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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, 1999
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
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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, 1999 was approximately $32,895,461. On that date, there
were 2,527,830 shares of common stock outstanding, net of Treasury Stock.
Certain sections of Registrant's definitive Proxy Statement for its 1999
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 1999 Annual Meeting of Stockholders.
Page 1 of 39 pages
Exhibit Index on Page 24
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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 10
G. Government Regulation 10
H. Employees 11
I. Advertising and Promotion 12
J. Manufacturing 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 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 19
PART III Item 10. Directors and Executive Officers 20
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
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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 governmental regulatory approval thereof. Sentences or phrases that use
the words such as "believes," "anticipates," "hopes," "plans," "may," "can,"
"will," "expects," 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, 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-Registered Trademark- 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, 1999 were
$11,220,528. Export sales to international distributors, plus product
exported by U.S. distributors to international markets accounted for
$4,180,038, 37% of total sales.
1. DAIRY INDUSTRY
Worldwide sales of dairy line products during fiscal year 1999 were
$9,189,063 as compared with $10,114,845 in FY 1998. In FY 1999 sales to the
dairy industry accounted for 82% of the
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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.
U.S. DAIRY INDUSTRY
In fiscal 1999, dairy industry sales in the United States were
$5,009,025, 55% 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 $4,180,038 in fiscal 1999, 45% of total sales to the dairy
industry.
DISTRIBUTOR ARRANGEMENTS
All Alcide sales to the dairy 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 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 agreements with ABS Global, Inc. for the
United States and several international markets expired on October 31, 1998
and were not renewed. On November 1, 1998 Alcide entered into a new four year
contract with IBA, Inc. to expand the IBA territory to cover the entire
United States. Simultaneously, the Universal Marketing Services, Inc.
contract, which had covered the territories of the United Kingdom, Republic
of Ireland and Spain, was amended to include the additional territories of
Canada, Italy, Portugal and the Czech Republic as exclusive UMS territories,
and the United States as a nonexclusive UMS territory.
2. POULTRY PROCESSING INDUSTRY
In May, 1997 the Company entered into an agreement with Novus
International, Inc. for Novus' introduction and distribution of Sanova
antimicrobial to the poultry industry. Under the terms of the agreement Novus
was obligated to pay Alcide the higher of 50% of Sanova profits or at least
$500,000 per quarter for fiscal 1998, and $1 million per quarter thereafter. In
August, 1998, Novus gave notice to Alcide that it intended to terminate the
agreement effective November 30, 1998. During fiscal 1999 Alcide sales to the
poultry industry were $1,538,887, of which $1,204,593 were contractual minimum
payments by Novus. During fiscal 1998 sales to the poultry processing industry
were $2,445,106, all of which was derived from contractual minimum payments by
Novus.
Effective December 1, 1998, Alcide assumed direct responsibility for
distribution of Sanova to the poultry processing industry. On May 31, 1999
five poultry processing plants were using Sanova under contract with Alcide.
In addition, Alcide has entered into contractual agreements for startup of
seven additional poultry processing plants during the period June through
October, 1999.
3. 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.
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Fiscal year 1999 sales of hard surface sterilants and disinfectants were
$440,672, or 4% of total sales, as compared with $390,178 in fiscal year 1998.
4. AUTOMOTIVE INDUSTRY
Fiscal year 1999 sales of RenNew-A/C Air Conditioning System
Disinfectant were $51,906 as compared with $48,823 in fiscal year 1998. All
RenNew-A/C Air Conditioning System Disinfectant sales in both fiscal year
1999 and fiscal year 1998 were to a supplier for the General Motors
Corporation.
5. INDUSTRY PRACTICES AND BACKLOG ORDERS
The Company's invoice terms for the dairy, health care and automotive
industries conform to those in the chemical industry in general, which are:
domestic-30 days, export-60 days.
Alcide had $1,138,270 of firm orders on May 31, 1999 for future
delivery to the dairy industry as compared to orders for future delivery at
May 31, 1998 of $2,062,834. The Company's distributors typically place orders
one to four months in advance.
The Company's invoice terms, product pricing and delivery to the
poultry processing industry are based on contracts with each processor which
typically cover two to four years. Under the terms of the agreements Alcide
provides inventory to the poultry processors. The inventory is used on demand
and billing by Alcide is determined at the end of each month based on the
previous month's amount of poultry product processed. Payment is due 15 days
after billing.
C. RESEARCH AND PRODUCT DEVELOPMENT
During fiscal year 1999 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 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 1999 are
described below:
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1. FOOD DISINFECTION
USDA approval to recommence the Continuous On-line Processing (COP)
concept was achieved in January, 1999. This approval provides added value to
the Sanova System and is of interest to the entire U.S. poultry processing
industry. Significant effort has been directed to the completion of a series
of COP studies in order to successfully validate to USDA that the Sanova
System can deliver significant improvements in the overall quality of
processed poultry. Additional research for the optimization of the Sanova
process will continue throughout fiscal 2000. This research will continue to
focus on improvements in performance (microbial reduction) as well as
reductions in product cost.
Testing to establish the application parameters for Sanova on beef
were completed during the final quarter of fiscal 1999 and those for pork
will be completed in the first quarter of fiscal 2000. It is expected that
all of the requirements for USDA approval for beef will be met by the end of
calendar 1999 permitting commercial expansion into this area during the
latter half of fiscal 2000. A Food Additive Petition requesting the use of
Sanova on red meat parts (in addition to whole carcass disinfection) was
submitted during the first quarter of fiscal 2000.
