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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: May 31, 1998
Commission file number 0-12395
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________________ to ____________________
Commission file number 0-12395
ALCIDE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2445061
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8561 154th Avenue NE, Redmond, Washington 98052
(Address of principal executive offices)
Registrant's telephone number, including Area Code (425) 882-2555
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of voting stock held by non-affiliates of
the Registrant on August 1, 1998 was approximately $75,879,648. On that date,
there were 2,563,148 shares of common stock outstanding, net of Treasury Stock.
Certain sections of Registrant's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders are incorporated by reference into Items 11,
12 and 13 of Part III hereof. Certain sections of Part I of this Form 10-K
Annual Report are incorporated by reference into the Registrant's definitive
Proxy Statement for its 1998 Annual Meeting of Stockholders.
Page 1 of 38 pages
Exhibit Index on Page 23
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TABLE OF CONTENTS
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PART I Item 1. Business 3
A. Introduction 3
B. Sales Development 3
C. Research and Product Development 5
D. Patents and Trademarks 7
E. Raw Materials 9
F. Competition 9
G. Government Regulation 10
H. Employees 11
I. Advertising and Promotion 11
J. Manufacturing 11
K. Subsequent Event 12
Item 2. Properties 12
Item 3. Legal Proceeding 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder
Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 15
Item 8. Financial Statements and
Supplementary Data 18
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures 18
PART III
Item 10. Directors and Executive Officers 19
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain
Beneficial Owners and Management 21
Item 13. Certain Relationships and Related
Transactions 21
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 21
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PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Alcide-Registered Trademark- Corporation (the "Company") is a Delaware
Corporation organized in 1983 which has its executive offices and research
laboratories at 8561 154th Avenue, N.E., Redmond, Washington 98052.
Alcide is engaged in the research, development and commercialization of
unique chemical compounds having intense microbiocidal activity. The Company
holds substantial worldwide rights to its discoveries through various patents,
patent applications, trademarks and other intellectual property, technology, and
know-how.
This report includes forward-looking statements which involve risk and
uncertainty including, without limitation, risk of dependence on patents and
trademarks, third party suppliers, market acceptance of and demand for the
Company's products, distribution capabilities, development of technology and
regulatory approval thereof. Sentences or phrases that use the words such as
"believes," "anticipates," "hopes," "plans," "may," "can," "will," and others,
are often used to flag such forward-looking statements, but their absence does
not mean a statement is not forward-looking. Such statements reflect
management's current opinion and are designed to help readers understand
management's thinking. By their very nature, however, such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof, or to reflect the occurrence of
unanticipated events.
B. SALES DEVELOPMENT
The Company presently sells products to the dairy, health care, poultry
processing and automotive industries. Its products include:
UDDERgold-Registered Trademark- Plus and UDDERgold-Registered
Trademark-Germicidal Barrier Teat Dips, Pre-Gold-Registered Trademark-
Germicidal Pre-Milking Teat Dip, silverQUICK-Registered Trademark- Udder Wash
and 4XLA-Registered Trademark- Pre- and Post-Milking Teat Dip to the dairy
industry; Exspor-Registered Trademark- Sterilant-Disinfectant and
LD-Registered Trademark-Disinfectant to the health care industry; Sanova-TM-
antimicrobial intervention to the poultry processing industry; and
RenNew-Registered Trademark--A/C Air Conditioning System Disinfectant to the
automotive industry. The Company's sales to date have primarily been derived
from UDDERgold Plus, UDDERgold and 4XLA teat dips, and Sanova food
antimicrobial.
Total product sales for the fiscal year ended May 31, 1998 were
$12,998,952. Export sales to international distributors, plus product exported
by ABS Global, Inc. accounted for $4,758,346, 37% of total sales.
1. DAIRY INDUSTRY
Worldwide sales of dairy line products during fiscal year 1998 were
$10,114,845 as compared with $10,365,001 in FY 1997. In FY 1998 sales to the
dairy industry accounted for 78% of the Company's total sales. Should there be
a loss of the sales generated by dairy line products, it would have a material
adverse effect on the Company.
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U.S. DAIRY INDUSTRY
In the United States, sales to the dairy industry are through two
distributors, ABS Global, Inc. and IBA, Inc. In fiscal 1998, dairy industry
sales in the United States were $5,356,499, 53% of total Alcide sales to the
dairy industry.
INTERNATIONAL DAIRY INDUSTRY
Alcide products are sold to the dairy industry in Canada, Latin
America and Europe through a network of five distributors. Sales to the
international dairy industry were $4,758,346 in fiscal 1998, 47% of total sales
to the dairy industry.
2. HEALTH CARE INDUSTRY
The Company markets a line of hard surface sterilants and disinfectants
which kill harmful microorganisms and help reduce the potential for disease
transmission via contaminated surfaces. The Company's LD Disinfectant and
Exspor Sterilant-Disinfectant offer users a combination of broad spectrum
efficacy, speed and relative safety.
Fiscal year 1998 sales of hard surface sterilants and disinfectants
were $390,178, or 3% of total sales, as compared with $364,869 in fiscal year
1997.
3. POULTRY PROCESSING INDUSTRY
In May, 1997 the Company entered into an agreement with Novus
International, Inc. for Novus distribution of Sanova antimicrobial to the
poultry industry. Sales to Novus for fiscal year 1998 were $2,445,106 or 19%
of total sales.
4. AUTOMOTIVE INDUSTRY
Fiscal year 1998 sales of RenNew-A/C Air Conditioning System Disinfectant
were $48,823 as compared with $37,638 in fiscal year 1997. All RenNew-A/C Air
Conditioning System Disinfectant sales in both fiscal year 1998 and fiscal
year 1997 were to the General Motors Corporation.
5. INDUSTRY PRACTICES AND BACKLOG ORDERS
The Company's invoice terms conform to those in the chemical industry in
general, which are: domestic-30 days, export-60 days.
Alcide had $2,062,834 of firm orders for future delivery at May 31, 1998,
as compared to orders for future delivery at May 31, 1997 of $2,014,234. The
Company's distributors typically place orders one to four months in advance.
6. DISTRIBUTION ARRANGEMENTS
All Alcide sales to the dairy industry and to the poultry processing
industry are to distributors who have contracted with the Company to provide
sales and marketing services to distribute the Company's products. In each
case the distributor purchases product from Alcide for resale to the
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end user. Loss of any of the Company's distributors can have a material impact
on the Company's sales and earnings.
The Company's distribution contracts with ABS Global, Inc. for the U.S.
market and for several international markets will expire on October 31, 1998.
Discussions are presently underway between Alcide and ABS Global regarding a
new multi-year nonexclusive distribution arrangement for the markets served by
ABS.
The Company's distribution contract with OHF Sante Animale, subsequently
assigned to Rhone Merieux and Merial for distribution of Alcide's dairy
industry products in France, expired on May 31, 1998. A new, multi-year,
nonexclusive agreement has been negotiated and is pending Merial approval.
C. RESEARCH AND PRODUCT DEVELOPMENT
During fiscal year 1998 the Company's efforts continued to focus on the
development of products for which its technology provides clear advantages in
the marketplace and for which weaknesses pose minimal impediment or
competitive disadvantage. Major strengths of the Company's patented
technology are broad spectrum of antimicrobial activity, rapidity of cidal
activity, safe residues and minimal or nonexistent resistant strains. Primary
weaknesses are the inconvenience of a two-part system and potential for
corrosive oxidation.
Additions and improvements to existing business units are expected to be
funded primarily by the Company. Programs for the new food antimicrobial
business area may be funded jointly by the company and its distributors.
Other development areas may require initial Company investment followed by
major financial support from corporate partners who would ultimately introduce
the products into the marketplace.
While many of the research and development programs undertaken by the
Company, and described hereafter, give evidence of possible success, the
nature of research, coupled with the necessity for regulatory approval, is
such that there can be no assurance of ultimate program success or that any
resulting product will be commercially successful.
Significant highlights of programs active during fiscal year 1998 are
described below:
1. PREOPERATIVE SKIN ANTISEPTIC
During fiscal 1998, delays were experienced in the finalization of the
Company's New Drug Application (NDA) arising from the process of identifying
and certifying a Good Manufacturing Practices (GMP) compliant supplier of the
active material. This process was finalized during the fourth quarter of
fiscal 1998 and a final NDA update to the Food and Drug Administration (FDA)
relating to the chemical and pharmaceutical issues is now expected to be made
during the first half of fiscal 1999. This submission will complete the
requirements for the NDA.
Further testing of the preoperative skin antiseptic product to evaluate
the potential use of the same formulation as an antiseptic for injection site
or in-dwelling catheter site uses has been on hold pending responses to and
final resolution of FDA's questions on the preoperative skin antiseptic NDA
submission. It is still the Company's intention that an addendum to the
original NDA to cover this
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expanded use will be submitted to FDA and this is now targeted for late in
fiscal 1999 following the completion of additional clinical testing.
