ITEM 1. BUSINESS. -------- General -------
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 is comprised of two business segments. See Note Thirteen to the consolidated financial statements in this Annual Report for financial information about these business divisions. The Company sells prescription and nonprescription human and veterinary products through its Medical Services Division. Through Caraloe, Inc., its consumer products subsidiary, the Company sells consumer and bulk raw material products and also provides product development and manufacturing services to customers in the cosmetic, nutraceutical and medical markets. The Company's research and product portfolio are based primarily on complex carbohydrates isolated from the Aloe vera L. plant.
In October 2001, the Company incorporated, a wholly-owned subsidiary named DelSite Biotechnologies, Inc. ("DelSite"). 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[TM] 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 to hospitals, alternate care facilities, cancer centers and the home health care market. The Company's products are designed to provide patients with the highest quality of care. 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, e.g., enterostomal therapists.
In response to changing market conditions, 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"). Medline is now responsible for all sales and marketing and distribution efforts for Carrington's wound and skin care product lines. The Company also has a Supply Agreement with Medline that allows the Company to manufacture specific products where the Company can meet or reduce Medline's current purchase price.
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 has resumed some limited marketing and advertising to bolster Medline's efforts in these areas.
The Company has several distribution and licensing agreements for the sale of its products into international markets. The Company also sells wound care products into international markets on a non-contract, purchase order basis. Opportunities in the growing Internet market are also addressed through the Company's websites, www.carringtonlabs.com. and www.woundcare.com.
The Company also produces Acemannan Immunostimulant[TM], a product 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.
Carrington is actively involved in developing and promoting the SaliCept[TM] line of products, which includes an oral rinse, patches for oral wounds and extraction sites, and other products. The SaliCept line[TM] is supported by a dedicated sales representative and strategic partners for this line are being considered.
Caraloe, Inc. -------------
Caraloe, Inc., a subsidiary of the Company, markets or licenses consumer products and bulk raw materials utilizing the Company's patented complex carbohydrate technology into the consumer health and nutritional products markets. Caraloe's premier product is Manapol[R] powder, a bulk raw material rich in complex carbohydrates. Manapol[R] powder is marketed to manufacturers of nutritional products who desire quality complex carbohydrate ingredients for their finished products. Caraloe also markets finished products containing Manapol[R] powder into domestic health and nutritional products markets through health food stores, through internet marketing services at www.aloevera.com, and the international marketplace on a non-contract, purchase order basis. In the fourth quarter of 2000, Caraloe introduced a new raw material, Hydrapol[TM], for use by cosmetic manufacturers.
In 1997, Caraloe signed a non-exclusive supply agreement with a major customer to supply Manapol[R] powder. This agreement was renewed through August 2003 and contains monthly minimum purchase requirements. During 2000, 2001, and 2002 sales of Manapol[R] powder to this customer represented 38%, 30%, and 35% respectively, of the Company's total revenues. The Company expects this supply agreement will be renewed at the end of August 2003.
Caraloe, Inc. also provides product development and manufacturing services to customers in the cosmetic, nutraceutical and medical 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 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 Carrollton, Texas.
Under the agreement, the Company paid CBI $501,000 at closing and deposited $500,000 in escrow, which was released to CBI on February 28, 2003. In addition, Carrington agreed (i) to purchase inventory of CBI for an amount not greater than $700,000, to be paid six months after closing and (ii) to pay CBI an amount equal to 9.0909% of Carrington's net sales up to $6.6 million per year and 8.5% of Carrington's net sales over $6.6 million per year of CBI products to CBI's existing customers for the next five years. 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 intends to use these assets in a substantially similar manner. The Company will provide services to these customers through the Caraloe, Inc. development and manufacturing services group.
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 advance at the rate of 6.5% per year on the outstanding balance of the advance.
DelSite Biotechnologies, Inc. -----------------------------
In October 2001 the Company incorporated a wholly-owned subsidiary named DelSite Biotechnologies, Inc. ("DelSite"). DelSite operates independently from the Company's research and development program, which supports the activities associated with the Company's Medical Services and Caraloe, Inc. divisions, and is responsible for the research, development and marketing of the Company's proprietary GelSite[TM] polymer (CR1013), 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 based on its GelSite[TM] polymer for controlled delivery of bioactive proteins and peptides as therapeutics and vaccines.
In January 2002 DelSite formed a strategic collaboration with Southern Research Institute, Inc. of Birmingham, Alabama, to assist in the development and ultimate commercialization of the drug delivery technology based on the GelSite[TM] polymer. Southern Research Institute 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.
Research and Development ------------------------ General -------
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 $3,602,000, $2,442,000 and $3,580,000 on research and development in fiscal 2000, 2001 and 2002, respectively. Of the total expenditures for 2000, $623,000 reflect clinical trial costs associated with the Phase III trial in ulcerative colitis. Research activities associated with DelSite accounted for 51% of the 2002 research and development expenditures.
DelSite Research and Development --------------------------------
The Company believes that its products' functionality and/or pharmacological activity make them potential candidates for further development as pharmaceutical or therapeutic agents. In 2003, DelSite will focus its activities in drug delivery through developing proof of concept data for potential pharmaceutical partners. There is no assurance, however, that DelSite will be successful in its efforts.
The Company sponsors a research and development laboratory at Texas A&M University in association with the College of Veterinary Medicine to 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 is developing a new platform technology based on its proprietary GelSite[TM] polymer (CR1013) for controlled delivery of bioactive proteins and peptides as therapeutics and vaccines. Basic proof of concept research is continuing on this material, which includes both parenteral delivery of therapeutic proteins and peptides and intranasal delivery of protein antigens as vaccines. Selected studies have been completed through sponsored research at Texas A&M and Southern Research Institute. Pilot scale production has been accomplished and studies to refine the process are ongoing. The technology has varied utility, but the primary focus of research is in the area of drug delivery. Three patents covering this invention have been issued to the Company with two patents pending. The 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 or, at the customer's request, through reverse engineering a similar product. Development efforts also include packaging design, label design and, where required by regulations, production validation.
During 2002 the Company also initiated scale-up development activities for the production of its proprietary oral patch product. This product had previously been manufactured by an independent vendor on a bench-scale basis. The Company purchased and installed production-scale equipment in its Costa Rica facility to form, fill and seal blister packs. The patch product is freeze-dried in the Company's existing freeze-drying equipment in Costa Rica. Installation, operation and performance qualifications were initiated in the fourth quarter of 2002 and completed in the first quarter of 2003. The first products were produced in December 2002 and January 2003. Human Clinical Studies ----------------------
Evaluation of Carrington[R] Oral Wound Rinse for Pain Associated with Mucositis.
In March 1997, the FDA cleared Carrington to market an Oral Wound Rinse for the management and relief of pain associated with mucositis and all types of oral wounds. A 20 patient trial of a new formulation for the product was completed in 2001. This trial evaluated the effectiveness and duration of effect of Carrington[R] Oral Wound Rinse. All patients in the trial reported that they experienced pain relief immediately upon use of the product and 80% reported the duration of relief was 4-6 hours.
Evaluation of the SaliCept[TM] Oral Patch for Reduction in the Incidence of Dry Socket.
An independent study conducted in 2000 that compared the incidence of alveolar osteitis ("AO", also known as dry socket) in patients treated with Gelfoam[R] soaked with an antibiotic or SaliCept[TM] Patches was conducted in 2000. A retrospective evaluation was performed of 587 records of Gelfoam[R] treated patients compared to a prospective trial of 608 patients treated with SaliCept[TM] Patches. The SaliCept[TM] Patch significantly reduced the incidence of AO when compared to the antibiotic-soaked Gelfoam[R]. The study results were filed with the FDA and the Company was granted clearance by the agency in the fourth quarter 2001 to market the patch as a 510(k) device for management of AO.
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 ------- 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
Oral ---- Human Pain Reduction Mucositis Marketed
Dental Pain Reduction Aphthous Ulcers, Oral Wounds Marketed Post Extraction Wounds Oral Surgery Marketed
Injectable ---------- Human Neutropenia Neutropenia associated with Discovery cancer
GelSite[TM] polymer (CR1013) Drug delivery Preclinical
Intranasal ---------- GelSite[TM] polymer (CR1013) Vaccine delivery Preclinical Veterinary Adjunct for cancer Fibrosarcoma Marketed
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 development effort and expense. Before governmental approval to market any such product is obtained, the Company may license these products for certain indications to other pharmaceutical companies in the United States or foreign countries and require such licensees to undertake the steps necessary to obtain marketing approval 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 aloe extracts from the central portion of the Aloe vera L. leaf known as the gel. A basic bulk mannan, Acemannan Hydrogel[TM], is used as an ingredient in certain of the Company's proprietary wound and skin care products.
The Company owns a 405-acre farm in the Guanacaste province of northwest Costa Rica which currently has approximately 113 acres planted with Aloe vera L. The Company is currently performing a land reclamation project on the farm to increase productive acreage. Currently, the Company's 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. The Company anticipates that the local suppliers will be able to meet all of its requirements for leaves in 2003.
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 nominal price per kilogram of leaves supplied, with the final price payable to Rancho Aloe based upon the yield of the final product.
As of December 31, 2002, Rancho Aloe was providing an average of 67% 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 -------------
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[TM]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.