Verbal notice was received from the Canadian regulatory authorities
in early August that their review of the Sanova chemistry had been completed.
Final written approval is expected by September 1, 1999, which will permit
both the importation of Sanova treated carcasses into Canada and the use of
Sanova within Canada.
The Food Additive Petition for the use of Sanova on Raw Agricultural
Commodities (intact fruits and vegetables) was successfully completed during
fiscal 1999. It is expected that the final FDA notice of approval for use
will issue during fiscal 2000. The degree to which the Environmental
Protection Agency (EPA) will exert regulatory authority over this field has,
during the past 60 days, become uncertain. The respective roles of FDA and
EPA have been clouded by the 1997 Food Quality Protection Act, and the
agencies themselves have been unable to specifically define their regulatory
authority and criteria for approval for antimicrobial products directed at
pathogen reduction such as Sanova. Given this environment, Alcide has pursued
a course through FDA which the Company believes has the strongest likelihood
of exerting control over treatment of Raw Agricultural Commodities in
processing plants. EPA involvement, if required, could delay
commercialization of Sanova for disinfection of Raw Agricultural Commodities.
2. UDDER CARE BUSINESS
Significant new formulation developments for potential new market
sectors and for patent extension opportunities were completed during fiscal
1999. It is believed that this effort will result in new product introduction
in fiscal 2000. Additional new products will continue to undergo "proof of
principle" testing during fiscal 2000 as well as field efficacy and
toleration testing prior to market introduction. A longer term development is
in process for the creation of a "next generation" of udder care products.
Field testing of the first of the new product opportunities in this area is
expected to begin during the second half of fiscal 2000.
3. PREOPERATIVE SKIN ANTISEPTIC
During fiscal 1999, continued delays were experienced in the
finalization of the Company's New Drug Application (NDA) arising from the
process of identifying and certifying a Good
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Manufacturing Practices (GMP) compliant supplier of the active material. As
of the end of fiscal 1999, this process remains unfinished. In lieu of the
qualification of a GMP compliant primary supplier of mandelic acid, a
proposal was submitted to FDA in early fiscal 2000 to request the
qualification of a secondary processor for the process of purification
through re-crystallization of non-GMP compliant mandelic acid. This proposal
has now been accepted paving the way for the completion of our GMP production
requirements and the completion of the CMC package for FDA submission. Timing
to completion of this process remains uncertain. Completion of the CMC
(pharmaceutical) section of the NDA is a pre-requisite to the finalization of
the NDA for this product.
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 continues on hold pending
responses to and final resolution of the preoperative skin antiseptic NDA
submission. It is still the Company's intention that an addendum to the
original NDA to cover this expanded use will be submitted to FDA and this is
now targeted for late in fiscal 2000.
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.
4. ANTI-INFECTIVE ORAL RINSE
Testing of the Company's candidate product for potential Rx or OTC
use in the oral care field continued during fiscal 1999 in cooperation with a
major international pharmaceutical marketer. This cooperative testing will
continue into fiscal 2000 with the expectation that if the results prove
successful, a licensing agreement for future development and marketing may
eventuate. As part of the fiscal 1999 testing it has been demonstrated that
optimal therapeutic product formulations may not necessarily prove to be the
most appropriate for OTC use. It is therefore expected that a parallel
development strategy for these two potential use areas will be followed in
fiscal 2000.
5. INTRAMAMMARY INFUSION
It was established during fiscal 1999 that modern analytical methods
for residues are able to detect the presence of unacceptable levels of
product degradants in the milk of cows treated with the candidate product.
Since these residues completely alter the market potential of this product,
it was decided in late fiscal 1999 to terminate the research program.
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
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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 fifteen issued United States
patents:
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1) U.S. Patent No. 4,891,216
"Disinfecting Compositions and Methods Therefor"
2) U.S. Patent No. 4,956,184
"Topical Treatment of Genital Herpes Lesions"
3) U.S. Patent No. 4,986,990
"Disinfection Method and Composition Therefor"
4) U.S. Patent No. 5,019,402
"Composition and Procedure for Disinfecting Blood and Blood Components"
5) U.S. Patent No. 5,100,652
"Disinfecting Oral Hygiene Compositions and Process for Using the Same"
6) U.S. Patent No. Re. 36,064
"Disinfection Method and Composition Therefor"
7) U.S. Patent No. 5,252,343
"Method and Composition for Preventing and Treatment of Bacterial Infections"
8) U.S. Patent No. 5,384,134
"Anti-Inflammatory Formulations for Inflammatory Diseases"
9) U.S. Patent No. 5,389,390
"Process for Removing Bacteria from Poultry and Other Meats"
10) U.S. Patent No. 5,597,561
"Adherent Disinfecting Compositions and Method of Use in Skin Disinfection"
11) U.S. Patent No. 5,622,725
"Wound Disinfection and Repair"
12) U.S. Patent No. 5,628,959
"Composition and Method for Sterilizing Dialyzers"
13) U.S. Patent No. 5,651,977
"Adherent Disinfecting Compositions and Methods Related Thereto"
14) U.S. Patent No. 5,667,817
"Method and Composition for the Prevention and Treatment of Female Lower Genital Tract
Microbial Infections"
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15) U.S. Patent No. 5,772,985
"Composition and Methods for Treatment of Skin Lesions"
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One new U.S. patent application was filed during fiscal year
1999. Five additional U.S. patent applications are pending, as well
as one reissue application corresponding to patent 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.