Wherever possible, it is the Company's strategy to further the
development of new use areas for the skin disinfectant range by the
development and submission of addenda to the original NDA.
2. UDDER CARE BUSINESS
The process of product registration in foreign markets continued during
fiscal 1998. In addition, significant new formulation developments for
potential new market sectors and for patent extension were also completed.
Several new products have been successfully formulated. These have undergone
"proof of principle" testing during fiscal 1998 and will continue to undergo
field efficacy and toleration testing prior to market introduction during
fiscal 1999.
3. ANTI-INFECTIVE ORAL RINSE
While it was the Company's intention to proceed into the broader human
clinical phase of evaluations for efficacy of the mouth rinse product versus
gingivitis within the United States during fiscal 1998, discussions and
investigations with potential licensees led instead to the conduct of an
alternative series of tests on oral cavity changes following treatment.
These were completed during the last quarter. A broader series of human
clinical tests is now planned to begin during the first half of fiscal 1999.
4. FOOD DISINFECTION
During fiscal 1998, the Company received final USDA approval to commence
the commercial plant installation and operation of a purpose designed system
for the application of acidified sodium chlorite to poultry carcasses. The
process, known as the Sanova Food Quality System (SFQ), is intended to
eliminate or substantially reduce food borne microorganisms of potential harm
to humans on poultry carcasses during the slaughter process. The Company
successfully introduced the system in the United States during 1998 and will
continue to broaden the business base through further installations during
fiscal 1999. In addition, the registration process for the SFQ system has
been expanded outside of the USA to include preparation of the support
documentation that is necessary for approvals for use in Europe, Canada and
South America.
During January, 1998, the FDA issued a notice of approval permitting the
use of the Sanova system on red meats (beef, pork and sheep). A protocol
proposing the commercial plant testing of the Sanova system to establish
performance to USDA satisfaction was also submitted and approved during 1998.
As a result, the first commercial plant installation for a beef plant is now
scheduled to commence testing during the second quarter of fiscal 1999.
The evaluation of the use of acidified sodium chlorite solutions for
microbial reductions on fresh fruits and vegetables was successfully completed
during fiscal 1998. At present the U.S. Environmental Protection Agency (EPA)
regulates this field. The Company expects to submit an approval request
during the first fiscal quarter.
Evaluations into the potential for expansion into the fish (shrimp and
shellfish) areas continued during fiscal 1998.
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5. INTRAMAMMARY INFUSION
The objective of this program is to provide safe and effective treatment
and control of bovine clinical and/or subclinical mastitis in lactating dairy
cattle with no milk-withholding requirements which would provide the Alcide
product with distinct market advantages as compared to antibiotics, which
require milk withdrawal during treatment and several days thereafter.
Evaluations completed during fiscal 1998 finalized the formulation development
effort and confirmed the creation of a well tolerated product for therapeutic
treatment schedules. The fiscal 1999 program will evaluate residue profiles
and dose rate/treatment regimes. On the successful completion of these
programs it is anticipated that a Investigational New Animal Drug (INAD)
submission will be made to the FDA.
On an ongoing basis the Company continues to examine the potential for
new, more effective formulations to protect and possibly enhance its market
position in the surface area sterilant/disinfectant field, in the disinfection
of foods and in the bovine mastitis treatment/prevention field.
D. PATENTS AND TRADEMARKS
The Company considers protection of its technologies by United States and
foreign patents to be an important aspect of its business. No assurance can
be given, however, as to the validity, enforceability or scope of its patent
protection. Should the patents be held invalid, become ineffective against
competition or expire prior to the Company's successful development of a
market for its products, there may be a material adverse impact on the
Company's business. Furthermore, the possibility of patent infringement by
third parties cannot be entirely eliminated. In the event of such
infringement by third parties, if the Company is not successful in terminating
such infringement, the viability of the Company could be severely and
adversely affected.
Conversely, no assurances can be given that the manufacture, use or sale
of the Company's products will not infringe the patent rights of others. In
the event of infringement or alleged infringement, the Company's ability to
market its products could be adversely affected and the viability of the
Company could be severely and adversely affected.
PATENTS -- The Company owns the following sixteen issued United States
patents:
1) U.S. Patent No. 4,330,531
"Germ-Killing Materials"
2) U.S. Patent No. 4,891,216
"Disinfecting Compositions and Methods Therefor"
3) U.S. Patent No. 4,956,184
"Topical Treatment of Genital Herpes Lesions"
4) U.S. Patent No. 4,986,990
"Disinfection Method and Composition Therefor"
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5) U.S. Patent No. 5,019,402
"Composition and Procedure for Disinfecting Blood and Blood
Components"
6) U.S. Patent No. 5,100,652
"Disinfecting Oral Hygiene Compositions and Process for Using the
Same"
7) U.S. Patent No. 5,185,161
"Disinfection Method and Composition Therefor"
8) U.S. Patent No. 5,252,343
"Method and Composition for Preventing and Treatment of Bacterial
Infections"
9) U.S. Patent No. 5,384,134
"Anti-Inflammatory Formulations for Inflammatory Diseases"
10) U.S. Patent No. 5,389,390
"Process for Removing Bacteria from Poultry and Other Meats"
11) U.S. Patent No. 5,597,561
"Adherent Disinfecting Compositions and Method of Use in Skin
Disinfection"
12) U.S. Patent No. 5,622,725
"Wound Disinfection and Repair"
13) U.S. Patent No. 5,628,959
"Composition and Method for Sterilizing Dialyzers"
14) U.S. Patent No. 5,651,977
"Adherent Disinfecting Compositions and Methods Related Thereto"
15) U.S. Patent No. 5,667,817
"Method and Composition for the Prevention and Treatment of
Female Lower Genital Tract Microbial Infections"
16) "U.S. Patent No. 5,772,985
"Composition and Methods for Treatment of Skin Lesions"
Two new U.S. patent applications were filed during fiscal year 1998. Four
additional U.S. patent applications are pending, as well as two reissue
applications corresponding to patents 7) and 8) above. Numerous corresponding
foreign applications are issued or pending.
The Company's original patent, U.S. Patent No. Re. 31,779, expired in the
United States on April 18, 1995. That patent was directed to disinfecting a
substrate using a lactic acid/sodium chlorite composition.
TRADEMARKS -- The Company has sought to acquire trademark protection,
primarily by the filing of applications for registration of its marks in a
large number of countries. There can be no assurances that a filed
application will result in a registration, that the issuance of a trademark
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registration to the Company or the acquisition of rights through use will
provide the Company with adequate protection against infringement in a
selected territory, that the Company will be able to expand its product line
under a registered mark in some territories or that the Company's trademark
rights cannot be terminated in some territories, such as by petition by others
claiming superior rights.
No assurances can be given that the Company's use of the marks and
business name will not infringe the rights of others in some territories
resulting in the exposure of the Company to liability to the holder of the
rights and a possible obligation to terminate use in such territory.
If rights to trademarks selected by the Company were unavailable in a
territory, if a Company trademark registration were to become invalid, or if the
Company's business name or trademarks were to infringe the rights of another in
a territory, there would be an adverse impact on the Company.
In addition to the Company's mark Alcide-Registered Trademark-, the
other Company marks registered in the U.S. are Exspor-Registered Trademark-,
LD-Registered Trademark-, UDDERgold-Registered Trademark-, 4XLA-Registered
Trademark-, Pre-Gold-Registered Trademark-, DIPPINgold-Registered Trademark-
silverQUICK-Registered Trademark- and RenNew-Registered Trademark-.
These same marks have been registered outside of the U.S. in markets
where the Company has determined that there is a commercial opportunity for the
appropriate product area. For translation reasons, the mark
DIPPINguld-Registered Trademark- has been determined to be more appropriate than
DIPPINgold-Registered Trademark- in certain foreign countries. Therefore, the
spelling variant DIPPINguld-Registered Trademark- has been registered in
Denmark, Norway, Finland and Sweden.
The Company markets its antimicrobial to the poultry processing
industry through Novus International, Inc. under the mark Sanova-TM-, which has
been registered to Novus. Under the terms of the agreement with Novus the
Sanova mark is being transferred and will be owned by Alcide Corporation. This
mark will cover antimicrobial applications in other food processing applications
once such applications are approved by the appropriate regulatory authority.
E. RAW MATERIALS
Various Alcide products include in their formulations chemical components
available from few (and in some cases only one) suppliers. Formulation
alternatives exist for each single-sourced material; however, changing
formulations could result in higher raw material costs and/or the necessity to
obtain regulatory clearance for the modified formulation.