Competition -----------
Research and Development. The biopharmaceutical field is expected to continue to undergo rapid and significant technological change. Potential competitors in the United States are numerous and include pharmaceutical, chemical and biotechnology companies. Many of these companies have substantially greater capital resources, research and development staffs, facilities and expertise (in areas including research and development, manufacturing, testing, obtaining regulatory approvals and marketing) than the Company. This competition can be expected to become more intense as commercial applications for biotechnology and pharmaceutical products increase. Some of these companies may be better able than the Company to develop, refine, manufacture and market products which have application to the same indications as 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 Caraloe, Inc. The Company competes against many companies that sell products which are competitive with the Company's products, with many of its competitors using very aggressive marketing efforts. Many of the Company's competitors are substantially larger than the Company in terms of sales and distribution networks and have substantially greater financial and other resources. The Company's ability to compete against these companies will depend in part on the expansion of the marketing network for its products. The Company believes that the principal competitive factors in the marketing of its products are their quality, and that they are naturally based and competitively priced.
Governmental Regulation -----------------------
The production and marketing of the Company's products, and the Company's research and development activities, are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, 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 United States, the Company is subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement may vary widely from country to country.
Food and Drug Administration. The contents, labeling and advertising of many of the Company's products are regulated by the FDA. The Company is required to obtain FDA approval before it can study or market any proposed prescription drugs and may be required to obtain such approval for proposed nonprescription products. This procedure involves extensive clinical research, and separate FDA approvals are required at various stages of product development. The approval process requires, among other things, presentation of substantial evidence to the FDA, based on clinical studies, as to the safety and efficacy of the proposed product.
After approval, manufacturers must continue to expend time, money and effort in production and quality control to assure continual compliance with the current Good Manufacturing Practices regulations. Also, under the new program for harmonization between Europe and the U.S. and the ISO 9001 Certification Program, a company can, under certain circumstances after application, have a new drug approved under a process known as centralization rather than having to go through a country-by-country approval in the European Union.
Certain of the Company's wound and skin care products are registered with the FDA as "devices" pursuant to the regulations under Section 510(k) of the FFDC Act. A device is a product used for a particular medical purpose, such as to cover a wound, with respect to which no pharmacological claim can be made. A device which is "substantially equivalent" to another device existing in the market prior to May 1976 can be registered with the FDA under Section 510(k) and marketed without further testing. A device which is not "substantially equivalent" is subject to an FDA approval process similar to that required for a new drug, beginning with an Investigational Device Exemption and culminating in a Premarket Approval. The Company has sought and obtained all its device approvals under Section 510(k). The Company currently markets seven (7) 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 subsidiary, Caraloe, are also subject to regulation by one or more federal agencies, including the FDA, the FTC, the USDA and the EPA. These activities are also regulated by various agencies of the states, localities and foreign countries to which Caraloe's products are distributed and in which Caraloe's products are sold. The FDA, in particular, regulates the formulation, manufacture and labeling of vitamin and other nutritional supplements.
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 of "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 Caraloe 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 Caraloe plans to commence or expand sales may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of Caraloe's products. Compliance with such foreign governmental regulations is generally the responsibility of Caraloe's distributors for those countries. These distributors are independent contractors over which Caraloe has limited control.
As a result of Caraloe's efforts to comply with applicable statutes and regulations, Caraloe has from time to time reformulated, eliminated or relabeled certain of its products and revised certain provisions of its sales and marketing program. Caraloe cannot predict the nature of any future laws, regulations, interpretations or applications, nor can it determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not capable of reformulation, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all of such requirements could have a material adverse effect on the Company's results of operations and financial condition.
Compliance with the provisions of national, state and local environmental laws and regulations has not had a material adverse effect upon the capital expenditures, earnings, financial position, liquidity or competitive position of the Company.
Patents and Proprietary Rights ------------------------------
As is industry practice, the Company has a policy of using patents, trademarks and trade secrets to protect the results of its research and development activities and, to the extent it may be necessary or advisable, to exclude others from appropriating the Company's proprietary technology. The Company's policy is to protect aggressively its proprietary technology by seeking and enforcing patents in a worldwide program.
The Company has obtained patents or filed patent applications in the United States and approximately 26 other countries in three series regarding the compositions of acetylated mannan derivatives, the processes by which they are produced and the methods of their use. The first series of patent applications, relating to the compositions of acetylated mannan derivatives and certain basic processes of their production, was filed in a chain of United States patent applications and its counterparts in the other 26 countries. The first United States patent application in this first series, covering the composition claims of acetylated mannan derivatives, matured into United States Patent No. 4,735,935 (the "935 Patent"), which was issued on April 5, 1988. United States Patent No. 4,917,890 (the "890 Patent") was issued on April 17, 1990 from a divisional application to the 935 Patent. This divisional application pertains to most of the remaining claims in the original application not covered by the 935 Patent. The 890 Patent generally relates to the basic processes of producing acetylated mannan derivatives, to certain specific examples of such processes and to certain formulations of acetylated mannan derivatives. Two other divisional applications covering the remaining claims not covered by the 890 Patent matured into patents, the first on September 25, 1990, as United States Patent No. 4,959,214, and the second on October 30, 1990, as United States Patent No. 4,966,892. Foreign patents that are counterparts to the foregoing United States patents have been granted in some of the member states of the European Economic Community and several other countries.
The second series of patent applications related to preferred processes for the production of acetylated mannan derivatives. One of them matured into United States Patent No. 4,851,224, which was issued on July 25, 1989. This patent is the subject of a Patent Cooperation Treaty application and national foreign applications in several countries. An additional United States patent based on the second series was issued on September 18, 1990, as United States Patent No. 4,957,907.
The third series of patent applications, relating to the uses of acetylated mannan derivatives, was filed subsequent to the second series. Three of them matured into United States Patent Nos. 5,106,616, issued on April 21, 1992; 5,118,673, issued on June 2, 1992, and 5,308,838, issued on May 3, 1994. The Company has filed a number of divisional applications to these patents, each dealing with specific uses of acetylated mannan derivatives. Patent Cooperation Treaty applications based on the parent United States applications have been filed designating a number of foreign countries where the applications are pending. In addition, the Company has also obtained a patent in the United States relating to a wound cleanser, U.S. Patent No. 5,284,833, issued on February 8, 1994.
The Company has obtained a patent in the United States relating to a therapeutic device made from freeze-dried complex carbohydrate hydrogel (U.S. Patent No. 5,409,703, issued on April 25, 1995). A Patent Cooperation Treaty application based on the parent United States application has been filed designating a number of foreign countries where the applications are pending.
The Company has obtained patents in the United States (U.S. Patent No. 5,760,102, issued on June 2, 1998) and Taiwan (Taiwan Patent No. 89390, issued on August 21, 1997) related to the uses of a denture adhesive and also a patent in the United States relating to methods for the prevention and treatment of infections in animals (U.S. Patent No. 5,703,060, issued on December 30, 1997).
The Company obtained a patent in the United States (U.S. Patent No.5,902,796, issued on May 11, 1999) related to the process for obtaining bioactive material from Aloe vera L.
The Company obtained an additional patent in the United States (U.S. Patent No. 5,929,051, issued on July 27, 1999) related to the composition and process for a new complex carbohydrate (pectin) isolated from Aloe vera L. Also obtained was a United States patent (U.S. Patent No. 5,925,357, issued on July 20, 1999) related to the process for a new Aloe vera L. product that maintains the complex carbohydrates with the addition of other substances normally provided by "Whole Leaf Aloe."
Additionally, the Company obtained a Japanese letters-patent (Patent No. 2888249, having a Patent Registration Date of February 19, 1999) for the use of acemannan (a) in a vaccine product; (b) in enhancing natural kill cell activity and in enhancing specific tumor cell lysis by white cells and/or antibodies; (c) in correcting malabsorption and mucosal cell maturation syndromes in man or animals; and (d) in reducing symptoms associated with multiple sclerosis.
The Company also received the grant of European Patent Application under No. 0611304, having the date of publication and mention of the grant of the patent of September 15, 1999. This European Letters Patent claims the use of acetylated mannan for the regulation of blood cholesterol levels and for the removal of plaque in blood vessels. A patent was also issued in South Korea. Applications are pending in Canada and Japan.
In addition, the Company obtained an Australian Patent (Patent No. 718631, having an Accepted Journal Date of April 20, 2000) 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).
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 October 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 has filed and intends to file patent applications with respect to subsequent developments and improvements when it believes such protection is in the best interest of the Company. Although the scope of protection which ultimately may be afforded by the patents and patent applications of the Company is difficult to quantify, the Company believes its patents will afford adequate protection to conduct the business operations of the Company. However, there can be no assurance that (i) any additional patents will be issued to the Company in any or all appropriate jurisdictions, (ii) litigation will not be commenced seeking to challenge the Company's patent protection or such challenges will not be successful, (iii) processes or products of the Company do not or will not infringe upon the patents of third parties or (iv) the scope of patents issued to the Company will successfully prevent third parties from developing similar and competitive products. It is not possible to predict how any patent litigation will affect the Company's efforts to develop, manufacture or market its products.
The Company also relies upon, and intends to continue to rely upon, trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive position. The Company typically enters into confidentiality agreements with its scientific consultants, and the Company's key employees have entered into agreements with the Company requiring that they forbear from disclosing confidential information of the Company and assign to the Company all rights in any inventions made while in the Company's employ relating to the Company's activities. Accordingly, the Company believes that its valuable trade secrets and unpatented proprietary know-how are adequately protected.