The Company's second patent, U.S. Patent No. 4,330,531, expired in the
United States on May 18, 1999, and was directed to a lactic acid/sodium
chlorite gel formulation.
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
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 Sanova-Registered Trademark-,
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.
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.
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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 expiration
on May 18, 1999 of the Company's U.S. Patent 4,330,531, which covered
Alcide's UDDERgold formulation, allows competing lactic acid based acidified
sodium chlorite products to enter the marketplace. ABS Global, Inc., the
Company's former distributor, has introduced one such product. Management
believes, however, that the expired patent's technology is inferior to that
represented by Alcide's more recent patents.
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
within the poultry processing industry 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 and rejected by the West German regulatory
authorities in March, 1997. A new registration application was filed in
March, 1999 and is presently under review by the German authorities. The
Company's distributor in The Netherlands had been selling UDDERgold to German
customers who bought the product in The Netherlands until May, 1999, at which
time the distributor was ordered to discontinue the practice of across border
shipment of UDDERgold. The distributor reports that 70% of its former German
UDDERgold customers have converted to Alcide's 4XLA Teat Dip.
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, Germany and the United States.
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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.
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 August 1999, as a necessary step in obtaining the
agency's required approval.
c. Fruits and Vegetables
In December, 1998 Alcide submitted a Food Additive Petition
to the Food and Drug Administration for the use of Sanova on raw agricultural
commodities. Approval of the petition is expected in fiscal 2000.
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 after May, 1997. The product cannot be marketed without FDA approval.
Completion of the pharmaceutical manufacturing section of the NDA is a
necessary final step in the approval process.
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 15 employees occupy a
6,751 square foot facility in Redmond, Washington. In addition there are 2
Sanova technical service representatives located in the southeastern U.S.
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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.
ITEM 2. PROPERTIES
The Company's Sanova food antimicrobial is stored, mixed and applied
on site at each poultry processing plant under contract by means of equipment
owned by Alcide. The historical cost of such equipment for the five poultry
processing plants in operation and three plants being prepared for startup
was $2,496,503 on May 31, 1999. Each new plant utilizing the Sanova System
will require an investment estimated at between $350,000 and $500,000,
depending on plant size.
ITEM 3. LEGAL PROCEEDING
Following termination of its agreement with Alcide, ABS Global, Inc.
introduced a new family of teat dips developed by Ecolab which Alcide asserts
infringes one of Alcide's patents. On December 18, 1998 the Company filed a
patent infringement suit against ABS in U.S. District Court for the Western
District of Wisconsin. Subsequently, in March, 1999, Alcide submitted a
motion to amend its complaint to add Ecolab and certain ABS independent
representatives as additional defendants in the suit. The lawsuit is expected
to go to trial in November, 1999.
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 for the fiscal quarters indicated, as reported by NASDAQ.
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HIGH LOW
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COMMON STOCK
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YEAR ENDED MAY 31, 1998
First quarter 59 1/2 30
Second Quarter 67 3/4 49 7/8
Third Quarter 65 46 1/2
Fourth Quarter 60 1/8 33 1/4
YEAR ENDED MAY 31, 1999
First Quarter 48 17 1/4
Second Quarter 22 13
Third Quarter 25 1/2 12 1/16
Fourth Quarter 19 1/4 11 3/4
</TABLE>
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, 1999, there were approximately 1,648 Common stockholders of
record.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------
MAY 31, 1995 MAY 31, 1996 MAY 31, 1997 MAY 31, 1998 MAY 31, 1999
<S> <C> <C> <C> <C> <C>
Net sales $9,153,104 $11,145,826 $11,768,504 $12,998,952 $11,220,528
Net income (loss) 1,663,213 2,325,062 2,881,295 3,222,723 (974,463)
Diluted earnings
(loss) per common
share and equivalents .60 .82 1.04 1.16 (.38)
Total assets 11,910,992 13,768,614 15,113,672 16,369,337 15,619,987
Long term debt --- --- --- --- ---
Redeemable Preferred
Stock 261,022 249,380 233,105 212,936 190,377
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA FOR THE YEARS ENDED MAY 31, 1998 AND
MAY 31, 1999
<TABLE>
<CAPTION>
Net Sales Gross Profit Net Income Net Income (Loss)
(Loss) per Share
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Year Ended
May 31, 1999
1st Quarter $ 3,781,279 $ 2,669,272 $ 1,033,738 $ .38
2nd Quarter 2,668,869 1,487,877 38,675 .01
3rd Quarter 2,280,135 1,211,675 (1,531,108) (.60)
4th Quarter 2,490,245 947,932 (515,768) (.20)
----------- ----------- ----------- -----------
Total for Year $11,220,528 $ 6,316,756 $ (974,463) $ (.38)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1999 AS COMPARED WITH 1998
Net sales for the twelve month period ended May 31, 1999 were
$11,220,528, a 14% decrease from the $12,998,952 sales for the equivalent
twelve month period in the preceding fiscal year. The net sales decrease and
the $974,463 net loss for the fiscal year ended May 31, 1999 reflect the
negative impact of several unusual events which occurred during the twelve
month period, including:
- The decision by Novus International, Inc. to terminate its
distribution agreement with Alcide pertaining to Alcide's Sanova
antimicrobial for the poultry industry. Under the terms of the
agreement Alcide was entitled to minimum quarterly revenue
payments from Novus. Such payments resulted in Alcide net sales
of $1,204,593 and gross margin of $927,890 during fiscal 1999,
as compared to net sales of $2,445,106 and gross margin of
$2,000,000 in the preceding fiscal year.