F. COMPETITION
The Company competes in substantially all of its markets on the basis of
quality and technical innovation. A number of companies have announced their
intention to introduce, or are believed to be in the process of developing, a
variety of products designed to perform some of the functions of Alcide
products. Additionally, there exist in the marketplace products that are
known to be competitive with the Company's products.
The dairy hygiene market into which UDDERgold Plus, UDDERgold, Pre-Gold
and 4XLA teat dips are sold is a highly fragmented worldwide market in which
major specialty chemical companies compete. The major classes of products
sold in this market are iodophors and chlorhexidines. The Company's acidified
sodium chlorite chemistry represents a novel chemical class. It, accordingly,
necessitates obtaining regulatory approval or registration in most countries
in which it is
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commercialized. The Company sells its teat dips in each country via either an
animal health or an artificial insemination company.
The market for disinfection of poultry and other food products is
dynamic and rapidly emerging as a result of consumer concern and U.S. Government
regulatory activity. A number of technologies are directed at reduction of food
borne pathogens. Of these, trisodium phosphate is used in a manner similar to
the Company's product, Sanova. Chlorine dioxide and ozone have been tested in
poultry chiller waters but have not been broadly accepted by the industry.
Irradiation technology has been approved by USDA and FDA but is not broadly used
by the poultry industry and, in the limited cases where irradiation is used, the
process involves a secondary treatment outside the poultry processing plant.
Market conditions within the food processing industry are such that additional
competition is likely.
G. GOVERNMENT REGULATION
1. DAIRY INDUSTRY
The Company's products sold to the dairy industry require registration
for sale in a number of international markets. UDDERgold Teat Dip has been
registered in Canada, the United Kingdom, Republic of Ireland, Denmark, The
Netherlands, Italy, Spain, Portugal, Belgium, New Zealand, Brazil, France,
Chile, Argentina and India. The product is legally sold without formal
registration in the United States, Greece, Hungary and Mexico. Registrations
are pending in Poland, South Africa and Switzerland.
In West Germany, a New Drug Application for UDDERgold Teat Dip was
filed in February, 1989. The application was rejected in March, 1997. Alcide
filed an appeal to the German court but this has also been rejected. A new
registration application is being prepared for filing. The Company's
distributor in The Netherlands is selling product to German customers who buy
the product in The Netherlands.
4XLA Teat Dip has been registered in New Zealand, Chile, Argentina,
Canada and Denmark. The product is sold without registration in France, The
Netherlands, Belgium, Italy and the United States.
In the event the Company employs distributors in other countries,
registration documents will be filed either directly by the Company or by the
specific distributor.
It is expected that substantially all new products presently under
development by Alcide Corporation will require regulatory approval.
2. FOOD PROCESSING ANTIMICROBIALS:
a. Poultry
The Company's Food Additive Petition was approved by FDA in April,
1996 and by USDA in January, 1998. The product is now actively marketed and
is being utilized by a number of major poultry processing companies.
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b. Red Meats
The Company's Food Additive Petition was approved by FDA in March,
1998. Alcide plans to begin conducting a commercial plant test under
supervision of the USDA in late 1998, as a necessary step in obtaining the
agency's required approval.
c. Fruits and Vegetables
Alcide has conducted tests that it believes necessary to obtain
regulatory approval to market its product as an antimicrobial intervention for
fruits and vegetables. The Company plans to submit its application to the EPA
in September, 1998.
3. PREOPERATIVE SKIN ANTISEPTIC
A New Drug Application for the Company's preoperative skin antiseptic was
submitted to the FDA in September, 1994. In October, 1995, the FDA requested
substantial supplemental testing and additional support for the NDA. Such
testing and support was completed in FY 1997 and submitted to the FDA in May,
1997. The product cannot be marketed without FDA approval.
4. STERILANTS/DISINFECTANTS
The Company's line of hard surface sterilants and disinfectants are
regulated in the U.S. by the EPA and FDA. Appropriate EPA and FDA approvals
for sale and manufacturing have been obtained.
H. EMPLOYEES
The corporate office and laboratory staff of 12 employees occupy a 5,461
square foot facility in Redmond, Washington.
The Company has relationships with, and from time to time engages the
services of, university professors and other qualified consultants to assist
it in technological research and development.
The Company is not a party to any collective bargaining agreement and
considers its employee relations to be excellent.
I. ADVERTISING AND PROMOTION
The Company's advertising and promotion activities consist of cooperative
advertising of dairy line products with its distributors and the publication
of product, financial and corporate literature.
J. MANUFACTURING
All manufacturing of the Company's products is performed by contract
manufacturers having appropriate FDA registration approval for such
manufacturing. Product release for sale is dependent on quality control
testing by Alcide. The Company is not dependent on any one manufacturer.
Many qualified manufacturers regularly compete in the contract packaging
marketplace.
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K. SUBSEQUENT EVENT
On August 3, 1998, the Company agreed with Novus International, Inc. to
open discussions regarding renegotiation of the agreement between Alcide and
Novus dated May 21, 1997, for distribution of the Company's products to the
poultry industry. The terms and conditions that govern the relationship
between Novus and Alcide during the renegotiation period, which ends October
31, 1998, were filed on Form 8-K on August 11, 1998.
ITEM 2. PROPERTIES
The five-year lease for the Company's Redmond facility provides for a
monthly rent of $5,188 through May, 1999. Management believes the space will
adequately support the Company's office and laboratory needs for at least the
next year.
ITEM 3. LEGAL PROCEEDING
On February 20, 1996, the Company was named as a defendant in a lawsuit
filed in United States District Court for the Southern District of New York by
Howard Alliger, Old Hill Associates, and other individuals who have rights to
receive royalties with respect to certain patents assigned to the Company.
The complaint alleges that the Company has not paid the required amount of
royalties due the plaintiffs pursuant to Royalty and Consolidation Agreements.
The complaint seeks damages for unpaid royalties and unjust enrichment,
injunctions, and other relief.
On November 17, 1997, the Company moved for leave to file an amended
answer, including a counter claim, against certain plaintiffs. The proposed
amended answer alleges that plaintiffs are precluded from obtaining the relief
sought in their complaint because, if the agreements at issue were found to
support such relief, they would constitute an unfair transaction from the
Company's point of view and a breach of fiduciary responsibility by the
plaintiffs who were officers and directors of the Company at the time of those
agreements and who were self interested in approving the agreements on the
Company's behalf. Further, if the Company is held liable in whole or part for
any of the obligations asserted by the plaintiffs, the Company is entitled to
recover all such obligations from the plaintiffs. The motion has been fully
briefed but the court has not yet issued a decision or scheduled oral argument.
The Company has denied any wrongdoing in connection with the matters that
have been alleged and intends to defend the lawsuit vigorously. There can be
no assurance, however, that the Company's defense will be successful, or that
the lawsuit, or any settlement or trial with regard thereto, will not have an
adverse effect on the Company or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock ("Common Stock") has been publicly traded
since May 26, 1983 in the over-the-counter market on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol
ALCD.
The following table sets forth the range of the Common Stock on NASDAQ
qfor the fiscal quarters indicated, as reported by NASDAQ.
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HIGH LOW
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COMMON STOCK
YEAR ENDED MAY 31, 1997
First quarter 25 1/4 20 3/4
Second Quarter 22 1/4 18 1/2
Third Quarter 25 3/4 18
Fourth Quarter 31 1/2 17 3/4
YEAR ENDED MAY 31, 1998
First Quarter 56 1/2 31 1/2
Second Quarter 67 1/8 49 7/8
Third Quarter 64 48
Fourth Quarter 60 38 1/4
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No dividends were declared or paid for these periods.
Prices represent final daily transactions between dealers without retail
mark-up, mark-down or commissions, and may not represent actual
transactions.
On August 1, 1998, there were approximately 1,731 Common stockholders of
record.
