9 (I) Notice of Adjustment . . . . . . . . . . . . . . . . . . . . 9 (j) Other Notices . . . . . . . . . . . . . . . . . . . . . . . . 9 (k) Certain Events . . . . . . . . . . . . . . . . . . . . . . 10 6. Registration Rights . . . . . . . . . . . . . . . . . . . . . . 10 (a) Right to Participate in Registrations . . . . . . . . . . . 10 (b) Registration Procedures . . . . . . . . . . . . . . . . . . 11 (c) Required Information . . . . . . . . . . . . . . . . . . . 12 (d) Expenses of Registration . . . . . . . . . . . . . . . . . 12 (e) Indemnification . . . . . . . . . . . . . . . . . . . . . . 12 7. Issue Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 8. Availability of Information . . . . . . . . . . . . . . . . . . 12 9. No Rights or Liabilities as a Shareholder . . . . . . . . . . . 13 10. Transfer, Exchange, and Replacement of Warrant . . . . . . . . . 13 (a) Transfer of Warrant . . . . . . . . . . . . . . . . . . . . 13 (b) Warrant Exchangeable for Different Denominations . . . . . 13 (c) Replacement of Warrant . . . . . . . . . . . . . . . . . . 13 (d) Cancellation; Payment of Expenses . . . . . . . . . . . . . 13 (e) Register . . . . . . . . . . . . . . . . . . . . . . . . . 13 (f) Exercise or Transfer Without Registration . . . . . . . . . 14 11. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . 14 13. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 15 (a) Amendments . . . . . . . . . . . . . . . . . . . . . . . . 15 (b) Descriptive Headings . . . . . . . . . . . . . . . . . . . 15 (c) Successors and Assigns . . . . . . . . . . . . . . . . . . 15 (d) Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 15 (e) Survival . . . . . . . . . . . . . . . . . . . . . . . . . 15 (f) Closing of Books . . . . . . . . . . . . . . . . . . . . . 15 (g) Amendments to Terms of Warrant Shares . . . . . . . . . . . 15 THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR UNDER ANY SECURITIES OR BLUE SKY LAWS OF ANY STATE OF THE UNITED STATES. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH. No. W-001 Right to Purchase 300,000 Shares STOCK PURCHASE WARRANT THIS CERTIFIES THAT, for value received, CARRINGTON LABORATORIES, INC., a Texas corporation, is entitled to purchase from ALOE AND HERBS INTERNATIONAL INC., a corporation organized under the laws of the Republic of Panama (the "Company"), at any time or from time to time during the period specified in Paragraph 2 hereof, THREE HUNDRED THOUSAND (300,000) fully paid and nonassessable shares of the Company's Capital Stock, par value U.S. $0.05 per share (the "Capital Stock"), at an exercise price per share of Sixty-Five Cents (U.S. $0.65) (such exercise price, as it may be adjusted hereunder, is herein called the "Exercise Price"). The term "Warrant Shares", as used herein, refers to the shares of Capital Stock purchasable hereunder. The Exercise Price will be adjusted upward on June 2, 2000 as provided in Paragraph 4 hereof, and the Warrant Shares and the Exercise Price are subject to further adjustment as provided in Paragraph 5 hereof. This Stock Purchase Warrant was originally issued in connection with a loan by the initial holder hereof to the Company in the amount of U.S. $300,000. The term "Warrants", as used herein, shall mean this Stock Purchase Warrant and all other Stock Purchase Warrants issued in connection with any transfer, exchange, or replacement thereof. This Warrant is subject to the following terms, provisions, and conditions: 1. Manner of Exercise; Issuance of Certificates; Payment for Shares. Subject to the provisions hereof, this Warrant may be exercised by the holder hereof in whole or in part (but not as to a fractional Warrant Share). The holder hereof may exercise this Warrant by the surrender of this Warrant, together with a completed Exercise Agreement in the form attached hereto, to the Company during normal business hours on any business day at any of the Company's principal offices in the Republic of Panama, the Republic of Costa Rica, or St. Marys, West Virginia, U.S.A. (or such other office or agency of the Company as may be mutually agreed upon by the Company and the holder hereof), and upon payment to the Company in cash, by wire transfer or by bank check, in United States dollars, of the Exercise Price for the Warrant Shares specified in said Exercise Agreement. The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or its designee as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement delivered, and payment made for such shares as aforesaid. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in said Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding five business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of said holder or such other name as shall be designated by said holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of said certificates, deliver to said holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. The Company shall pay all taxes and other expenses and charges payable in connection with the preparation, execution, and delivery of stock certificates (and any new Warrants) pursuant to this Paragraph 1 except that, in case such stock certificates shall be registered in a name or names other than the holder of this Warrant, funds sufficient to pay all stock transfer taxes which shall be payable in connection with the execution and delivery of such stock certificates shall be paid by the holder hereof to the Company at the time of the delivery of such stock certificates by the Company as mentioned above. 2. Period of Exercise. This Warrant is exercisable at any time or from time to time after November 23, 1998, and before 5:00 p.m., local time in Dallas, Texas, on November 24, 2003. 3. Certain Representations and Agreements of the Company. The Company hereby represents and warrants to, and covenants and agrees with, each holder of this Warrant as follows: (a) Corporate Organization. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the Republic of Panama and has all requisite power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. No actions or proceedings to dissolve the Company are pending or threatened. The Company has delivered to the initial holder of this Warrant accurate and complete copies of the Company's articles of incorporation and other charter documents as currently in effect and the stock records of the Company. Such records accurately reflect the stock ownership of the Company. (b) Authorized and Outstanding Capital Stock. The authorized capital stock of the Company consists of 15,000,000 shares of Capital Stock, par value U.S. $0.05 per share, of which 7,765,000 shares are issued and outstanding as of the date of this Warrant. All outstanding shares of Capital Stock have been validly issued and are fully paid and nonassessable. Except as set forth above and as provided in this Warrant, as of the date of this Warrant, there are outstanding (I) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company convertible into or exchangeable for shares of capital stock or other voting securities of the Company, (iii) no options or other rights to acquire from the Company, and no obligation of the Company to issue or sell, any shares of capital stock or other voting securities of the Company or any securities of the Company convertible into or exchangeable for such capital stock or voting securities, and (iv) no equity equivalents, interests in the ownership or earnings or other similar rights of or with respect to the Company. (c) Shares to be Fully Paid. All Warrant Shares will, upon issuance, be validly issued, fully paid, and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof. (d) Reservation of Shares. During the period within which this Warrant may be exercised (the "Exercise Period"), the Company will at all times have authorized, and reserved for the purpose of issue upon exercise of this Warrant, a sufficient number of shares of Capital Stock to provide for the exercise of this Warrant. (e) Continued Existence; Certain Actions Prohibited. During the Exercise Period, the Company and its subsidiaries will maintain in full force and effect their respective corporate existence and all rights and franchises that are necessary to carry on their respective businesses as then conducted. (I) The Company will not increase the par value of the shares of Capital Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) before taking any action which would cause an adjustment reducing the Exercise Price below the then par value of the shares of Capital Stock so receivable, the Company will take all such corporate action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Capital Stock at such adjusted Exercise Price upon the exercise of this Warrant and (iii) the Company will not take any action which results in any adjustment of the Exercise Price if the total number of shares of Capital Stock issuable after the action upon the exercise of this Warrant would exceed the total number of shares of Capital Stock then authorized by the Company's articles of incorporation or other charter documents and available for the purpose of issue upon such exercise. (f) Corporate Authority. The Company has full power and authority to execute, deliver, and perform this Warrant. The execution, delivery, and performance by the Company of this Warrant have been duly authorized by all necessary corporate action of the Company. This Warrant has been duly executed and delivered by the Company and constitutes a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms. (g) Noncontravention. The execution, delivery and performance by the Company of this Warrant do not and will not (I) conflict with or result in a violation of any provision of the Company's articles of incorporation or other charter documents, (ii) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to a right of termination, cancellation, or acceleration under, or acquire any consent, approval, authorization or waiver of, or notice to, any party to, any bond, debenture, note, mortgage, indenture, lease, contract, agreement, or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties may be bound or any permit held by the Company or any of its subsidiaries, (iii) result in the creation or imposition of any encumbrance upon the properties of the Company or any of its subsidiaries or (iv) violate any applicable law binding upon the Company or any of its subsidiaries. (h) Governmental Approvals. No consent, approval, order, or authorization of, or declaration, filing, or registration with, any governmental authority is required to be obtained or made by the Company or any of its subsidiaries in connection with the execution, delivery, or performance by the Company of this Warrant. (i) Registration. If the issuance of any Warrant Shares required to be reserved for purposes of exercise of this Warrant requires registration with or approval of any governmental authority under any federal, state, local or other law, rule or regulation of the United States, the Republic of Panama or other country or any state or political subdivision of any such country (other than any registration under the United States Securities Act of 1933, as amended (the "Securities Act"), or under applicable securities or blue sky laws of any state of the United States, which registration is subject to Paragraph 6 hereof) or listing on any securities exchange or stock market, before such shares may be issued upon exercise of this Warrant, the Company will, at its expense, use its best efforts to cause such shares to be duly registered or approved, or listed on the relevant securities exchange or stock market, as the case may be, at such time, so that such shares may be issued in accordance with the terms hereof. (j) Financial Statements. During the Exercise Period, the Company will keep true and correct books of account and prepare financial statements in accordance with generally accepted accounting principles consistently applied and shall cause to be made available to the holder of this Warrant: (i) as soon as practicable and in any event within 30 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of operations, stockholders equity and cash flows of the Company and its subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and its subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; and (ii) as soon as practicable and in any event within 60 days after the end of each fiscal year, consolidating