- Negotiated settlement costs of $354,000 relating to the
termination of the distribution agreement with Novus
International.
- Operating expenses, testing, development costs and startup
expenses totaling $950,000 related to the support for expansion
of the Sanova business under Alcide control.
- Alcide's decision not to ship product ordered by its former
distributor, ABS Global, Inc. for the month of October. The
order had a sales value of $718,031 and a gross margin value of
$466,720.
- Agreement with royalty rights holders to settle their suit filed
in February, 1996 for a one-time payment totaling $2,212,512.
The entire payment has been reflected as an expense in fiscal
1999.
Interest income of $557,669 for the twelve month period ended May
31, 1999 was $80,347 lower than the equivalent twelve month period last year.
Approximately $46,500 of the year-to-year decrease is due to 8% lower
investable cash resources. The balance of the decrease is due to lower
prevailing interest rates.
Cost of goods as a percentage of net sales was 44% for the twelve
month period ended May 31, 1999, an increase of 11 points over the 33% of net
sales for the same period last year. Sanova cost of goods during the second,
third and fourth quarters with no corresponding minimum profit as occurred in
the prior year account for 6 percentage points of the difference. The balance
is due primarily to increased warehousing, freight and handling costs
incurred in building inventory to support the transition to two new
distributors for the Company's mastitis prevention products.
15
<PAGE>
ROYALTY OBLIGATIONS
Prior to May, 1999, the Company had 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, resulting in royalties of $332,881. During the
first nine months of FY 1999 net sales of $2,505,926 were covered by the
royalty and consolidation agreements, resulting in royalties of $200,482. In
May, 1999, the Company reached agreement with royalty rights holders to
settle their claim to all past and future royalties for a one-time payment of
$2,212,512, resulting in total royalty expense for the year of $2,412,994.
RESEARCH AND DEVELOPMENT
Research and development expenses of $2,240,509 for the twelve month
period ended May 31, 1999 were $606,584 higher than for the twelve months
last year. This increase is due to reimbursement to Novus of $317,000 in
research and development costs associated with the settlement negotiated at
the termination of the Novus contract and increased salary, consulting,
testing and travel costs incurred in connection with food safety related
projects.
SELLING AND ADMINISTRATIVE EXPENSE
Other selling, general and administrative expenses of $3,349,434 for
the twelve months ended May 31, 1999 were $1,200,485 higher than for the
equivalent period last year. The increase reflects costs incurred to manage
the Sanova projects following termination of the Novus agreement of
approximately $628,000, $193,460 of expenses incurred in connection with the
debt collection and patent infringement lawsuits against ABS Global, Inc. and
$298,000 for increases in salaries and executive bonuses.
INCOME TAXES
Income tax benefit during fiscal 1999 was $320,316 compared to an
income tax expense in fiscal 1998 of $1,848,358. The difference between the
effective tax rate of 24.7% in fiscal 1999, compared to 36.4% in fiscal 1998,
is primarily due to state taxes paid and expenses in 1999 related to
settlement of prior year's liabilities. The Company expects its effective
rate in the future to be approximately 36.5%.
LIQUIDITY
The Company's cash, cash equivalents, short term investments and U.S.
Treasury investments totaled $6,895,126 on May 31, 1999, an amount $5,236,103
lower than at the end of the previous fiscal year. The reduction is due
primarily to:
- - Inventory increases of $710,617 to support the Sanova
expansion/transition from Novus International, Inc., and to support the
transition from ABS to two new U.S. animal health distributors.
- - Investment in Sanova plant equipment, components and replacement parts
of $2,631,195.
- - Cash payment in fiscal 1999 of $2,208,399 related to royalty rights
holders' settlement; the balance of the settlement, $4,113, was paid in
the first quarter of fiscal 2000.
16
<PAGE>
OUTLOOK
- - Sanova Food Quality System Distribution
On October 8, 1998, the Company and Novus International, Inc. announced
the termination of their May 21, 1997 agreement to market the Sanova
Food Quality System. As a result of this decision Alcide is now selling
and distributing Sanova directly to the poultry processing industry.
Management has announced its goal for the utilization of Sanova by at
least 20 poultry processing plants by the end of fiscal 2000. On August
1, 1999, seven poultry processing plants were utilizing Sanova and an
additional five plants had contracted with the Company for Sanova use.
Each new plant startup requires process validation testing, engineering
support and other startup expenses. In total, such startup related
expenses are estimated at between $30,000 and $75,000 per plant,
depending on plant size and complexity. Management anticipates that,
initially, startup expenses related to expansion of the Sanova business
base will eclipse profit generated by systems already in operation.
It is further expected that substantial expense will be necessary
during the early part of fiscal 2000 to optimize the Sanova delivery
system and chemistry in the interest of long term cost reduction.
Lastly, it is expected that each new plant will require a capital
investment of $350,000 to $500,000.