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ITEM 6. SELECTED FINANCIAL DATA
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FISCAL YEARS ENDED
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MAY 31, 1994 MAY 31, 1995 MAY 31, 1996 MAY 31, 1997 MAY 31, 1998
<S> <C> <C> <C> <C> <C>
Net sales $7,645,350 $9,153,104 $11,145,826 $11,768,504 $12,998,952
Net income 1,066,124 1,663,213 2,325,062 2,881,295 3,222,723
Diluted earnings per
common share and
equivalents .40 .60 .82 1.04 1.16
Total assets 10,347,770 11,910,992 13,768,614 15,113,672 16,369,337
Long term debt --- --- --- --- ---
Redeemable
Preferred Stock 272,736 261,022 249,380 233,105 212,936
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA FOR THE
YEARS ENDED MAY 31, 1997 AND MAY 31, 1998
<TABLE>
<CAPTION>
Net Income
Net Sales Gross Profit Net Income per Share
<S> <C> <C> <C> <C>
Year Ended
May 31, 1997
1st Quarter $ 2,042,222 $1,419,797 $ 376,296 $ .13
2nd Quarter 2,744,874 1,850,961 601,724 .22
3rd Quarter 2,963,436 1,856,327 707,544 .25
4th Quarter 4.017,972 2,787,544 1,195,731 .43
----------- ---------- ----------
Total for Year $11,768,504 $7,914,629 $2,881,295 $1.04
----------- ---------- ----------
----------- ---------- ----------
Year Ended
May 31, 1998
1st Quarter $ 3,192,396 $2,089,395 $ 723,050 $ .26
2nd Quarter 3,231,276 2,206,822 795,155 .28
3rd Quarter 3,189,789 2,149,403 891,025 .31
4th Quarter 3,385,491 2,234,090 813,493 .29
----------- ---------- ----------
Total for Year $12,998,952 $8,679,710 $3,222,723 $1.16
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1998 AS COMPARED WITH 1997
Fiscal year 1998 sales of $12,998,952 were 10% higher than fiscal year 1997
sales of $11,768,504. The sales increase was caused primarily by the $2,445,106
sales of Sanova food antimicrobial to Novus International, Inc. During fiscal
1997, sales to Novus were $1 million, representing an up-front, one time
purchase by Novus of Alcide's prototype application equipment and inventory at
the time that Novus entered into a distribution agreement with Alcide.
Interest income for fiscal 1998 was $638,016, a 49% increase over fiscal
1997 interest income of $427,316. The increase is due entirely to an increase
of funds available for investment.
Cost of goods sold was $4,319,242 in fiscal year 1998, or 33% of net
sales as compared to $3,853,875 in fiscal year 1997, which was also 33% of
net sales. During the fiscal year there were no material changes in the unit
cost components of cost of goods, nor did Alcide change its selling prices
during the year, and therefore, on balance, cost of goods as a percentage of
sales remained essentially unchanged.
ROYALTY OBLIGATIONS
The Company has an obligation pursuant to certain royalty and
consolidation agreements to pay patent holders, some of whom were early
investors in the Company, a royalty of 50% of its license revenues and 8% of
its net cash sales of products subject to such agreements. In fiscal 1998,
net sales of $4,161,018 were covered by the royalty and consolidation
agreements compared to $4,248,923 in fiscal 1997.
The Company anticipates paying a royalty of 8% of the net cash sales of
its products to the extent they are subject to royalty payments, which
payments will increase the Company's costs by such amount. The Company
believes that it has the ability to provide for these payments in the selling
prices of its products.
On February 20, 1996, the Company was named as a defendant in a lawsuit
filed in United States District Court for the Southern District of New York by
Howard Alliger, Old Hill Associates, and other individuals who have rights to
receive royalties with respect to certain patents assigned to the Company.
The complaint alleges that the Company has not paid the required amount of
royalties due the plaintiffs pursuant to Royalty and Consolidation Agreements.
The complaint seeks damages for unpaid royalties and unjust enrichment,
injunctions, and other relief.
RESEARCH AND DEVELOPMENT
Research and Development expenses in fiscal year 1998 were $1,633,925 as
compared to $1,546,285 in fiscal 1997. The 6% increase over fiscal 1997 was
caused primarily by inflationary increases for salaries and laboratory
supplies and by the testing required to support USDA approval of Sanova for
poultry processing plants.
15
<PAGE>
SELLING AND ADMINISTRATIVE EXPENSE
Other selling, general and administrative expenses were $2,148,949 in
fiscal 1998, a 6% increase over fiscal 1997 expenses of $2,026,284. The
difference was primarily due to an increase in marketing and promotion expense
and an increase in legal fees due to product litigation, offset by a $185,415
reduction in executive bonus expense.
INCOME TAX
The Company's Statements of Operations for fiscal 1998 includes a
provision for income taxes of $1,848,358 which is a tax rate of 36.4% of
income before provision for income taxes. The provision for income taxes in
fiscal 1997 was $1,423,698, or a tax rate of 33.1%. The difference in tax
rates is due primarily to a 2.4% provision for state taxes in fiscal 1998,
while no such provision was made in fiscal 1997.
NET INCOME
Net income for fiscal 1998 was $3,222,723, an increase of $341,428 or 12%
over the previous fiscal year. The increase was achieved as a result of the
net sales increase and interest income increases noted above, offset by an
increase in operating expenses and the income tax provision.
LIQUIDITY
The Company's cash, cash equivalents and investments in U.S. Government
securities totaled $12,131,229 at May 31, 1998, a $2,220,555 increase over the
previous fiscal year end. The increase was generated from operations
primarily offset by a $2,934,369 repurchase of Alcide Common Stock.
The Company anticipates that income during fiscal 1999 will be adequate
to sustain the Company and that its cash resources will enable it to meet its
operating requirements and support its capital needs in the ensuing fiscal
year.
ACCOUNTS RECEIVABLE
The Company sells its products to customers and distributors on terms
typical of the industry. Sales to U.S. customers are on 30-day terms. Sales
to international distributors are on 60-day terms. During the past three
fiscal years Alcide offered extended terms up to 120 days to ABS Global, Inc.,
its largest distributor, in exchange for a finance charge equal to 2% of
invoice amounts. In February, 1998, ABS resumed normal 30-day payment terms
to Alcide. This had the effect of reducing accounts receivable from ABS by
$1,308,876 at May 31, 1998 as compared with May 31, 1997.
LEASES AND CAPITAL EXPENDITURES
The Company's office and laboratory space is leased under operating
leases from unaffiliated lessors. During fiscal 1998 the Company spent
$25,158 on the purchase of fixed assets. Planned capital expenditures for
laboratory and office equipment for fiscal year 1999 are expected to be less
than $100,000. In addition, the Company may elect to invest capital to supply
Sanova Food Quality
16
<PAGE>
Systems to poultry processing plants to expand the sale of the Company's
Sanova antimicrobial compound. Investments in Sanova equipment are estimated
to be $300,000 to $500,000 per processing plant and as many as 20 plants may
be started in fiscal 1999. If such capital investments were made in Sanova
Food Quality Systems, the Company would expect to offset a portion of the
capital investment cost with increased sales revenue.
FISCAL YEAR 1997 AS COMPARED WITH 1996
The Company's net sales in fiscal year 1997 were $11,768,504, an increase
of 6% from the previous fiscal year's $11,145,826. During the fiscal year, ABS
Global, Inc. reduced its inventory of Alcide products by an estimated $800,000.
This sales reduction was offset by sales of $273,792 to IBA, Inc., which began
distributing Alcide udder care products in February, 1997, and by a Novus
International, Inc's. $1 million purchase of Alcide poultry antimicrobial
inventory and equipment, concurrent with the May 21, 1997 distribution
agreement.
Interest and nonoperating income for the fiscal year 1997 was $553,846, an
increase of 74% from the prior year's $318,677. The increase reflects the
impact of higher investable liquid assets and a $100,000 payment to Alcide by
Novus on February 6, 1997 to secure negotiating rights for a distribution
agreement.
Cost of goods sold was $3,853,875 in fiscal year 1997, or 33% of sales, as
compared to $3,737,957 in fiscal year 1996, or 34% of sales. The lower cost of
goods as a percentage of sales reflects the impact of the sale to Novus.
ROYALTY OBLIGATIONS
The Company has an obligation pursuant to certain royalty and
consolidation agreements to pay patent holders, some of whom were early
investors in the Company, a royalty of 50% of its license revenues and 8% of its
net cash sales of products subject to such agreements. In fiscal 1997, net
sales of $4,248,923 were covered by the royalty and consolidation agreements.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal year 1997 were $1,546,285,
as compared to $1,176,563 in fiscal year 1996, an increase of 31%. The increase
resulted primarily from fees paid to third parties for clinical testing and
outside laboratory testing related to the Company's new product development
program and expenses related to commercial plant testing of Sanova, the
Company's new poultry processing antimicrobial. All research and development
expenditures were funded by the Company in both fiscal years 1996 and 1997.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses were $2,026,284 in fiscal year
1997, as compared with $2,070,570 in fiscal year 1996, a decrease of 2%.
17
<PAGE>
INCOME TAXES
The Company had available carry forward losses aggregating approximately
$1,861,462 at May 31, 1997 and which expire during the years 2000 to 2008. At
the present pace of operations, it is likely that the carry forward losses
will be exhausted in FY 1998.
NET INCOME
Net Income for fiscal 1997 was $2,881,295, an increase of $556,233 or 24%
over the previous fiscal year. The increase was achieved as a result of the
net sales increase and interest and non-operating income increases noted
above, offset by cost of goods and expense increases.