The technology applicable to the Company's products is developing rapidly. A substantial number of patents have been issued to other biopharmaceutical companies. In addition, competitors have filed applications for, or have been issued, patents and may obtain additional patents and proprietary rights relating to products or processes competitive with those of the Company. To the Company's knowledge, acetylated mannan derivatives do not infringe any valid, enforceable United States patents. A number of patents have been issued to others with respect to various extracts of the Aloe vera L. plant and their uses and formulations, particularly in respect to skin care and cosmetic uses. While the Company is not aware of any existing patents which conflict with its current and planned business activities, there can be no assurance that holders of such other Aloe vera L.-based patents will not claim that particular formulations and uses of acetylated mannan derivatives in combination with other ingredients or compounds infringe, in some respect, on these other patents. In addition, others may have filed patent applications and may have been issued patents relating to products and technologies potentially useful to the Company or necessary to commercialize its products or achieve their business goals. There is no assurance that the Company will be able to obtain licenses of such patents on acceptable terms.
The Company has given the trade name Carrasyn[R] to certain of its products containing acetylated mannans. The Company has filed a selected series of domestic and foreign trademark applications for the marks Manapol[R] powder, Carrisyn[R], Carrasyn[R] and CarraGauze[R]. Further, the Company has registered the trademark AVMP[R] Powder and the trade name Carrington[R] in the United States. In 1999, the Company obtained four additional registered trademarks in Brazil. The Company believes that its trademarks and trade names are valuable assets.
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 marks ISG[TM], APEC[TM], GELSITE[TM] and ORAPATCH[TM] are pending in the U.S.
Employees ---------
As of February 28, 2003, the Company employed 252 persons, of whom 45 were engaged in the operation and maintenance of its Irving, Texas processing plant, 130 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, 121 were located in Texas, 130 in Costa Rica and one in Puerto Rico. The Company considers relations with its employees to be good. The employees are not represented by a labor union.
ITEM 2.
ITEM 2. PROPERTIES. ----------
The Company believes that all its farming property, manufacturing and laboratory facilities, as described below, and material farm, manufacturing and laboratory equipment are in satisfactory condition and are adequate for the purposes for which they are used, although the farm is not adequate to supply all of the Company's needs for Aloe vera L. leaves. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information regarding the Company's arrangements to purchase Aloe vera L. leaves.)
Walnut Hill Facility. The Company's corporate headquarters and principal U.S. manufacturing facility occupy all of the 35,000 square foot office and manufacturing building (the "Walnut Hill Facility"), which is situated on an approximately 6.6 acre tract of land located in the Las Colinas area of Irving, Texas. The Company owns the land and the building. The manufacturing operations occupy approximately 19,000 square feet of the facility, and administrative offices occupy approximately 16,000 square feet.
Laboratory 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.
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.
Costa Rica Facility. The Company owns approximately 405 acres of land in the Guanacaste province of northwest Costa Rica. This land is being used for the farming of Aloe vera L. plants and for a processing plant to produce bulk pharmaceutical and injectable mannans and freeze-dried extracts from Aloe vera L. used in the Company's operations. The processing plant became operational in 1993.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
As reported in the Company's Form 10-Q Quarterly Report for the quarter ended March 31, 2001, on April 3, 2001, Arthur Singer, a former employee of the Company (the "Plaintiff"), filed a lawsuit in the United States District Court for the Eastern District of New York, Long Island Division. The suit alleges multiple causes of action against the Company and its chief executive officer (the "Defendants") and seeks to recover damages in excess of $4,000,000, plus legal fees and expenses. The Plaintiff, who was formerly employed by the Company as a sales representative, alleges among other things 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 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 an implied covenant 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 have both filed motions for summary judgment which are pending before the Court. This case was originally scheduled for trial on March 3, 2003. However, the Court has continued the trial on this matter until such time has it has ruled on the outstanding motions for summary judgment. The Company believes that the Plaintiff's claims are without merit and intends to defend the lawsuit vigorously.
On June 22, 2001, a lawsuit was filed by Swiss-American Products, Inc. ("the Plaintiff") against G. Scott Vogel and the Company in the 193rd Judicial District Court of Dallas County, Texas. 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. 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 temporary and 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.
Defendants have filed a motion for sanctions against Plaintiff and its counsel for filing an affidavit containing statements that Defendants believe to be false and misleading and for making claims and seeking injunctive relief based in part on those statements. In addition, the Company has filed a counterclaim against Plaintiff, seeking to recover actual and exemplary damages for wrongful injunction and also seeking a declaratory judgment confirming the Company's right to manufacture for a third party a wound cleanser that is similar to a wound cleanser that Plaintiff has previously provided to that party.
Following a hearing on July 30, 2001, the trial court entered an order setting the case for trial on July 30, 2002 and granting 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. The Court continued the July 30, 2002 trial setting; the case is currently set for trial on May 6, 2003. The Company believes that Plaintiff's claims are without merit and intends to vigorously defend against those claims and pursue its counterclaim and motion for sanctions.
ITEM 4.
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.
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 2001 High Low ----------- ---- ---- First Quarter $1.38 $1.03
Second Quarter 1.68 1.00
Third Quarter 1.40 0.88
Fourth Quarter 1.15 0.84
Fiscal 2002 High Low ----------- ---- ---- First Quarter $3.25 $1.07
Second Quarter 1.98 1.20
Third Quarter 1.33 0.95
Fourth Quarter 1.11 0.71
At March 11, 2003, there were 972 holders of record (including brokerage firms) of Common Stock.
The Company has not paid any cash dividends on the Common Stock and presently intends to retain all earnings for use in its operations. Any decision by the Board of Directors of the Company to pay cash dividends in the future will depend upon, among other factors, the Company's earnings, financial condition and capital requirements.
In March 2001, the Board of Directors authorized the repurchase of up to 1,000,000 shares, or approximately 10.3%, 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 the Company and its shareholders to repurchase some of its outstanding shares. As of March 11, 2003, the Company had repurchased 2,400 of its outstanding Common Stock under the program.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. ------------------------------------
The selected consolidated financial data below should be read in conjunction with the consolidated financial statements of the Company and notes thereto and "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS. ---------------------
Background ----------
The Company is a research-based biopharmaceutical, medical device, raw materials and nutraceutical company engaged in the development, manufacturing and marketing of naturally-derived complex carbohydrates and other natural product therapeutics for the treatment of major illnesses, the dressing and management of wounds and nutritional supplements. The Company is comprised of two business segments. See Note Thirteen to the unaudited condensed consolidated financial statements for financial information about these business segments. The Company sells prescription and nonprescription human and veterinary products through its Medical Services Division. Through Caraloe, Inc., its consumer products subsidiary, the Company sells consumer and bulk raw material products and also provides product development and manufacturing services to customers in the cosmetic, nutraceutical and medical markets. The Company's research and product portfolio are based primarily on complex carbohydrates isolated from the Aloe vera L. plant.
In October 2001, the Company incorporated, a wholly-owned subsidiary named DelSite Biotechnologies, Inc. ("DelSite"). 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[TM] technology for controlled release and delivery of bioactive pharmaceutical ingredients.
Liquidity and Capital Resources -------------------------------
At December 31, 2002 and 2001, the Company held cash and cash equivalents of $3,636,000 and $3,454,000, respectively, an increase of $182,000. Net cash used in operating activities in 2002 was $1,365,000, as compared to cash provided by operating activities in 2001 of $1,275,000. The Company received royalty payments totaling $2,875,000 in 2002 under its licensing agreement with Medline. In addition, the Company received an advance on future royalty payments due from Medline of $2.0 million which was recorded in the Company's financial statements as a loan to be repaid in quarterly installments through September 2005. See Part I for discussions regarding agreements with Medline. Significant cash outflows during 2002 included a $378,000 investment in property and equipment and $1.0 million for the acquisition of the custom division of CBI. Customers with significant accounts receivable balances at the end of 2002 included Mannatech, Inc. ($1,320,000) and Medline Industries ($610,000), and of these amounts, $1,864,000 has been collected as of February 28, 2003.
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 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 will be used in the Company's operations.
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 Aloe & Herbs in November 1998 for the acquisition of an irrigation system to improve production on the farm and allow harvesting of leaves year-round. The Company was also granted a five-year warrant to purchase 300,000 shares of common stock of Aloe & Herbs. In the fourth quarter of 1998, the Company fully reserved all amounts owed to it by Aloe & Herbs, in the total amount of $487,000, due to the start-up nature of the business. In 2002, the Company received payments totaling $19,000 from Aloe & Herbs against the amount due.
In November 1997, the Company entered into a financing arrangement with Comerica Bank-Texas ("Comerica"). The arrangement was composed of a $3,000,000 line of credit structured as a demand note without a stated maturity date and with an interest rate equal to the Comerica prime rate. The line of credit is collateralized by the Company's accounts receivable and inventory. This credit facility is used for operating needs, as required. In October 2002, the Company entered into a credit agreement with Comerica which further defined the credit arrangement, including certain covenants. As of December 31, 2002, the Company was in compliance with all such covenants. As of December 31, 2002, there was a $1,587,000 balance owed to Comerica under the terms of the financing agreement.