- - Udder Care Product Distribution
The Company's distribution agreements with ABS Global, Inc. expired on
October 31, 1998 and were not renewed. Effective November 1, 1998
Alcide entered into a new four year agreement with IBA, Inc. to expand
IBA's territory to cover the entire United States. In addition, the
present Universal Marketing Services, Inc. contract has been amended to
include the additional territories of Canada, Italy, Portugal and the
Czech Republic as exclusive UMS territories and the United States as a
non-exclusive territory.
Management believes that the combined distribution coverage provided by
IBA and UMS has the potential to equal or surpass that previously
provided by ABS for the territories of the United States, Canada,
Italy, Portugal and the Czech Republic.
The transition from ABS to the two expanded distributors, IBA and UMS,
coupled with ABS's infringement, has had an impact on Alcide's fiscal
1999 financial performance and is expected to have an impact on
Alcide's fiscal 2000 financial performance, although the magnitude of
such cannot be determined at this time.
YEAR 2000 ISSUES
The Company has developed and is implementing a comprehensive plan
to address issues related to Year 2000. The organizational simplicity of
Alcide's business structure, which relies heavily on third party
manufacturers and a network of third party distributors, limits the direct
financial impact on the Company to become Year 2000 compliant.
It has been necessary to upgrade the Company's accounting software
which controls internal and external reporting, sales order and billing records,
cost accounting inventory records, accounts
17
<PAGE>
payable and cash management processes. The costs incurred to accomplish the
upgrade were approximately $10,000 and were recorded as an expense during
fiscal 1998. All such upgrades have been completed.
Further, the Company identified a need to upgrade computer software
which controls certain laboratory analytical instruments. The upgrade was
completed during the Company's fiscal 1999 third quarter at a cost of $12,297.
Lastly, the Company has surveyed each of its raw material suppliers,
manufacturing resources and distributors to assure their Year 2000 readiness.
All business related computer systems are fully Year 2000 compatible.
Critical raw materials and manufacturing requirements are available from
multiple sources and the Company can serve its distributors without reliance on
computers.
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
Prior to May, 1999, the Company had 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.
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.
18
<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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 14 and 26 through 37 of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
19
<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, 1999 is listed in the following table:
<TABLE>
<CAPTION>
POSITIONS WITH THE COMPANY AND PRINCIPAL OCCUPATION OR DIRECTOR OR EXECUTIVE OFFICER
NAME AGE EMPLOYMENT DURING THE PAST FIVE YEARS SINCE
<C> <C> <S> <C>
Thomas L. Kempner 72 Director and Chairman of the Board of the Company; 1983
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
Corporation; Northwest Airlines, Inc. (Emeritus); CCC
Information Services Group, Inc.; Evercel, Inc.; and
Insight Communications Company, Inc.
Kenneth N. May 68 Director of the Company; Retired in August, 1989 as 1995
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. Former technical advisor and consultant to the
National Chicken 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 Chicken Council, and has served on various
committees for the USDA.
20
<PAGE>
Joseph A. Sasenick 59 Director of the Company; President and Chief Executive 1991
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 on the 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 61 Director of the Company; Chairman of Key Asset Management, 1989
the investment advisory subsidiary of KeyCorp, since 1996;
Principal of W. G. Spears, Grisanti & Brown LLC since July
1, 1999. Presently serves on the Board of Directors of
United HealthCare Corp.; Avatar Holdings, Inc.; Chairman,
HealthCare Chaplaincy Board of Trustees and Vice Chairman
of Quinnipiac College Board of Trustees.
John P. Richards 57 Executive Vice President, Chief Financial Officer and 1991
Secretary of the Company since 1991; President, Alcide
Food Safety, Inc., a wholly owned subsidiary of the
Company, since January, 1999.
G. Kere Kemp 49 Executive Vice President, Chief Scientific Officer of the 1992
Company; previously Director, Animal Health Research and
Vice President, Clinical Research. Prior to employment at
Alcide, worked for Pfizer, Inc. animal health group for
sixteen years in various research and management positions.
</TABLE>
21
<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 1999 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 1999 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 1999 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, 1998 and May 31, 1999.
Statements of Operations for each of the years ended May
31, 1997, May 31, 1998 and May 31, 1999.
Statements of Changes in Shareholders' Equity for each of
the years ended May 31, 1997, May 31, 1998 and
May 31, 1999.
Statements of Cash Flows for each of the years ended May
31, 1997, May 31, 1998 and May 31, 1999.
2. FINANCIAL STATEMENT SCHEDULE
Notes to Financial Statements.
Selected Quarterly Financial Data for the Years Ended May
31, 1998 and May 31, 1999, on Page 14.
3. EXHIBITS
See Index to Exhibits on Page 24.
(b) Reports on Form 8-K.
None
22
<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: August 17, 1999
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 August 17, 1999
- --------------------------
Thomas L. Kempner
/s/Kenneth N. May Director August 17, 1999
- --------------------------
Kenneth N. May
/s/Joseph A. Sasenick Director, President, August 17, 1999
- -------------------------- Chief Executive Officer
Joseph A. Sasenick
/s/William G. Spears Director August 17, 1999
- --------------------------
William G. Spears
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
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).
10.24 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).
10.28 Distributor Agreement by and between the Company and Merial Societe
Par Actions Simplifiee, dated September 1, 1998, covering the
territory of France (previously filed as an exhibit to Form 10-Q of
the Registrant for the quarter ended August 31, 1998, and
incorporated herein by reference).
10.29 Distributor Agreement by and between the Company and IBA, Inc.,
dated November 1, 1998, covering the United States (previously
filed as an exhibit to Form 10-Q of the Registrant for the quarter
ended November 30, 1998, and incorporated herein by reference).