LEASES AND CAPITAL EXPENDITURES
The Company's office and laboratory space is leased under operating
leases from unaffiliated lessors. During fiscal 1997, the Company spent
$7,354 on purchases of fixed assets. Planned capital expenditures for fiscal
year 1998 are expected to be less than $100,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 14 and 25 through 36 of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no disagreements on accounting and financial disclosures
with Arthur Andersen LLP with regard to the financial statements for fiscal
1998, 1997 and 1996. The principal accountants' reports on financial
statements of the Company for the past year did not contain an adverse opinion
or a disclaimer of opinion nor were they qualified or modified as to
uncertainty of audit scope or accounting principles.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Company's by-laws, Directors are elected to a one-year
term of office by the shareholders of the Company at its Annual Meeting.
Information regarding the Directors and Executive Officers of the Company
as of May 31, 1998 is listed in the following table:
<TABLE>
<CAPTION>
POSITIONS WITH THE COMPANY AND DIRECTOR OR
PRINCIPAL OCCUPATION OR EMPLOYMENT EXECUTIVE OFFICER
NAME AGE DURING THE PAST FIVE YEARS SINCE
<S> <C> <C> <C>
Thomas L. Kempner 71 Director and Chairman of the Board 1983
of the Company; Chairman and Chief
Executive Officer of Loeb Partners
Corporation, a private investment
banking firm, since 1979.
Presently serves on the Boards of
Directors of Energy Research
Corporation; IGENE Biotechnology,
Inc.; Roper Starch Worldwide,
Inc.; Intermagnetics General;
Northwest Airlines, Inc.
(Emeritus); and CCC Information
Services Group, Inc.
Kenneth N. May 67 Director of the Company; Retired 1995
in August, 1989 as Chairman, Chief
Executive Officer and a director
of Holly Farms Foods, Inc.,
completing 19 years with that
company. Previously held
positions as Professor of Poultry
Science at Mississippi State
University and the University of
Georgia. Technical advisor and
consultant to the National Broiler
Council on food safety matters.
Serves on the Board of Directors
of Embrex, Inc. Dr. May has been
active in the Poultry Science
Association and the National
Broiler Council, and has served on
various committees for the USDA.
19
<PAGE>
Joseph A. Sasenick 58 Director of the Company; President 1991
and Chief Executive Officer of the
Company since February 1992;
President and Chief Operating
Officer of the Company from
February 1991 to February 1992.
Presently serves on the Executive
Committee and Board of Directors
of the Washington Biotechnology
and Biomedical Association and
Board of Directors of the
Technology Alliance, a special
program of the Greater Seattle
Chamber of Commerce. Previously
held senior management positions
at Abbott Laboratories and The
Gillette Company.
William G. Spears 60 Director of the Company; Chairman 1989
and CEO of Key Asset Management,
the investment advisory subsidiary
of KeyCorp. since 1996. Presently
serves on the Board of Directors
of United HealthCare Corp.
Chairman, HealthCare Chaplaincy
Board of Trustees and Vice
Chairman of Quinnipiac College
Board of Trustees.
John P. Richards 56 Executive Vice President, Chief 1991
Financial Officer of the Company;
President of Tartan Marine Company
from June 1983 to November 1990.
Previously held various financial
and operational management
positions at Abbott Laboratories
from 1968 to 1983.
G. Kere Kemp 48 Executive Vice President, Chief 1992
Scientific Officer of the Company.
Previously held clinical research
positions with Pfizer, Inc. His
fifteen year term at Pfizer
included assignments in New
Zealand, the United Kingdom and
New York, from 1976 to 1991.
</TABLE>
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Section captioned
"Executive Compensation" contained in the Company's definitive Proxy Statement
for its 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Section captioned
"Share Ownership by Directors, Executive Officers and Certain Beneficial
Owners" contained in the Company's definitive Proxy Statement for its 1998
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from the Section
captioned "Certain Transactions" contained in the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with Report:
1. FINANCIAL STATEMENTS
Independent Auditors' Report.
Balance Sheets as of May 31, 1997 and May 31, 1998.
Statements of Operations for each of the years ended
May 31, 1996, May 31, 1997 and May 31, 1998.
Statements of Changes in Shareholders' Equity for each
of the years ended May 31, 1996, May 31, 1997 and May
31, 1998.
Statements of Cash Flows for each of the years ended
May 31, 1996, May 31, 1997 and May 31, 1998.
2. FINANCIAL STATEMENT SCHEDULE
Notes to Financial Statements.
Selected Quarterly Financial Data for the Years Ended
May 31, 1997 and May 31, 1998, on Page 14.
3. EXHIBITS
See Index to Exhibits on Page 23.
(b) Reports on Form 8-K.
None
21
<PAGE>
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.
ALCIDE CORPORATION
(Registrant)
By /s/Joseph A. Sasenick
-------------------------------------
Joseph A. Sasenick, President
Chief Executive Officer
By /s/John P. Richards
-------------------------------------
John P. Richards, Executive Vice President
Chief Financial Officer (Principal Accounting Officer)
Date: July 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/Thomas L. Kempner Director July 15, 1998
- -------------------------------
Thomas L. Kempner
/s/Kenneth N. May Director July 15, 1998
- -------------------------------
Kenneth N. May
/s/Joseph A. Sasenick Director, President, July 15, 1998
- ------------------------------- Chief Executive Officer
Joseph A. Sasenick
/s/William G. Spears Director July 15, 1998
- -------------------------------
William G. Spears
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
3.1 Certificate of Incorporation (previously filed as an exhibit to
Registration Statement No. 2-79954 on Form S-1 filed October 22, 1982,
and incorporated herein by reference).
3.2 By-Laws (previously filed as an exhibit to Form 10-K of the Registrant
for the fiscal year ended May 31, 1984, and incorporated herein by
reference).
10.3 1983 Incentive Stock Option Plan as amended (previously filed as an
exhibit to Form 10-K of the Registrant for the fiscal year ended May
31, 1984, and incorporated herein by reference).
10.14 Agreement by and between the Company and Holstein Genetika KFT dated
May 1, 1992 (previously filed as an exhibit to Form 10-K of the
Registrant for the fiscal year ended May 31,1992, and incorporated
herein by reference).
10.16 Second amendment dated April 8, 1993 to employment agreement for
Joseph A. Sasenick dated February 11, 1991 and first amendment to
employment agreement dated February 4, 1992 (previously filed as
exhibits to Form 10-K of the Registrant for the fiscal years ended May
31, 1991 and 1992, respectively and incorporated herein by reference).
10.19 1993 Incentive Stock Option Plan (previously filed as an Exhibit to
Proxy Statement for meeting held December 7, 1993, and incorporated
herein by reference).
10.20 Distributor Agreement by and between the Company and ABS Global, Inc.,
dated October 30, 1996, covering the United States (previously filed
as an exhibit to Form 10-Q of the Registrant for the quarter ended
November 30, 1996, and incorporated herein by reference).
10.21 Distributor Agreement by and between the Company and ABS Global, Inc.,
dated October 30, 1996, covering several international markets
(previously filed as an exhibit to Form 10-Q of the Registrant for the
quarter ended November 30, 1996, and incorporated herein by
reference).
10.22 Distributor Agreement by and between the Company and IBA Inc., dated
February 7, 1997, covering territories in the United States
(previously filed as an exhibit to Form 10-Q of the Registrant for the
quarter ended February 28, 1997, and incorporated herein by
reference).
10.23 Distributor Agreement by and between the Company and Novus
International, Inc., dated May 21, 1997 (previously filed on Form 8-K
of the Registrant on May 30, 1997, and incorporated herein by
reference).
10.24 Distributor Agreement by and between the Company and Ingenieursbureau
lr. P.C. Heemskerk b.v., dated June 1,1997, covering territories of
The Netherlands, Denmark, Belgium, Germany, Luxembourg, Sweden and
Finland (previously filed as an exhibit to Form 10-Q of the Registrant
for the quarter ended February 28, 1998, and incorporated herein by
reference).
10.25 Distributor Agreement by and between the Company and Ingenieursbureau
lr. P.C. Heemskerk b.v., dated September 4, 1997, covering the
territory of France (previously filed as an exhibit to Form 10-Q of
the Registrant for the quarter ended February 28, 1998, and
incorporated herein by reference).
10.26 Distributor Agreement by and between the Company and Universal
Marketing Services, Inc., dated January 30, 1998, covering territories
of the United Kingdom, Spain and the Republic of Ireland (previously
filed as an exhibit to Form 10-Q of the Registrant for the quarter
ended February 28, 1998, and incorporated herein by reference).
10.27 Amendment dated August 3, 1998 to Distributor Agreement by and between
the Company and Novus International, Inc., dated May 21, 1997
(previously filed on Form 8-K of the Registrant on August 11, 1998,
and incorporated herein by reference).
