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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number 0-11997
Carrington Laboratories, Inc.
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(Exact name of Registrant as specified in its charter)
Texas 75-1435663
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(State of Incorporation) (IRS Employer ID No.)
2001 Walnut Hill Lane, Irving, Texas 75038
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(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 518-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Preferred Share Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S229.405 of this chapter) 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant (treating all executive officers
and directors of the Registrant and holders of 10% or more of shares
outstanding, for this purpose, as if they may be affiliates of the
Registrant) was $42,399,538, computed by reference to the price at which
common equity was sold on June 30, 2004 of $4.45 per share.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 10,727,977
shares of Common Stock, par value $.01 per share, were outstanding on March
21, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
shareholders to be held on May 19, 2005 are incorporated by reference into
Part III hereof, to the extent indicated herein.
PART I
ITEM 1. BUSINESS.
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General
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Incorporated in Texas in 1973, Carrington Laboratories, Inc. ("Carrington"
or 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 research and proprietary product portfolios are based primarily on
complex carbohydrates isolated from the Aloe vera L. plant. The Company is
comprised of three business segments. See Note Thirteen to the consolidated
financial statements in this Annual Report for financial information about
these business segments: the Medical Services Division, Consumer Services
Division and DelSite Biotechnologies Inc., ("DelSite"). The Company sells
prescription and nonprescription medical products through its Medical
Services Division and provides manufacturing services to customers in
medical markets. Through its Consumer Services Division, formerly referred
to as Caraloe, Inc., the Company sells consumer and bulk raw material
products and also provides product development and manufacturing services
to customers in the cosmetic and nutraceutical markets. DelSite was
incorporated in 2001 as a wholly-owned subsidiary. DelSite operates
independently from the Company's research and development program and is
responsible for the research, development and marketing of the Company's
proprietary GelSite[R] technology for controlled release and delivery of
bioactive pharmaceutical ingredients.
Medical Services Division
-------------------------
Carrington's Medical Services Division offers a comprehensive line of wound
management products. Carrington products are used in a wide range of acute
and chronic wounds, for skin conditions and incontinence care. The primary
marketing emphasis for Carrington's wound and skin care products is directed
toward hospitals, nursing homes, alternate care facilities, cancer centers,
home health care providers and managed care organizations. The wound and
skin care product lines are being promoted primarily to physicians and
specialty nurses, for example, enterostomal therapists.
In response to changing market conditions and to improve the Company's
competitive position, the Company decided during 2000 to redirect the
distribution of its Medical Services products from multiple distributors to
a single, sole-source distributor. As a result of this decision, the
Company entered into an exclusive Distributor and License Agreement
effective December 1, 2000 with Medline Industries, Inc. ("Medline"). The
agreement provides that the Company will continue to manufacture its
existing line of products and sell them to Medline at specified prices. The
prices are subject to adjustment not more than once each year to reflect
increases in manufacturing cost. The agreement requires Medline to pay the
Company a base royalty totaling $12,500,000 in quarterly installments that
began on December 1, 2000. In addition to the base royalty, if Medline
elects to market any other products under any of the Company's trademarks,
Medline must pay the Company a royalty of between one percent and five
percent of the annual sales of the trademarked products, depending on the
aggregate amount of the net sales under this agreement to Medline. The
Company and Medline amended the Distributor and License Agreement in April
2004 to extend the term of the agreement through November 30, 2008. The
amended agreement specified an advance payment of $1,250,000, which the
Company has received.
The Company maintains control of certain national pricing agreements which
cover hospitals, alternate care facilities, home health care agencies and
cancer centers. These agreements allow Medline representatives to make
presentations in member facilities throughout the country. In order to
promote continued brand-name recognition, the Company engages in limited
marketing and advertising to bolster Medline's efforts in these areas.
The Company entered into a Supply Agreement with Medline effective December
1, 2000, which among other things, provides that the Company will
manufacture Medline brand dermal management products. The Supply Agreement
is co-terminus with the amended Distributor and License Agreement.
The Medical Services Division has several distribution and licensing
agreements for the sale of its products into international markets. The
Division also sells wound care products into international markets on a non-
contract, purchase order basis. Opportunities in the Internet market are
also addressed through the Company's websites, www.carringtonlabs.com and
www.woundcare.com.
The Medical Services Division also produces Acemannan Immunostimulant[TM], a
biologic fully licensed by the United States Department of Agriculture
("USDA") as an adjuvant therapy for certain cancers in dogs and cats. This
product, in addition to several wound and skin care products developed
specifically for the veterinary market, are marketed and distributed through
an exclusive distribution arrangement with Farnam Companies, Inc., a leading
veterinary marketing company.
The Medical Services Division is actively involved in developing and
promoting the SaliCept[R] line of products, which includes an oral rinse,
patches for oral wounds and extraction sites, and other products. The
SaliCept[R] line is supported by a dedicated sales representative and the
Company is actively seeking a strategic sales/distribution partner for this
line.
Consumer Services Division
--------------------------
The Consumer Services Division, formerly referred to as Caraloe, Inc.,
markets or licenses consumer products and bulk raw materials utilizing the
Company's patented complex carbohydrate technology into the consumer health
and beauty care product markets. The premier product is Manapol[R] powder,
a bulk raw material rich in polymeric acetylated mannans. Manapo1[R] powder
is marketed to manufacturers of food and nutritional products who desire
quality, clinically-proven ingredients for their finished products for
immune system enhancement. In addition, the Consumer Services Division
markets the bulk raw material Hydrapol[TM] powder to manufacturers of bath,
beauty and skin care products.
The Consumer Services Division also markets finished products containing
Manapol[R] powder into domestic health and nutritional products markets
through health food stores, internet marketing services at www.aloevera.com,
direct consumer sales, and to the international marketplace on a non-
contract, purchase order basis.
In 1997, the Company signed a non-exclusive supply agreement with
Mannatech, Inc. to supply Manapol[R] powder. In 2003, Natural Alternatives
International, Inc. ("Natural Alternatives") was added as a party to the
supply agreement as a manufacturing supplier for Mannatech and purchaser of
the Manapol[R] powder from the Company. This agreement was renewed through
November 2005 and contains monthly minimum purchase requirements. During
2004, 2003, and 2002 sales of Manapol[R] powder under this agreement
represented 47%, 39%, and 35% respectively, of the Company's total revenues.
Due to the nature of the product and the Company's relationship with this
customer, the Company expects this supply agreement will be renewed at the
end of November 2005. However, due to the fact that the non-renewal of this
contract would have a substantial impact on the Company and its revenues,
the Company is continually seeking to expand its customer base in this area.
The Consumer Services Division also provides product development and
manufacturing services to customers in the cosmetic and nutraceutical
markets. In June 2001 a development group was formed to concentrate efforts
on providing these services. The scope of services provided by this group
includes taking projects from formulation design through manufacturing,
manufacturing and filling according to customer-provided formulations and
specifications, filling customer-provided packaging components and
assembling custom kits for customers.
In December 2002, the Company acquired certain assets of the Custom Division
of Creative Beauty Innovations, Inc. ("CBI"), including specialized
manufacturing customer information, intellectual property, equipment and
selected inventories. CBI is a privately held manufacturer of skin and
cosmetic products with operations in Fort Worth, Texas.
Under the agreement, the Company paid CBI $1.6 million, including $0.6
million for related inventory. In addition, for the five-year period ending
in December 2007, the Company agreed to pay CBI an amount equal to 9.0909%
of Carrington's net sales of CBI products to CBI's transferring customers up
to $6.6 million per year, and 8.5% of its net sales of CBI products to CBI's
transferring customers over $6.6 million per year. The Company recorded
expenses of $271,000 and $383,000 in 2004 and 2003, respectively, for
royalties due under the agreement. The acquired assets include equipment and
other physical property previously used by CBI's Custom Division to compound
and package cosmetic formulations of liquids, creams, gels and lotions into
bottles, tubes or cosmetic jars. The Company uses these assets in a
substantially similar manner. The Company provides services to these
customers through its specialty manufacturing group of the Consumer Services
Division. Specialty manufacturing sales through both acquired and other
customers represented 15.1% and 21.8% of total company revenue in 2004 and
2003.
To finance the acquisition, the Company entered into an agreement with
Medline for accelerated payment of $2.0 million of the royalties due under
the Distributor and License Agreement. The royalty acceleration agreement
provides for each of the remaining quarterly royalty payments due to be paid
to the Company by Medline to be reduced by equal amounts, the sum of which
offsets the royalty advance. In addition, the Company will pay Medline
interest on the $2.0 million at the rate of 6.5% per year on the outstanding
balance of the advance.
DelSite Biotechnologies, Inc.
-----------------------------
In 2001, the Company incorporated a wholly-owned subsidiary named DelSite
Biotechnologies, Inc. DelSite operates independently from the Company's
research and development program, which supports the activities associated
with the Company's Medical Services and Consumer Services Divisions, and was
formed to commercialize innovations discovered by scientists at Carrington.
DelSite is responsible for the research, development and marketing of the
Company's proprietary drug delivery technology based on GelSite[R] polymer,
a new and unique complex carbohydrate, which was isolated in 1998 from Aloe
vera L. DelSite commenced operations in January 2002 and is currently
developing new technologies for controlled delivery of vaccines as well as
bioactive protein and peptide therapeutics.
DelSite's business plan is to partner with biotechnology and pharmaceutical
companies to provide novel delivery solutions for their drugs and vaccines.
Together with its collaborators and contractors, DelSite has the following
capabilities:
* Formulation development
* Feasibility studies
* Preclinical development
* Clinical supply production
* Product scale-up
* Technology transfer
In 2002, DelSite formed a strategic collaboration with Southern Research
Institute, Inc. of Birmingham, Alabama, ("Southern Research") to assist in
the development of an injectable drug delivery system based on the
GelSite[R] polymer. Southern Research is an independent, not-for-profit
center for scientific research affiliated with the University of Alabama at
Birmingham. Under the three-year collaborative agreement, DelSite retains
all product rights plus intellectual property rights to its existing
technology as well as any discoveries made by DelSite or Southern Research,
either jointly or individually, as a result of any project undertaken as
part of the agreement. Southern Research will receive fees and royalties
when undertaking certain specified projects on behalf of DelSite. In
addition, a second five-year collaborative agreement with Southern Research
was signed in April 2003. Under this agreement the two companies will
jointly develop an injectable long-term delivery system for proteins and
peptides. The companies will jointly own intellectual property that
originates from this relationship. In January 2005, the three-year
collaborative agreement was extended through January 26, 2006 and Southern
Research transferred both agreements to its affiliate, Brookwood
Pharmaceuticals, Inc.
In March 2004, the National Institute of Allergy and Infectious Diseases
("NIAID") awarded a Small Business Innovation Research ("SBIR") Biodefense
Grant to DelSite of up to $888,000 over two years, based on satisfactory
progress of the project. The grant proposal will fund additional development
of the GelVac[TM] intranasal powder vaccine delivery platform technology.
In July 2004, DelSite leased over 5,000 square feet of new laboratory and
office space in the Texas A&M University Research Park in College Station,
Texas. DelSite also completed a 3,000 square foot expansion of its
facilities in Irving, Texas.
In October 2004, NIAID awarded DelSite a $6 million grant to develop an
inactivated influenza nasal powder vaccine against the H5N1 strain commonly
known as avian or bird flu. The grant was awarded under a biodefense and
SARS product development initiative and will fund a three-year preclinical
program utilizing the Company's proprietary GelVac[TM] nasal powder delivery
system.
Research and Development
------------------------
General
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Carrington has developed proprietary processes for obtaining materials from
Aloe vera L. The Company intends to seek approval of the Food and Drug
Administration (the "FDA") and other regulatory agencies to sell products
containing materials obtained from Aloe vera L. 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 $4,737,000, $3,660,000 and $3,580,000 on
research and development in fiscal 2004, 2003 and 2002, respectively.
Research activities associated with DelSite accounted for 81% of the 2004,
75% of the 2003 and 52% of the 2002 research and development expenditures.
DelSite Research and Development
--------------------------------
The Company believes that DelSite's products' functionality and/or
pharmacological activity make them potential candidates for further
development as pharmaceutical or therapeutic agents. In 2005, DelSite
intends to focus its research and development activities on its preclinical
development program for an intranasal powder delivery system for influenza
vaccine as well as developing further basic research data for potential
pharmaceutical and vaccine partners. There is no assurance, however, that
DelSite will be successful in its efforts.
The Company sponsors research and development activities at Texas A&M
University in association with the College of Veterinary Medicine to support
research activities of the Company and its DelSite subsidiary. Pursuant to
this arrangement, the Company has access to leading authorities in the life
sciences, as well as facilities and equipment to help further the Company's
research programs. DelSite also has a research relationship with the
University of Southern Mississippi where it sponsors research in the
university's School of Polymer Science. In July 2004, DelSite entered into a
master research agreement with The Texas A&M University System Health
Science Center College of Medicine through the Texas A&M Research Foundation
that allows DelSite to conduct multiple research projects in association
with the Center in the areas of virology and bacteriology for vaccine
delivery.
DelSite is developing a new platform technology based on its proprietary
GelSite[R] polymer for controlled delivery of vaccines as well as bioactive
protein and peptide therapeutics. Basic research is continuing on this
material, which includes both injectable delivery of therapeutic proteins
and peptides and delivery of protein and particle antigens as vaccines using
its proprietary GelVac[TM] intranasal powder vaccine delivery system.
Selected studies have been completed through sponsored research at Texas
A&M and Southern Research Institute. Pilot scale production has been
accomplished and scale-up studies are in progress. The technology has
varied utility, but the primary focus of research is in the area of
injectable and intranasal delivery of bioactive agents. Four patents
covering this invention have been issued to DelSite with one patent pending.
The first composition and process patent was issued in 1999.
Specialized Research and Development
------------------------------------
The Company also has a separate, specialized research team to support
research and in-house development for Carrington products as well as to
provide services to customers in the medical, nutraceutical and cosmetic
markets. These services typically include research and development of
a formulation from the customer's initial concept and specifications.
Development efforts also include packaging design, label design and, where
required by regulations, production validation.
During 2003, the specialized research and development group contributed to
the successful transfer and start-up of the technologies and products
acquired from CBI. These activities included proof of formulation
capabilities and technology transfer services to assist in production
of initial quantities of products in the manufacturing facility. The
specialized research and development group provides the necessary technology
support to successfully meet the requirements of new customers for new
cosmetic and nutraceutical products.
In 2003, several wound care projects were also initiated in the general area
of wound infection control, which Carrington's marketing partners have
identified as a potentially significant addition to its wound care product
line.
In 2004, several wound care projects were initiated in the general area of
chronic wound care. Carrington's marketing partners have continued to
develop a marketing presence for products designed to help treat complex and
chronic dermal wounds.
Human Clinical Studies
----------------------
The Company's new product programs for its operating segments do not require
clinical trials for clearance or approval prior to commercial distribution.
However, the Company intends to support its existing products and new
products with clinical studies that will support the product claims and
indications for use and thereby demonstrate the product's features and
benefits. The Company initiated several such studies in 2004 and intends to
initiate several such clinical studies during 2005. DelSite's development
program may require human clinical trials prior to further development of
its novel drug delivery systems for potential partners. DelSite intends to
initiate such a clinical study for its GelVac[TM] vaccine delivery system in
2005.
Research and Development Summary
--------------------------------
The following table outlines the status of the products and potential
indications of the Company's 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
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Dressings Pressure and Vascular Ulcers Marketed
Dressings Diabetic Ulcers, Surgical Wounds Marketed
Cleansers Wounds Marketed
Anti-fungal Cutaneous Fungal Infection Marketed
Hydrocolloids Wounds Marketed
Alginates Wounds Marketed
Anti-infective Wounds Development
Sunscreens Skin Marketed
Oral
----
Human
Pain Reduction Mucositis Marketed
Dental
Pain Reduction Aphthous Ulcers, Oral Wounds Marketed
Post Extraction Wounds Oral Surgery Marketed
Injectable
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Human
Neutropenia Neutropenia associated with Discovery
cancer
GelSite[R] polymer (CR1013) Drug delivery Preclinical
Veterinary
Adjunct for cancer Fibrosarcoma Marketed
Intranasal
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GelSite[R] polymer (CR1013) Vaccine delivery Clinical
Nutraceuticals
--------------
Immune Enhancing Product Manapol[R]/Maitake Gold 404[R] Marketed
Immune Enhancing Product Manapol[R]/Calcium Enriched Clinical
Evaluation
Licensing Strategy
------------------
The Company expects that prescription pharmaceutical products containing
certain defined drug substances will require a substantial degree of
developmental 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 in a particular country or for
specific indications.