and consolidated statements of operations, stockholders equity and cash flows of the Company and its subsidiaries for such year, and consolidating and consolidated balance sheets of the Company and its subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, all in reasonable detail and reasonably satisfactory in scope to the holder of this Warrant, and, as to the consolidated statements, certified to the Company by independent public accountants of recognized United States national standing selected by the Company and reasonably satisfactory to such holder. (k) Laws. During the Exercise Period, the Company and its subsidiaries will comply with all governmental statutes, regulations and orders, domestic and foreign, applicable to the Company and its subsidiaries, the noncompliance with which would have a material adverse effect on the business, condition (financial or otherwise), or operations of the Company and its subsidiaries taken as a whole or the ability of the Company to perform its obligations under this Warrant. (l) Inspection. Upon reasonable notice to the Company, at any reasonable time and from time to time during the Exercise Period, the Company will permit any representative designated by the holder of this Warrant to (I) visit and inspect any of the properties of the Company or its subsidiaries; (ii) examine the corporate and financial records of the Company and its subsidiaries and make copies thereof or extracts therefrom; and (iii) discuss the affairs, finances, and accounts of the Company and its subsidiaries with the directors, officers, key employees, and independent accountants of the Company and its subsidiaries (and the Company hereby authorizes all independent accountants employed by the Company and its subsidiaries to consult with and answer inquiries by such holder with respect to the financial condition and matters of the Company and its subsidiaries and with respect to any matters which have come to their attention concerning the Company and its subsidiaries during the course of their dealings with the Company and its subsidiaries). (m) Records. During the Exercise Period, the Company and its subsidiaries shall keep books and records of account in which full, true, and correct entries will be made of all dealings and transactions in relation to their respective businesses and affairs in accordance with generally accepted accounting principles applied on a consistent basis. (n) Taxes. During the Exercise Period, the Company and its subsidiaries shall file all required tax returns (or requests for extensions of time to file such returns), reports, and requests for refunds on a timely basis and shall pay or discharge on a timely basis all taxes imposed on them or on any of their respective assets, income, or franchises. 4. Upward Adjustment in Exercise Price. Effective as of 12:01 a.m., local time in Dallas, Texas, on June 2, 2000 (the "Adjustment Effective Time"), the Exercise Price shall be adjusted upward to an amount (which shall be rounded downward to the nearest whole cent) equal to the mathematical product of (x) the Exercise Price in effect immediately prior to the Adjustment Effective Time multiplied by (y) 1.1538462. Such adjustment shall be effective for any exercise of this Warrant that occurs at or after the Adjustment Effective Time, and shall not apply to exercises prior to that time. Such adjustment shall not affect the number of Warrant Shares purchasable hereunder. 5. Antidilution Provisions. The Exercise Price (including the Exercise Price as adjusted pursuant to Paragraph 4 hereof) shall be subject to adjustment from time to time as provided in this Paragraph 5. Upon each adjustment of the Exercise Price pursuant to this Paragraph 5, the holder of this Warrant shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the largest number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable hereunder immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. For purposes of this Paragraph 5, the term "Capital Stock", as used herein, includes the Capital Stock and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation which may be authorized in the future by the Company's articles of incorporation or other charter documents, provided that the shares purchasable pursuant to this Warrant shall include only shares of the class designated as capital stock of the Company as of the date of this Warrant, or shares resulting from any subdivision or combination of such capital stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in Paragraph 5(g) hereof, the stock or other securities or property provided for in said Paragraph. (a) Stock Dividends; Subdivisions and Combinations. In case at any time the Company shall (I) pay a dividend or make a distribution on Capital Stock in Capital Stock, (ii) subdivide the outstanding shares of Capital Stock into a greater number of shares, or (iii) combine the outstanding shares of Capital Stock into a smaller number of shares, the Exercise Price in effect immediately prior thereto shall be adjusted proportionately so that the adjusted Exercise Price shall bear the same relation to the Exercise Price in effect immediately prior to such event as the total number of shares of Capital Stock outstanding immediately prior to such event shall bear to the total number of shares of Capital Stock outstanding immediately after such event. An adjustment made pursuant to this Paragraph 5(a) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) Extraordinary Dividends and Distributions. In case at any time the Company shall pay a dividend or make a distribution to all holders of Capital Stock, as such, of shares of its stock (other than Capital Stock), evidences of its indebtedness, assets (excluding dividends or distributions payable in cash out of earnings or earned surplus), or rights, options, or warrants to subscribe for or purchase such shares, evidences of indebtedness, or assets, then in each such case the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the record date mentioned below by a fraction, the numerator of which shall be the total number of shares of Capital Stock outstanding on such record date multiplied by the market price per share of