23.1 Consent of Independent Public Accountants.
</TABLE>
23
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Alcide Corporation:
We have audited the accompanying balance sheets of Alcide Corporation (a
Delaware corporation) as of May 31, 1998 and 1997, and the related statements of
operations, changes in shareholders' equity and cash flows for each of the three
years ended May 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of Alcide Corporation as of May 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years then ended in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Seattle, Washington
June 19, 1998
24
<PAGE>
ALCIDE CORPORATION BALANCE SHEETS MAY 31,
<TABLE>
<CAPTION>
MAY 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 6,723,154 $ 7,844,217
Short term investments 2,086,900 3,782,752
Accounts receivable - trade 2,498,981 2,268,264
Inventory 1,115,627 1,353,870
Prepaid expenses and other current assets 285,971 213,269
----------- -----------
Total current assets 12,710,633 15,462,372
----------- -----------
Equipment and leasehold improvements:
Office equipment 100,010 112,280
Laboratory and manufacturing equipment 132,404 145,292
Leasehold improvements 56,152 56,152
Less: Accumulated depreciation and amortization (143,604) (202,318)
----------- -----------
Total equipment and leasehold improvements, net 144,962 111,406
----------- -----------
Deferred income tax asset 1,090,229 285,618
----------- -----------
Other assets 1,167,848 509,941
----------- -----------
TOTAL ASSETS $15,113,672 $16,369,337
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 329,808 $ 269,801
Accrued expenses 477,793 157,812
Income taxes payable 15,253 125,000
----------- -----------
Total liabilities 822,854 552,613
----------- -----------
COMMITMENTS AND CONTINGENCIES
Redeemable Class B Preferred Stock -
noncumulative convertible $.01 par value;
authorized 10,000,000 shares
issued and outstanding:
May 31, 1997 - 88,802
May 31, 1998 - 81,119 233,105 212,936
----------- -----------
Shareholders' equity:
Class "A" Preferred Stock - no par value
authorized 1,000 shares; issued and
outstanding 1,000 shares 135,307 135,307
Common Stock $.01 par value;
authorized 100,000,000 shares;
issued and outstanding:
May 31, 1997 - 2,799,408
May 31, 1998 - 2,872,313 27,994 28,723
Treasury stock at cost (3,191,425) (6,125,794)
Additional paid-in capital 18,302,377 19,559,369
Retained Earnings (Accumulated Deficit) (1,216,540) 2,006,183
----------- -----------
Total Shareholders' Equity 14,057,713 15,603,788
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,113,672 $16,369,337
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
25
<PAGE>
ALCIDE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
NET SALES $11,145,826 $11,768,504 $12,998,952
----------- ----------- -----------
EXPENDITURES:
Cost of goods sold 3,737,957 3,853,875 4,319,242
Royalty expense 807,940 437,877 332,881
Research and development expense 1,176,563 1,546,285 1,633,925
Depreciation and amortization 49,454 57,022 58,714
Consulting expense to related parties 96,150 96,014 96,012
Other selling, general/administrative 2,070,570 2,026,284 2,148,949
----------- ----------- -----------
7,938,634 8,017,357 8,589,723
----------- ----------- -----------
Operating income 3,207,192 3,751,147 4,409,229
Interest income 294,881 427,316 638,016
Other income 23,796 126,530 23,836
----------- ----------- -----------
Income before provision for income taxes 3,525,869 4,304,993 5,071,081
Provision for income taxes 1,200,807 1,423,698 1,848,358
----------- ----------- -----------
Net income $ 2,325,062 $ 2,881,295 $ 3,222,723
----------- ----------- -----------
----------- ----------- -----------
Basic earnings per common share $ 0.89 $ 1.12 $ 1.24
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings per common share and equivalents $ 0.82 $ 1.04 $ 1.16
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 2,623,355 2,578,945 2,607,192
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares & common share
equivalents 2,832,088 2,783,064 2,789,491
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to financial statements.
26
<PAGE>
ALCIDE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class "A" Additional
Preferred Stock Common Stock Paid In Common Treasury Stock
Capital
- ------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1995 1000 $135,307 2,787,838 $27,878 $18,164,399 (153,380) ($1,441,132)
Exercise of Stock Options 3,700 37 26,013
Purchase Treasury Stock (38,957) (772,713)
Tax Benefit from Exercise of
Non-Qualified Stock Options 19,000
Net Income
- ------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1996 1,000 $135,307 2,791,538 $27,915 $18,209,412 (192,337) ($2,213,845)
Exercise of Stock Options 7,870 79 69,965
Purchase Treasury Stock (48,382) (977,580)
Tax Benefit from Exercise of
Non-Qualified Stock Options 23,000
Net Income
- ------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1997 1,000 $135,307 2,799,408 $27,994 $18,302,377 (240,719) ($3,191,425)
Exercise of Stock Options 72,905 729 394,617
Purchase Treasury Stock (68,446) (2,934,369)
Tax Benefit from Exercise of
Non-Qualified Stock Options 862,375
Net Income
- ------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1998 1,000 $135,307 2,872,313 $28,723 $19,559,369 (309,165) ($6,125,794)
----- -------- --------- ------- ----------- -------- -----------
----- -------- --------- ------- ----------- -------- -----------
Retained Total
Earnings Shareholders'
(Accumulated Equity
Deficit)
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<S> <C> <C>
Balance May 31, 1995 ($6,422,897) $10,463,555
Exercise of Stock Options 26,050
Purchase Treasury Stock (772,713)
Tax Benefit from Exercise of
Non-Qualified Stock Options 19,000
Net Income 2,325,062 2,325,062
- ----------------------------------------------------------------
Balance May 31, 1996 ($4,097,835) $12,060,954
Exercise of Stock Options 70,044
Purchase Treasury Stock (977,580)
Tax Benefit from Exercise of
Non-Qualified Stock Options 23,000
Net Income 2,881,295 2,881,295
- ----------------------------------------------------------------
Balance May 31, 1997 ($1,216,540) $14,057,713
Exercise of Stock Options 395,346
Purchase Treasury Stock (2,934,369)
Tax Benefit from Exercise of
Non-Qualified Stock Options 862,375
Net Income 3,222,723 3,222,723
- ----------------------------------------------------------------
Balance May 31, 1998 $2,006,183 $15,603,788
---------- -----------
---------- -----------
</TABLE>
See notes to financial statements.
27
<PAGE>
ALCIDE CORPORATION STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $2,325,062 $ 2,881,295 $ 3,222,723
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 49,454 57,022 58,714
Amortization (50,959) (53,359) (82,512)
Common Stock issued to directors,
consultants and the employee
stock ownership plan 62,003 52,000 55,081
Deferred income tax 1,103,218 1,330,962 804,611
Decrease (increase) in assets:
Inventory (366,303) (187,127) (238,243)
Accounts receivable - trade (1,522) 86,446 230,717
Prepaid expenses and other current assets 55,163 (137,424) 72,702
Other assets 10,273 (53,058) 657,907
Increase (decrease) in liabilities:
Accounts payable (4,758) (44,632) (60,007)
Accrued expenses and
taxes payable 276,623 (590,794) 652,141
---------- ----------- -----------
Net cash provided by operating activities 3,458,254 3,341,331 5,373,834
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investments (997,786) (2,050,907) (3,720,340)
Redemption of investments 1,000,000 1,050,000 2,107,000
Acquisition of equipment (44,422) (7,354) (25,158)
---------- ----------- -----------
Net cash provided by (used in)
investing activities (42,208) (1,008,261) (1,638,498)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Alcide Common and
redemption of Class B
Preferred Stock (846,358) (1,045,855) (3,009,619)
Stock Options exercised 26,050 70,044 395,346
---------- ----------- -----------
Net cash (used in) financing activities (820,308) (975,811) (2,614,273)
---------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,595,738 1,357,259 1,121,063
Cash and cash equivalents at beginning of year 2,770,157 5,365,895 6,723,154
---------- ----------- -----------
Cash and cash equivalents at end of year $5,365,895 $ 6,723,154 $ 7,844,217
---------- ----------- -----------
---------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest --- ---
Cash paid during the year for income taxes $ 87,000 $ 41,000 $ 71,625
</TABLE>
See notes to financial statements.