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. In addition, the Company will pay Medline interest on the advance at the rate of 6.5% per year on the outstanding balance of the advance. The Company has accounted for this transaction in its financial statement as if it were a loan.
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 up to $700,000 for useable inventories. 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 will provide services to these customers through the Caraloe, Inc. 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 is seeking approximately $1.0 million in additional financing to be used as working capital in 2003 and 2004. The Company anticipates that such borrowings, together with the expected cash flows from operations, will provide the funds necessary to finance its current operations, including expected 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 necessary to develop its products to their full commercial potential. Additional funds, therefore, may need to be raised through equity offerings, borrowings, licensing arrangements or other means, and there is no assurance that the Company will be able to obtain such funds on satisfactory terms when they are needed.
In March 2001, the Board of Directors authorized the Company to repurchase up to one million shares of its outstanding Common Stock. See "Market for Registrant's Common Equity and Related Stockholder Matters" above. The Company believes it has the financial resources necessary to repurchase shares from time to time pursuant to the Board's repurchase authorization.
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 licensees' products. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested could delay or preclude the Company or any licensees from marketing their products, or could limit the commercial use of the products, and thereby have a material adverse effect on the Company's liquidity and financial condition.
Results of Operations ---------------------
Fiscal 2002 Compared to Fiscal 2001 ----------------------------------- Total revenues were $18,041,000 in 2002, compared with $17,594,000 in 2001. Total sales in the Company's Medical Services Division were $8,394,000 in 2002 as compared to $10,400,000 in 2001 and total sales in the Company's Caraloe, Inc. subsidiary were $9,647,000 in 2002 as compared to $7,194,000 in 2001.
Total sales of the Company's wound and skin care products in 2002 were $5,855,000 as compared with $7,921,000 in 2001. The decrease in wound care revenue was primarily due to a $2.2 million decrease in orders from Medline, the Company's exclusive domestic distributor. A portion of the decrease can be attributed to initial stocking orders made by Medline in early 2001, as the distribution agreement was implemented. Additionally, the Company's products are facing increasing competitive pressure from low-end, commodity- type products which is eroding its market share. Educational efforts are underway to support the distributors 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.
Partially offsetting the decrease in domestic wound care sales was an increase in sales to international customers. The Company sells its wound care products to international distributors, primarily in Europe and Central and South America. Total international wound care sales in 2002 were $534,000 as compared to $386,000 in 2001, with the increase primarily due to increased sales in Latin America.
Sales of the Company's oral technology products decreased from $129,000 in 2001 to $56,000 in 2002 due primarily to the loading of inventory by a significant international customer in 2001.
The Company recorded royalty revenue in 2002 of $2,470,000 relating to the exclusive Licensing and Distribution agreement with Medline as compared to $2,479,000 in 2001.
Of the total Caraloe, Inc. sales in 2002, $6,493,000 was related to the sale of bulk Manapol[R] powder. Caraloe currently sells bulk Manapol[R] powder to a major customer under a three-year, non-exclusive supply and licensing agreement. The current agreement expires in August 2003. Sales to this customer increased from $5,192,000 in 2001 to $6,366,000 in 2002.
Caraloe also sells its AloeCeuticals[R] line of immune-enhancing dietary supplements containing Manapol[R], which are available in liquid, capsule and tablet forms. These products are sold directly to health and nutrition stores and broker/distributors. They are also sold through the Company's Internet sites. Sales of these products in 2001 and 2002 totaled $538,000 and $532,000, respectively.
Caraloe continued to develop its contract manufacturing business during 2002. Caraloe manufactures a variety of products that can be filled using the Company's current equipment including gels, creams, lotions and drinks. Total contract manufacturing sales in 2002 were $2,622,000 compared with $1,144,000 in 2001. Of the $1,478,000 increase, $845,000 was attributable to products the Company produced for Medline under a supply agreement entered into in December 2000, whereby the Company manufactures Medline's own branded skin care products for them on a contract basis.
Cost of goods sold increased from $9,803,000 in 2001 to $11,739,000 in 2002, or 19.7%. As a percentage of sales, cost of sales increased from 55.7% to 65.1%. The increase in the cost of goods sold percentage was largely attributable to a significant shift in sales mix toward lower margin contract manufactured products. The Company experienced significant unfavorable variances associated with its manufacturing processes in its Irving, Texas facility due to lower manufacturing volumes associated with the decrease in its wound care sales. The Company also experienced significant unfavorable variances associated with its manufacturing processes in its Costa Rica facility due to lower manufacturing volumes for Manapol[R] powder through much of the year. Increased sales of Manapol[R] powder in the fourth quarter of 2002 prompted the Company to increase its production of Manapol[R] at the end of the year, thereby eliminating the unfavorable variances through the first quarter of 2003.
Selling, general and administrative expenses ("SG&A") increased to $6,040,000 from $5,016,000, or 20.4%. The 2001 balance included a one-time favorable adjustment of $211,000 to reduce the Company's franchise tax liability. The Company recorded additional distribution expenses in 2002 of $285,000, which was primarily due to increased shipping volume and increased facility costs associated with the distribution facility leased in October 2001. The Company recorded additional selling expense in 2002 of $201,000, primarily in the areas of salaries, travel, literature and advertising, in support of efforts to grow total sales. The Company also recorded additional administrative expenses in 2002 of $327,000, primarily in the areas of information systems, training, professional fees and travel as part of an effort to improve the infrastructure of the Company and position it for future growth.
Research and development ("R&D") expenses in support of the Company's ongoing operations decreased to $1,701,000 in 2002 from $2,442,000 in 2001, or 30.3%. This decrease resulted from 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 research and development program and is responsible for the research, development and marketing of the Company's proprietary Gelsite[TM] technology for controlled release and delivery of bioactive pharmaceutical ingredients. DelSite began operations in January 2002 and its expenses in support of this mission totaled $1,879,000 in 2002. Combined research and development expenses totaled $3,580,000 in 2002, an increase of 46.6% over 2001.
Net interest expense of $41,000 was recorded in 2002 versus net interest income of $32,000 in 2001, with the variance primarily due to lower interest rates earned on investments in 2002 and increased Company borrowings.
There was no provision for income taxes in 2002 due to the Company's utilization of net operating loss carryforwards. The Company has provided a valuation allowance against all deferred tax asset balances at December 31, 2002 and 2001 due to uncertainty regarding realization of the asset.
The Company's net loss for 2002 was $3,378,000, versus a net income of $378,000 for 2001. The 2002 net loss was due to reduced gross margins resulting from the mix of products sold and from plant operating variances, as well as additional operating expenses incurred in defense of litigation and in support of positioning business for future growth. Results in 2001 benefited from higher unit volume sales of wound care products, lower production costs and a one time gain of $211,000 from adjustments to franchise tax liabilities booked in prior periods. The loss per share in 2002 was $0.34, compared to earnings per share of $0.04 in 2001.
Fiscal 2001 Compared to Fiscal 2000 ----------------------------------- Total revenues were $17,594,000 in 2001, compared with $23,103,000 in 2000. Total sales of the Company's wound and skin care products in 2001 were $7,921,000 as compared to $11,971,000 in 2000. The decrease in wound and skin care revenue was primarily effected by the distribution agreement with Medline which significantly lowered the Company's selling prices for these products in exchange for Medline assuming all of the selling, marketing and distribution activities and the related costs, and paying the Company a royalty. The Company recorded royalty income of $2.5 million in 2001 related to this agreement. Partially offsetting this revenue reduction due to pricing was a 10% increase in unit volume in 2001 as compared to 2000.
The Company also sells products to international distributors, primarily in Europe, and Central and South America. Total international sales in 2001 were $1,315,000 as compared to $1,343,000 in 2000. Included in the 2001 amount were sales of $386,000 of wound care products, which was a decrease of $153,000 from 2000.
Sales of the Company's oral technology products increased from $68,000 in 2000 to $129,000 in 2001 because of significantly increased sales of the product to an international customer. Included in this line are products for the management of oral mucositis/stomatitis and oral lesions and ulcers.
Of the 2001 total Caraloe sales, $5,367,000 was related to the sale of bulk Manapol[R] powder. Caraloe currently sells bulk Manapol[R] powder to a major customer under a three-year, non-exclusive supply and licensing agreement. The current agreement has been extended and expires in August 2003. Sales to this customer decreased from $8,794,000 in 2000 to $5,192,000 in 2001.
In July 1999, Caraloe launched its new AloeCeuticals[R] line of immune- enhancing dietary supplements containing Manapol[R], which are available in liquid, capsule and tablet forms. These products are sold directly to health and nutrition stores and broker/distributors. They are also sold through the Company's Internet sites. Sales of these products in 2000 and 2001 totaled $446,000 and $538,000, respectively.
Caraloe also continued to develop its contract manufacturing business during 2001. Caraloe manufactures a variety of products that can be filled using the Company's current equipment including gels, creams, lotions and drinks. Total contract manufacturing sales in 2001 were $1,144,000 compared with $779,000 in 2000.
Cost of sales decreased from $12,782,000 in 2000 to $9,803,000 in 2001, or 23.3%. As a percentage of sales, cost of sales increased from 55.3% to 55.7%. The increase in the cost of goods sold percentage was largely attributable to lower wound care pricing as a result of the distribution agreement with Medline. Offsetting this was a change in product mix caused by the decline in lower margin Manapol[R] sales as well as increased efficiency in the operation of the Company's manufacturing plant in the United States.