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 such products
effectively. If the Company is unable to enter into such agreements, it may
undertake marketing 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 known as Aloe vera L. Through patented processes, the Company
obtains several bulk freeze-dried extracts from the central portion of
the Aloe vera L. leaf known as the gel. A basic bulk mannan, Acemannan
Hydrogel[R], is used as an ingredient in certain of the Company's
proprietary wound and skin care products.
The Company owns a 410-acre farm in the Guanacaste province of northwest
Costa Rica which currently has approximately 33 acres planted with Aloe vera
L. The Company is currently performing a land reclamation project on the
farm to increase productive acreage. 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 Costa Rica at prices comparable
to the cost of acquiring leaves from the Company's farm. The Company has
entered into several supply agreements with local suppliers near the
Company's factory to provide leaves. From time to time the Company also
imports leaves from Central and South America at prices comparable to
those in the local market. The Company anticipates that the suppliers it
currently uses will be able to meet all of its requirements for leaves in
2005.
The Company has a 23% ownership interest in Aloe and Herbs International,
Inc., ("Aloe & Herbs"), a Panamanian corporation formed for the purpose of
establishing an Aloe vera L. farm in Costa Rica. The Company purchases
leaves from Rancho Aloe, S.A., ("Rancho Aloe") a wholly-owned subsidiary of
Aloe & Herbs, which has a 5,000-acre farm in close proximity to the
Company's farm, at a market price per kilogram of leaves supplied.
As of December 31, 2004, Rancho Aloe was providing an average of 87% of the
Company's monthly requirement of leaves. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for further information regarding the Company's
relationship with Aloe & Herbs.
Manufacturing
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Since 1995, the Company's manufacturing facility has been located in the
Company's headquarters in Irving, Texas. The Company believes that this
manufacturing facility has sufficient capacity to provide for the present
line of products and to 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.
All of the Company's proprietary bulk pharmaceutical products 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. Certain liquid nutraceutical products
which the Company provides to customers on a custom manufacturing basis are
also produced at the Costa Rica facility. In addition, production of the
Salicept[R] Patch has been transferred to the plant in Costa Rica to better
meet anticipated market demands for the product for post-extraction wounds
and aphthous ulcers.
On January 21, 2005, the Company's wholly-owned subsidiary in Costa Rica
entered into a Manufacturing Agreement with Miradent Products of Costs Rica
("Miradent"). Under the terms of the agreement, the Company will manufacture
proprietary dental products for Miradent for a period of five years. The
Company expects revenues in the first twelve months of this agreement to be
approximately $200,000 to $500,000.
Competition
-----------
DelSite and Research and Development. The biopharmaceutical field is
expected to continue to undergo rapid and significant technological change.
Potential competitors in the United States and abroad 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 the Company is exploring. The
Company understands that certain of these competitors are in the process of
conducting human clinical trials of, or have filed applications with
government agencies for approval to market certain products that will
compete with the Company's products, both in its present wound care market
and in markets associated with products the Company currently has under
development.
Medical Services Division and Consumer Services Division. The Company
competes against many companies that sell products which are competitive
with the Company's products, with many of its competitors using very
aggressive marketing efforts. Many of the Company's competitors are
substantially larger than the Company in terms of sales and distribution
networks and have substantially greater financial and other resources. The
Company's ability to compete against these companies will depend in part on
the expansion of the marketing network for its products. The Company
believes that the principal competitive factors in the marketing of its
products are their quality, and that they are naturally based and
competitively priced.
Governmental Regulation
-----------------------
The production and marketing of the Company's products, and the Company's
research and development activities, are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United
States and other countries. In the United States, drug devices for human
use are subject to rigorous FDA regulation. The Federal Food, Drug and
Cosmetic Act, as amended (the "FFDC Act"), the regulations promulgated
thereunder, and other federal and state statutes and regulations govern,
among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of
the Company's products. For marketing outside the U.S., 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.
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 United States, the Company
is required to meet the requirements of the International Committee on
Harmonization and the ISO 13485 regulations, for OTC drugs and medical
devices, respectively. 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 medical devices pursuant to the regulations under Section 510(k)
of the FFDC Act (known as Premarket Notification). A medical device is a
product whose primary intended medical purpose, such as to cover a wound, is
accomplished without a chemical or pharmacological action. A medical device
which is substantially equivalent to an existing product will be reviewed by
the FDA and if clearance to market is granted, then the device can be sold
in the United States without additional developmental studies. A medical
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). The Company currently markets eight (8) products which require a
prescription as medical devices.
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
and USDA.
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 Consumer Services Division, 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
the Company's products are distributed and in which the Company's products
are sold. The FDA, in particular, regulates the formulation, manufacture
and labeling of vitamin and other nutritional supplements.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised
the provisions of the FFDC Act concerning the composition and labeling of
dietary supplements and, in the judgment of the Company, is favorable to the
dietary supplement industry. The legislation created a new statutory class,
entitled dietary supplement, which includes vitamins, minerals, herbs, amino
acids and other dietary substances for human use to supplement the diet.
DSHEA grandfathered, with certain limitations, dietary ingredients on the
market before October 15, 1994. A dietary supplement which contains a new
dietary ingredient, one not on the market before October 15, 1994, requires
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 the Consumer Services Division are classified as dietary
supplements under DSHEA.
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,
DSHEA amended, for dietary supplements, the NLEA by providing that
statements of nutritional support may be used in labeling for dietary
supplements without FDA pre-approval if certain requirements, including
prominent disclosure on the label of the lack of FDA review of the relevant
statement, possession by the marketer of substantiating evidence for the
statement and post-use notification to the FDA, are met. Such statements
may describe how particular nutritional supplements affect the structure,
function or general well-being of the body (e.g., "promotes cardiovascular
health").
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 the Consumer Services
Division plans to commence or expand sales may prevent or delay entry into
the market, or prevent or delay the introduction of, or require the
reformulation of, certain of the Consumer Services Division's products.
Compliance with such foreign governmental regulations is generally the
responsibility of the Consumer Service Division's distributors for those
countries. These distributors are independent contractors over which the
Consumer Services Division has limited control.
As a result of efforts to comply with applicable statutes and regulations,
the Consumer Services Division has from time to time reformulated,
eliminated or relabeled certain of its products and revised certain
provisions of its sales and marketing program. The Consumer Services
Division cannot predict the nature of any future laws, regulations,
interpretations or applications, nor can it determine what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. They could, however, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not capable of reformulation, additional
record keeping, expanded documentation of the properties of certain
products, expanded or different labeling, and/or scientific substantiation.
Any or all of such requirements could have a material adverse effect on the
Company's results of operations and financial condition.
Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive
position of the Company.
Patents and Proprietary Rights
------------------------------
As is industry practice, the Company has a policy of using patents,
trademarks and trade secrets to protect the results of its research and
development activities and, to the extent it may be necessary or advisable,
to exclude others from appropriating the Company's proprietary technology.
The Company's policy is to aggressively protect 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
U.S. patent applications and its counterparts in the other 26 countries.
The first U.S. patent application in this first series, covering the
composition claims of acetylated mannan derivatives, matured into U.S.
Patent No. 4,735,935 (the "935 Patent"), which was issued on April 5, 1988.
U.S. 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 U.S. Patent No. 4,959,214, and the second on
October 30, 1990, as U.S. Patent No. 4,966,892. Foreign patents that are
counterparts to the foregoing U.S. patents have been granted in some of the
member states of the European Union 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
U.S. 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 U.S. patent based
on the second series was issued on September 18, 1990, as U.S. 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 U.S. 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 U.S. applications have
been filed designating a number of foreign countries where the applications
are pending.
The Company has obtained a patent in the United States relating to a
therapeutic device made from freeze-dried complex carbohydrate hydrogel
(U.S. Patent No. 5,409,703, issued on April 25, 1995). A Patent Cooperation
Treaty application based on the parent U.S. application has been filed
designating a number of foreign countries where the applications are
pending.
The Company has obtained patents in the United States (U.S. Patent No.
5,760,102, issued on June 2, 1998) and Taiwan (Taiwan Patent No. 89390,
issued on August 21, 1997) related to the uses of a denture adhesive and
also a patent in the United States relating to methods for the prevention
and treatment of infections in animals (U.S. Patent No. 5,703,060, issued on
December 30, 1997).
The Company obtained a patent in the United States (U.S. Patent
No.5,902,796, issued on May 11, 1999) related to the process for obtaining
bioactive material from Aloe vera L. The Company obtained an additional
patent in the United States (U.S. Patent No. 5,929,051, issued on July 27,
1999) related to the composition and process for a new complex carbohydrate
(pectin) isolated from Aloe vera L. Also obtained was a U.S. patent (U.S.
Patent No. 5,925,357, issued on July 20, 1999) related to the process for a
new Aloe vera L. product that maintains the complex carbohydrates with the
addition of other substances normally provided by "Whole Leaf Aloe."
Additionally, the Company obtained a Japanese letters-patent (Patent No.
2888249, having a Patent Registration Date of February 19, 1999) for the use
of acemannan (a) in a vaccine product; (b) in enhancing natural kill cell
activity and in enhancing specific tumor cell lysis by white cells and/or
antibodies; (c) in correcting malabsorption and mucosal cell maturation
syndromes in man or animals; and (d) in reducing symptoms associated with
multiple sclerosis.
The Company also received the grant of European Patent Application under No.
0611304, having the date of publication and mention of the grant of the
patent of September 15, 1999. This European Letters Patent claims the use
of acetylated mannan for the regulation of blood cholesterol levels and for
the removal of plaque in blood vessels. A patent was also issued in South
Korea and Canada.
In addition, the Company obtained an Australian Patent (Patent No. 718631,
having an Accepted Journal Date of April 20, 2000) and a South Korean Patent
(No. 463469), issued December 16, 2004 on Uses of Denture Adhesive
Containing Aloe Extract. On June 20, 2000, Singapore granted the Company a
patent on Bioactive Factors of Aloe Vera Plants (P-No. 51748) and on
February 6, 2004, under Patent No. 419354, South Korea issued a patent for
the same.
The Company received the grant of two U.S. patents (Patent No. 6,274,548
issued August 14, 2001, and Patent No. 6,313,103 issued November 6, 2001)
associated with the use of pectins for purification, stabilization and
delivery of certain growth factors. Other U.S. PCT applications on aloe
pectin are pending. A U.S. patent application on growth factor and protease
enzyme is also pending.
The Company obtained on September 25, 2002, a European Patent (Patent No.
0884994) which was validated in Great Britain, Germany (No. 69715827.6),
France, Italy and Portugal associated with the uses of denture adhesive
containing Aloe Vera L. extract.
In addition, the Company was issued on August 13, 2002, a Canadian Patent
(No. 2,122,604) associated with the process for preparation of aloe
products.
The Company also obtained on June 24, 2002, a Korean Patent (No. 343293) and
on June 5, 2002, European Patent (No. 0705113) which was validated in Great
Britain, France, Germany (No. 69430746.7-08), Italy and Austria associated
with dried hydrogel from hydrophilic hygroscopic polymer.
The Company also obtained, on May 28, 2003, a European Patent (No. 966294),
which was validated in Great Britain, France, Italy, Sweden, and Germany
(No. 69815071.6) associated with the bifurcated method to process aloe whole
leaf.
Also, the Company was issued, on July 23, 2003 a European Patent (No.
965346), which was validated in France, Great Britain, Italy, and Germany
(No. 69133298.3), associated with uses of acetylated mannan derivatives in
treating chronic respiratory disease.
The Company also received, on August 17, 2004, a U.S. patent (No. 6,777,000)
relating to the use of pectin in-situ gelling formulations for the delivery
and sustained release of physiologically active agents such as drugs and
vaccines.
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. The scope of protection which
ultimately may be afforded by the patents and patent applications of the
Company is difficult to quantify. 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.
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 U.S. 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.
On December 15, 2004, DelSite filed an Opposition proceeding in the European
Patent Office against EP Patent EP 0 975 367. This EP patent was granted
March 31, 2004 and assigned to West Pharmaceutical Services Drug Delivery &
Clinical Research Centre Limited ("West"). A similar U.S. Patent No.
6,432,440 issued to West on August 13, 2002, and similar West patents have
been granted or applications are pending in several non-European countries,
such as Australia, Japan, New Zealand, and South Africa.
The claims of the West patents are directed to aqueous liquid compositions
for delivering drugs which contain therapeutic agents and pectins and can
form therapeutic agent-containing gels when applied to mucosal surfaces.
The West patents also claim methods of using and manufacturing the liquid
pharmaceutical compositions, and the pharmaceutical gel compositions formed
by "in-situ" gellation processes.
DelSite also desires to clear a legal path so that potential DelSite
products can be sold for administration in liquid form in the future. The
objective of the DelSite opposition to the West EP patent is to force legal
revocation of the West patent in Europe, or a significant narrowing of the
West claims, by legally demonstrating that, in view of prior art not
considered by the patent examiners, the current claims of the EP patent
should not have been granted and/or are invalid. Completion of the EP
opposition proceedings is anticipated to take as long as three to six years.
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], Carrasyn[R] and CarraGauze[R]. Further, the Company has
registered the trademark AVMP[TM] Powder and the trade name Carrington[R] in
the United States. In 1999, the Company obtained four additional registered
trademarks in Brazil.
In June 2000 the Company obtained registration in the United States of its
mark AloeCeuticals[R] for its skin care and nutritional supplement products.
In September 2002 the Company obtained registration in the United States of
its mark CaraKlenz[R] for its proprietary wound cleanser product with that
name.
In addition, applications for the registration of the marks GelVac[TM]
and OraPatch[TM] are pending in the United States. Application for the
registration of the mark GelVac[TM] and SaliCept[R] are pending in Europe.
In November 2003 the Company obtained registration in the United States of
its mark "Delsite and design[TM]" for its research and development of dry
stabilization and delivery systems for customers in the field of
pharmaceuticals and diagnostic reagents.
In September 2004 the Company obtained registrations in the United States of
its marks GelSite[R] and Salicept[R].
In August 2004 the Company obtained registrations in Japan and in November
2004, South Korea of its mark GelVac[TM].
Employees
---------
As of February 28, 2005, the Company employed 324 persons, of whom 59 were
engaged in the operation and maintenance of its Irving, Texas processing
plant, 206 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, 116 were located in Texas, 206 in Costa Rica, one in Puerto Rico
and one in Europe. The Company considers relations with its employees to be
good. The employees are not represented by a labor union.
Available Information
---------------------
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and other reports, and amendments to these
reports, that the Company files with or furnishes to the Securities and
Exchange Commission ("SEC") are available free of charge at the Company's
website www.carringtonlabs.com, as soon as reasonably practicable, after the
Company electronically files such reports with, or furnishes such reports
to, the SEC. The posting of these reports on the Company's website does not
constitute incorporation by reference of the other information contained on
the website, and such other information on the Company's website should not
be considered part of such reports unless the Company expressly incorporates
such other information by reference. The Company will also furnish copies of
such reports free of charge upon written request to the Company's Investor
Relations department.
Additionally, the Company's corporate governance code of business conduct
and ethics and the charters of the Company's Board Committees, including the
Audit, Board Governance, Compensation and Executive Committees are available
on the Company's website. The Company will also furnish copies of such
information free of charge upon written request to the Company's Investor
Relations department. Individuals can contact the Company's Investor
Relations department at:
Carrington Laboratories, Inc., 2001 Walnut Hill Lane, Irving, TX 75038,
Attention: Maria Mitchell.
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, except that the farm is not adequate
to supply all of the Company's needs for Aloe vera L. leaves. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more information regarding the Company's arrangements to
purchase Aloe vera L. leaves.)
Walnut Hill Facility. The Company's corporate headquarters and principal
U.S. manufacturing facility occupy all of the 41,400 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 17,300 square feet of the
facility, administrative offices occupy approximately 16,100 square feet and
with an additional 8,000 square feet undeveloped.
Laboratory and Warehouse Facility. The Company has leased a 51,200 square
foot building in close proximity to the Walnut Hill facility for a ten-year
term to house its Research and Development, Quality Assurance and Quality
Control Departments. Laboratories and offices for DelSite are also located
in this facility. In addition, the Company utilizes a portion of the
building as warehouse space. The Company relocated those functions to this
facility in the third quarter of 2001. During 2004, the Company completed a
3,000 square feet expansion of the DelSite facilities at this location.