28
<PAGE>
ALCIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. GENERAL:
Alcide Corporation (the "Company") is engaged in the research, development
and commercialization of unique chemical compounds having intense
microbiocidal activity. The Company holds substantial worldwide rights to
its discoveries through various patents, patent applications, trademarks
and other intellectual property, technology and know-how.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Revenue Recognition: Sales to Novus International, Inc. are recorded
at the greater of minimum payments set forth in the contract or actual
products shipped at the end of each fiscal quarter. All other sales are
recorded at the time of shipment to end users or to distributors who take
title to products at the time of shipment. One distributor accounted for
$7,905,048 or 71% of net sales and $6,891,749 or 59%, and $6,532,471 or 50%
in the years ended May 31, 1996, May 31, 1997 and May 31, 1998,
respectively. Accounts receivable due from this customer were $1,646,162
at May 31, 1997 and $337,286 at May 31, 1998. Sales through the Company's
four European distributors accounted for $2,697,254 or 24% of net sales in
1996, $3,194,221 or 27% of net sales in 1997 and $2,915,591 or 22% of net
sales in 1998. Accounts receivable due from these customers were $672,983
at May 31, 1997 and $1,111,750 at May 31, 1998.
The Company provides a limited warranty to its distributors which limits
the Company's obligation to replacement of defective product. Such
replacements have for the past several years been less than .1% of net
sales.
b. Cash and cash equivalents consist of short-term interest-bearing
instruments, primarily U.S. Treasury based money market accounts redeemable
on demand. These investments are carried at amortized cost which
approximates market.
c. Royalties: Provisions in royalty agreements provide for the payment of
8% of net cash sales of applicable products.
d. Litigation Expense: The expected costs to defend the Company in law
suits filed against it are recorded in the period in which the Company
becomes aware of the action.
e. Depreciation and Amortization: Office, laboratory and manufacturing
equipment is being depreciated over the five-year estimated useful life of
the assets by the straight-line method.
Leasehold improvements are being amortized over the lives of leases by the
straight-line method.
f. Income Taxes: The Company accounts for income taxes using the
liability method. Under this method, the Company computes deferred income
taxes based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
29
<PAGE>
g. Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent 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.
h. Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.
3. INVESTMENTS:
Debt securities that the Company has both the intent and ability to hold to
maturity are classified as "held-to-maturity" and are carried at amortized
cost. Information regarding securities held at May 31, 1997 and May 31,
1998, is as follows:
<TABLE>
<CAPTION>
Amortized Cost Fair Value
-------------- ----------
Investment Classification 1997 1998 1997 1998
- ------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Held-to-maturity:
Current $2,086,900 $3,782,752 $2,098,013 $3,783,746
Long Term 1,100,620 504,259 1,102,750 511,875
---------- ---------- ---------- ----------
$3,187,520 $4,287,011 $3,200,763 $4,295,621
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized Gains Maturity
---------------------- --------
Investment Classification 1997 1998 1997 1998
- ------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Held-to-maturity $13,243 $8,610 1-2 years 1-5 years
</TABLE>
Investments consist entirely of debt obligations of the United States.
4. INVENTORY:
Inventory is recorded at the lower of cost or market on a first-in,
first-out basis, as follows:
<TABLE>
<CAPTION>
May 31, 1997 May 31, 1998
------------ ------------
<S> <C> <C>
Raw Materials $ 973,907 $ 947,243
Finished Products 141,720 406,627
---------- ----------
Total $1,115,627 $1,353,870
---------- ----------
---------- ----------
</TABLE>
30
<PAGE>
5. ACCRUED EXPENSES:
At May 31, accrued expenses were comprised of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Accrued royalties $108,549 $113,655
Accrued employee salaries, incentive and
benefits 267,228 29,147
Reserve for defending against potential
royalty claim 87,000 -0-
Other accrued expenses 15,016 15,010
-------- --------
$477,793 $157,812
-------- --------
-------- --------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
a. Leases:
Effective July, 1994, the Company occupied office and laboratory space in
Redmond, Washington under a five-year noncancellable lease expiring May 31,
1999. Insurance, utilities and maintenance expenses are borne by the
Company.
There are no contingent rentals or sublease rentals.
The annual lease commitment for the Redmond, Washington facility is $62,256
in fiscal year 1999.
b. Employment Agreements:
One officer has an employment agreement which obligates the Company to a
salary of $210,109 per year. Bonus compensation of 100% of base pay can be
earned.
c. Royalty Agreement:
The Company has an obligation pursuant to certain royalty and consolidation
agreements to pay patent holders a royalty of 50% of license revenues and
8% of net cash sales of its covered products subject to such agreements.
On February 20, 1996, the Company was named as a defendant in a lawsuit
filed in United States District Court for the Southern District of New York
by some of the individuals who have rights to receive royalties with
respect to certain patents assigned to the Company. The complaint alleges
that the Company has not paid the required amount of royalties due the
plaintiffs pursuant to Royalty and Consolidation Agreements. The complaint
seeks damages for unpaid royalties and unjust enrichment, injunctions and
other relief.
The Company has denied any wrongdoing in connection with the matters that
have been alleged and intends to defend the lawsuit vigorously. The
Company has included in royalty expense in the accompanying income
statement $514,977 in FY 1996, and $85,497 in FY 1997, to establish a
reserve for the purpose of defending its position in this legal dispute.
No reserve was established in FY 1998. During fiscal 1998, the Company
incurred legal fees of $131,666 to defend its position in this lawsuit;
$87,000 of those fees were charged against the previously established
reserve. It is believed that the Company has completed substantially all
discovery work in connection with the dispute (see Note 5).
31
<PAGE>
Royalty payments earned by patent holders for the fiscal years ended May
31, 1996, 1997, and 1998 were $305,167, $352,380, and $332,881,
respectively.
d. Distribution Agreements:
The Company has entered into agreements with each of its distributors of
products sold to the dairy industry. Such agreements describe the
territories covered, product pricing, and expected product purchases during
the term of the agreement. Each such agreement has been filed with the SEC
and is incorporated herein by reference.
The Company has entered into an agreement with Novus International, Inc.
for Sanova, its poultry processing antimicrobial. The agreement grants
worldwide rights to Novus for antimicrobials sold to the poultry processing
industry and also grants negotiating rights to Novus for other food
processing industries.
7. INCOME TAXES:
A summary of the provision for income taxes follows:
<TABLE>
<CAPTION>
FY 1996 FY 1997 FY 1998
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ 97,589 $ 93,166 $ 854,353
State and local --- -- 189,394
---------- ---------- ----------
$ 97,589 $ 93,166 $1,043,747
Deferred
Federal $1,103,218 $1,330,532 $ 804,611
---------- ---------- ----------
$1,200,807 $1,423,698 $1,848,358
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FY 1996 FY 1997 FY 1998
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes 0.0% 0.0% 2.4%
Other 0.1% (0.9%) 0.0%
----- ----- -----
Effective income tax rate 34.1% 33.1% 36.4%
----- ----- -----
----- ----- -----
</TABLE>
At May 31, 1997 and May 31, 1998, the deferred tax assets were comprised of
the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Operating loss carry forward $ 632,897 ---
Temporary differences 1,188 $ 27,414
Credits carry forward 194,837 ---
Alt. minimum tax carry forward 261,307 258,204
---------- --------
Total deferred tax asset $1,090,229 $285,618
---------- --------
---------- --------
</TABLE>
The temporary differences result primarily from reserves recorded in the
financial statements which will be deductible for tax reporting when paid.
32
<PAGE>
8. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards 128
("SFAS 128"), "Earnings Per Share" which replaced the calculation of
primary and fully diluted earnings per share with Basic and Diluted
earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding during
the year. Diluted earnings per share is computed by dividing net income by
the weighted average number of common shares and common stock equivalents
outstanding during the year. Common stock equivalents of the Company
include the dilutive effect of outstanding stock options.
Basic and Diluted earnings per share were calculated as follows:
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Years Ended May 31,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net Income $2,325,062 $2,881,295 $3,222,723
Weighted average number of
common shares outstanding 2,623,355 2,578,945 2,607,192
Basic EPS $ .89 $ 1.12 $ 1.24
Assuming exercise of options
reduced by the number of shares
which could have been purchased
with the proceeds from exercise of
such options 208,733 204,119 182,299
---------- ---------- ----------
Weighted average common shares
outstanding and common share
equivalents 2,832,088 2,783,064 2,789,491
---------- ---------- ----------
---------- ---------- ----------
Diluted EPS $ .82 $ 1.04 $ 1.16
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK:
a. Authorized Capital
The authorized capital of the Company is 100,000,000 shares of $.01 par
value Common Stock, 1,000 shares of no par value Class A Preferred Stock
and 10,000,000 shares of $.01 par value Class B Preferred Stock.
The Company has not declared dividends on any of its classes of stock.
b. Class A Preferred Stock
The nonvoting Class A Preferred Stock has preference in liquidation for
$135,307, its stated value. Holders have the right to receive an annual
noncumulative dividend of 6% of the stated
33
<PAGE>
value amount, if a dividend is declared and paid on Common Stock. The
stock is redeemable at any time by the Company.
c. Redeemable Class B Preferred Stock - Series 1 and 2.