Selling, general and administrative expenses ("SG&A") decreased to $5,016,000 from $10,162,000, or 50.6%. Included in this decrease was a $4,550,000 reduction in selling and marketing expenses for wound care products directly related to the Medline Agreement and Medline's acquisition of the Company's sales force that existed on December 1, 2000. Additionally, the Company took advantage of the reduced administrative burdens of supporting the sales force by reducing costs in all departments affected by the reduction in sales personnel. The Company also recorded a one-time favorable adjustment of $211,000 to adjust its accrued franchise tax liability to actual.
Research and development ("R&D") expenses decreased to $2,442,000 in 2001 from $3,602,000 in 2000, or 32.2%. This decrease was primarily the result of a reduction of $623,000 in expenditures for the unsuccessful Aliminase[TM] clinical trial as well as refocusing efforts and priorities within the department. The Company continued its efforts in basic research during 2001, including work on a new and unique complex carbohydrate (CR1013) which has potential near-term utility in the area of drug delivery. Also included in total R&D activities during 2001 were various small clinical trials designed to collect data in support of the Company's products.
Net interest income of $32,000 was realized in 2001 versus $80,000 in 2000, with the variance primarily due to lower interest rates in 2001.
There was no provision for income taxes in 2001 due to the Company's utilization of net operating loss carryforwards. The Company has provided a valuation allowance against all deferred tax asset balances at December 31, 2001 and 2000 due to uncertainty regarding realization of the asset.
The Company's net income for 2001 was $378,000, versus a net loss of $3,476,000 for 2000. The 2001 net income was due to the operating efficiencies occurring as a result of the distribution agreement with Medline Industries, lower production costs as well as increased unit sales in 2001 of the Company's wound and skin care products. 2001 results benefited from a one time gain of $200,000 from adjustments to state tax liabilities booked in prior periods. The loss in 2000 was primarily attributable to lower selling prices for wound care products and lower volumes of Manapol[R] sales, high selling and marketing costs for wound care products and final costs for the Aliminase Clinical Trial. The net income per share was $0.04 in 2001, compared to a net loss per share of $0.36 in 2000.
Impact of Inflation ------------------- The Company does not believe that inflation has had a material impact on its results of operations.
Critical Accounting Policies ----------------------------
Management 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 revenues, product returns, 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 estimated reductions to revenue for incentive offerings including promotions and other volume-based incentives as well as estimates for returns based upon recent history. If market conditions were to decline or inventory was in danger of expiring or becoming obsolete, the Company may take actions to increase customer incentive offerings possibly 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 return of 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.
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 reach a satisfactory agreement with its supplier of freeze-dried products, 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 or Caraloe may fail to do so, that competitive pressures may require the Company to lower the prices of or increase the discounts on its products, that the Company's sales of products it is contractually obligated to purchase from suppliers may not be sufficient to enable and justify its fulfillment of those contractual purchase obligations, that other parties who owe the Company substantial amounts of money may be unable to pay what they owe the Company, that the Company'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 its supplier of freeze-dried products or 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, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ----------------------------------------------------------
Foreign Currency ----------------
The Company's manufacturing operation in Costa Rica accounted for 37.5% of cost of sales for the year ended December 31, 2002. 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 2002, the exchange rate from U.S. Dollars to Costa Rica Colones increased by 11.3% to 340 at December 31, 2002. The effect of an additional 10% strengthening in the value of the U.S. Dollar relative to the Costa Rica Colones in 2002 would have resulted in an increase of $66,300 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 7.9% of sales for 2002. 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.
For quantitative and qualitative disclosures about market risk related to the supply of Aloe vera L. leaves, see "Business."
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. --------------------
There were no changes in or disagreements with the Company's independent public accountants on accounting matters or financial disclosure.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. --------------------------------------------------
The information required by Item 10 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to its 2002 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 2002.
ITEM 11.
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 2003 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 2002.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. --------------------------------------------------------------
The information required by Item 12 of Form 10-K is hereby incorporated by reference from the information appearing under the captions "Security Ownership of Management" and "Principal Shareholders" in the Company's definitive Proxy Statement relating to its 2002 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 2002.
ITEM 13.
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 2003 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year ended December 31, 2002.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES -----------------------
With the participation of management, the Company's Chief Executive Officer and its Chief Financial Officer evaluated the Company's disclosure controls and procedures within 90 days of the filing of this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within an entity have been detected. Subsequent to the date of the most recent evaluation of the Company's internal controls, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV -------
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. ---------------------------------------------------------------
(a)(1) Financial Statements.
Reference is made to the index on page 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 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-7 for a list of all exhibits to this report.
(b) Reports on Form 8-K.
The Company filed a Form 8-K Report dated December 23, 2002, to report the Acquisition of certain assets of the Custom Division of Creative Beauty Innovations, Inc.
CARRINGTON LABORATORIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Financial Statements of the Company:
Consolidated Balance Sheets -- December 31, 2001 and 2002 F - 2
Consolidated Statements of Operations -- years ended December 31, 2000, 2001 and 2002 F - 3
Consolidated Statements of Shareholders' Equity -- years ended December 31, 2000, 2001 and 2002 F - 4
Consolidated Statements of Cash Flows -- years ended December 31, 2000, 2001 and 2002 F - 5
Notes to Consolidated Financial Statements F - 6
Financial Statement Schedule Valuation and Qualifying Accounts F - 17
Report of Ernst & Young LLP, Independent Auditors F - 18
Consolidated Balance Sheets (Amounts in thousands, except share and per share amounts)
December 31, 2001 2002 ------- ------- Assets: Current Assets: Cash and cash equivalents $ 3,454 $ 3,636 Accounts receivable, net of allowance for doubtful accounts of $100 and $110 December 31, 2001 and 2002, respectively 1,622 2,370 Inventories, net 5,338 4,333 Prepaid expenses 189 603 ------- ------- Total current assets 10,603 10,942
Property, plant and equipment, net 10,404 10,065 Customer relationships, net - 893 Other assets, net 210 259 ------- ------- Total assets $ 21,217 $ 22,159 ======= ======= Liabilities and Stockholders' Equity: Current Liabilities: Line of credit $ 763 $ 1,587 Accounts payable 1,099 1,458 Accrued liabilities 884 1,256 Current portion of long-term debt and capital lease obligations - 730 Deferred revenue 1,542 1,922 ------- ------- Total current liabilities 4,288 6,953
Long-term debt and capital lease obligations - 1,517
Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares authorized, 9,809,087 and 9,967,938 shares issued at December 31, 2001 and 2002, respectively 98 100 Capital in excess of par value 52,429 52,568 Accumulated Deficit (35,598) (38,976) Treasury stock at cost, 0 and 2,400 shares at December 31, 2001 and 2002, respectively - (3) ------- ------- Total stockholders' equity 16,929 13,689 ------- ------- Total liabilities and stockholders' equity $ 21,217 $22,159 ======= =======
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, ----------------------------- 2000 2001 2002 ------ ------ ------ Revenues: Net product sales $22,833 $15,115 $15,571 Royalty income 270 2,479 2,470 ------ ------ ------ Total revenues 23,103 17,594 18,041 Cost of sales 12,782 9,803 11,739 ------ ------ ------ Gross margin 10,321 7,791 6,302
Expenses: Selling, general and administrative 10,162 5,016 6,040 Research and development 2,979 2,442 1,701 Research and development, DelSite - - 1,879 Research and development, Aliminase[TM] clinical trial expenses 623 - - Charges related to Oregon Freeze Dry, Inc. 223 - - Other expense (income) (110) (13) 19 Interest expense (income), net (80) (32) 41 ------ ------ ------ Net income (loss) before income taxes (3,476) 378 (3,378) Provision for income taxes - - - ------ ------ ------ Net income (loss) $(3,476) $ 378 $(3,378) ====== ====== ======
Basic and diluted earnings (loss) per share $ (0.36) $ 0.04 $ (0.34) ====== ====== ====== Basic and diluted average shares outstanding 9,545 9,743 9,889 ====== ====== ======
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows (Amounts in thousands)
Years Ended December 31, --------------------------- 2000 2001 2002 ------ ------ ------ Operating activities: Net income (loss) $(3,476) $ 378 $(3,378) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for bad debts 116 55 38 Provision for inventory obsolescence 316 91 135 Depreciation and amortization 1,043 1,050 1,087 Loss on disposal of assets 65 - 21 Charge related to Oregon Freeze Dry, Inc. 223 - - Changes in operating assets and liabilities: Accounts receivable, net 1,392 504 (786) Inventories 294 (706) 870 Prepaid expenses 390 (6) (414) Other assets 515 (117) (49) Accounts payable and accrued liabilities (1,328) (849) 731 Deferred revenue 667 875 380 ------ ------ ------ Net cash provided by (used in) operating activities 217 1,275 (1,365)
Investing activities: Cash paid in purchase of business, net of cash acquired - - (1,001) Purchases of property, plant and equipment (445) (1,132) (378) ------ ------ ------ Net cash used in investing activities (445) (1,132) (1,379)
Financing activities: Borrowings on line of credit 563 - 824 Proceeds from debt issuances - - 2,000 Principal payments on debt and capital lease obligations - - (36) Issuances of common stock 412 111 141 Treasury stock purchased - - (3) ------ ------ ------ Net cash provided by financing activities 975 111 2,926 ------ ------ ------ Net increase in cash and cash equivalents 747 254 182 Cash and cash equivalents at beginning of year 2,453 3,200 3,454 ------ ------ ------ Cash and cash equivalents at end of year $ 3,200 $ 3,454 $ 3,636 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest $ 40 $ 58 $ 61 Cash paid during the year for income taxes - - -
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, alternative care facilities, cancer centers and the home health care market. The Company and Medline Industries, Inc. ("Medline") entered into a Distributor and License Agreement dated November 3, 2000, under which the Company granted to Medline the exclusive right, subject to certain limited exceptions, to distribute all of the Company's wound and skin care products (the "Products") in the United States, Canada, Puerto Rico and the Virgin Islands for a term of five years 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 are 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, except that the royalty on certain high volume commodity products will be two percent.