10.30 Transfer of Assets and Assignment of Contracts by and between the
Company and Novus International, Inc., dated November 11, 1998
(previously filed as an exhibit to Form 10-Q of the Registrant for
the quarter ended November 30, 1998, and incorporated herein by
reference).
23.1 Consent of Independent Public Accountants.
</TABLE>
24
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Alcide Corporation:
We have audited the accompanying consolidated balance sheets of Alcide
Corporation (a Delaware corporation) and subsidiary as of May 31, 1999 and
1998, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years ended May
31, 1999. 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 and
subsidiary as of May 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years ended May 31, 1999 in
conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Seattle, Washington
June 25, 1999
25
<PAGE>
ALCIDE CORPORATION CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
------------------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 7,844,217 $ 6,391,868
Short term investments 3,782,752 ---
Accounts receivable - trade 2,268,264 2,259,917
Inventory 1,353,870 2,064,487
Prepaid income taxes --- 615,000
Prepaid expenses and other current assets 213,269 311,406
----------- -----------
Total current assets 15,462,372 11,642,678
----------- -----------
Equipment and leasehold improvements:
Sanova plant assets --- 2,496,503
Office equipment 112,280 172,857
Laboratory and manufacturing equipment 145,292 160,028
Leasehold improvements 56,152 70,520
Less: Accumulated depreciation and amortization (202,318) (407,817)
----------- -----------
Total equipment and leasehold improvements, net 111,406 2,492,091
Deferred income tax asset 285,618 862,298
Long term investments and other assets 509,941 622,920
----------- -----------
TOTAL ASSETS $16,369,337 $15,619,987
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 269,801 $ 797,934
Accrued expenses 157,812 412,150
Income taxes payable 125,000 ---
----------- -----------
Total current liabilities 552,613 1,210,084
Long term payable to Novus --- 316,000
----------- -----------
Total liabilities 552,613 1,526,084
----------- -----------
Commitments and Contingencies
Redeemable Class "B" Preferred Stock - noncumulative convertible $.01
par value; authorized 10,000,000 shares;
issued and outstanding:
May 31, 1998 - 81,119
May 31, 1999 - 72,525 212,936 190,377
----------- -----------
Shareholders' equity:
Class "A" Preferred Stock - no par value;
authorized 1,000 shares; issued and outstanding:
May 31, 1998 - 1,000
May 31, 1999 - 594 135,307 80,437
Common Stock $.01 par value;
authorized 100,000,000 shares;
Issued and outstanding:
May 31, 1998 - 2,872,313
May 31, 1999 - 2,888,968 28,723 28,889
Treasury stock at cost (6,125,794) (6,939,750)
Additional paid-in capital 19,559,369 19,702,230
Retained Earnings 2,006,183 1,031,720
----------- -----------
Total Shareholders' Equity 15,603,788 13,903,526
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,369,337 $15,619,987
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
26
<PAGE>
ALCIDE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
NET SALES $11,768,504 $12,998,952 $11,220,528
EXPENDITURES:
Cost of goods sold 3,853,875 4,319,242 4,903,772
Royalty expense 437,877 332,881 2,412,994
Research and development expense 1,546,285 1,633,925 2,240,509
Depreciation and amortization 57,022 58,714 66,267
Consulting expense to related parties 96,014 96,012 100,000
Other selling, general/administrative 2,026,284 2,148,949 3,349,434
----------- ----------- -----------
8,017,357 8,589,723 13,072,976
----------- ----------- -----------
Operating income (loss) 3,751,147 4,409,229 (1,852,448)
Interest income 427,316 638,016 557,669
Other income 126,530 23,836 ---
----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes 4,304,993 5,071,081 (1,294,779)
Provision (benefit) for income taxes 1,423,698 1,848,358 (320,316)
----------- ----------- -----------
Net income (loss) $ 2,881,295 $ 3,222,723 $ (974,463)
----------- ----------- -----------
----------- ----------- -----------
Basic earnings (loss) per common share $ 1.12 $ 1.24 $ (.38)
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per common share and equivalents $ 1.04 $ 1.16 $ (.38)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 2,578,945 2,607,192 2,550,312
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares & common share equivalents 2,783,064 2,789,491 2,550,312
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to financial statements.