On September 30, 1994, the Company issued to holders of any
outstanding Series 1 Stock, in a recapitalization, one share of Class
B Stock to be designated as Series 2 Redeemable Preferred Stock
("Series 2 Stock") and 0.2 share of Common Stock. Commencing on
September 30, 1994, the Company created a sinking fund to be funded,
on that day and on the 30th day of September of each year thereafter,
at a rate equal to 0.7% of the Company's prior fiscal year's net
income, if any, at $2.625 per share plus declared and unpaid
dividends in any amount equal to the sinking fund payment. The
Company was required to redeem 7,683 shares of Series 2 Stock on
September 30, 1997, for $20,169. Based on fiscal 1998 net income,
the Company will redeem 8,594 shares of Series 2 stock for $22,559 on
September 30, 1998. The Company may redeem any or all of the issued
and outstanding Series 2 Stock at its option, at any time, at the
redemption price of $2.625 per share.
10. STOCK OPTIONS:
The Company had an incentive stock option plan, which expired in May
1993. No additional grants may be issued under this plan. The
Company replaced this plan with a new plan effective December, 1993,
which includes both incentive stock options and nonstatutory stock
options. Nonstatutory stock options may be granted to employees,
directors, officers and consultants. The option exercise price for
incentive stock options may not be less than the fair market value of
the Common Stock on the date of the grant of the option.
Non-qualified stock options are granted with an exercise price equal
to 100% or greater of the fair market value of the Common Stock on
the date of grant. Under this plan there are 120,750 options
available for grant as of May 31, 1998.
The Company also has a stock option plan for nonemployee directors.
Options granted under the plan are granted with an exercise price
equal to 100% of the fair market value of the Common Stock on the
date of grant. Under this plan there are 45,071 options available
for grant as of May 31, 1998.
Options are exercisable within 10 years from the date the option was
granted. Options outstanding were granted at the market price or
higher on the date of grant and will expire during the period July
2000 through June 2008. The Company accounts for its stock option
plans under the guidelines of Accounting Principles Board Opinion 25
("APB 25"), under which no compensation cost has been recognized. In
1996, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," effective for years beginning after May
31, 1996. The Company has continued to measure compensation cost for
employee stock compensation plans under the guidelines of APB 25, as
allowed by SFAS 123.
34
<PAGE>
The status of the plan is as follows:
<TABLE>
<CAPTION>
FY 1996 FY 1997 FY 1998
------- ------- -------
No. of Weighted No. of Weighted No. of Weighted
Shares Avg. Share $ Shares Avg. Share $ Shares Avg. Share $
------ ------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 304,834 $7.50 337,634 $8.84 344,366 $9.22
Granted 39,750 20.58 17,602 22.01 20,897 35.90
Exercised (3,700) 7.04 (7,870) 8.90 (75,325) 6.87
Canceled (3,250) 28.35 (3,000) 42.03 (750) 20.25
------- ------- -------
Outstanding at end of year 337,634 $8.84 344,366 $9.22 289,188 11.78
------- ------- -------
------- ------- -------
Exercisable at end of year 275,225 $7.31 286,338 $7.44 233,888 $8.76
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
Information relating to stock options outstanding and stock options
exercisable at May 31, 1998 is as follows:
<TABLE>
<CAPTION>
Range of Exercise
Prices Options Outstanding Options Exercisable
----------------- ---------------------------------------------------------- -----------------------------
No. of Shares Weighted Avg. Life Weighted Avg. $/Sh. No. Shares Wtd. Avg. $/Sh.
------------- ------------------ ------------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$4.10 - $7.75 143,120 2.90 $ 5.93 142,520 $5.92
$8.63 - $11.63 73,739 5.23 9.82 68,339 9.68
$19.75 - $63.00 72,329 7.98 25.35 23,029 23.59
------- -------
289,188 4.76 $11.78 233,888 $8.76
------- -------
------- -------
</TABLE>
Had compensation cost for these stock option plans been determined in
accordance with SFAS 123, the Company's "Net income" and "Net income per
common share" would have decreased to the following pro forma amounts for
the years ended May 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
FY 1996 FY 1997 FY 1998
------- ------- -------
<S> <C> <C> <C> <C>
Net Income As reported $2,325,062 $2,881,295 $3,222,723
Pro forma $2,254,515 $2,780,416 $2,983,590
Basic earnings per common
share As reported $ .89 $ 1.12 $ 1.24
Pro forma $ .86 $ 1.08 $ 1.14
Diluted earnings per
common share and
equivalents As reported $ .82 $ 1.04 $ 1.16
Pro forma $ .80 $ 1.00 $ 1.07
</TABLE>
Because the SFAS 123 method of accounting has not been applied to stock
options granted before January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
35
<PAGE>
The fair value of each stock option granted is valued on the date
of grant using the Black-Scholes option pricing model. The
weighted average grant-date fair value of stock options granted
during 1998 was $26.99 per share using the assumptions of expected
volatility of 72.2%, expected option lives of 7.5 years, risk-free
rate of interest of 6.6% and no expected dividends. During 1997,
the weighted average grant-date fair value of stock options granted
was $14.05 per share using the assumptions of expected volatility
of 51%, expected option lives of 7.5 years, risk-free rate of
interest of 6.7% and no expected dividends. During 1996, the
weighted average grant-date fair value of stock options granted was
$12.86 per share using the assumptions of expected volatility of
51%, expected option lives of 7.5 years, risk-free rate of interest
of 6.0% and no expected dividends.
11. RELATED PARTY TRANSACTIONS:
a. Consulting Agreements
Loeb Partners Corporation. During the fiscal year ended May 31, 1998,
the Company paid Loeb Partners Corporation $60,000 in cash for
executive and management services provided by Mr. Kempner and Mr.
Mintz. Mr. Kempner holds approximately 51% of the voting equity of
Loeb Holding Corporation, of which Loeb Partners Corporation is a 100%
wholly-owned operating subsidiary.
Kenneth N. May. During the fiscal year ended May 31, 1998, the
Company paid Dr. Kenneth N. May 264 shares of Alcide Common stock
having an aggregate purchase price of $12,012 plus $24,000 cash for
consulting services in the field of pathogen control on poultry and
other food products.
b. Royalty and Consolidation Agreement
The Company has an obligation pursuant to certain royalty and
consolidation agreements to pay to patent holders, some of whom
were founders of and early investors in the Company, a royalty of
50% of its license revenues and 8% of its net sales of its covered
manufactured products subject to said agreements. As the Company
does not presently anticipate entering into sublicense agreements
for products requiring royalty payment, its obligation to pay a
royalty of 50% of its license revenues should have no material
impact on the financial condition of the Company. The Company does
anticipate paying a royalty of 8% of the net sales of its products
to the extent they are subject to royalty payments, which payments
will increase the Company's costs by such amount. Payments have
aggregated $3,573,937 since 1983. During fiscal years 1998 and
1997, the amounts indicated below were paid to the following
individuals and entities, certain of whose principals were members
of the Board: Loeb Investors Co. V., $21,865 and $22,114; Loeb
Investors Co. VIII, $863 and $873, respectively.
Thomas L. Kempner is the managing partner of both Loeb Investors
Co. V and Loeb Investors Co. VIII.
12. EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has an employee stock ownership plan (the Plan).
Employees who are at least age 21 and have completed one year of
service are eligible to participate. The Company may make
discretionary contributions to the Plan. The Company's
contributions for fiscal years 1998, 1997 and 1996 were
approximately $67,000, $60,500, and $62,000, respectively.
36
<PAGE>
CORPORATE OFFICE
8561 154th Avenue NE
Redmond, Washington 98052
Phone: (425) 882-2555
Fax: (425) 861-0173
AUDITORS
Arthur Andersen LLP
801 Second Avenue, Suite 800
Seattle, WA 98104
COMMON STOCK LISTING
NASDAQ
(Symbol - ALCD)
TRANSFER AGENT AND REGISTRAR
American Securities Transfer and Trust, Incorporated
938 Quail Street, Suite 101
Lakewood, Colorado 80515
38
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement, File No. 333-00909.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
August 18, 1998
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 7,844,217
<SECURITIES> 0
<RECEIVABLES> 2,268,264
<ALLOWANCES> 0
<INVENTORY> 1,353,870
<CURRENT-ASSETS> 15,462,372
<PP&E> 313,724
<DEPRECIATION> 202,318
<TOTAL-ASSETS> 16,369,337
<CURRENT-LIABILITIES> 552,613
<BONDS> 0
0
212,936
<COMMON> 28,723
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,369,337
<SALES> 12,998,952
<TOTAL-REVENUES> 13,660,804
<CGS> 4,319,242
<TOTAL-COSTS> 8,589,723
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,071,081
<INCOME-TAX> 1,848,358
<INCOME-CONTINUING> 3,222,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,222,723
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.16
</TABLE>