Caraloe, Inc., a subsidiary, markets or licenses consumer products and bulk raw material products. Principal sales of Caraloe, Inc., are bulk raw material products which are sold to United States manufacturers who include the high quality extracts from Aloe vera L. in their finished products. Caraloe also provides product development and manufacturing services to Customers in the cosmetic, nutraceutical and medical 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[TM] 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 Carrollton, Texas.
Under the agreement, the Company paid CBI $501,000 at closing and deposited $500,000 in escrow, which was released to CBI on February 28, 2003. In addition, Carrington agreed (i) to purchase inventory of CBI for an amount not greater than $700,000, to be paid six months after closing and (ii) to pay CBI an amount equal to 9.0909% of Carrington's net sales up to $6.6 million per year and 8.5% of Carrington's net sales over $6.6 million per year of CBI products to CBI's existing customers for the next five years. 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 intends to use these assets in a substantially similar manner. The Company will provide services to these customers through the Caraloe, Inc. development and manufacturing services group. The Company recorded $100,000 for the purchase of equipment and $901,000 for the purchase of customer relationship intangibles in connection with the acquisition. No inventory had been purchased as of December 31, 2002.
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 Costa Rica.
NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Carrington Laboratories, Inc., and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS. The Company's policy is that all highly liquid investments purchased with a maturity of three months or less at date of acquisition are considered to be cash equivalents unless otherwise restricted.
INVENTORY. Inventories are recorded at the lower of cost (first-in, first- out) or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are recorded at cost less accumulated depreciation. Land improvements, buildings and improvements, furniture and fixtures and machinery and equipment are depreciated on the straight-line method over their estimated useful lives. Leasehold improvements and equipment under capital leases are amortized over the terms of the respective leases or the estimated lives of the assets, whichever is less.
LONG-LIVED ASSETS. In October 2001, the Financial Accounting Standards Board issued a Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS144). The Company adopted FAS 144 on January 1, 2002. In accordance with FAS 144, 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 $901,000 for customer relationships acquired. The Company will amortize this intangible asset over five years, which is based on the estimated contractual life of the agreement. 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 amortization expense of $8,000 in 2002.
DEFERRED REVENUE. Deferred revenue is related to the licensing and royalty agreement with Medline Industries and represents amounts received in excess of amounts amortized to royalty income.
TRANSLATION OF FOREIGN CURRENCIES. The functional currency for international operations (primarily Costa Rica) is the U.S. Dollar. Accordingly, such foreign entities translate monetary assets and liabilities at year-end exchange rates, while non-monetary items are translated at historical rates. Revenue and expense accounts are translated at the average rates in effect during the year, except for depreciation and amortization, which are translated at historical rates. Translation adjustments and transaction gains or losses are recognized in the consolidated statement of operations in the year of occurrence.
REVENUE RECOGNITION. The Company recognizes revenue for product sales at the time of shipment when title to the goods transfers and collectibility is reasonably assured. Royalty income is recognized over the period of the licensing and royalty agreement.
FEDERAL 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.
ADVERTISING. Advertising expense is charged to operations in the year in which such costs are incurred. Advertising expense has not been significant for 2000, 2001 or 2002.
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 estimated fair value of the stock on the date of grant, as determined by the Board of Directors.
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (FAS1 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 (in thousands) illustrates the effect on net loss if the Company had applied the fair value recognition provision of FAS 123 to stock based compensation:
-------------------------------------------------------------------------- 2000 2001 2002 -------------------------------------------------------------------------- Net income (loss) (in thousands): As reported $(3,476) $ 378 $(3,378) Less: Stock-based compensation expense determined under fair value-based method (1,174) (461) (331) ------ ------ ------ Pro forma $(4,650) $ (83) $(3,709) ====== ====== ====== Net income (loss) per share: As reported $ (0.36) $ 0.04 $(0.34) Pro forma $ (0.49) $(0.01) $(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.
The Company follows the provisions of FAS 123 and Emerging Issues Task Force No. 96-19, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Connection with Selling Goods or Services, for equity instruments granted to non-employees. The Company expenses the fair value of these equity instruments over the respective vesting term.
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.
USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform to the current year presentation.
NEW PRONOUNCEMENTS. In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"), which is effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. The Company does not anticipate any impact on the results of operations or financial position from the adoption of SFAS 146.
NOTE THREE. INVENTORIES
The following summarizes the components of inventory at December 31, 2001 and 2002, in thousands:
2001 2002 ------------------------------------------------------------------ Raw materials and supplies $2,041 $1,776 Work-in-process 910 624 Finished goods 2,387 $1,933 ------------------------------------------------------------------ Total $5,338 $4,333 ------------------------------------------------------------------
The inventory balances are net of $516,000 and $632,000 of reserves for obsolete and slow moving inventory at December 31, 2001 and 2002, respectively.
NOTE FOUR. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 2001 and 2002, in thousands:
Estimated 2001 2002 Useful Lives ------------------------------------------------------------------ Land and improvements $ 1,391 $1,391 Buildings and improvements 8,618 8,984 7 to 25 years Furniture and fixtures 603 593 4 to 8 years Machinery and equipment 7,800 8,094 3 to 10 years Leasehold improvements 783 782 1 to 3 years Equipment under capital leases 114 197 4 years ------------------------------------------------------------------ Total 19,309 20,041 Less accumulated depreciation and amortization 8,905 9,976 ------------------------------------------------------------------ Property, plant and equipment, net $10,404 $10,065 ------------------------------------------------------------------
The net book value of property, plant and equipment in Costa Rica at December 31, 2001 and 2002 was $3,847,000 and $3,716,000, respectively.
NOTE FIVE. ACCRUED LIABILITIES
The following summarizes significant components of accrued liabilities at December 31, 2001 and 2002, in thousands:
2001 2002 ------------------------------------------------------------------ Accrued payroll $270 $343 Accrued insurance 81 81 Accrued taxes 230 278 Accrued professional fees 70 247 Other 233 307 ------------------------------------------------------------------ Total $884 $1,256 ------------------------------------------------------------------
NOTE SIX. LINE OF CREDIT
The Company has a line of credit with a bank 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 (4.25% at December 31, 2002 plus 0.5%). The line of credit requires the Company to maintain certain financial ratios and the Company was in compliance with these requirements at December 31, 2002. As of December 31, 2002 there was $1,587,000 outstanding on the credit line with $433,000 credit available for operations.
NOTE SEVEN. LONG-TERM DEBT
Medline advanced the Company $2,000,000 on December 16, 2002. The amount bears interest at 6.5% and will be repaid by reducing each quarterly royalty payment due from Medline through September 2005 by $200,000.
The following summarizes annual maturities at December 31, 2002, in thousands:
------------------------------------------------------------------ 2003 $684 2004 734 2005 582 ------------------------------------------------------------------ Total $2,000 ------------------------------------------------------------------
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 1,000,000 shares of common stock was reserved for purchase under this Plan. As of December 31, 2002, a total of 625,000 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 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 from December 1998 through March 2001 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 March 2001 normally 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 2,250,000 shares of common stock for issuance under this plan. As of December 31, 2002, options to purchase 614,000 shares were available for future grants under the plan.