Warehouse and Distribution Facility. In February 2003, the Company leased a
58,130 square foot building for a term of five years for additional
warehouse space. In addition, the Company relocated its distribution
operations to this new facility.
Texas A & M University Research Park Facility. In July 2004, DelSite leased
over 5,000 square feet of new laboratory and office space in the Texas A&M
University Research Park in College Station, Texas for a term of 24 months.
DelSite will use this facility primarily for vaccine delivery research and
development.
Costa Rica Facility. The Company owns approximately 410 acres of land in
the Guanacaste province of northwest Costa Rica. This land is being used
for the farming of Aloe vera L. plants and as the site for a 30,700 square
foot processing plant to produce bulk pharmaceutical and injectable mannans
and freeze-dried extracts from Aloe vera L. used in the Company's
operations. The processing plant became operational in 1993. The Company
also produces liquid nutraceutical products and proprietary dental products
at this facility.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
On April 3, 2001, Arthur Singer, a former employee of the Company (the
"Plaintiff"), filed a lawsuit entitled Arthur Singer vs. Carrington
Laboratories, Inc. and Carlton Turner, CV-01-2084 in the United States
District Court for the Eastern District of New York, Long Island Division,
alleging multiple causes of action against the Company and its chief
executive officer (the "Defendants") and seeking damages in excess of $4.0
million, plus legal fees and expenses. The Plaintiff, who was formerly
employed by the Company as a sales representative, alleged in substance that
the Company failed to pay the full amount of commissions owed to him; that
the Defendants breached an alleged contract of employment with him; that the
Company deprived him of the opportunity to exercise some vested stock
options, prevented some of his unvested stock options from vesting and
caused all of his options to expire earlier than they otherwise would have;
and that the Defendants misrepresented that the Company intended to retain
him as an employee, fraudulently induced him to remain in its employ and
breached alleged covenants of fair dealing.
On May 31, 2001, the Defendants filed a motion seeking to have the complaint
dismissed or to have the case transferred to Texas. On August 28, 2001, the
Defendants' motion to transfer was granted, and the case was transferred to
the United States District Court for the Northern District of Texas, Dallas
Division, as Case No. 01-CV-1776.
The Defendants and Plaintiff then both filed motions for summary judgment.
On October 3, 2003, the court denied the Plaintiffs motion for summary
judgment and granted Defendants motion for summary judgment for all
complaints except three, the alleged damages for which totaled approximately
$56,000.
On January 5, 2004, a jury trial was held to settle the remaining claims,
with the jury finding for the Plaintiff on one claim, awarding $28,162, plus
interest, for unpaid commissions, and finding for the Defendants on a second
claim. The judge dismissed the third claim at the end of testimony, citing
lack of sufficient evidence to support the Plaintiff's claim. The court
awarded no legal fees or expenses to the Plaintiff. Total judgment was for
approximately $35,000, which was recorded as of the period ended December
31, 2003 and paid during 2004.
On June 23, 2004, the United States District Court denied the Plaintiff's
appeal for reasonable legal fees. On July 7, 2004, the Plaintiff filed a
motion of appeal with the Fifth Circuit Court regarding all judgments
entered by the District Court. Oral arguments on the motion to appeal were
heard by the Court on March 8, 2005. On March 10, 2005, the Fifth Circuit
Court affirmed the ruling of the District Court.
On June 22, 2001, a lawsuit styled Swiss-American Products, Inc. v. G. Scott
Vogel and Carrington Laboratories Inc., Cause No. 01-5163-A, was filed in
the 193rd Judicial District Court of Dallas County, Texas. On June 25,
2001, the Company was served with this lawsuit, an Ex Parte Temporary
Restraining Order, and an Order Appointing Independent Third Party Expert
Pursuant to Temporary Restraining Order. The suit alleges, among other
things, that Mr. Vogel (the Company's former Vice President, Operations)
improperly obtained proprietary information of Swiss-American Products, Inc.
("Plaintiff") from a former employer that manufactured products under
contract for Plaintiff, and used that information on behalf of the Company,
in breach of certain common law duties and a confidentiality agreement
between his former employer and Plaintiff. The suit further alleges that
Mr. Vogel and the Company ("Defendants") conspired to unlawfully disclose,
convert and misappropriate Plaintiff's trade secrets.
The suit seeks permanent injunctive relief, including a permanent injunction
prohibiting Defendants from disclosing or using to Plaintiff's disadvantage
any confidential proprietary information belonging to Plaintiff which Mr.
Vogel allegedly obtained from his former employer, or from developing or
marketing products based on Plaintiff's formulas or other information
allegedly taken from Mr. Vogel's former employer. The suit also seeks to
recover damages in an unspecified amount from Defendants.
Following a hearing on July 30, 2001, the trial court entered an order
setting the case for trial on July 30, 2002 and granted a temporary
injunction that prohibits Defendants from (i) disclosing or using any of
Plaintiff's confidential, proprietary or trade secret information; (ii)
developing or marketing a wound cleanser product that is the same or
substantially the same as reflected in a formula that is at issue in the
lawsuit (although this prohibition expressly does not apply to products
actively manufactured and sold by the Company before January 1, 2001 using
the exact same formula then in effect); and (iii) destroying, concealing,
altering, removing or disposing of any documents, files, computer data or
other things relating to Plaintiff or Mr. Vogel's former employer, or
containing or referring to trade secrets or confidential or proprietary
information of Plaintiff or Mr. Vogel's former employer.
A trial was held on October 7, 2003. Three days into the proceeding a
mistrial was declared due to juror misconduct. The trial judge subsequently
ordered the two parties to mediate the suit and such mediation was held on
May 17, 2004. Despite the efforts of the mediator, the parties were unable
to reach a settlement. Although a trial date had been set for June 1, 2004,
the court later moved the trial start date to September 21, 2004.
Due to the Court's striking of the economic damage model provided by the
Plaintiff's expert witness, a motion for continuance was filed and accepted
by the Court, with the trial start date subsequently moved to June 21, 2005.
The Company believes that Plaintiff's claims are without merit and intends
to vigorously defend against those claims.
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 2004 High Low
----------- ---- ----
First Quarter $5.48 $3.72
Second Quarter 5.41 3.52
Third Quarter 4.55 3.02
Fourth Quarter 6.90 3.73
Fiscal 2003 High Low
----------- ---- ----
First Quarter $1.08 $0.91
Second Quarter 2.80 0.95
Third Quarter 6.20 2.18
Fourth Quarter 4.68 3.35
At March 21, 2005, there were 870 holders of record (including brokerage
firms) of Common Stock and the closing price of the Company's Common Stock
was $5.05.
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 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, 2004, is derived from the consolidated
financial statements of the Company, of which the Statements for the years
ended December 31, 2000 through 2002, have been audited by Ernst & Young
LLP, and for the years ended December 31, 2003 and 2004 have been audited by
Grant Thornton LLP.
Years ended December 31,
(Dollars and numbers of shares in -----------------------------------------
thousands except per share amounts) 2004 2003 2002 2001 2000
------------------------------------------------------------------------------
OPERATIONS STATEMENT INFORMATION:
Revenues:
Net product sales $27,584 $26,636 $15,571 $15,115 $22,833
Royalty income 2,470 2,467 2,470 2,479 270
Grant income 767 - - - -
------ ------ ------ ------ ------
Total revenues 30,821 29,103 18,041 17,594 23,103
Costs and expenses:
Cost of product sales 18,250 18,806 11,739 9,803 12,782
Selling, general and
administrative 7,560 8,017 6,040 5,016 10,162
Research and development 911 899 1,701 2,442 2,979
Research and development,
DelSite 3,826 2,761 1,879 - -
Research and development,
Aliminase[TM] clinical
trial expenses - - - - 623
Charges related to Oregon
Freeze Dry, Inc. - - - - 223
Other expense (income), net (92) (123) 19 (13) (110)
Interest expense (income), net 205 249 41 (32) (80)
------ ------ ------ ------ ------
Income (loss) before income taxes 161 (1,506) (3,378) 378 (3,476)
Provision for income taxes 125 - - - -
------ ------ ------ ------ ------
Net income (loss) $ 36 $(1,506) $(3,378) $ 378 $(3,476)
====== ====== ====== ====== ======
Net income (loss) per common share
- basic and diluted(1) $ 0.00 $ (0.15) $ (0.34) $ 0.04 $ (0.36)
====== ====== ====== ====== ======
BALANCE SHEET INFORMATION (as of December 31):
Working capital $ 2,244 $ 3,019 $ 3,989 $ 6,315 $ 6,275
Total assets 23,017 22,784 22,159 21,217 20,702
Total shareholders' equity 13,371 12,619 13,689 16,929 16,440
(1) For a description of the calculation of basic and diluted net income
(loss) per share, see Note Twelve to the consolidated financial
statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
Company Overview
----------------
The Company is a research-based biopharmaceutical, medical device, raw
materials and nutraceutical company engaged in the development,
manufacturing and marketing of naturally-derived complex carbohydrates and
other natural product therapeutics for the treatment of major illnesses, the
dressing and management of wounds and nutritional supplements. The Company
is comprised of three business segments. The Company generates revenues
through the sales of prescription and non-prescription medical products
through its Medical Services Division. It also generates revenues through
the sales of consumer and bulk raw material nutritional products and sales
of specialized product development and manufacturing services to customers
in the cosmetic and nutraceutical markets through its Consumer Services
Division, formerly referred to as Caraloe, Inc. In addition, the Company
generates revenues from research grant awards through its DelSite subsidiary
that is engaged in the research, development and marketing of the Company's
proprietary GelSite[R] technology for controlled release and delivery of
bioactive pharmaceutical ingredients.
Products sold through the Medical Services Division include hydrogels, wound
cleansers, hydrocolloids, advanced wound covering products, incontinence-
care products and two lines of condition-specific products. Many products
sold through this division contain the Company's proprietary, medical-grade
raw material, Acemannan Hydrogel[TM]. The Company regularly engages in
development projects to create line extensions and other new products for
this category. Products sold through the Consumer Services Division include
Manapol[R] and other proprietary and non-proprietary raw materials sold to
nutraceutical and cosmetic customers; nutritional products sold under the
AloeCeuticals[R] brand; skin care products sold under the Snow or Sun[TM]
brand and private-labeled products manufactured to customer specifications,
including powders, creams, liquids, gels, lotions, drinks, tablets and
capsules for various customers.
Prior to 1996, the Company generated most of its revenues from product sales
in its Medical Services Division. In 1996, the Company launched its line of
raw materials, including Manapol[R] powder, through its Consumer Services
Division. In 2001, the Company created its specialty manufacturing group to
provide services to cosmetic and nutraceutical markets. In December 2002,
the Company acquired the assets of the custom division of CBI, which
substantially increased revenues for the Consumer Services Division. In
2004 approximately 34% of the Company's revenues were generated through
product sales, services and royalties in its Medical Services Division, 64%
through sales of products and services in its Consumer Services Division and
2% through U.S. Federal grant income in its DelSite research and development
subsidiary.
Revenues
-------- Year-over- Year-over-
Year Year
2004 2003 Growth Growth
($) (%)
-----------------------------------------------------------------------
Net product sales $27,584 $26,636 $ 948 3.6%
Royalty income 2,470 2,467 3 0.1%
Grant income 767 0 767 100%
------ ------ ------ ----
Total revenues $30,821 $29,103 $ 1,718 5.9%
====== ====== ====== ====
Grant Awards
------------
In March 2004 DelSite received a SBIR grant award of up to $888,000 over a
two-year period. The grant will fund additional development of GelVac[TM],
DelSite's intranasal vaccine delivery platform technology. In October 2004
DelSite received notification of a $6 million grant over a three-year period
from the National Institute of Allergy and Infectious Diseases. The $6
million grant is to fund the development of an inactivated influenza nasal
powder vaccine against the H5N1 strain, commonly known as bird flu,
utilizing the Company's proprietary GelVac[TM] delivery system. The grant
was awarded under a biodefense and SARS product development initiative and
will fund a three-year preclinical program.
Cash Flow
--------- Year-over- Year-over-
Year Year
2004 2003 Growth Growth
($) (%)
-----------------------------------------------------------------------
Net cash provided by (used
in) operating activities $ 2,412 $(1,288) $3,700 287.3%
Net cash used in investing
Activities (2,172) (1,472) (700) (47.6%)
Net cash provided by financing
Activities 270 1,044 (774) (74.1%)
The increase in net cash provided by operating activities was primarily
related to a $1.1 million decrease in inventory levels in 2004, as the
Company initiated programs to reduce inventory levels to improve inventory
months on hand. The 2004 decrease is compared to a $1.8 million increase in
inventory during 2003. Additionally, net income increased by $1.54 million,
with net income of $36,000 in 2004 as compared to a net loss of $1.5 million
in 2003. The Company also received an additional $1.2 million in the form
of advanced royalty payments from Medline. See Note 15 "Deferred Revenue"
in the Consolidated Financial Statements for further information regarding
Medline. These items were partially offset by a decrease in accounts payable
and accrued liabilities of $639,000 in 2004 as compared to a $927,000
increase in 2003. The increase in net cash used in investing activities
resulted from an increased investment in facilities and equipment primarily
to support the Company's DelSite subsidiary. Cash provided by financing
activities in 2004 reflects increased principal payments on debt and capital
lease obligations and only $650,000 of new debt incurred as compared to $1.5
million of new debt in 2003.
The Company's costs and expenses generally fall into four broad categories:
cost of product sales; sales and distribution expenses in support of product
sales; general and administrative expenses; product support and DelSite
research and development expenses. In recent years, the Company has shifted
a greater percentage of its overall research and development expenses to its
DelSite subsidiary. General and administrative expenses represent corporate
infrastructure costs, such as accounting, human resources and information
systems, and executive management expenses. In addition to its operating
expenses, the Company also incurs interest expense arising from the debt
portion of its capital structure.
Costs and Expenses
------------------ Year-over- Year-over-
Year Year
2004 2003 Growth Growth
($) (%)
-----------------------------------------------------------------------
Cost of product sales $18,250 $18,806 $ (556) (3.0%)
Selling, general and
administrative 7,560 8,017 (457) (5.7%)
Research and development 911 899 12 1.3%
Research and development,
DelSite 3,826 2,761 1,065 38.6%
Other expenses (income) (92) (123) 31 25.2%
Interest expense (income), net 205 249 (44) (17.7%)
The Company utilizes the cash flow generated from its manufacturing and
sales operations and borrowings to fund additional capital projects in
support of manufacturing operations and to fund the research activities of
its wholly-owned subsidiary, DelSite. DelSite, which was incorporated in
2001, operates separately from the Company's product-support research and
development program and is responsible for the research, development and
marketing of the Company's proprietary GelSite[R] technology for controlled
release and delivery of bioactive pharmaceutical ingredients. DelSite's
business plan is to develop its data in support of it technologies and then
partner with biotechnology and pharmaceutical companies to provide novel
delivery solutions for their drugs and vaccines.
Key Performance Indicators
--------------------------
The following table illustrates the key performance indicators that the
Company uses to measure the performance and manage the business.