Capital Stock (determined as provided in Paragraph 5(d) hereof) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company) as of such record date of such shares of stock, evidences of indebtedness, assets, or rights, options, or warrants so paid or distributed, and the denominator of which shall be the total number of shares of Capital Stock outstanding on such record date multiplied by the market price per share of Capital Stock (determined as provided in Paragraph 5(d) hereof) on such record date. Such adjustment shall be made whenever such dividend is paid or such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution. (c) Issuance of Capital Stock. If and whenever the Company shall issue or sell any shares of Capital Stock (the "Dilutive Capital Stock") for a consideration per share less than the Exercise Price in effect immediately prior to the date of issuance or sale of the Dilutive Capital Stock, the Exercise Price shall be adjusted to equal the consideration per share received by the Company for the Dilutive Capital Stock. (d) Computation of Market Price. For the purpose of any computation under Paragraph 5(b) hereof, the market price of the security in question on any day shall be deemed to be the average of the last reported sale prices for the security for the 20 consecutive Trading Days (as defined below) commencing 20 Trading Days before the day in question. The last reported sale price for each day shall be (I) the last reported sale price of the security on the Nasdaq National Market, the Nasdaq Small Cap Issuer Market or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, or (ii) if not quoted as described in clause (I) above, the mean between the high bid and low asked quotations for the security as reported by the National Quotation Bureau, Inc. if at least two securities dealers have inserted both bid and asked quotations for such security on at least 10 of such 20 consecutive Trading Days, or (iii) if the security is listed or admitted for trading on any national securities exchange, the last sale price, or the closing bid price if no sale occurred, of such class of security on the principal securities exchange on which such class of security is listed or admitted to trading. If the security is quoted on a national securities or central market system, in lieu of a market or quotation system described above, the last reported sale price shall be determined in the manner set forth in clause (ii) of the preceding sentence if bid and asked quotations are reported but actual transactions are not, and in the manner set forth in clause (iii) of the preceding sentence if actual transactions are reported. If none of the conditions set forth above is met, the last reported sale price of the security on any day or the average of such last reported sale prices for any period shall be the fair market value of such security as determined, at the sole expense of the Company, by a member firm of the New York Stock Exchange mutually selected by the Company and the holder of this Warrant. If the fair market value is determined pursuant to the immediately preceding sentence, such value shall continue to be used by the Company and the holder for all purposes of this Paragraph 5(d) for the immediately succeeding 90-day period; provided, however, the use of such value during such 90-day period shall immediately cease if either (I) the market price of such security can be determined in the manner contemplated by the first three sentences of this Paragraph 5(d) or (ii) the Company is unable to provide the holder with an officer's certificate to the effect that there has been no change within the elapsed portion of such 90-day period in the condition of the Company, financial or otherwise, that would materially affect the market value of the applicable security. The term "Trading Days", as used herein, means (I) if the security is quoted on the Nasdaq National Market or any similar system of automated dissemination of quotations of securities prices, days on which trades may be made on such system, or (ii) if the security is listed or admitted for trading on any national securities exchange, days on which such national securities exchange is open for business. (e) Record Date Adjustments. In any case in which this Paragraph 5 requires that a downward adjustment of the Exercise Price shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (I) issuing to the holder of this Warrant exercised after such record date and before the occurrence of such event the additional Warrant Shares issuable upon such exercise by reason of the adjustment required by such event over and above the Warrant Shares issuable upon such exercise before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of a fractional share pursuant to Paragraph 5(h) hereof. (f) Minimum Adjustment of Exercise Price. No adjustment of the Exercise Price shall be made in an amount less than 0.25% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 0.25% of such Exercise Price; provided that, upon the exercise of this Warrant, all adjustments carried forward and not theretofore made up to and including the date of such exercise shall, with respect to this Warrant then exercised, be made to the nearest .001 of a cent. (g) Reorganization, Reclassification, Consolidation, Merger, or Sale. If any capital reorganization of the Company, or any reclassification of the Capital Stock, or any consolidation or merger of the Company with or into another corporation or entity, or any sale of all or substantially all the assets of the Company, shall be effected in such a way that the holders of Capital Stock (or any other securities of the Company then issuable upon the exercise of this Warrant) shall be entitled to receive stock or other securities or property (including cash) with respect to or in exchange for Capital Stock (or such other securities), then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, lawful and adequate provision shall be made whereby the holder of this Warrant shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant, and in lieu of the shares of Capital Stock (or such other securities) immediately theretofore purchasable and receivable upon the exercise hereof, such