The following summarizes stock option activity for each of the three years in the period ended December 31, 2002 (shares in thousands):
Weighted Average Exercise Shares Price Per Share Price ------------------------------------------------------------------- Balance, January 1, 2000 1,407 $ 2.06 to $28.75 $4.05 Granted 263 $ 1.31 to $ 2.03 $1.35 Lapsed or canceled (333) $ 2.06 to $28.75 $3.35 Exercised (94) $ 2.50 to $ 4.81 $2.58 ------------------------------------------------------------------- Balance, December 31, 2000 1,243 $ 1.31 to $28.75 $3.78 Granted 345 $ 1.05 to $ 1.37 $1.17 Lapsed or canceled (215) $ 1.25 to $27.00 $3.94 ------------------------------------------------------------------- Balance, December 31, 2001 1,373 $ 1.05 to $28.75 $3.11 Granted 381 $ 1.05 to $ 1.50 $1.28 Lapsed or canceled (227) $ 1.05 to $12.75 $3.62 Exercised (10) $ 1.31 to $ 2.06 $1.38 ------------------------------------------------------------------- Balance, December 31, 2002 1,517 $ 1.05 to $28.75 $2.58 ------------------------------------------------------------------- Options exercisable at December 31, 2000 605 $ 2.03 to $28.75 $4.86 ------------------------------------------------------------------- Options exercisable at December 31, 2001 902 $ 1.31 to $28.75 $3.78 ------------------------------------------------------------------- Options exercisable at December 31, 2002 1,092 $ 1.05 to $28.75 $3.12 -------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 2002:
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 $28.75 8 3.4 years $28.64 8 $28.64 $10.25 to $12.75 5 1.2 years $11.38 5 $11.38 $ 5.25 to $ 8.25 94 4.2 years $ 6.74 94 $ 6.74 $ 4.50 to $ 4.81 246 5.2 years $ 4.79 246 $ 4.79 $ 2.03 to $ 3.63 319 5.6 years $ 2.38 319 $ 2.38 $ 1.05 to $ 1.50 845 8.9 years $ 1.25 420 $ 1.31 ----- ----- 1,517 6.4 years $ 2.58 1,092 $ 3.12 ===== =====
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 2000, 2001, and 2002, respectively: risk-free interest rates of 5.99%, 5.09% and 3.00%; expected dividend yields of 0%; expected volatility of 89.3%, 89.7% and 105.2% and expected lives of 10 years for 2000 and 2001 and 5 years for 2002. The weighted average fair values of options granted were $0.85, $0.84 and $1.00 in 2000, 2001, 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. The following summarizes warrant activity for each of the years in the period ending December 31, 2002 (shares in thousands):
Weighted Average Exercise Shares Price Per Share Price ---------------------------------------------------------------- Balance, December 31, 1999, 2000 and 2001 55 $ 3.50 to $20.13 $ 5.01 Lapsed or canceled 5 $20.13 $20.13 ---------------------------------------------------------------- Warrants exercisable at December 31, 2002 50 $ 3.50 $ 3.50 ----------------------------------------------------------------
Warrants outstanding at December 31, 2002 had a weighted average remaining contractual life of 1.6 years.
COMMON STOCK RESERVED At December 31, 2002 the Company had reserved a total of 2,556,000 common shares for future issuance relating to the employee stock purchase plan, stock option plan and stock warrants disclosed above.
NOTE NINE. COMMITMENTS AND CONTINGENCIES
The Company conducts a significant portion of its operations from two office/ warehouse/distribution 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, 2002 were as follows, in thousands:
Capital Operating Leases Leases -------------------------------------------------------------------- 2003 $ 62 $ 738 2004 64 770 2005 62 795 2006 64 778 2007 14 771 Thereafter 34 2,238 -------------------------------------------------------------------- Total minimum lease payments 300 $6,090 ===== Amounts representing interest (53) ----- Present value of capital lease obligations 247 Less current portion of capital lease obligations (46) ----- Obligations under capital lease agreements, excluding the current portion $ 201 =====
Total rental expense under operating leases was $661,000, $666,000 and $667,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
In 2000 the Company expensed $223,000 related to a 1995 commitment to purchase freeze-dried products from Oregon Freeze Dried, Inc. The Company had no further losses related to this commitment.
From time to time in the normal course of business, the Company is 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 $800,000 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 tax effects of temporary differences that gave rise to deferred tax assets and deferred tax liabilities at December 31, 2001 and 2002 were as follows, in thousands:
2001 2002 --------------------------------------------------------------- Net operating loss carryforward $ 12,965 $14,282 Research and development and other credits 478 254 Property, plant and equipment 340 333 Inventory 394 399 Other, net 78 92 Bad debt reserve 452 448 Deferred income 524 653 ACI Stock Valuation 204 204 Accrued liability 89 93 Less - Valuation allowance (15,524) (16,758) ------ ------ $ 0 $ 0 ====== ======
The Company has provided a valuation allowance against the entire net deferred tax asset at December 31, 2001 and 2002 due to the uncertainty as to the realization of the asset.
The provision (benefit) for income taxes for the three years in the period ended December 31, 2002 was offset by changes in the valuation reserve.
At December 31, 2002, the Company had net operating loss carryforwards of approximately $42.0 million for federal income tax purposes, which begin to expire in 2003, and research and development tax credit carryforwards of approximately $748,000, which begin to expire in 2003, all of which are available to offset federal income taxes due in future periods. Net operating loss carryforwards of $3.2 million expired during the year ended December 31, 2002 and $1.5 million will expire in the year ended December 31, 2003. The Company has approximately $28,000 in alternative minimum tax credits which do not expire.
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 three customers. Owens & Minor accounted for 10% of the Company's net sales in 2001. Sales to Mannatech, Inc., accounted for 38%, 30%, and 35% of the Company's net sales in 2000, 2001 and 2002, respectively. Accounts receivable from Mannatech represented 53% of gross accounts receivable at December 31, 2002. Sales to Medline Industries, Inc., accounted for 35% and 34% of the Company's sales during 2001 and 2002, respectively. Accounts receivable from Medline represented 25% of the Company's gross accounts receivable at December 31, 2002. The Company performs ongoing credit evaluations of its customers' financial condition and establishes an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers and historical trends and other information.
NOTE TWELVE. NET INCOME (LOSS) PER SHARE
Basic net income (loss) available to common shareholders per share was computed by dividing net income (loss) by the weighted average number of common shares outstanding.
In calculating the diluted net income (loss) per share for the three years ended 2002, no effect was given to options or warrants, because the effect of including these securities would have been antidilutive. In 2001 all options and warrants had exercise prices which exceed the average market price of the common stock during the year.
NOTE THIRTEEN. REPORTABLE SEGMENTS
The Company operates in two reportable segments: human and veterinary products sold through its Medical Services Division and Caraloe, Inc., a consumer products subsidiary, which sells bulk raw materials, consumer beverages and nutritional and skin care products. Caraloe also provides product development and manufacturing services to Customers in the cosmetic, nutraceutical and medical markets.
The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies (Note Two).
Corporate income (loss) before income taxes set forth in the following table includes research and development expenses which were related to the development of pharmaceutical products not associated with the reporting segments. Assets which are used in more than one segment are reported in the segment where the predominant use occurs. The Company's production facility in Costa Rica, which provides bulk ingredients for all segments, and total cash for the Company are included in the Corporate Assets figure.
Reportable Segments (in thousands)
Medical Caraloe, Services Inc. Corporate Total ---------------------------------------------------------------- ---------------------------------------------------------------- Sales to unaffiliated customers $10,400 $7,194 $ - $17,594 Income (loss) before income taxes 1,333 1,121 (2,076) 378 Identifiable assets 12,481 1,420 7,316 21,217 Capital expenditures - - 1,132 1,132 Depreciation and amortization 586 - 464 1,050 ---------------------------------------------------------------- ---------------------------------------------------------------- Sales to unaffiliated customers $8,394 $9,647 $ - $18,041 Income (loss) before income taxes (10) (552) (2,916) (3,378) Identifiable assets 15,006 1,960 5,193 22,159 Capital expenditures - - 378 378 Depreciation and amortization 634 - 453 1,087 ----------------------------------------------------------------
NOTE FOURTEEN. RELATED PARTY TRANSACTIONS
At December 31, 2002, 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 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 $417,000, $450,000 and $468,000 in 2000, 2001 and 2002, respectively.
NOTE FIFTEEN. SUBSEQUENT EVENT
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 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 will be used in the Company's operations.
NOTE SIXTEEN. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The unaudited selected quarterly financial data below reflect the fiscal years ended December 31, 2001 and 2002, respectively.
(Amounts in thousands, except shares and per share amounts)
-------------------------------------------------------------------------- 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------------------------------------------------------------------- Revenue $4,657 $4,330 $4,381 $4,226 Gross profit 2,000 1,866 2,040 1,885 Net income 226 60 77 15(1) Diluted income per share $0.02 $0.01 $0.01 $0.00 Weighted average common shares 9,728,000 9,734,000 9,747,000 9,809,000
-------------------------------------------------------------------------- 2002 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------------------------------------------------------------------- Revenue $3,736 $4,346 $5,093 $4,866 Gross profit 1,145 1,472 2,042 1,643 Net loss (1,042) (858) (541) (937) Diluted loss per share $(0.11) $(0.09) $(0.05) $(0.09) Weighted average common shares 9,819.000 9,849,000 9,908,000 9,944,000 --------------------------------------------------------------------------
(1) The fourth-quarter results benefited from a one-time gain of $326,000, partially reversing a charge taken earlier in the year as a pricing reserve related to a strategic sales and marketing partnership. Fourth-quarter and full-year results benefited from a one-time gain of $211,000 from adjustments to state tax liabilities booked in prior periods.
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 -------------------------------------------------------------------------- -------------------------------------------------------------------------- Bad debt reserve $ 304 $ 116 $ - $ 322 $ 98 Inventory reserve 430 316 - 304 441 Rebates 340 4,508 - 4,576 272 Reserve for ACI and Aloe & Herbs non-current notes and investments included in other assets 1,292 - - 27 1,265 Oregon Freeze Dry, Inc. 699 223 - 922 -
-------------------------------------------------------------------------- -------------------------------------------------------------------------- Bad debt reserve $ 98 $ 55 $ - $ 53 $ 100 Inventory reserve 441 91 - 16 516 Rebates 272 - - 272 - Reserve for ACI and Aloe & Herbs non-current notes and investments included in other assets 1,265 - - 31 1,228
-------------------------------------------------------------------------- -------------------------------------------------------------------------- Bad debt reserve $ 100 $ 38 $ - $ 28 $ 110 Inventory reserve 516 135 - 19 632 Reserve for ACI and Aloe & Herbs non-current notes and investments included in other assets 1,228 - - 19 1,209
REPORT OF INDEPENDENT AUDITORS
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, 2001 and 2002 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a) for the same periods. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carrington Laboratories, Inc. and subsidiaries as of December 31, 2001 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Dallas, Texas February 28, 2003, except for Note Fifteen as to which the date is March 10, 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 duly authorized.