FISCAL YEARS ENDED
------------------
2004 2003
------ ------
Days Sales Outstanding:
Accounts Receivable $ 3,325 $ 3,098
Fourth Quarter Sales 7,761 6,705
Divided by 90 days equals
Average Daily Sales 86.2 74.5
------ ------
Accounts Receivable divided by
Average Daily Sales equals
Days Sales Outstanding 38.6 41.6
====== ======
Months Inventory on Hand:
Inventory $ 4,614 $ 5,960
Fourth Quarter Cost of Product Sales 4,473 4,551
Divided by 3 equals
Average Monthly Cost of Product Sales 1,491 1,517
------ ------
Inventory divided by Average
Monthly Cost of Product Sales equals
Months Inventory on Hand 3.1 3.9
====== ======
Current Ratio:
Current Assets $10,566 $11,231
Divided by
Current Liabilities 8,322 8,212
------ ------
Equals Current Ratio 1.27 1.37
====== ======
Quick Ratio:
Quick Assets $ 5,755 $ 5,018
Divided by
Current Liabilities 8,322 8,212
------ ------
Equals Quick Ratio 0.69 0.61
====== ======
Debt to Equity:
Current Liabilities $ 8,322 $ 8,212
Long Term Debt 1,324 1,953
------ ------
Total Debt $ 9,646 $10,165
Divided by Equity 13,371 12,619
------ ------
Equals Debt to Equity 0.72 0.80
====== ======
Long-term Debt to Equity:
Long Term Debt $ 1,324 $ 1,953
Divided by Equity 13,371 12,619
------ ------
Equals Long-term Debt to
Equity 0.10 0.15
====== ======
Working Capital:
Current Assets $10,566 $11,231
Less Current Liabilities 8,322 8,212
------ ------
Equals Working Capital $ 2,244 $ 3,019
====== ======
Liquidity and Capital Resources
-------------------------------
The following table summarizes the Company's contractual obligations at
December 31, 2004 (amounts in thousands):
Payments Due by Period
---------------------------------------
Less than One to Four to More than
One Three Five Five
Total Year Years Years Years
----------------------------------------------------------------------------
Contractual Obligations
Notes Payable
Line of Credit with
Comerica Bank (5.75% at
December 31, 2004) $ 1,887 $ 1,887 $ - $ - $ -
Comerica Bank note payable
(5.75% at December 31,2004) 717 200 400 117 -
Medline note payable
(6.5% at December 31, 2004) 582 582 - - -
Bancredito notes payable
(U.S. prime plus 2.5% at
December 31, 2004) 754 90 199 227 238
Other
Capital leases 250 127 86 34 3
Operating leases 4,852 986 1,688 1,274 904
------ ------ ------ ------ ------
Total contractual
obligations $ 9,042 $ 3,872 $ 2,373 $ 1,652 $ 1,145
====== ====== ====== ====== ======
The Company has historically depended on operating cash flows, bank
financing, advances on royalty payments under certain of its existing
contracts and equity financing to fund its operations, capital projects and
research and development projects, with the majority of funds generated from
operating cash flows. The Company also has available to it various leasing
arrangements for financing equipment purchases, and is seeking additional
grant awards and other potential collaborative or sponsorship funding for
DelSite projects and potential licensing revenues for product lines or
DelSite projects.
At December 31, 2004 and 2003, the Company held cash and cash equivalents of
$2,430,000 and $1,920,000, respectively, an increase of $510,000. The
increase was primarily due to a $1.1 million decrease in inventory as the
Company implemented programs to reduce inventory levels, the receipt of $1.2
million from Medline as an advance payment of royalties; (See Note 15
"Deferred Revenue" in the Consolidated Financial Statements for further
information regarding Medline), the receipt of $650,000 in loan proceeds and
$716,000 in proceeds from stock option exercises and employee purchases of
shares. These cash receipts were partially offset by the Company's
investment in property plant and equipment of $2.2 million and debt
and capital lease obligation payments of $1.1 million. Customers with
significant accounts receivable balances at the end of 2004 include Natural
Alternatives ($2,205,000) and Medline ($688,000), and of these amounts
$2,814,000 has been collected as of February 28, 2005.
The Company has a line of credit with Comerica Bank ("Comerica") that
provides for borrowings of up to $3 million based on the level of qualified
accounts receivable and inventory. The line of credit is collateralized by
accounts receivable and inventory. Borrowings under the line of credit bear
interest at the bank's prime rate (5.25% at December 31, 2004) plus 0.5%.
As of December 31, 2004 there was $1,887,000 outstanding on the credit line
with $563,000 of credit available for operations, net of outstanding letters
of credit of $550,000.
Effective July 1, 2004, the Company and Comerica negotiated an amendment to
the Company's credit facilities, which, among other things, redefined the
covenants that require the Company to maintain certain financial ratios. As
of December 31, 2004 the Company is in compliance with all of the covenant
provisions. The new covenants and the Company's position at December 31,
2004 are as follows:
Covenant Covenant Requirement Company's Position
--------- -------------------- ------------------
Total Net Worth $12,200,000 $12,744,000
Current Ratio 1.60 1.76
Liquidity Ratio 1.75 2.21
The Total Net Worth, Current Ratio and Liquidity Ratio covenant amounts and
the Company's position are calculated as defined in the amendment. The
definition of the current ratio in the amendment is different from the
definition used in the Company's key performance indicators. The covenant
amounts for these ratios will remain at these same fixed amounts until
maturity of the loan.
In September 2004, the Company received a loan of $350,000 from Bancredito,
a Costa Rica bank, with interest and principal to be repaid in monthly
installments over eight years. The interest rate on the loan is the U.S.
Prime Rate (5.25%) plus 2.5%. The loan is secured by certain of the
Company's equipment. The proceeds of the loan were used in the Company's
operations. As of December 31, 2004, there was $343,000 outstanding on the
loan.
In July 2003, the Company received a loan of $1,000,000 from Comerica under
a variable rate installment note with interest and principal to be repaid in
monthly installments over five years. The interest rate on the loan is the
U.S. Prime Rate plus 0.5%. The loan is collateralized by the Company's
accounts receivable and inventory and by a first lien on the Company's
production facility in Irving, Texas. The proceeds of the loan were used in
the Company's operations. As of December 31, 2004, there was $717,000
outstanding on the loan. Both the line of credit and loan with Comerica are
cross-collateralized and cross-defaulted.
In March 2003 the Company received a loan of $500,000 from Bancredito, a
Costa Rica bank, with interest and principal to be repaid in monthly
installments over eight years. The interest rate on the loan is the U.S.
Prime Rate plus 2.0%. The loan is secured by a mortgage on an unused, 164-
acre parcel of land owned by the Company in Costa Rica plus a lien on
specified oral patch production equipment. The proceeds of the loan were
used in the Company's operations. As of December 31, 2004, there was
$410,000 outstanding on the loan.
In December 2002, the Company entered into an agreement with Medline for
accelerated payment of $2.0 million of the royalties due under the
Distributor and License Agreement. The royalty acceleration agreement
provides for each of the remaining quarterly royalty payments due to be paid
to the Company by Medline to be reduced by equal amounts, the sum of which
offsets the royalty advance. The Company has accounted for this transaction
in its financial statements as a loan, which bears interest at 6.5%. The
proceeds of the loan were used to fund the acquisition of the CBI assets.
As of December 31, 2004, there was $582,000 outstanding on the advance.
The Company had no additional material capital commitments as of that date
other than its leases and agreements with suppliers.
In July 1998 the Company provided a $187,000 cash advance to Rancho Aloe,
which is evidenced by a note receivable, due in installments, with payments
being made monthly based upon farm production. The Company also advanced
$300,000 to Rancho Aloe in November 1998 for the acquisition of an
irrigation system to improve production on the farm and allow harvesting of
leaves year-round. In the fourth quarter of 1998, the Company fully
reserved all amounts owed to it by Rancho Aloe, in the total amount of
$487,000, due to the start-up nature of the business. In 2004, the Company
received payments totaling $92,250 from Rancho Aloe against the amount due.
In December 2002, the Company acquired the assets of the custom division of
Cosmetic Beauty Innovations ("CBI") for $1.0 million plus a royalty on the
Company's sales to custom division customers for five years and $0.6 million
for useable inventories. The royalty amount is equal to 9.0909% of
Carrington's net sales of CBI products to CBI's transferring customers up to
$6.6 million per year and 8.5% of Carrington's net sales of CBI products to
CBI's transferring customers over $6.6 million per year. The Company
recorded expenses of $271,000 and $383,000 in 2004 and 2003, respectively,
for royalties due under the agreement. The CBI custom division provided
product development and manufacturing services to customers in the cosmetic
and skin care markets. Included in the purchase were intellectual property,
certain inventories and specified pieces of equipment. The Company provides
services to these customers through the Consumer Services Division
development and manufacturing services group. The Company began producing
products for the transferring CBI customers in February 2003 at its Irving,
Texas facility.
The Company anticipates capital expenditures in 2005 of approximately $1.0
million. The expenditures will primarily be comprised of production and
laboratory equipment and facility modifications.
Presently, the Company's debt/equity ratio is 0.72 to 1. Based on its
current estimates, management believes that the Company has the capacity to
incur additional debt, and, in 2005, the Company may seek additional
financing to be used as working capital to fund additional research and
development projects. The Company anticipates that any such borrowings,
together with the expected cash flows from operations and licensing
agreements and expected revenues from government grant programs, will
provide the funds necessary to finance its current operations, including
additional levels of research and development. 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
which may be necessary to develop its products to their full commercial
potential. Additional funds, therefore, may need to be raised through
equity offerings, borrowings, licensing arrangements or other means.
Management believes that each of the enumerated financing avenues is
presently available to the Company. However, there is no assurance that the
Company will be able to obtain such funds on satisfactory terms when they
are needed.
In March 2001, the Board of Directors authorized the repurchase of up to
1,000,000 shares, or approximately 9.3% of the Company's outstanding Common
Stock, dependent on market conditions. Under the authorization, purchases
of Common Stock may be made on the open market or through privately
negotiated transactions at such times and prices as are determined jointly
by the Chairman of the Board and the President of the Company. The Board
authorized the repurchase program based on its belief that the Company's
stock is undervalued in light of the Company's future prospects and that it
would be in the best interest of Company and its shareholders to repurchase
some of its outstanding shares. As of March 2005, the Company had
repurchased 2,400 of its outstanding Common Stock under the program.
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 pharmaceutical products and therapeutic
agents 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
licensee's 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.
Results of Operations
---------------------
2004 was the third consecutive year of revenue growth and second consecutive
year of earnings growth for the Company. Revenues, product-related gross
margin and net income in 2004 increased from 2003 by 5.9%, 14.6%, and
102.4%, respectively. There were several key drivers for the increases in
revenue, product-related gross margin, and net income, including: (1)
increased sales of bulk raw material products by the Consumer Services
Division, (2) grant income from two NIAID awards received by DelSite, and
(3) cost reduction initiatives implemented to reduce freight costs, reduce
costs for raw material, packing materials and shipping supplies and reduce
administrative expenses.
The information presented in this financial review should be read in
conjunction with other financial information provided throughout this 2004
Annual Report. The following discussion of operating results focuses on the
Company's three reportable business segments: Medical Services Division,
Consumer Services Division and DelSite.
Net Revenue
-----------
Net revenues in 2004 were $30.8 million, a 5.9% increase from $29.1 million
in 2003. The 2004 revenue increase was the third consecutive year of revenue
growth for the Company. Included in the revenue growth of $1.7 million for
2004 was approximately $767,000 related to grant awards that were received
during 2004. Approximately $3.1 million in additional revenue resulted from
sales of the Company's bulk Manapol[R] powder in 2004. These were partially
offset by a decrease of $391,000 in medical services related revenue and
$1.69 million in specialty manufacturing sales.
Comparative net revenue information related to the Company's operating
segments is shown in the following tables.
2004 vs. 2003
Change
----------------
Net Revenue 2004 Total $ %
----------- ------ ----- ------ -----
Medical Services Division $10,391 33.7% $ (391) (3.6%)
Consumer Services Division 19,663 63.8% 1,342 7.3%
DelSite 767 2.5% 767 100.0%
------ ----- ------ -----
Total $30,821 100.0% $ 1,718 5.9%
====== ===== ====== =====
2003 vs. 2002
Change
----------------
Net Revenue 2003 Total $ %
----------- ------ ----- ------ -----
Medical Services Division $10,782 37.0% $ 1,312 13.8%
Consumer Services Division 18,321 63.0% 9,750 113.8%
DelSite 0 0.0% 0 0.0%
------ ----- ------ -----
Total $29,103 100.0% $11,062 61.3%
====== ===== ====== =====
The Medical Services Division revenues decreased $391,000, or 3.6%, in 2004
from 2003, primarily due to decreased demand of wound care products from
Medline, the Company's exclusive domestic distributor. Total sales of the
division's domestic wound care products decreased by $1.44 million to $4.10
million in 2004 from $5.54 million in 2003, as Medline decreased its
inventory stock levels. Additionally, the Division's products are facing
increasing competitive pressure from low-end, commodity-type products which
are eroding their market share. Educational efforts are underway to
support Medline's sales efforts in product differentiation, performance and
net cost of therapy to the customer. The Company has also initiated
selective advertisements to support its brand. Total sales of the Division's
international wound care products increased $396,000 to $844,000 in 2004
from $448,000 in 2003, with the sales increase due to increased European
sales. Additionally, sales of $2.97 million in 2004, compared to $2.33
million in 2003, were generated from products the Division produced for
Medline under a supply agreement entered into in December 2000, whereby the
company manufactures Medline's own branded dermal management products on a
non-exclusive basis. The Division also recorded royalty revenue of $2.47
million in each of 2004, 2003 and 2002 relating to the exclusive Licensing
and Distribution Agreement with Medline.
The Medical Services Division's revenues increased 13.8% in 2003 from 2002.
This sales growth resulted primarily from additional products being added to
the Supply Agreement including the production of Medline's dermal management
products, sales of which increased by $1.28 million to $2.33 million in 2003
from $1.05 million in 2002.
The Company's Consumer Services Division recorded an increase in revenues of
$1.34 million, or 7.3%, to $19.66 million in 2004 over revenues of $18.32
million in 2003. Sales of bulk Manapol[R] powder grew $3.11 million to
$14.56 million in 2004 from $11.46 million in 2003. The Division currently
sells bulk Manapol[R] powder to Natural Alternatives under a one-year, non-
exclusive supply and licensing agreement with Natural Alternatives and
Mannatech, Inc., that commenced in 1997 and extends to November 2005. Total
sales to this customer were $14.41 million, $11.35 million and $6.37 million
for the years 2004, 2003 and 2002, respectively. Sales for the Division's
specialty manufacturing business, which develops and manufactures a variety
of gels, creams, lotions and drinks for customers in the cosmetic, skin care
and nutraceutical industries, decreased $1.69 million to $4.66 million in
2004 from $6.35 million in 2003, due in part to intensifying competition
in the specialty manufacturing market. Of this decrease, $529,000 was
attributable to the cancellation of a single product manufactured for a
major customer, and $171,000 was due to a decrease in international sales of
drinks manufactured for Japan, Taiwan and Korea. Additionally, sales of the
Division's Aloeceuticals[R] line of immune-enhancing dietary supplements
decreased by $77,000 to $442,000 in 2004 from $519,000 in 2003.
The Consumer Services Division's revenues increased 113.8% in 2003 from
2002. The 2003 revenue growth of $9.75 million was primarily attributable
to sales of the Division's bulk Manapol[R] powder, which increased by $4.95
million to $11.46 million in 2003 from $6.51 million in 2002, and to $4.11
million of sales of products the Company produced for former customers of
CBI in the first year after the acquisition. Additionally, an $846,000
increase was attributable to the addition of a single product manufactured
for a major customer. These increases were partially offset by an
international sales decrease of $137,000 for drinks manufactured for Japan,
Taiwan and Korea.
Revenues from the Company's DelSite subsidiary were $767,000 in 2004, the
first year that DelSite has recorded revenues. These revenues represent two
grant awards received from NIAID. In March 2004 DelSite received a Small
Business Innovation Research grant award of up to $888,000 over a two-year
period. Revenue of $447,000 was recognized in 2004 from this grant. In
October 2004 DelSite received a $6 million grant award from NIAID under a
biodefense and SARS product development initiative that will fund a three-
year preclinical program. Revenue of $320,000 was recognized in 2004 from
this grant.
Product Related Gross Margin
----------------------------
The product-related gross margins of $11.80 million in 2004 reflect a $1.51
million, or 14.6%, increase over 2003. The increase in product-related
gross margins reflects the increased revenue levels for the Consumer
Services Division plus cost reduction programs that led to improvements in
capacity utilization and production efficiencies. Product-related gross
margins of $10.30 million in 2003 were 63.4% higher than the $6.30 million
received in 2002. This increase was primarily the result of increased sales
levels and improved capacity utilization.
Comparative product-related gross margin information related to the
Company's business segments is shown in the following table.