stock or other securities or property (including cash) as may be issuable or payable with respect to or in exchange for a number of outstanding shares of Capital Stock (or such other securities) equal to the number of shares of Capital Stock (or such other securities) immediately theretofore purchasable and receivable upon the exercise of this Warrant, had such reorganization, reclassification, consolidation, merger, or sale not taken place. In any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including, without limitation, the provisions for adjustments of the Exercise Price and of the number of Warrant Shares purchasable upon exercise hereof) shall thereafter be applicable, as nearly as reasonably may be, in relation to the stock or other securities or property thereafter deliverable upon the exercise hereof (including an immediate adjustment of the Exercise Price if by reason of or in connection with such consolidation, merger, or sale any securities are issued or event occurs which would, under the terms hereof, require an adjustment of the Exercise Price). In the event of a consolidation or merger of the Company with or into another corporation or entity as a result of which a greater or lesser number of shares of common stock of the surviving corporation or entity are issuable to holders of Capital Stock in respect of the number of shares of Capital Stock outstanding immediately prior to such consolidation or merger, then the Exercise Price in effect immediately prior to such consolidation or merger shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Capital Stock. The Company shall not effect any such consolidation, merger, or sale unless prior to or simultaneously with the consummation thereof the successor corporation or entity (if other than the Company) resulting from such consolidation or merger or the corporation or entity purchasing such assets and any other corporation or entity the shares of stock or other securities or property of which are receivable thereupon by the holder of this Warrant shall expressly assume, by written instrument executed and delivered (and satisfactory in form and substance) to the holder of this Warrant, (I) the obligation to deliver to such holder such stock or other securities or property as, in accordance with the foregoing provisions, such holder may be entitled to purchase and (ii) all other obligations of the Company hereunder. (h) No Fractional Shares. No fractional shares of Capital Stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in United States dollars in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the current market value of a share of Capital Stock, which current market value shall be the last reported sale price (determined as provided in Paragraph 5(d) hereof) on the Trading Day immediately preceding the date of the exercise. (i) Notice of Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then and in each such case the Company shall give notice thereof to the holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (j) Other Notices. In case at any time: (i) the Company shall declare any dividend upon the Capital Stock payable in shares of stock of any class or make any other distribution (including dividends or distributions payable in cash) to the holders of the Capital Stock; (ii) the Company shall offer for subscription pro rata to the holders of the Capital Stock any additional shares of stock of any class or other rights; (iii) t h ere shall be any capital reorganization of the Company, or reclassification of the Capital Stock, or consolidation or merger of the Company with or into, or share exchange by the holders of the Capital Stock with, or sale of all or substantially all the assets of the Company to, another corporation or entity or any other person; or (iv) there shall be a voluntary or involuntary dissolution, liquidation, or winding-up of the Company; then, in each such case, the Company shall give to the holder of this Warrant (a) notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Capital Stock entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Capital Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation, or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation, or winding-up, notice of the date (or, if not then known, a reasonable approximation thereof by the Company) when the same shall take place. Such notice shall also specify the date on which the holders of Capital Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Capital Stock for stock or other securities or property deliverable upon such reorganization, reclassification, consolidation, merger, share exchange, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given at least 20 days prior to the record date or the date on which the Company's books are closed in respect thereto. (k) Certain Events. If any event occurs as to which, in the good faith judgment of the Board of Directors of the Company, the other provisions of this Paragraph 5 are not strictly applicable or if strictly applicable would not fairly protect the exercise rights of the holder of this Warrant in accordance with the essential intent and principles of such provisions, then the Board of Directors of the Company and the holder of this Warrant shall, at the Company's expense, appoint a mutually agreed firm of independent public accountants of recognized United States national standing which shall give their opinion upon the adjustment, if any, on a basis consistent with such essential intent and principles, necessary to preserve, without dilution, the rights of the holder of this Warrant. Upon receipt of such opinion, the Board of Directors of the Company shall forthwith make the adjustments described therein; provided, that no such adjustment shall have the effect of increasing the Exercise Price as otherwise determined pursuant to this Paragraph 5. 