CARRINGTON LABORATORIES, INC.
Date: March 27, 2003 By:/s/ Carlton E. Turner ---------------------------------- Carlton E. Turner, Ph.D.,D.Sc. 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.
Signatures Title Date ------------------------- ----------------------------- --------------
/s/ Carlton E. Turner President, Chief Executive March 27, 2003 ------------------------- Officer and Director Carlton E. Turner, Ph.D., (principal executive officer) D.Sc.
/s/ Robert W. Schnitzius Vice President and Chief March 27, 2003 ------------------------- Financial Officer Robert W. Schnitzius (principal financial and accounting officer)
/s/ R. Dale Bowerman Director March 27, 2003 ------------------------- R. Dale Bowerman
/s/ George DeMott Director March 27, 2003 ------------------------- George DeMott
/s/ Thomas J. Marquez Director March 27, 2003 ------------------------- Thomas J. Marquez
/s/ Selvi Vescovi Director March 27, 2003 ------------------------- Selvi Vescovi
CERTIFICATION
I, Carlton E. Turner, President and Chief Executive Officer of Carrington Laboratories, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Carrington Laboratories, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report ("Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 27, 2003 /s/ Carlton E. Turner ----------------------------------- Carlton E. Turner, President & Chief Executive Officer (principal executive officer)
CERTIFICATION
I, Robert W. Schnitzius, Vice President and Chief Financial Officer of Carrington Laboratories, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Carrington Laboratories, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report ("Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 27, 2003 /s/ Robert W. Schnitzius ------------------------------------------- Robert W. Schnitzius Vice President and Chief Financial Officer (principal financial and accounting officer)
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).
10.1+ Retirement and Consulting Agreement dated August 14, 1997 between Carrington Laboratories, Inc. and David Shand (incorporated herein by reference to Exhibit 4.1 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997).
10.2+ First Amendment to Retirement and Consulting Agreement dated September 30, 1997 between Carrington Laboratories, Inc. and David G. Shand (incorporated herein by reference to Exhibit 4.2 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997).
10.3 Contract Research Agreement dated as of August 8, 1991 between Carrington Laboratories, Inc. and Texas Agriculture Experimental Station, as agent for the Texas A&M University System (incorporated herein by reference to Exhibit 10.55 to Carrington's 1991 Annual Report on Form 10-K).
10.4 + 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).
10.5 Common Stock Purchase Warrant dated September 14, 1993 issued by Carrington Laboratories, Inc. to E. Don Lovelace (incorporated by reference to Exhibit 10.10 to Carrington's 1999 Annual Report on Form 10-K).
10.6 Common Stock Purchase Warrant dated September 14, 1993, issued by Carrington Laboratories, Inc., to Jerry L. Lovelace (incorporated by reference to Exhibit 10.11 to Carrington's 1999 Annual Report on Form 10-K).
10.7 Lease Agreement dated June 15, 1994 between DFW Nine, a California limited partnership, and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.12 to Carrington's 1999 Annual Report on Form 10-K).
10.8 Lease Amendment dated August 23, 1994 amending Lease Agreement listed as Exhibit 10.12 (incorporated by reference to Exhibit 10.13 to Carrington's 1999 Annual Report on Form 10-K).
10.9 Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. (incorporated by reference to Exhibit 10.14 to Carrington's 1999 Annual Report on Form 10-K).
10.10 Modification Number One dated February 19, 1996 to the Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. (incorporated by reference to Exhibit 10.15 to Carrington's 1999 Annual Report on Form 10-K).
10.11 Modification Number Two dated November 11, 1996 to the Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. (incorporated by reference to Exhibit 10.16 to Carrington's 1999 Annual Report on Form 10-K).
10.12 Modification Number Three to the Production Contract dated February 13, 1995 between Carrington Laboratories, Inc. and Oregon Freeze Dry, Inc. (incorporated herein by reference to Exhibit 10.89 to Carrington's 1998 Annual Report on Form 10-K).
10.13+ 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).
10.14 Trademark License Agreement dated August 14, 1997 between Caraloe, Inc. and Mannatech, Inc. (incorporated herein by reference to Exhibit 10.2 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997).
10.15 Supply Agreement dated August 14, 1997 between Caraloe, Inc. and Mannatech, Inc.(incorporated herein by reference to Exhibit 10.3 to Carrington's quarterly report on Form 10-Q for the quarter ended September 30, 1997).
10.16 Letter of Agreement dated January 12, 2000 extending Trademark License Agreement and Supply Agreement between Caraloe, Inc. and Mannatech, Inc. (incorporated by reference to Exhibit 10.21 to Carrington's 1999 Annual Report on Form 10-K).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 Form of Stock Purchase Agreement dated April 5, 1995 between Carrington Laboratories, Inc. and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.1 to Carrington's Registration Statement 33- 60833 on Form S-3).
10.22 Form of Registration Rights Agreement dated June 20, 1995 between Carrington Laboratories, Inc. and persons named in Annex I thereto (incorporated herein by reference to Exhibit 2.2 to Carrington's Registration Statement 33-60833 on Form S-3).
10.23 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).
10.24+ Carrington Laboratories, Inc. 1995 Stock Option Plan, As Amended and Restated Effective January 15, 1998 (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
10.25+ Form of Nonqualified Stock Option Agreement with Outside Director, relating to the Registrant's 1995 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
10.26+ Form of Incentive Stock Option Agreement for Employees (incorporated herein by reference to Exhibit 4.4 to Carrington's Second Quarter 1996 Report on Form 10-Q).
10.27 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).
10.28 Sales Distribution Agreement dated December 4, 1996 between Darrow Laboratorios S/A and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.59 to Carrington's 1996 Annual Report on Form 10-K).
10.29 Supply Agreement dated February 13, 1997 between Aloe Commodities International, Inc. and Caraloe, Inc. (incorporated by reference to Exhibit 10.63 to Carrington's 1996 Annual Report on Form 10-K).
10.30 Sales Distribution Agreement dated November 1, 1995 between Laboratories PiSA S.A. DE C.V. and Carrington Laboratories, Inc. (incorporated by reference to Exhibit 10.70 to Carrington's 1996 Annual Report on Form 10-K).
10.31 Sales Distribution Agreement dated January 1, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and Henry Schein U.K. Holdings, Ltd., (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
10.32 Sales Distribution Agreement dated January 5, 1998 between Carrington Laboratories, Inc. and Carrington Laboratories Belgium N.V. and Saude 2000 (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
10.33 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).
10.34 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).
10.35 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).
10.36 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).
10.37 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).
10.38 Wound and Skin Care Purchase Agreement dated August 27, 1998 between American Association for Homes & Services for the Aging and Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.2 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
10.39 Purchase Agreement dated October 1, 1998 between Vencor, Inc. and Carrington Laboratories, Inc. (incorporated herein by reference to Exhibit 10.3 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
10.40 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).
10.41 Clinical Services Agreement dated January 25, 1999 between Carrington Laboratories, Inc. and PPD Pharmaco, Inc. (incorporated herein by reference to Exhibit 10.96 to Carrington's 1998 Annual Report on Form 10-K).
10.42 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).
10.43 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).
10.44 Exclusive Sales Representative Agreement dated April 13, 1999, between Caraloe, Inc. and Classic Distributing Company (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.45 Terms Sheet for Lease of Rancho Aloe Farm Land to Sabila Industrial dated April 20, 1999 (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.46 Terms Sheet for Maintenance of Sabila Industrial Plants on Leased Land dated April 20, 1999 (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.47 Exclusive Sales and Trademark Agreement dated June 11, 1999, between Caraloe, Inc. and Nutra Vine (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
10.48 Lease Agreement dated September 23, 1999 between Rancho Aloe and Sabila Industrial, S.A. (incorporated herein by reference to Exhibit 10.1 to Carrington's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
10.49 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).
10.50 Sales Distribution Agreement dated October 26, 1999. between Carrington Laboratories, Inc. and E-Wha International, Inc. (incorporated by reference to Exhibit 10.78 to Carrington's 1999 Annual Report on Form 10-K).
10.51 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).
10.52 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).
10.53 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).
10.54 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).
10.55 Lease Agreement dated January 22, 2001 between Plazamerica, Inc and Carrington Laboratories, Inc.
10.56+ 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).
10.57+ 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).
10.58+ Employee Stock Purchase Plan of Carrington Laboratories, Inc., as amended through November 15, 2001 (incorporated by reference to Exhibit 10.87, filed on Carrington's Form 8-K on March 20, 2002).
10.59 * Lease Agreement dated February 28, 2003 between Maintenance Warehouse/America Corp and Carrington Laboratories, Inc.
21.1 * Subsidiaries of Carrington
23.1 * Consent of Independent Auditors
99.1 * CEO Certification of SEC Reports Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 * CFO Certification of SEC Reports 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.