2004 vs. 2003
Change
----------------
Product Related Gross Margin 2004 Total $ %
---------------------------- ------ ----- ------ -----
Medical Services Division $ 2,550 21.6% $ (465) (15.4%)
Consumer Services Division 9,254 78.4% 1,971 27.1%
------ ----- ------ -----
Total $11,804 100.0% $ 1,506 14.6%
====== ===== ====== =====
2003 vs. 2002
Change
----------------
Product Related Gross Margin 2003 Total $ %
---------------------------- ------ ----- ------ -----
Medical Services Division $ 3,014 29.3% $ 5 0.2%
Consumer Services Division 7,283 70.7% 3,990 121.1%
------ ----- ------ -----
Total $10,297 100.0% $ 3,995 63.4%
====== ===== ====== =====
Product-related gross margin for the Medical Services Division, which
includes $2.47 million of royalty revenue for each year presented, decreased
15.4% to $2.55 million in 2004 from $3.01 million in 2003. The reduction in
product-related gross margin in 2004 was primarily the result of increased
sales of Medline-branded dermal management products which have dramatically
lower product-related gross margins than the Carrington-branded wound care
products the Company produces. The increased production of these products
improved the capacity utilization and thereby helped to reduce manufacturing
variances in the Irving manufacturing facility. Product-related gross
margins in 2003 increased 0.2% from 2002.
The Consumer Services Division reported an increase of $1.97 million, or
27.1%, in product-related gross margins in 2004 compared to 2003. The
increase was primarily due to the increase in sales noted above. In
addition, the Division experienced reductions in the direct cost of
packaging components and a shift in product mix toward higher margin product
sales. The segment's 2003 product-related gross margin increased 121.1%
over 2002 primarily as a result of increased sales of cosmetic products
manufactured from the CBI acquisition, increased sales of bulk Manapol[R]
powder, and ongoing discretionary cost reduction programs.
DelSite's 2004 revenues were $767,000. DelSite has no direct cost of goods
sold, only research and development cost.
Selling, General and Administrative Expenses
--------------------------------------------
The Company experienced a decrease of 5.7% in selling, general and
administrative expenses during 2004. These expenses totaled $7.56 million
in 2004, a decrease of $457,000 from $8.02 million in 2003. The Company
recorded a decrease in distribution-related expenses of $254,000 to $2.03
million in 2004 from $2.29 million in 2003. The reduction was primarily
related to consolidated shipping programs and reduced freight rates achieved
through improved negotiations with freight carriers. Additionally, the
Company experienced a $74,000 decrease in selling expenses to $2.06
million in 2004 from $2.13 million in 2003. This decrease was primarily
attributable to headcount reductions in Aloeceuticals[R] sales personnel.
The Company also recorded a decrease of $128,000 in administrative expenses
to $3.47 million in 2004 from $3.60 million in 2003 as the Company more
efficiently managed these expenses.
In 2003, the Company experienced a $1.98 million, or 32.8% increase in
selling, general and administrative expenses from $6.04 million in 2002.
Distribution-related expenses increased by $1.09 million in 2003 due to
increased shipping volume and increased facility costs associated with the
growing business. Selling expenses increased by $403,000 and administrative
costs increased by $480,000 primarily in the areas of salary, professional
fees and information systems expenses to support the increased level of
operations and to improve the infrastructure of the Company.
Research and Development
------------------------
Specialized research and development expenses in support of the Company's
ongoing operations rose by 1.3%, increasing to $911,000 in 2004 from
$899,000 in 2003. These expenses decreased by 52.8% in 2003 from $1.70
million in 2002. The significant decrease in 2003 was a result of the
Company's efforts to refocus the activities of this group toward services in
support of manufacturing, including formulation design, formulation
modifications and re-engineering, technology transfer to the manufacturing
suite and stability studies.
DelSite operates independently from the Company's specialized research and
development program and is responsible for the research, development and
marketing of the Company's proprietary GelSite[R] technology for controlled
release and delivery of bioactive pharmaceutical ingredients. DelSite began
operations in January 2002 and its expenses totaled $3.83 million in 2004.
The 2004 expenditures were a 38.6% increase over the 2003 expenditures of
$2.76 million. The 2003 expenditures were a 47.7% increase over the 2002
expenditures of $1.87 million.
Combined research and development expenses totaled $4.74 million, $3.66
million and $3.58 million for the years 2004, 2003 and 2002, respectively.
Other Expense (Income)
----------------------
Other expense or income primarily consists of collections the Company has
received from Rancho Aloe against a fully reserved note receivable balance.
Interest Expense
----------------
Net interest expense of $205,000 was recorded in 2004 versus net interest
expense of $249,000 in 2003, with the decrease of $44,000 due to lower
outstanding debt balances throughout 2004. Net interest expense increased
by $208,000 in 2003, rising from $41,000 in 2002 to $249,000. The increase
was due to increased Company borrowings in 2003.
Income Taxes
------------
The Company incurred $125,000 of foreign income tax expense related to the
Company's operations in Costa Rica in 2004. This was the first year that
these activities were subject to income taxes. The Company commenced
operations in Costa Rica in July 1992 and was granted a 100% exemption for
the first twelve years of operation and a 50% exemption for the next six
years of operation. The Company's current tax rate in Costa Rica is 15% and
will increase to 30% effective July 1, 2010.
There was no benefit or expense for U.S. income taxes in 2004, 2003 or 2002
as the Company has provided a valuation allowance against all U.S. deferred
tax asset balances at December 31 of each year due to the uncertainty
regarding realization of the asset.
Net Earnings and Earnings Per Share
-----------------------------------
Net earnings of $36,000, or basic and diluted earnings per share of $0.00,
were at a three-year high in 2004. Net loss was $1.50 million in 2003, or
basic and diluted loss per share of $(0.15), compared to a loss of $3.38
million, or basic and diluted loss per share of $(0.34) in 2002. Basic and
diluted average shares outstanding for 2004 were 10,590,062 and 11,171,305,
respectively, compared to basic and diluted average shares outstanding for
2003 of 10,120,147. Basic and diluted average shares outstanding for 2002
were 9,888,759. The increase in basic and diluted average shares outstanding
was primarily due to additional stock option grants that are in-the-money at
year end and employee share purchases.
Impact of Inflation
-------------------
The Company does not believe that inflation has had a material impact on its
results of operations.
Critical Accounting Policies
----------------------------
The Company has identified the following accounting policies as critical.
The Company's accounting policies are more fully described in Note Two
of the Financial Statements. The preparation of consolidated financial
statements requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing
basis, the Company evaluates its estimates, including those related to bad
debts and inventories. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company records reductions to revenue for estimated returns based upon
recent history. Historical returns have been $2,000, $105,000 and $74,000
for the years ending December 31, 2004, 2003, and 2002, respectively.
Accordingly, the Company has a $35,000 reserve recorded for customer returns
at December 31, 2004. If market conditions were to decline or inventory was
in danger of expiring or becoming obsolete, the Company may be required to
implement customer incentive offerings, such as price discounts, resulting
in an incremental reduction of revenue at the time the incentive is offered.
Additionally, if demand for the Company's product were to drop, the
Company's distributors may request permission from the Company to return
product for credit causing a need to re-evaluate and possibly increase the
reserve for product returns. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers
to make required payments. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. The Company writes
down its inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
The Company has provided a valuation allowance against the net deferred tax
assets, based on available evidence that the assets may not be realized.
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", "will", "would", "should" or
words of similar import. Such forward-looking statements include, but are
not limited to, statements regarding the ability of local suppliers of Aloe
vera L. leaves in Costa Rica to supply the Company's need for leaves; the
condition, capacity and adequacy of the Company's manufacturing and
laboratory facilities and equipment; the adequacy of the protection that the
Company's patents provide to the conduct of its business operations; the
adequacy of the Company's protection of its trade secrets and unpatented
proprietary know-how; the Company's belief that the claims of the Plaintiffs
identified under Item 3 of Part I of this report are without merit; the
adequacy of the Company's cash resources and cash flow from operations to
finance its current operations; and the Company's intention, plan or ability
to repurchase shares of its outstanding Common Stock, 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 file additional patent applications, to
rely on trade secrets, unpatented proprietary know-how and technological
innovation, to reach satisfactory resolutions of its disputes with third
parties, to acquire sufficient quantities of Aloe vera L. leaves from local
suppliers at significant savings, to collect the amounts owed to it by its
distributors, customers and other third parties, and to use its tax loss
carryforwards before they expire, 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 may
fail to do so, that competitive pressures may require the Company to lower
the prices of or increase the discounts on its products, that the Company's
sales of products it is contractually obligated to purchase from suppliers
may not be sufficient to enable and justify its fulfillment of those
contractual purchase obligations, that other parties who owe the Company
substantial amounts of money may be unable to pay what they owe the Company,
that the Company's patents may not provide the Company with adequate
protection, that the Company's manufacturing facilities may be inadequate to
meet demand, that the Company's distributors may be unable to market the
Company's products successfully, that the Company may not be able to resolve
its disputes with third parties in a satisfactory manner, that the Company
may be unable to reach a satisfactory agreement with other important
suppliers, that the Company may not be able to use its tax loss
carryforwards before they expire, that the Company may not have sufficient
financial resources necessary to repurchase shares of its outstanding Common
Stock, that the Company may be unable to maintain effective internal
controls over financial reporting, 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 33.5%
of cost of sales for the year ended December 31, 2004. The Company's
functional currency in Costa Rica is the U.S. Dollar. As a result, the
Company's financial results could be significantly affected by factors such
as changes in foreign currency exchange rates or economic conditions in
Costa Rica. When the U.S. Dollar strengthens against the Costa Rica Colon
the cost of sales decreases. During 2004, the exchange rate from U.S.
Dollar to Costa Rica Colon increased by 9.6% to 458 at December 31, 2004.
The effect of an additional 10% strengthening in the value of the U.S.
Dollar relative to the Costa Rica Colon in 2004 would have resulted in an
increase of $556,130 in gross profit. The Company's sensitivity analysis of
the effects of changes in foreign currency rates does not factor in a
potential change in sales levels or local currency prices.
Sales of products to foreign markets comprised 4.6% of sales for 2004.
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 products
would have a significant effect on operating results. If sales to foreign
markets increase in future periods, the effects could become significant.
Changes in short-term interest rates on debt balances with variable interest
rates could have an affect on the Company's earnings. At December 31, 2004,
a hypothetical one percent increase in interest rates would result in an
increase in interest expense of $40,000 on an annual basis.
For quantitative and qualitative disclosures about market risk related to
the supply of Aloe vera L. leaves, see "Business - Raw Materials and
Processing."
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 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES.
-----------------------
Management of the Company, with the participation of its Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company's disclosure controls and procedures. Based on their evaluation, as
of the end of the period covered by this Form 10-K, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are
effective.
There have been no changes in internal control over financial reporting, for
the period covered by this report, that have materially affected or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
-----------------
None.
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", "Corporate Governance and Board Committees", "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive Proxy Statement relating to its 2005 annual meeting
of shareholders, which will be filed pursuant to Regulation 14A within 120
days after the Company's fiscal year ended December 31, 2004.
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
2005 annual meeting of shareholders, which will be filed pursuant to
Regulation 14A within 120 days after the Company's fiscal year ended
December 31, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND
---------------------------------------------------------------
RELATED STOCKHOLDERS MATTERS.
----------------------------
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 2005 annual meeting of
shareholders, which will be filed pursuant to Regulation 14A within 120 days
after the Company's fiscal year ended December 31, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information, if any, required by Item 13 of Form 10-K is hereby
incorporated by reference from the information appearing under the caption
"Certain Transactions", if any, in the Company's definitive Proxy Statement
relating to its 2005 annual meeting of shareholders, which will be filed
pursuant to Regulation 14A within 120 days after the Company's fiscal year
ended December 31, 2004.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.
--------------------------------------
The information required by Item 14 of Form 10-K is hereby incorporated by
reference from the information appearing under the captions "Principal
Accountant Fees and Services" in the Company's definitive Proxy Statement
relating to its 2005 annual meeting of shareholders, which will be filed
pursuant to Regulation 14A within 120 days after the Company's fiscal year
ended December 31, 2004.
PART IV
-------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
------------------------------------------
(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 one
financial statement schedule filed as a part of this Annual
Report.
(3) Exhibits.
Reference is made to the Index to Exhibits on pages E-1 through
E-5 for a list of all exhibits to this report.
CARRINGTON LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets --
December 31, 2004 and 2003 F-2
Consolidated Statements of Operations -- years ended
December 31, 2004, 2003 and 2002 F-3
Consolidated Statements of Shareholders' Equity --
years ended December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Cash Flows -- years ended
December 31, 2004, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-6
Financial Statement Schedule
Valuation and Qualifying Accounts F-21
Report of Grant Thornton LLP F-22
Report of Ernst & Young LLP F-23
Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)
December 31,
----------------------
2004 2003
-------- --------
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,430 $ 1,920
Accounts receivable, net of allowance for
doubtful accounts of $162 and $181 at
December 31, 2004 and 2003, respectively 3,325 3,098
Inventories, net 4,614 5,960
Prepaid expenses 197 253
-------- --------
Total current assets 10,566 11,231
Property, plant and equipment, net 11,674 10,538
Customer relationships, net 585 777
Other assets, net 192 238
-------- --------
Total assets $ 23,017 $ 22,784
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Line of credit $ 1,887 $ 1,587
Accounts payable 1,674 2,037
Accrued liabilities 1,328 1,604
Current portion of long-term debt and
capital lease obligations 1,000 1,104
Deferred revenue 2,433 1,880
-------- --------
Total current liabilities 8,322 8,212
Long-term debt and capital lease obligations 1,324 1,953
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000,000 shares
authorized, 10,722,364 and 10,384,669 shares
issued at December 31, 2004 and 2003,
respectively 107 104
Capital in excess of par value 53,713 53,000
Accumulated deficit (40,446) (40,482)
Treasury stock at cost, 2,400 shares
at December 31, 2004 and 2003 (3) (3)
-------- --------
Total shareholders' equity 13,371 12,619
-------- --------
Total liabilities and shareholders' equity $ 23,017 $ 22,784
======== ========
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,
----------------------------
2004 2003 2002
------ ------ ------
Revenues:
Net product sales $27,584 $26,636 $15,571
Royalty income 2,470 2,467 2,470
Grant income 767 - -
------ ------ ------
Total revenues 30,821 29,103 18,041
Cost and expenses:
Cost of product sales 18,250 18,806 11,739
Selling, general and administrative 7,560 8,017 6,040
Research and development 911 899 1,701
Research and development, DelSite 3,826 2,761 1,879
Other expense (income) (92) (123) 19
Interest expense (income), net 205 249 41
------ ------ ------
Net income (loss) before income taxes 161 (1,506) (3,378)
Provision for income taxes 125 - -
------ ------ ------
Net income (loss) $ 36 $(1,506) $(3,378)
====== ====== ======
Basic and diluted earnings (loss) per
share $ 0.00 $ (0.15) $ (0.34)
====== ====== ======
Basic shares outstanding 10,590 10,120 9,889
Diluted shares outstanding 11,171 10,120 9,889
The accompanying notes are an integral part of these statements.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2004, 2003 and 2002
(Amounts in thousands)
Common Stock Capital in Treasury Stock
-------------- Excess of Accumulated --------------
Shares Amount Par Value Deficit Shares Amount Total
------ ----- ------ ------- ------ ----- ------
January 1, 2002 9,809 $ 98 $52,429 $(35,598) - $ - $16,929
Issuance of common
stock for employee
stock purchase plan 149 2 126 - - - 128
Issuance of common
stock for stock
option plan 10 - 13 - - - 13
Treasury stock
purchase - - - - 2 (3) (3)
Net loss - - - (3,378) - - (3,378)
------ ----- ------ ------- ------ ----- ------
December 31, 2002 9,968 100 52,568 (38,976) 2 (3) 13,689
Issuance of common
stock for employee
stock purchase plan 246 2 197 - - - 199
Issuance of common
stock for stock
option plan 171 2 235 - - - 237
Net loss - - - (1,506) - - (1,506)
------ ----- ------ ------- ------ ----- ------
December 31, 2003 10,385 104 53,000 (40,482) 2 (3) 12,619
Issuance of common
stock for employee
stock purchase plan 56 - 163 - - - 163
Issuance of common
stock for stock
option plan 281 3 550 - - - 553
Net income - - - 36 - - 36
------ ----- ------ ------- ------ ----- ------
December 31, 2004 10,722 $ 107 $53,713 $(40,446) 2 $ (3) $13,371
====== ===== ====== ======= ===== ===== ======
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Years Ended December 31,
--------------------------
2004 2003 2002
------ ------ ------
Operating activities:
Net income (loss) $ 36 $(1,506) $(3,378)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Provision for bad debts 48 150 38
Provision for inventory obsolescence 205 200 135
Depreciation and amortization 1,241 1,309 1,087
Loss on disposal of assets - 8 21
Changes in operating assets and liabilities:
Accounts receivable (275) (878) (786)
Inventories 1,141 (1,827) 870
Prepaid expenses 56 350 (414)
Other assets 46 21 (49)
Accounts payable and accrued liabilities (639) 927 731
Deferred revenue 553 (42) 380
------ ------ ------
Net cash provided by (used in) operating
activities 2,412 (1,288) (1,365)
Investing activities:
Cash paid in purchase of business, net of
cash acquired - (79) (1,001)
Purchases of property, plant and equipment (2,172) (1,393) (378)
------ ------ ------
Net cash used in investing activities (2,172) (1,472) (1,379)
Financing activities:
Borrowings on line of credit 300 - 824
Proceeds from debt issuances 350 1,500 2,000
Principal payments on debt and capital
lease obligations (1,096) (892) (36)
Issuances of common stock 716 436 141
Treasury stock purchased - - (3)
------ ------ ------
Net cash provided by financing activities 270 1,044 2,926
------ ------ ------
Net increase (decrease) in cash and cash
equivalents 510 (1,716) 182
------ ------ ------
Cash and cash equivalents at beginning of year 1,920 3,636 3,454
------ ------ ------
Cash and cash equivalents at end of year $ 2,430 $ 1,920 $ 3,636
====== ====== ======
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 225 $ 259 $ 61
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 Medical Services Division offers a comprehensive line of wound
management products to hospitals, nursing homes, alternative care
facilities, cancer centers, home health care providers and managed care
organizations. The Company and Medline Industries, Inc. ("Medline") entered
into a Distributor and License Agreement dated November 3, 2000, under which
the Company granted to Medline the exclusive right, subject to certain
limited exceptions, to distribute all of the Company's wound and skin care
products (the "Products") in the United States, Canada, Puerto Rico and the
U.S. Virgin Islands for a term of five years that began December 1, 2000.