6. Registration Rights. (a) Right to Participate in Registrations. If at any time the Company proposes to register shares of its Capital Stock (as defined in Paragraph 5 hereof) under the Securities Act on Form S-1, S-2, or S-3 (or any form which replaces or is substantially similar to such form), the Company shall each such time give notice of such proposed registration to the holder of this Warrant, if this Warrant has not yet expired, and to all holders of Warrant Shares. Subject to the terms and provisions of this Paragraph 6(a), upon the request of any such holder made within 20 days after the receipt of such notice by such holder, the Company shall cause all Warrant Shares that have been acquired by such holder pursuant to the exercise of this Warrant, all Warrant Shares that will be acquired by such holder pursuant to the exercise of this Warrant not later than the day prior to the effectiveness of the registration statement under the Securities Act, and any other shares of Capital Stock held by such holder, which shares such holder shall have requested to be included in the proposed registration (the "Registrable Shares"), to be included as "piggy-back" shares in such registration (the "Piggyback Registration") to the extent requisite to permit the sale or other disposition by such holder of such Registrable Shares. In the event the offering to be conducted pursuant to the proposed registration is to be an underwritten public offering, the registration rights provided in this Paragraph 6(a) shall be subject to the approval of the managing underwriter or underwriters of such offering, who shall determine the number of Registrable Shares, if any, that may be included in such registration without adversely affecting such offering; provided, however, any such reduction by the underwriter or underwriters in the number of shares of Capital Stock included in such offering shall be applied and borne pro rata among all participants in such offering other than the Company. (b) Registration Procedures. If and whenever the Company is required by the provisions of Paragraph 6(a) to cause Registrable Shares to be included in the registration of securities of the Company under the Securities Act, the Company will, as expeditiously as possible: (A) prepare and file with the United States Securities and Exchange Commission (the "Commission") a registration statement (the "Registration Statement") covering such Registrable Shares and use its best efforts to cause the Registration Statement to become effective and to remain effective for so long as may reasonably be necessary to complete the sale or other disposition of such Registrable Shares, provided that the Company shall not in any event be required to use its best efforts to maintain the effectiveness of the Registration Statement for a period in excess of 180 days; (B) prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus contained therein as may be necessary to keep the Registration Statement effective, and comply with the provisions of the Securities Act, with respect to the sale or other disposition of such Registrable Shares; (C) furnish to each holder of such Registrable Shares such numbers of copies of the Registration Statement, the prospectus contained therein (including each preliminary prospectus), and each amendment and supplement to the Registration Statement and such prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such holder may reasonably request in order to facilitate the sale or other disposition of such Registrable Shares; (D) use reasonable efforts to register or qualify such Registrable Shares for sale under the securities or blue sky laws of such jurisdictions as the holders thereof may request, and do any and all other acts and things that may be necessary under such securities or blue sky laws to enable the holders of such Registrable Shares to consummate the sale or other disposition of such Registrable Shares in such jurisdictions, provided that the Company shall not in any event be required to keep any such registration or qualification in effect after the expiration of the period during which the Company maintains the effectiveness of the Registration Statement and shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to subject itself to taxation in any such jurisdiction; and (E) before filing the Registration Statement, any prospectus to be used in connection with the offering to be conducted pursuant to such registration, or any amendments or supplements to the Registration Statement or such prospectus with the Commission, furnish counsel to the holders of such Registrable Shares with copies of all such documents proposed to be filed, which shall be subject to the reasonable approval of such counsel. (c) Required Information. The Company shall not be required to include any Registrable Shares in a proposed registration of its securities under the Securities Act unless and until (I) the holder of such Registrable Shares furnishes to the Company such information regarding such holder and such Registrable Shares and the intended method of disposition of such Registrable Shares as the Company shall reasonably request in order to satisfy the requirements applicable to such registration, and (ii) in the event of a Piggyback Registration that is part of an underwritten public offering, such holder agrees to the terms of the underwriting agreed to between the Company and the underwriter or underwriters of such offering and executes all documents reasonably required to effect such offering. (d) Expenses of Registration. In the event of the inclusion pursuant to Paragraph 6(a) of Registrable Shares in a Piggyback Registration by the Company, each holder of such Registrable Shares shall pay any brokerage and underwriting discounts and commissions payable in respect of Registrable Shares sold on such holder's behalf and all fees and expenses of any attorneys and accountants employed by such holder, and the Company shall pay any and all other fees and expenses of any nature whatsoever incurred in connection with such Piggyback Registration. (e) Indemnification. In connection with any registration of Registrable Shares pursuant to the provisions of this Paragraph 6, the Company shall indemnify and hold harmless the holder of such Registrable Shares to the extent that companies generally indemnify and hold harmless underwriters in connection with public offerings under the Securities Act, and such holder shall indemnify and hold harmless the Company to the extent that selling shareholders generally indemnify and hold harmless issuers of securities in connection with public offerings under the Securities Act with respect to the written information provided by such holder for use by the Company in the preparation of the Registration Statement. 