27
<PAGE>
ALCIDE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS "A" ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID IN
CAPITAL
- ----------------------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance May 31, 1996 1,000 $135,307 2,791,538 $27,915 $18,209,412
Exercise of Stock Options 7,870 79 69,965
Purchase Treasury Stock, Net
Tax Benefit from Exercise of Stock
Options 23,000
Net Income
- ----------------------------------------------------------------------------------------------------------------
Balance May 31, 1997 1,000 $135,307 2,799,408 $27,994 $18,302,377
Exercise of Stock Options 72,905 729 394,617
Purchase Treasury Stock, Net
Tax Benefit from Exercise of Stock
Options 862,375
Net Income
- ----------------------------------------------------------------------------------------------------------------
Balance May 31, 1998 1,000 $135,307 2,872,313 $28,723 $19,559,369
Redeem Class "A" Preferred (406) (54,870) 13,913
Exercise of Stock Options 16,655 166 109,581
Purchase Treasury Stock, Net
Tax Benefit from Exercise of Stock
Options 19,367
Net Loss
- ----------------------------------------------------------------------------------------------------------------
Balance May 31, 1999 594 $80,437 2,888,968 $28,889 $19,702,230
--- ------- --------- ------- -----------
--- ------- --------- ------- -----------
<CAPTION>
COMMON TREASURY STOCK RETAINED TOTAL
EARNINGS SHAREHOLDERS'
(ACCUMULATED EQUITY
DEFICIT)
- ---------------------------------------------------------------------------------------------------
SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance May 31, 1996 (192,337) ($2,213,845) ($4,097,835) $12,060,954
Exercise of Stock Options 70,044
Purchase Treasury Stock, Net (48,382) (977,580) (977,580)
Tax Benefit from Exercise of Stock
Options 23,000
Net Income 2,881,295 2,881,295
- ---------------------------------------------------------------------------------------------------
Balance May 31, 1997 (240,719) ($3,191,425) ($1,216,540) $14,057,713
Exercise of Stock Options 395,346
Purchase Treasury Stock, Net (68,446) (2,934,369) (2,934,369)
Tax Benefit from Exercise of Stock
Options 862,375
Net Income 3,222,723 3,222,723
- ---------------------------------------------------------------------------------------------------
Balance May 31, 1998 (309,165) ($6,125,794) $2,006,183 $15,603,788
Redeem Class "A" Preferred (40,957)
Exercise of Stock Options 109,747
Purchase Treasury Stock, Net (51,973) (813,956) (813,956)
Tax Benefit from Exercise of Stock
Options 19,367
Net Loss (974,463) (974,463)
- ----------------------------------------------------------------------------------------------------
Balance May 31, 1999 (361,138) ($6,939,750) $1,031,720 $13,903,526
--------- ------------ ---------- -----------
--------- ------------ ---------- -----------
</TABLE>
See notes to financial statements.
28
<PAGE>
ALCIDE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,881,295 $ 3,222,723 $(974,463)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 57,022 58,714 205,499
Amortization of investment discounts/premiums (53,359) (82,512) (76,246)
Common Stock issued to directors, consultants and the
employee stock ownership plan 52,000 55,081 70,998
Deferred income tax 1,330,962 804,611 (557,313)
Decrease (increase) in assets:
Inventory (187,127) (238,243) (710,617)
Accounts receivable - trade 86,446 230,717 8,347
Prepaid income taxes --- --- (615,000)
Replacement parts and components --- --- (134,692)
Prepaid expenses and other current assets (137,424) 72,702 36,555
Long term investments and other assets (53,058) 657,907 (113,981)
Increase (decrease) in liabilities:
Accounts payable (44,632) (60,007) 528,133
Accrued expenses and taxes payable (590,794) 652,141 129,338
Other liabilities --- --- 316,000
------------ -------------- ------------
Net cash provided by operating activities 3,341,331 5,373,834 (1,887,442)
------------ -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investments (2,050,907) (3,720,340) ---
Redemption of investments 1,050,000 2,107,000 3,860,000
Acquisition of equipment and leasehold improvements (7,354) (25,158) (2,586,184)
------------ -------------- ------------
Net cash provided by (used in) investing activities (1,008,261) (1,638,498) 1,273,816
------------ -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Alcide Common Stock (1,029,580) (2,989,450) (884,954)
Redemption of Class "A" Preferred Stock --- --- (40,957)
Redemption of Class "B" Preferred Stock (16,275) (20,169) (22,559)
Stock Options exercised 70,044 395,346 109,747
------------ -------------- ------------
Net cash (used in) financing activities (975,811) (2,614,273) (838,723)
------------ -------------- ------------
Net increase (decrease) in cash and cash equivalents 1,357,259 1,121,063 (1,452,349)
Cash and cash equivalents at beginning of year 5,365,895 6,723,154 7,844,217
------------ -------------- ------------
Cash and cash equivalents at end of year $ 6,723,154 $ 7,844,217 $6,391,868
------------ -------------- ------------
------------ -------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest --- --- ---
Cash paid during the year for income taxes $ 41,000 $ 71,625 $ 976,997
</TABLE>
See notes to financial statements.
29
<PAGE>
ALCIDE CORPORATION
NOTES TO CONSOLIDATED 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 the poultry industry are determined by
the number of birds or pounds treated at each processor. Alcide owned
inventory is maintained at each customer processing site. Sales are
recognized during the month in which inventory is used to disinfect
customer's product. 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.
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: Until May, 1999, Alcide was obligated to pay royalties to
certain early investors in the Company at a rate of 8% of net cash sales
of applicable products. In May, 1999, Alcide reached settlement of a
lawsuit brought against it in February, 1996, by certain royalty rights
holders. The cash settlement of $2,212,512 to royalty rights holders was
accrued during Alcide's fiscal third quarter and paid in Alcide's fiscal
fourth quarter. This payment satisfies all of Alcide's past and future
obligations with respect to the royalty agreement.
d. Litigation Expense: The expected costs to defend the Company in
lawsuits filed against it are recorded in the period in which the Company
becomes aware of the action. No such suits were filed against the Company
in fiscal 1999.
e. Depreciation and Amortization: Office, laboratory and computer
equipment is depreciated over the five-year estimated useful life by the
straight line method. Equipment provided by Alcide to poultry processing
plants to mix and spray Sanova is depreciated over the five-year estimated
useful life of the assets by the straight line method.
Leasehold improvements are amortized over the lives of the 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 and
tax credits 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.