The agreement provides that Carrington will continue to manufacture its
existing line of Products and sell them to Medline at specified prices. The
prices, which were generally firm for the first two years of the contract
term, are thereafter subject to adjustment not more than once each year to
reflect increases in manufacturing cost.
The agreement also grants Medline a nonexclusive license to use certain of
the Company's trademarks in connection with the marketing of the Products.
In addition, it permits Medline, if it so elects, to use those trademarks in
connection with the marketing of various Medline products and other products
not manufactured by the Company (collectively, "Other Products").
The agreement requires Medline to pay the Company a base royalty totaling
$12,500,000 in quarterly installments that began on December 1, 2000. In
addition to the base royalty, if Medline elects to market any of the Other
Products under any of the Company's trademarks, Medline must pay the Company
a royalty of between one percent and five percent of Medline's aggregate
annual net sales of the Products and the Other Products, depending on the
amount of the net sales. The Company and Medline amended the Distributor
and License Agreement in April 2004 to extend the term of the agreement
through November 30, 2008. The amended agreement specified an advance
payment of $1,250,000, which the Company has received.
The Company entered into a Supply Agreement with Medline effective
December 1, 2000, which among other things, provides that the Company will
manufacture Medline brand dermal management products. The Supply Agreement
is co-terminus with the amended Distributor and License Agreement.
The Consumer Services Division, formerly referred to as Caraloe, Inc.,
markets or licenses consumer products and bulk raw material products.
Principal sales of the Division are bulk raw material products which are
sold to U.S. manufacturers who include the high quality extracts from Aloe
vera L. in their finished products. The Consumer Services Division also
provides product development and manufacturing services to customers in the
cosmetic and nutraceutical markets.
The Company formed a subsidiary, DelSite Biotechnologies, Inc., in October
2001 as a vehicle to further the development and commercialization of its
new proprietary complex carbohydrate (Gelsite[R] polymer) that the Company
is developing for use as a drug and vaccine delivery system.
In December 2002 the Company entered into an agreement to acquire certain
assets of the Custom Division of Creative Beauty Innovations, Inc. ("CBI"),
including specialized manufacturing customer information, intellectual
property and equipment. CBI is a privately held manufacturer of skin and
cosmetic products with operations in Fort Worth, Texas.
Under the agreement, the Company paid CBI $1.6 million, including $0.6
million for inventory of CBI. In addition, for the five-year period ending
in December 2007 the Company agreed to pay CBI an amount equal to 9.0909% of
Carrington's net sales of CBI products to CBI's transferring customers up to
$6.6 million per year and 8.5% of Carrington's net sales of CBI products to
CBI's transferring customers over $6.6 million per year. The acquired
assets include equipment and other physical property previously used by
CBI's Custom Division to compound and package cosmetic formulations of
liquids, creams, gels and lotions into bottles, tubes or cosmetic jars.
Carrington uses these assets in a substantially similar manner. The Company
provides services to these customers through the Consumer Services
Division's development and manufacturing services group. The Company
recorded $100,000 for the purchase of equipment and $980,000 for the
purchase of customer relationship intangibles in connection with the
acquisition.
The Company's products are produced at its plants in Irving, Texas and Costa
Rica. A portion of the Aloe vera L. leaves used for manufacturing the
Company's products are grown on a Company-owned farm in Costa Rica. The
remaining leaves are purchased from other producers in Central and South
America.
NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Carrington Laboratories, Inc., and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS. The Company's policy is that all highly liquid
investments purchased with a maturity of three months or less at date of
acquisition are considered to be cash equivalents unless otherwise
restricted. None of the cash equivalents are restricted for any years
presented.
INVENTORY. Inventories are recorded at the lower of cost (first-in, first-
out) or market. The Company records a reserve for inventory obsolescence
based on an analysis of slow moving and expired products.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are recorded
at cost less accumulated depreciation. 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 or the estimated lives of the assets, whichever is
less. Expenditures for maintenance and repairs are charged to expense as
incurred.
LONG-LIVED ASSETS. The Company reviews long-lived assets, including finite-
lived intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset. There have been no
impairment charges recorded in the years presented.
CUSTOMER RELATIONSHIPS. In connection with the CBI acquisition described in
Note One, the Company recorded a finite-lived intangible asset of $980,000
for customer relationships acquired. The Company is amortizing this
intangible asset over five years, which is based on the estimated life of
the customer relationships. Future amounts paid to the sellers based on a
percentage of sales of CBI products as described in Note One will be
recorded as an expense in the same period the corresponding sales are
recorded. The Company recorded expenses of $271,000 and $383,000 in 2004
and 2003, respectively, for royalties due under the agreement. The Company
recorded expense for amortization of the intangible asset of $193,000 and
$195,000 in 2004 and 2003, respectively, and accumulated amortization
of $388,000 and $195,000 at December 31, 2004 and 2003, respectively.
Amortization expenses over each of the next three years are expected to be
approximately $200,000 per year.
TRANSLATION OF FOREIGN CURRENCIES. The functional currency for
international operations (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 amortization, which are
translated at historical rates. Translation adjustments and transaction
gains or losses are recognized in the consolidated statement of operations.
REVENUE RECOGNITION. The Company recognizes revenue for product sales at
the time of shipment when title to the goods transfers and collectibility is
reasonably assured, net of a reserve for estimated returns. Royalty income
is recognized over the period of the licensing and royalty agreement. Grant
income is recognized ratably as the grant budget-approved expenses are
incurred.
DEFERRED REVENUE. Deferred revenue is primarily related to the licensing
and royalty agreement with Medline and represents amounts received in excess
of amounts amortized to royalty income.
INCOME TAXES. The Company uses the liability method of accounting for income
taxes. Under this method, deferred income taxes are recorded to reflect the
tax consequences of differences between the tax basis of assets and
liabilities and the financial reporting basis. Valuation allowances are
provided against net deferred tax assets when it is more likely than not,
based on available evidence, that assets may not be realized.
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.
FREIGHT COSTS. Shipping costs incurred by the Company are included in the
consolidated statement of operations in selling, general and administrative
expenses and were $914,000, $1,230,000 and $500,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
ADVERTISING COSTS. Advertising costs, included in selling, general and
administrative, are expensed as incurred and were $240,000, $190,000 and
$191,000 for the years ended 2004, 2003 and 2002, respectively.
STOCK-BASED COMPENSATION. The Company accounts for employee stock options
in accordance with Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees and Financial Accounting Standards
Board Interpretation No. 44, Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25. Under APB 25,
the Company recognizes no compensation expense related to employee or
director stock options when options are granted with exercise prices at the
quoted market price of the stock on the date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based
Compensation and Statement of Financial Accounting Standards No. 148 (FAS
148), Accounting for Stock-Based Compensation - Transition and Disclosure -
An Amendment of FASB Statement No. 123. Under the provisions of FAS 123,
pro forma compensation expense related to options issued to employees is
disclosed based on the fair value of options on the grant date.
The following table illustrates the effect on net income (loss) if the
Company had applied the fair value recognition provision of FAS 123 to stock
based compensation:
---------------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------------
Net income (loss) (in thousands):
As reported $ 36 $(1,506) $(3,378)
Less: Stock-based compensation
expense determined under fair
value-based method (1,496) (583) (331)
------ ------ ------
Pro forma net loss $(1,460) $(2,089) $(3,709)
====== ====== ======
Basic and diluted shares outstanding 10,590 10,120 9,889
Net income (loss) per share:
Basic and diluted as reported $ 0.00 $ (0.15) $ (0.34)
Basic and diluted pro forma (0.14) (0.21) (0.38)
---------------------------------------------------------------------------
Because options vest over a period of several years and additional awards
are generally made each year, the pro forma information presented above is
not necessarily indicative of the effects on reported or pro forma net
earnings or losses for future years.
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. Diluted net income (loss) per share includes the effects of options,
warrants and convertible securities unless the effect is antidilutive. The
Company uses its weighted-average close price of its stock for the reporting
period to determine the dilution of its stock options and warrants related
to its EPS calculation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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. These estimates include accounts receivable bad debt,
inventory obsolescence and return reserves. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of the Company's
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities estimate fair value due to their relative short-term nature.
The majority of the Company's debt approximates fair value due to the nature
of the floating interest rates being charged.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current year presentation.
NEW PRONOUNCEMENTS. In November 2004, the FASB issued SFAS No. 151
"Inventory Costs." This Statement amends the guidance in ARB No. 43 to
clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material. This Statement requires that
those items be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal." In addition, this Statement
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities.
The provisions of SFAS No. 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company anticipates
no material effect from the adoption of SFAS No. 151.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payments",
which replaces SFAS No. 123 "Accounting for Stock Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees"
and amends SFAS No. 95, "Statement of Cash Flows." SFAS No. 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. As such, pro forma disclosure in lieu of expensing is no longer an
alternative. The new standard is effective in the first interim or annual
reporting period beginning after June 15, 2005. The Company is currently
assessing the impact that the statement may have on its financial
statements.
NOTE THREE. INVENTORIES
The following summarizes the components of inventory at December 31, 2004
and 2003, in thousands:
2004 2003
---------------------------------------------------------------------------
Raw materials and supplies $2,306 $3,009
Work-in-process 514 638
Finished goods 2,613 3,048
Less obsolescence reserve (819) (735)
---------------------------------------------------------------------------
Total $4,614 $5,960
---------------------------------------------------------------------------
NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
2004 and 2003, in thousands:
Estimated
2004 2003 Useful Lives
---------------------------------------------------------------------------
Land $ 1,391 $ 1,391
Buildings and improvements 10,297 9,286 7 to 25 years
Furniture and fixtures 638 620 4 to 8 years
Machinery and equipment 9,488 8,831 3 to 10 years
Leasehold improvements 1,332 846 3 to 10 years
Equipment under capital leases 392 379 5 years
---------------------------------------------------------------------------
Total 23,538 21,353
Less accumulated depreciation
and amortization 11,864 10,815
---------------------------------------------------------------------------
Property, plant and
equipment, net $11,674 $10,538
---------------------------------------------------------------------------
The net book value of property, plant and equipment in Costa Rica at
December 31, 2004 and 2003 was $4,241,000 and $3,593,000, respectively.
NOTE FIVE. ACCRUED LIABILITIES
The following summarizes significant components of accrued liabilities at
December 31, 2004 and 2003, in thousands:
2004 2003
---------------------------------------------------------------------------
Accrued payroll $ 267 $ 550
Accrued insurance 194 227
Accrued taxes 290 181
Accrued professional fees 145 197
Other 432 449
---------------------------------------------------------------------------
Total $1,328 $1,604
---------------------------------------------------------------------------
NOTE SIX. LINE OF CREDIT
The Company has a line of credit with Comerica Bank Texas ("Comerica") that
provides for borrowings of up to $3 million based on the level of qualified
accounts receivable and inventory. The line of credit is collateralized by
accounts receivable and inventory. Borrowings under the line of credit bear
interest at the bank's prime rate (5.25% at December 31, 2004) plus 0.5%.
As of December 31, 2004 there was $1,887,000 outstanding on the credit line
with $563,000 of credit available for operations, net of outstanding letters
of credit of $550,000. The line of credit has no expiration date and is
payable on demand.
Effective July 1, 2004, the Company and Comerica negotiated an amendment to
the Company's credit facilities, which, among other things, redefined the
covenants that require the Company to maintain certain financial ratios. As
of December 31, 2004 the Company is in compliance with all of the covenant
provisions. The new covenants and the Company's position at December 31,
2004 are as follows:
Covenant Covenant Requirement Company's Position
--------- -------------------- ------------------
Total net worth $12,200,000 $12,744,000
Current ratio 1.60 1.76
Liquidity ratio 1.75 2.21
The total net worth, current ratio and liquidity ratio covenant amounts and
the Company's position are calculated as defined in the amendment. The
covenant amounts for these ratios will remain at these same fixed amounts
until maturity.
NOTE SEVEN. LONG-TERM DEBT
In December 2002, Medline advanced the Company $2,000,000 against future
royalty payments due under the Distributor and License Agreement. The
amount bears interest at 6.5% and is being repaid by reducing each quarterly
royalty payment due from Medline through September 2005 by approximately
$200,000. As of December 31, 2004, there was $582,000 outstanding on the
advance.
In March 2003, the Company received a loan of $500,000 from Bancredito, a
Costa Rica bank, with interest and principal to be repaid in monthly
installments over eight years. The interest rate on the loan is the U.S.
Prime Rate (5.25%) plus 2.0%. As of December 31, 2004, there was $410,000
outstanding on the loan.
In July 2003, the Company received a loan of $1,000,000 from Comerica under
a variable rate installment note with interest and principal to be repaid in
monthly installments over five years. The interest rate on the loan is the
U.S. Prime Rate ($5.25%) plus 0.5%. The loan is collateralized by the
Company's accounts receivable and inventory and by a lien on the Company's
production facility in Irving, TX (with a carrying value of $4,089,000). As
of December 31, 2004 there was $717,000 outstanding on the loan.
Both the line of credit and loan with Comerica are cross-collateralized and
cross-defaulted.
In September 2004, the Company received a loan of $350,000 from Bancredito,
a Costa Rica bank, with interest and principal to be repaid in monthly
installments over eight years. The interest rate on the loan is the U.S.
Prime Rate (5.25%) plus 2.5%. As of December 31, 2004, there was $343,000
outstanding on the loan.
Both the loans through Bancredito are secured by land and equipment in Costa
Rica (with a carrying value of approximately $700,000).
The following summarizes annual maturities at December 31, 2004, in
thousands:
2005 $ 873
2006 310
2007 307
2008 229
2009 117
Thereafter 238
-----
Total $2,074
---------------------------------------------------------------------------
NOTE EIGHT. COMMON STOCK
SHARE PURCHASE RIGHTS PLAN. The Company has a share purchase rights plan
which provides, among other rights, for the purchase of common stock by
existing common stockholders at significantly discounted amounts in the
event a person or group acquires or announces the intent to acquire 15% or
more of the Company's common stock. The rights expire in 2011 and may be
redeemed at any time at the option of the Board of Directors for $.001 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 1,250,000 shares of common stock
was reserved for purchase under this Plan. As of December 31, 2004, a total
of 927,420 shares had been purchased by employees at prices ranging from
$0.77 to $29.54 per share.