7. Issue Tax. The issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the holder of this Warrant or such shares for any issuance tax in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of this Warrant. 8. Availability of Information. The Company will cooperate with the holder of this Warrant and each holder of any Warrant Shares in supplying such information as may be necessary for such holder to complete and file any information reporting forms presently or hereafter required by any governmental authority, including the Commission, as a condition to (I) the sale or transfer of this Warrant or any Warrant Shares or (ii) the availability of an exemption from the Securities Act for the sale or transfer of this Warrant or any Warrant Shares. The Company will deliver to the holder of this Warrant, promptly upon their becoming available, copies of all financial statements, reports, notices, and proxy statements sent or made available generally by the Company to its shareholders, and copies of all regular and periodic reports, if any, and all registration statements and prospectuses, if any, filed by the Company with any securities exchange or governmental authority, including the Commission. 9. No Rights or Liabilities as a Shareholder. This Warrant shall not entitle the holder hereof to any rights as a shareholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 10. Transfer, Exchange, and Replacement of Warrant. (a) Transfer of Warrant. The holder of this Warrant may not assign, transfer, pledge, hypothecate or otherwise dispose of this Warrant or any of its rights hereunder without the prior written consent of the Company; provided, however, that (I) the holder hereof may assign or otherwise transfer this Warrant, in whole or in part, to any wholly owned subsidiary or other corporate affiliate of the holder without the consent of the Company and (ii) if the holder hereof merges or consolidates with or into another entity, or transfers or sells all or substantially all of its assets to a third party, the holder may assign this Warrant to the party which is the successor to its business and assets without the consent of the Company. Any permitted transfer of this Warrant, in whole or in part, is registrable at the offices or agency of the Company referred to in Paragraph 10(e) hereof by the holder hereof in person or by such holder's duly authorized attorney , upon surrender of this Warrant properly endorsed. In the event that the holder of this Warrant determines to assign, transfer, pledge, hypothecate or otherwise dispose of this Warrant or any of its rights hereunder, it shall give the Company ten (10) days advance written notice of its intention so to do, identifying the other party or parties to such proposed assignment, transfer, pledge, hypothecation or other disposition and the essential terms thereof. No such assignment, transfer, pledge, hypothecation or other disposition will be effective as to the Company, nor shall the Company be required to honor any such assignment, transfer, pledge, hypothecation or other disposition in the absence of the advance notice for which provision is made herein. (b) Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the offices or agency of the Company referred to in Paragraph 10(e) hereof, for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares of Capital Stock which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. (c) Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor. (d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Paragraph 10, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Paragraph 10. (e) Register. The Company shall maintain, at its principal offices in the Republic of Panama, the Republic of Costa Rica, and St. Marys, West Virginia, U.S.A. (or such other office or agency of the Company as may be mutually agreed upon by the Company and the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant. (f) Exercise or Transfer Without Registration. Anything in this Warrant to the contrary notwithstanding, if, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant shall not be registered under the Securities Act and under applicable securities or blue sky laws of any state of the United States, the Company may require, as a condition of allowing such exercise, transfer, or exchange, that (I) the holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel, which opinion and counsel are reasonably acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under said Act and under such applicable state securities or blue sky laws and (ii) the holder or transferee execute and deliver to the Company an investment letter in form and substance reasonably acceptable to the Company. The holder of this Warrant, by taking and holding the same, represents to the Company that such holder is acquiring this Warrant for investment and not with a view to the distribution thereof. 11. N o tices. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the holder of this Warrant or to the holder of shares acquired upon exercise of this Warrant shall be in writing, and shall be personally delivered, sent by overnight delivery service, or sent by facsimile transmission, to such holder at the address shown for such holder on the books of the Company (which address, in the case of the holder of this Warrant, is set forth on the signature page hereof), or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall be personally delivered or sent by overnight delivery service, United States mail, or facsimile transmission, to the office of the Company at P.O. Box 730, St. Marys, West Virginia, U.S.A. 26170, Fax no. (506) 671-1338, Attention: President, or at such other address as shall have been furnished to the holder of this Warrant or to the holder of shares acquired upon exercise of this Warrant by notice from the Company. Any such notice, request, or other communication sent by facsimile transmission shall be subsequently confirmed by a writing personally delivered or sent by overnight delivery service or United States mail as provided above. All such notices, requests, and other communications shall be deemed to have been given at the time of the receipt by the person entitled to receive such notice at the address of such person for purposes of this Paragraph 11. 12. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF WEST VIRGINIA (WITHOUT REFERENCE TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF). 13. Miscellaneous. (a) Amendments. This Warrant and any provision hereof may not be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party (or any predecessor in interest thereof) against which enforcement of the same is sought. (b) Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof. (c) Successors and Assigns. This Warrant shall be binding upon any entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all the Company's assets. (d) Remedies. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific enforcement of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. (e) Survival. All representations, covenants, and agreements made by the Company in this Warrant or in any certificate or other instrument delivered to the holder hereof by or on behalf of the Company in connection with the execution and delivery of this Warrant shall be considered to have been relied upon by the holder of this Warrant and shall survive the execution, delivery, and performance of this Warrant regardless of any investigation made by the holder hereof. (f) Closing of Books. The Company will at no time close its transfer books against the transfer of this Warrant or any Warrant Shares or in any manner which interferes with the timely exercise of this Warrant. (g) Amendments to Terms of Warrant Shares. The Company will not amend the terms of the Warrant Shares as set forth in the articles of incorporation of the Company as in effect on the date of this Warrant, except with the prior written consent of the holder of this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer effective as of the 23rd day of November, 1998. ALOE AND HERBS INTERNATIONAL INC. By: \s\ Bernard Tice Name: Bernard Tice Title: President Address of Warrantholder: CARRINGTON LABORATORIES, INC. 2001 Walnut Hill Lane Irving, Texas 75038 Telephone: (214) 518-1300 Fax: (214) 518-1020 Attention: President FORM OF EXERCISE AGREEMENT Dated: To: The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to purchase shares of Capital Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant in cash, by wire transfer or by bank check in the amount of U.S. $ . Please issue a certificate or certificates for such shares of Capital Stock in the name of and pay any cash for any fractional share to: Name: Signature: Title of Signing Officer or Agent (if any): Note: The above signature should correspond exactly with the name on the face of the within Warrant or with the name of the assignee appearing in the assignment form. and, if said number of shares of Capital Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share paid in cash. FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Capital Stock covered thereby set forth hereinbelow, to: Name of Assignee Address No. of Shares , and hereby irrevocably constitutes and appoints as agent and attorney-in-fact to transfer said Warrant on the books of the within-named corporation, with full power of substitution in the premises. Dated: In the presence of Name: Signature: Title of Signing Officer or Agent (if any): Address: Note: The above signature should correspond exactly with the name on the face of the within Warrant. EX-21.1 13 Exhibit 21.1 SUBSIDIARIES OF CARRINGTON Name of Subsidiary Organization Jurisdiction of ------------------------------- --------------- Carrington Laboratories, Belgium, N.V. Belgium Finca Savila, S.A. Costa Rica Carrington Laboratories International, Inc. Texas Hilcoa Corporation California Caraloe, Inc. Texas Carrington Laboratories of Canada, Ltd. Canada Sabila Industrial, S.A. Costa Rica EX-23.1 14 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8 (Nos. 33-22849, 33-36041, 33-42002, 33-50430, and 33-64407) and the Registration Statements on Form S-3 (Nos. 33-60833 and 33- 17177). It should be noted that we have not audited any financial statements of Carrington Laboratories, Inc. subsequent to December 31, 1996, or performed any audit procedures subsequent to the date of our report, February 7, 1997 (except with respect to certain matters discussed in Note 8, as to which the date is April 25, 1997). ARTHUR ANDERSEN LLP Dallas, Texas March 31, 1999 EX-23.2 15 Exhibit 23.2 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-22849, 33-36041, 33-42002, 33-50430, and 33-64407 ) pertaining to the 1985 Stock Option Plan of Carrington Laboratories, Inc., Registration Statements (Form S-8 Nos. 33-64403, 33-64405, and 33-55920) pertaining to the 1995 Management Compensation Plan of Carrington Laboratories, Inc., the 1995 Stock Option Plan of Carrington Laboratories, Inc., and the Employee Stock Purchase Plan of Carrington Laboratories, Inc., respectively, the Registration Statements (Form S-3 Nos. 33-60833 and 333-17177) pertaining to the 1995 and 1997 private placements of common stock of Carrington Laboratories, Inc., respectively, of our report dated February 26, 1999, with respect to the consolidated financial statements and schedules of Carrington Laboratories, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1998 filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Dallas, Texas March 26, 1999 EX-27.1 16
5 This schedule contains summary financial information extracted from (1) Statements of Balance Sheets, (2) Statement of Operations, and (3) Statements of Cash Flows, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS 12-MOS DEC-31-1997 DEC-31-1998 DEC-31-1997 DEC-31-1998 4,023 3,931 0 0 3,568 3,483 478 722 5,003 4,969 12,444 12,600 19,146 20,424 8,331 9,374 25,796 24,247 2,970 2,884 0 0 0 0 0 0 93 94 22,733 21,269 25,796 24,247 23,559 23,625 23,559 23,625 9,530 10,870 10,814 12,004 3,006 2,589 0 0 (37) (233) 246 (1,605) 20 10 226 (1,615) 0 0 0 0 0 0 226 (1,615) .02 (.17) .02 (.17)
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