STOCK OPTIONS. The Company has an incentive stock option plan which was
approved by the shareholders in 2004 under which incentive stock options and
nonqualified stock options may be granted to employees, consultants and non-
employee directors. Options are granted at a price no less than the market
value of the shares on the date of the grant, except for incentive options
to employees who own more than 10% of the total voting power of the
Company's Common Stock, which must be granted at a price no less than 110%
of the market value. Employee options are normally granted for terms of 10
years. Options granted in 2004 vest at the rate of 50% per year beginning
on the first anniversary of the grant date. Options to non-employee
directors have terms of ten years and are 100% vested on the grant date.
The Company has reserved 500,000 shares of Common Stock for issuance under
this plan. As of December 31, 2004, options to purchase 340,050 shares were
available for future grants under the plan.
The Company also has an incentive stock option plan which was approved
by the shareholders in 1995 under which incentive stock options and
nonqualified stock options may be granted to employees, consultants and non-
employee directors. Options are granted at a price no less than the market
value of the shares on the date of the grant, except for incentive options
to employees who own more than 10% of the total voting power of the
Company's Common Stock, which must be 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 vested 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, 1999 and 2001 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 granted subsequent to 2001 vested at the rate of
50% per year beginning on the first anniversary of the grant date. Options
to non-employee directors have terms of ten years and are 100% vested on the
grant date. The Company has reserved 2,250,000 shares of Common Stock for
issuance under this plan. As of December 31, 2004, options to purchase 66
shares were available for future grants under the plan. The Plan expires on
April 1, 2005 after which no additional grants may be made under the plan.
In accordance with the provision of the plan, all options issued under the
plan and outstanding on the expiration date of the plan shall remain
outstanding until the earlier of their exercise, forfeiture or lapse.
The following summarizes stock option activity for each of the three years
in the period ended December 31, 2004 (shares in thousands):
Weighted
Average
Exercise
Shares Price Per Share Price
---------------------------------------------------------------------------
Balance, January 1, 2002 1,373 $ 1.05 to $28.75 $3.11
Granted 375 $ 1.05 to $ 1.50 $1.28
Forfeited (227) $ 1.05 to $12.75 $3.62
Exercised (10) $ 1.31 to $ 2.06 $1.38
---------------------------------------------------------------------------
Balance, December 31, 2002 1,511 $ 1.05 to $28.75 $2.58
Granted 358 $ 1.58 to $ 4.26 $2.94
Forfeited (73) $ 1.05 to $10.25 $1.68
Exercised (171) $ 1.05 to $ 4.81 $1.41
---------------------------------------------------------------------------
Balance, December 31, 2003 1,625 $ 1.05 to $28.75 $2.82
Granted 632 $ 3.90 to $ 5.30 $4.66
Forfeited (204) $ 1.05 to $28.75 $4.95
Exercised (231) $ 1.05 to $ 4.26 $1.62
---------------------------------------------------------------------------
Balance December 31, 2004 1,822 $ 1.05 to $27.00 $3.38
======
Options exercisable at
December 31, 2002 1,092 $ 1.05 to $28.75 $3.12
Options exercisable at
December 31, 2003 1,326 $ 1.05 to $28.75 $2.81
Options exercisable at
December 31, 2004 1,440 $ 1.05 to $27.00 $3.13
The following table summarizes information about stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
------------------------------ -------------------
Weighted
Average Weighted Weighted
Shares Remaining Average Shares Average
Range of (In Contractual Exercise (In Exercise
Exercise Prices thousands) Life Price thousands) Price
---------------------------------------------------------------------
$27.00 to $27.00 1 0.92 years $27.00 1 $27.00
$11.13 to $12.75 2 0.01 years $11.13 2 $11.13
$ 6.00 to $ 7.50 28 2.08 years $ 7.50 28 $ 7.50
$ 3.90 to $ 5.30 988 8.76 years $ 4.63 612 $ 4.78
$ 2.03 to $ 3.00 228 4.57 years $ 2.29 228 $ 2.29
$ 1.05 to $ 1.80 575 7.38 years $ 1.42 569 $ 1.41
----- -----
1,822 7.30 years $ 3.38 1,440 $ 3.13
===== =====
The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants to employees in 2004, 2003, and 2002,
respectively: risk-free interest rates of 3.51%, 4.27% and 3.00%; expected
dividend yields of 0%; expected volatility of 79.2%, 89.7% and 105.2% and
expected lives of 5 years for all periods presented. The weighted average
fair values of options granted were $3.11, $2.20 and $1.00 in 2004, 2003 and
2002, respectively.
STOCK WARRANTS. From time to time, the Company has granted warrants to
purchase common stock to the Company's research consultants and other
persons rendering services to the Company. The exercise price of such
warrants was normally the market price or in excess of the market price of
the common stock at date of issuance. At December 31, 2004 there were no
warrants outstanding. At December 31, 2003 there were 50,000 warrants
exercisable at $3.50 per share.
COMMITMENTS. On May 3, 2004, the Company retained Redington, Inc. to
provide certain investor relations services. In addition to cash payments
for its consulting services, Redington was also granted a non-qualified
stock option to purchase 150,000 shares of the Company's Common Stock at a
price of $4.15 per share, the closing price on that date. The Options are
exercisable based upon the attainment of certain sustained share price
levels. During the period it becomes probable that the share price levels
would be achieved, a charge to the statement of operations will be recorded
based on the fair value of the options at that time.
COMMON STOCK RESERVED. At December 31, 2004, the Company had reserved a
total of 2,485,173 common shares for future issuance relating to the
employee stock purchase plan and stock option plan.
NOTE NINE. COMMITMENTS AND CONTINGENCIES
The Company conducts a significant portion of its operations from three
office/ warehouse/distribution/laboratory facilities under operating leases.
In addition, the Company leases certain office equipment under operating
leases and certain manufacturing and transportation equipment under capital
leases. Future minimum lease payments under noncancelable operating leases
and the present value of future minimum capital lease payments as of
December 31, 2004 were as follows, in thousands:
Capital Operating
Leases Leases
---------------------------------------------------------------------
2005 $ 140 $ 986
2006 74 885
2007 25 804
2008 21 672
2009 16 601
Thereafter 3 904
---------------------------------------------------------------------
Total minimum lease payments 279 $4,852
=====
Amounts representing interest (29)
-----
Present value of capital lease obligations 250
Less current portion of capital lease obligations (127)
-----
Obligations under capital lease agreements,
excluding the current portion $ 123
=====
Total rental expense under operating leases was $881,000, $774,000, and
$667,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
From time to time in the normal course of business, the Company is a party
to various matters involving claims or possible litigation. Management
believes the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
The Company has outstanding a letter of credit in the amount of $450,000
which is used as security on the lease for the Company's laboratory and
warehouse facility. The Company has outstanding a letter of credit in the
amount of $100,000 which is used as security on a capital lease for
equipment.
NOTE TEN. INCOME TAXES
The United States tax effects of temporary differences that gave rise to
deferred tax assets and deferred tax liabilities at December 31, 2004 and
2003 were as follows, in thousands:
2004 2003
---------------------------------------------------------------------
Net operating loss carryforward $ 9,274 $14,849
Research and development
and other credits 343 385
Property, plant and equipment 210 302
Inventory 341 324
Foreign tax credits 125 0
Other, net 55 103
Bad debt reserve 198 218
Deferred income 827 639
ACI Stock Valuation 204 204
Accrued liability 16 36
Less - Valuation allowance (11,593) (17,060)
------ ------
$ 0 $ 0
====== ======
The Company has provided a valuation allowance against the entire U.S. net
deferred tax asset at December 31, 2004 and 2003, due to the uncertainty as
to the realization of the asset.
The Company incurred $125,000 of foreign income tax expense related to the
Company's operations in Costa Rica in 2004. This was the first year that
these activities were subject to income taxes.
The provision (benefit) for income taxes varies from the federal statutory
rate as follows (in thousands):
2004
------
Taxes at federal statutory rate $ 55
Permanent differences 13
Unbenefited foreign income taxes 125
Expired and unbenefitted net
operating loss carryforwards (5,575)
Expired research and development credits (42)
Other 82
Change in valuation allowance 5,467
------
Total tax provision $ 125
======
The benefit for income taxes for the years ended December 31, 2003 and 2002
was offset by an increase in the valuation allowance.
At December 31, 2004, the Company had net operating loss carryforwards of
approximately $27.3 million for federal income tax purposes, which began to
expire in 2004, and research and development tax credit carryforwards of
approximately $343,000, which begin to expire in 2005, all of which are
available to offset federal income taxes due in future periods. All net
operating loss carryforwards will expire between the year 2009 and the year
2023. The Company has approximately $20,000 in alternative minimum tax
credits which do not expire. During 2004, the Company had $5.6 million of
net operating loss carryforwards that expired. Also, in 2004, the Company
had $11.4 million of net operating loss carryforwards that were utilized to
offset foreign dividends with no offsetting foreign tax benefit.
NOTE ELEVEN. 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 two customers. Sales to Natural Alternatives International, Inc.,
("Natural Alternatives"), a customer in the Consumer Services Division,
accounted for 45%, 36%, and 35% of the Company's net sales in 2004, 2003
and 2002, respectively. Accounts receivable from Natural Alternatives
represented 64% and 47% of gross accounts receivable at December 31, 2004
and 2003. Sales to Medline Industries, Inc., ("Medline") a customer in the
Medical Services Division, accounted for 23%, 26% and 34% of the Company's
sales during 2004, 2003 and 2002, respectively. Accounts receivable from
Medline represented 20% and 29% of the Company's gross accounts receivable
at December 31, 2004 and 2003. 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.
Accounts are considered past due after contractual terms (net 30 days) and
are written-off after extensive collection efforts and nine months time.
The following table summarizes the allowance for doubtful accounts activity
for the period ended December 31, 2004 and 2003, in thousands.
Balance at Beginning Charges to Balance at End
of Period Expenses Deductions of Period
---------------------------------------------------------------------------
A/R Reserve-2004 $181 $ 48 $67 $162
A/R Reserve-2003 $110 $150 $79 $181
NOTE TWELVE. NET INCOME (LOSS) PER SHARE
The Company calculates basic earnings per share by dividing net earnings by
the weighted average number of shares outstanding. Diluted earnings per
share reflects the impact of outstanding stock options during the periods
presented using the treasury stock method. The following table provides a
reconciliation of the denominators utilized in the calculation of basic and
diluted earnings per share with the amounts rounded to the nearest
thousands, except per share amounts:
2004 2003 2002
------ ------ ------
Net income (loss) $ 36 $(1,506) $(3,378)
Basic earnings (loss) per share:
Weighted average number of common shares
outstanding 10,590 10,120 9,889
Basic per share amount $ 0.00 $ (0.15) $ (0.34)
====== ====== ======
Diluted earnings (loss) per share:
Weights average number of common shares
outstanding 10,590 10,120 9,889
Dilutive effect of stock options 581 0 0
------ ------ ------
Diluted weighted average number of
common shares outstanding 11,171 10,120 9,889
Diluted per share amount $ 0.00 $ (0.15) $ (0.34)
====== ====== ======
At December 31, 2004, 691,787 common stock options were excluded from the
diluted earnings per share calculation using a weight-average close price of
$4.34 per share, as their effect was antidilutive.
At December 31, 2003, all of the Company's 1,625,185 common stock options
and 50,000 warrants were excluded from its diluted earnings per share
calculation as their effect was antidilutive due to the Company's net loss
for the year.
At December 31, 2002, all of the Company's 1,510,751 common stock options
and 50,000 warrants were excluded from its diluted earnings per share
calculation as their effect was antidilutive due to the Company's net loss
for the year.
NOTE THIRTEEN. REPORTABLE SEGMENTS
Based on the economic characteristics of the Company's business activities,
the nature of its products, customers and markets it serves, and the
performance evaluation by management and the Company's Board of Directors,
the Company has identified three reportable segments: Medical Services
Division, Consumer Services Division and DelSite.
The Medical Services Division sells a comprehensive line of wound and skin
care medical products and provides manufacturing services to customers in
medical products markets. These products are primarily sold through a
domestic, sole source distributor, where the products are ultimately
marketed to hospitals, nursing homes, alternative care facilities, cancer
centers, home health care providers and managed care organizations.
International sales of these products account for less than 10% of the
Division's consolidated net sales for the years ended December 31, 2004,
2003, and 2002.
The Consumer Services Division sells and licenses consumer products and bulk
raw materials that utilize the Company's patented complex carbohydrate
technology into the consumer health and beauty care products markets. The
Division also sells finished products, provides product development and
manufacturing services to customers in the cosmetic and nutraceutical
markets. These products are primarily sold domestically, with international
sales accounting for less than 10% of the Division's consolidated net sales
for the years ended December 31, 2004, 2003, and 2002.
DelSite is a research and development subsidiary responsible for the
research, development and marketing of the Company's proprietary GelSite[R]
technology for controlled release and delivery of bioactive pharmaceutical
ingredients. Revenues for DelSite currently consist of research grant
awards.
Prior to January 1, 2004, the Company reported its results in two segments:
Medical Services Division and Caraloe, Inc. The Caraloe activities have
been renamed the Consumer Services Division. In addition, due to the
growing significance of DelSite's operations, in 2004 the Company began
reporting DelSite as a separate segment. DelSite was previously reported as
part of the corporate operations category.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes.
Net revenues represent revenues from external customers. Assets which are
used in more than one segment are reported in the segment where the
predominant use occurs. Total cash for the Company is included in the
Corporate Assets figure.
The segment data for the years ended December 31, 2004, 2003 and 2002 were
as follows:
2004 2003 2002
------ ------ ------
Net revenues:
Medical Services Division $10,391 $10,782 $ 9,470
Consumer Services Division 19,663 18,321 8,571
DelSite 767 0 0
------ ------ ------
$30,821 $29,103 $18,041
====== ====== ======
Income (loss) before income taxes:
Medical Services Division $(1,861) $(1,335) $(1,405)
Consumer Services Division 5,081 2,590 (104)
DelSite (3,059) (2,761) (1,869)
------ ------ ------
$ 161 $(1,506) $(3,378)
====== ====== ======
Identifiable assets:
Medical Services Division $ 6,094 $ 7,248 $ 8,910
Consumer Services Division 12,129 12,813 8,530
DelSite 1,978 324 161
Corporate 2,816 2,399 4,558
------ ------ ------
$23,017 $22,784 $22,159
====== ====== ======
Capital expenditures:
Medical Services Division $ 0 $ 291 $ 348
Consumer Services Division 278 920 0
DelSite 1,894 182 30
Corporate 0 0 0
------ ------ ------
$ 2,172 $ 1,393 $ 378
====== ====== ======
Depreciation and amortization:
Medical Services Division $ 244 $ 357 $ 259
Consumer Services Division 711 888 810
DelSite 286 64 18
------ ------ ------
$ 1,241 $ 1,309 $ 1,087
====== ====== ======
NOTE FOURTEEN. RELATED PARTY TRANSACTIONS
At December 31, 2004, the Company had a 23% interest in a company which was
formed in 1998 to acquire and develop a 5,000-acre tract of land in Costa
Rica to be used for the production of Aloe vera L. leaves, the Company's
primary raw material. The Company's initial investment was written off in
1998 and no additional investments have been made or are expected to be
made. The Company has no influence on the business or operating decisions
of this company. Additionally, $92,250 and $149,500 was collected in 2004
and 2003, respectively, from this company against the fully reserved note
receivable balances. The Company is accounting for its investment on the
cost basis. The Company purchases Aloe vera L. leaves from this company at
prices the Company believes are competitive with other sources. Such
purchases totaled $1,447,000, $1,229,000 and $468,000 in 2004, 2003 and
2002, respectively.
NOTE FIFTEEN. DEFERRED REVENUE
Pursuant to the Distributor and License Agreement with Medline, the Company
is to receive $12.5 million in base royalties over a five-year period ending
November 30, 2005. In April 2004, the Company entered into an Amendment
(the "Amendment") to the Distributor and License Agreement and the Supply
Agreement. Among other things, the Amendment extended the term of the
Distributor and License Agreement and the term of the Supply Agreement
through November 30, 2008, and, subject to certain refund rights more
specifically described in the Amendment, provided that the Company would
receive an additional $1.25 million of royalties, to be paid upon the
signing of the Amendment, in consideration of the extended term of the
Distributor and License Agreement. The Company received the funds on April
21, 2004. The Company continues to recognize royalty income under this
agreement, as amended, on a straight-line basis. At December 31, 2004, the
Company had received $2.4 million more in royalties than it had recognized
in income, which is recorded as deferred revenue on the balance sheet.
Royalties to be received subsequent to December 31, 2004 total $1.1 million.
NOTE SIXTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The unaudited selected quarterly financial data below reflect the fiscal
years ended December 31, 2004 and 2003, respectively.
(Amounts in thousands, except shares and per share amounts)
---------------------------------------------------------------------------
2004 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------
Net revenue $7,340 $7,991 $7,729 $7,761
Cost of product sales 4,573 4,813 4,391 4,473
Net income (loss) (245) (36) 104 213
Basic and diluted income
(loss) per share $(0.03) $(0.00) $ 0.01 $ 0.02
---------------------------------------------------------------------------
2003 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------
Net revenue $6,904 $7,962 $7,532 $6,705
Cost of product sales 4,337 4,883 5,035 4,551
Net income (loss) (298) 339 (466) (1,081)
Basic and diluted income
(loss) per share $(0.03) $ 0.03 $(0.05) $(0.10)
NOTE SEVENTEEN. SUPPLY CONCENTRATION
Commodities or components used in the Company's production processes which
can only be obtained from a single supplier could potentially expose the
Company to risk of production interruption should the supplier be unable to
deliver the necessary materials in a timely manner. The Company utilizes
alcohol as a key part of its production process in Costa Rica. The Company
engages the services of an alcohol refinery company, located adjacent to
its facility, to repurify the alcohol used in its production utilizing
a distillation process. The purified alcohol is then returned to the
Company's inventory for further use. The Company is unaware of any other
providers of this service in Costa Rica. Senior managers from the Company's
Costa Rica operations meet regularly with owners and managers of the
refinery company to discuss operational issues.
NOTE EIGHTEEN. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan to provide eligible employees with a
retirement savings plan. All employees are eligible to participate in the
plan if they are age 21 years or older. Company matching contributions are
made dollar for dollar up to 3% of pay and 50% for contributions greater
than 3% of pay but not in excess of 5% of pay. The Company may make
discretionary contributions upon direction of the Board of Directors. The
Company's contribution expense for the years ended December 31, 2004, 2003
and 2002 was approximately $129,000, $134,000 and $144,000, respectively.
NOTE NINETEEN. SUBSEQUENT EVENTS
On January 21, 2005, the Company's wholly-owned subsidiary in Costa Rica
entered into a Manufacturing Agreement with Miradent Products of Costa Rica
("Miradent"). Under the terms of the agreement, the Company will manufacture
proprietary dental products for Miradent for a period of five years.
Financial Statement Schedule
Valuation and Qualifying Accounts
(In thousands)
Description Additions
----------------
Balance Charged Charged
at to to Balance
Beginning Cost and Other at End
of Period Expenses Accounts Deductions of Period
---------------------------------------------------------------------------
2004
---------------------------------------------------------------------------
Bad debt reserve $ 181 $ 48 $ - $ 67 $ 162
Inventory reserve 735 205 - 121 819
Reserve Aloe & Herbs
non-current notes and
investments included
in other assets 227 - - 92 135
Reserve for returns 35 - - - 35
---------------------------------------------------------------------------
2003
---------------------------------------------------------------------------
Bad debt reserve $ 110 $ 150 $ - $ 79 $ 181
Inventory reserve 632 200 - 97 735
Reserve for Aloe & Herbs
non-current notes and
investments included
in other assets 377 - - 150 227
Reserve for returns 136 - - 101 35
---------------------------------------------------------------------------
2002
---------------------------------------------------------------------------
Bad debt reserve $ 100 $ 38 $ - $ 28 $ 110
Inventory reserve 516 135 - 19 632
Reserve for Aloe & Herbs
non-current notes and
investments included
in other assets 396 - - 19 377
Reserve for returns 136 - - - 136
---------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003 and the
related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit
of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Carrington Laboratories, Inc. and subsidiaries as of December
31, 2004 and 2003, and the consolidated results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The related financial
statement Schedule II is presented for purposes of additional analysis and
is not a required part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audit
of the basic consolidated financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic consolidated
financial statements taken as a whole.
/s/Grant Thornton LLP
Dallas, Texas
March 3, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Carrington Laboratories, Inc.
We have audited the accompanying consolidated statement of operations of
Carrington Laboratories, Inc. and subsidiaries and the related consolidated
statements of shareholders' equity and cash flows for the year ended
December 31, 2002. Our audit also includes the financial statement schedule
listed in the Index at Item 15(a) for the same period. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our 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 consolidated results of
operations and cash flows of Carrington Laboratories, Inc. and subsidiaries
for the year ended December 31, 2002 in conformity with U.S. 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.
/s/ Ernst & Young LLP
Dallas, Texas
February 28, 2003
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 dully authorized.
Carrington Laboratories, Inc.
Date: March 24, 2005 By: /s/ Carlton E. Turner, Ph.D., D.Sc.
----------------------------------------
Carlton E. Turner, President,
Chief Executive Officer and Director
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.
/s/ Carlton E. Turner President, Chief Executive March 24, 2005
------------------------- Officer and Director
Carlton E. Turner, Ph.D. (principal executive officer)
D.Sc.
/s/ Robert W. Schnitzius Vice President and Chief March 24, 2005
------------------------- Financial Officer
Robert W. Schnitzius (principal financial and
accounting officer)
/s/ Ronald R. Blanck Director March 24, 2005
-------------------------
Ronald R. Blanck, D.O.
/s/ R. Dale Bowerman Director March 24, 2005
-------------------------
R. Dale Bowerman
/s/ George DeMott Director March 24, 2005
-------------------------
George DeMott
/s/ Thomas J. Marquez Director March 24, 2005
-------------------------
Thomas J. Marquez
/s/ Edwin Meese, III Director March 24, 2005
-------------------------
Edwin Meese, III
/s/ Selvi Vescovi Director March 24, 2005
-------------------------
Selvi Vescovi
INDEX TO EXHIBITS
-----------------
Sequentially
Exhibit Numbered
Number Exhibit Page
------ --------------------------------------------------- ----
3.1 Restated Articles of Incorporation of Carrington
Laboratories, Inc. (incorporated by reference to
Exhibit 3.1 to Carrington's 1999 Annual Report
on Form 10-K).
3.2 Statement of Change of Registered Office and
Registered Agent of Carrington Laboratories,
Inc. (incorporated by reference to Exhibit 3.2
to Carrington's 1999 Annual Report on Form 10-K).
3.3 Statement of Resolution Establishing Series D
Preferred Stock of Carrington Laboratories, Inc.
(incorporated by reference to Exhibit 3.3 to
Carrington's 1999 Annual Report on Form 10-K).
3.4 Bylaws of Carrington Laboratories, Inc., as
amended through March 3, 1998 (incorporated
herein by reference to Exhibit 3.8 to
Carrington's 1997 Annual Report on Form 10-K).
4.1 Form of certificate for Common Stock of
Carrington Laboratories, Inc. (incorporated
herein by reference to Exhibit 4.5 to
Carrington's Registration Statement on Form S-3
(No. 33-57360) filed with the Securities and
Exchange Commission on January 25, 1993).
4.2 Rights Agreement dated as of September 19,
1991 between Carrington Laboratories, Inc.
and Ameritrust Company National Association
(incorporated by reference to Exhibit 4.2 to
Carrington's 1999 Annual Report on Form 10-K).
4.3 Amendment No. 1 to Rights Agreement dated
October 21, 1998 (incorporated herein by
reference to Exhibit 4 to the Company's
Form 8-A/A Post-Effective Amendment No. 1).
4.4 Amended and Restated Rights Agreement dated
October 15, 2001, between Carrington Laboratories,
Inc. and American Stock Transfer & Trust Company,
as successor Rights Agent (incorporated by reference
to Exhibit 4.1 to the Company's Form 8-A/A
Post-Effective Amendment No. 2).
4.5 Amendment No. 1 to the Amended and Restated Rights
Agreement, dated effective as of December 17, 2003,
between Carrington Laboratories, Inc. and American
Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the
Company's Form 8-A/A Post-Effective Amendment No. 3).
10.1 + Employee Stock Purchase Plan of Carrington
Laboratories, Inc., as amended through June 15,
1995 (incorporated by reference to Exhibit 10.9
to Carrington's 1999 Annual Report on Form 10-K).
10.2 + 1995 Management Compensation Plan (incorporated
herein by reference to Exhibit 4.1 to Form S-8
Registration Statement No. 33-64403 filed with
the Commission on November 17, 1995).
10.3 Trademark License and Product Supply Agreement
dated July 22, 1997 between Caraloe, Inc., and
Nu Skin International, Inc. (incorporated herein
by reference to Exhibit 10.1 to Carrington's
quarterly report on Form 10-Q for the quarter
ended September 30, 1997).
10.4 Non-exclusive Sales and Distribution
Agreement dated August 22, 1995 between
Innovative Technologies Limited and
Carrington Laboratories, Inc. (incorporated
herein by reference to Exhibit 10.6 to
Carrington's Third Quarter 1995 Report on
Form 10-Q).
10.5 Supplemental Agreement dated October 16,
1995 to Non-exclusive Sales and Distribution
Agreement between Innovative Technologies
Limited and Carrington Laboratories,
Inc.(incorporated herein by reference to
Exhibit 10.7 to Carrington's Third Quarter
1995 Report on Form 10-Q).
10.6 Product Development and Exclusive
Distribution Agreement dated November 10,
1995 between Innovative Technologies
Limited and Carrington Laboratories, Inc.
(incorporated herein by reference to
Exhibit 10.8 to Carrington's Third Quarter
1995 Report on Form 10-Q).
10.7 Supply and Distribution Agreement dated
March 22, 1996 between Farnam Companies,
Inc. and Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit
10.76 to Carrington's 1995 Annual Report on
Form 10-K).
10.8 Sales Distribution Agreement dated December
20, 1996 between Recordati, S.P.A. and
Carrington Laboratories, Inc. and Carrington
Laboratories Belgium N.V.(incorporated by
reference to Exhibit 10.55 to Carrington's
1996 Annual Report on Form 10-K).
10.9 Sales Distribution Agreement dated March 27,
1998 between Carrington Laboratories, Inc.
and Carrington Laboratories Belgium N.V.
and Hemopharm GmbH (incorporated herein by
reference to Exhibit 10.4 to Carrington's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
10.10 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).
10.11 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).
10.12 Letter Agreement dated February 4, 1999
between Aloe Commodities International, Inc.
and the Registrant amending due date of
Promissory Note dated June 17, 1998 from
Aloe Commodities International, Inc. to the
Registrant (incorporated herein by reference
to Exhibit 10.98 to Carrington's 1998 Annual
Report on Form 10-K).
10.13 Promissory Note dated July 1, 1998 of Rancho
Aloe, (C.R.) S.A. payable to the order of
the Registrant in the principal amount of
$186,655.00 (incorporated herein by
reference to Exhibit 10.1 to Carrington's
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.14 Promissory Note of Aloe & Herbs
International, Inc. dated November 23, 1998
payable to the order of the Registrant in
the principal amount of $300,000
(incorporated herein by reference to Exhibit
10.92 to Carrington's 1998 Annual Report on
Form 10-K).
10.15 Common Stock Purchase Warrant dated
November 23, 1998, issued by Aloe and
Herbs International, Inc. to Carrington
Laboratories, Inc. (incorporated herein by
reference to Exhibit 10.99 to Carrington's
1998 Annual Report on Form 10-K).
10.16 Letter dated February 25, 1999 from
Aloe Commodities, Inc. to Carrington
Laboratories, Inc. (incorporated herein by
reference to Exhibit 10.1 to Carrington's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999).
10.17 Letter Agreement dated September 29, 1999
between Aloe Commodities International,
Inc. and Carrington Laboratories, Inc.
(incorporated herein by reference to Exhibit
10.1 to Carrington's Quarterly Report on
Form 10-Q for the quarter ended September
30, 1999).
10.18 Supplier Agreement dated August 6, 1999
between Novation, LLC and Carrington
Laboratories, Inc. MS 91022 (incorporated by
reference to Exhibit 10.80 to Carrington's
1999 Annual Report on Form 10-K).
10.19 Supplier Agreement dated August 6, 1999
between Novation, LLC and Carrington
Laboratories, Inc. MS 91032 (incorporated by
reference to Exhibit 10.81 to Carrington's
1999 Annual Report on Form 10-K).
10.20 Distributor and License Agreement dated
November 3, 2000 between Carrington
Laboratories, Inc. and Medline Industries,
Inc. (Exhibits A, B and C to this agreement
have been excluded pursuant to a request for
confidential treatment submitted by the
registrant to the Securities and Exchange
Commission)(incorporated by reference to
Exhibit 10.82 to Carrington's 1999 Annual
Report on Form 10-K).
10.21 Supply Agreement dated November 3, 2000
between Carrington Laboratories, Inc. and
Medline Industries, Inc. (Exhibit A to this
agreement has been excluded pursuant to a
request for confidential treatment submitted
by the registrant to the Securities and
Exchange Commission, (incorporated by
reference to Exhibit 10.83 to Carrington's
1999 Annual Report on Form 10-K).
10.22 Lease Agreement dated January 22, 2001
between Plazamerica, Inc and Carrington
Laboratories, Inc.
10.23 + Employee Stock Purchase Plan of Carrington
Laboratories, Inc., as amended through May
17, 2001 (incorporated by reference to
Exhibit 10.1 to Carrington's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 2001).
10.24 + 1995 Stock Option Plan of Carrington
Laboratories, Inc., as Amended and Restated
Effective January 15, 1998 and further
amended through May 17, 2001 (incorporated
by reference to Exhibit 10.2 to Carrington's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001).
10.25 Credit Agreement dated as of September 1,
2002, between Carrington Laboratories, Inc.
and Comerica Bank.
10.26 Advance Formula Agreement dated as of
September 1, 2002, between Carrington
Laboratories, Inc., and Comerica Bank,
Caraloe, Inc., and DelSite Biotechnologies,
Inc.
10.27 Amendment to Distributor and License
Agreement and Supply Agreement between
Carrington Laboratories, Inc., and Medline
Industries, Inc. (incorporated by reference
to Exhibit 10.1, filed on Carrington's Form
8-K on April 22, 2004) .
10.28 2004 Stock Option Plan of Carrington Laboratories,
Inc. (incorporated by reference to Exhibit 4.1
to Carrington's Form S-8 Registration Statement
filed with the SEC on August 17, 2004).
10.29 Employee Stock Purchase Plan as amended through
May 20, 2004 of Carrington Laboratories, Inc.
(incorporated by reference to Exhibit 4.1 to
Carrington's Form S-8 Registration Statement
filed with the SEC on August 17, 2004).
10.30 Certificate of Pledge between Sabila
Industrial, S.A., a Costa Rica Corporation
and wholly-owned subsidiary of Carrington
Laboratories, Inc., and Banco Credito
Agricola de Cartage dated August 6, 2004
(incorporated by reference to Exhibit 10.1
to Carrington's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004).
10.31 Amendment dated October 15, 2004 and
effective as of July 1, 2004, to Credit
agreement and Advanced Formula Agreement
dated September 1, 2002, between Carrington
Laboratories, Inc., and Comerica Bank,
Caraloe, Inc., and DelSite Biotechnologies,
Inc. (incorporated by reference to Exhibit
10.1, filed on Carrington's Form 8-K on
October 21, 2004).
10.32 * Supply Agreement dated December 17, 2004
between Carrington Laboratoreis, Inc.,
Mannatech, Inc., and Natural Alternatives,
Inc. (portions of this exhibit have been
excluded pursuant to a request for
confidential treatment).
10.33 * Trademark License Agreement dated
December 17, 2004 between Carrington
Laboratories, Inc. and Mannatech, Inc.
10.34 * Manufacturing Agreement between Sabila
Industrial, S.A., a Costa Rica Corporation
and wholly-owned subsidiary of Carrington
Laboratories, Inc., and Miradent Products
of Costa Rica, S.A., dated January 21, 2005,
(portions of this exhibit have been excluded
pursuant to a request for confidential
treatment).
21.1 * Subsidiaries of Carrington.
23.1 * Consent of Grant Thornton, LLP.
23.2 * Consent of Ernst & Young, LLP.
31.1 * Certification of Chief Executive Officer
Required by Rule 13a-14(a)(17 CFR 240.13a-14(a).
31.2 * Certification of Chief Financial Officer
Required by Rule 13a-14(a)(17 CFR 0.13a-14(a).
32.1 * Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 * Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith.
+ Management contract or compensatory plan.