30
<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.
i. The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant inter-company accounts and
balances have been eliminated.
3. SEGMENT REPORTING:
The Company has adopted Statement of Accounting Standard No. 131
"Disclosures About Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 requires companies to disclose certain
information about operating segments. Based on the criteria within SFAS
No. 131, the Company has determined that it has one reportable segment,
antimicrobial products.
Sales of the Company's products by categories and amounts are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
-------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Dairy industry $10,365,001 $10,114,845 $9,189,063
Poultry processing industry 1,000,996 2,445,106 1,538,887
Healthcare industry 364,869 390,178 440,672
Automotive industry 37,638 48,823 51,906
</TABLE>
4. 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, 1998 and
May 31, 1999, is as follows:
<TABLE>
<CAPTION>
INVESTMENT CLASSIFICATION AMORTIZED COST FAIR VALUE
------------------------- -------------- ----------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Held-to-maturity:
Current $3,782,752 --- $3,783,746 ---
Long term 504,259 $503,257 511,875 $508,750
---------- -------- ---------- --------
$4,287,011 $503,257 $4,295,621 $508,750
---------- -------- ---------- --------
---------- -------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT CLASSIFICATION GROSS UNREALIZED GAINS MATURITY
------------------------- ---------------------- --------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Held-to-maturity $8,610 $5,493 1-5 years 3-4 years
</TABLE>
31
<PAGE>
Investments consist entirely of debt obligations of the United States.
5. INVENTORY:
Inventory is recorded at the lower of cost or market on a first-in,
first-out basis, as follows:
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 31, 1999
------------ ------------
<S> <C> <C>
Raw materials $947,243 $1,100,808
Finished products 406,627 792,733
Sanova inventory at customer sites --- 170,946
------------ ------------
Total $1,353,870 $2,064,487
------------ ------------
------------ ------------
</TABLE>
6. ACCRUED EXPENSES:
At May 31, accrued expenses were comprised of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Accrued royalties $113,655 $ 4,113
Accrued employee salaries, incentive and benefits 29,147 38,330
Payable to Novus -0- 158,000
Accrued consulting and outside services -0- 92,150
Accrued patent, trademark and legal expenses -0- 85,000
Other accrued expenses 15,010 34,557
-------- --------
$157,812 $412,150
-------- --------
-------- --------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
a. Leases:
Effective June 1, 1999, the Company renewed its lease for office and
laboratory space in Redmond, Washington. The Company has also leased 1,290
adjoining square feet of space effective August 1, 1999. The
noncancellable lease expires May 31, 2004. Insurance, utilities and
maintenance expenses are borne by the Company.
There are no contingent rentals or sublease rentals.
The annual lease commitments for the Redmond, Washington facility are as
follows:
<TABLE>
<S> <C>
FY 2000 $96,016
FY 2001 99,216
FY 2002 100,752
FY 2003 100,752
FY 2004 111,192
</TABLE>
Lease payments in FY 1999 were $62,256.
32
<PAGE>
b. Employment Agreements:
One officer has an employment agreement which obligates the Company to a
salary of $220,614 per year. Bonus compensation of 100% of base pay can be
earned at the discretion of the Board of Directors.
c. 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 was party to an agreement with Novus International, Inc. for
distribution of Sanova, its poultry processing antimicrobial. Under the
terms of the agreement Novus was obligated to pay Alcide the greater of
50% of the gross profits or $500,000 each fiscal quarter during fiscal
1998 and $1 million for each fiscal quarter during fiscal 1999. In August,
1998, Novus exercised its right to terminate the agreement and paid Alcide
the $1 million minimum requirement during Alcide's fiscal first quarter.
At the end of November, 1998, Alcide assumed direct responsibility for
Sanova distribution and acquired certain Sanova related assets from Novus
International.
8. INCOME TAXES:
A summary of the provision (benefit) for income taxes follows:
<TABLE>
<CAPTION>
FY 1997 FY 1998 FY 1999
------- ------- -------
<S> <C> <C> <C>
Current
Federal $93,166 $854,353 $(592,866)
State and local --- 189,394 148,232
---------- ---------- ----------
$93,166 $1,043,747 $(444,634)
---------- ---------- ----------
Deferred
Federal $1,330,532 $804,611 $124,318
---------- ---------- ----------
$1,423,698 $1,848,358 $(320,316)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FY 1997 FY 1998 FY 1999
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes 0.0% 2.4% (9.3%)
Other (0.9%) 0.0% 0.0%
------ ----- -----
Effective income tax rate 33.1% 36.4% 24.7%
------ ----- -----
------ ----- -----
</TABLE>
At May 31, 1998 and May 31, 1999, the deferred tax assets were comprised
of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Operating loss carry forward --- $613,372
Temporary differences $27,414 (51,816)
Research & experimental credits carry forward --- 42,538
Alt. Minimum tax carry forward 258,204 258,204
-------- --------
Total deferred tax asset $285,618 $862,298
-------- --------
-------- --------
</TABLE>
33
<PAGE>
The temporary differences result from the use of straight line
depreciation for equipment in the financial statements versus use of
accelerated depreciation for tax reporting. The Company has not
established a valuation allowance against the deferred tax asset as
management believes it is more likely than not that the tax benefits will
be realized in the future based on historical levels of pre-tax income and
expected future taxable income.
9. EARNINGS (LOSS) 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 (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) $2,881,295 $3,222,723 $(974,463)
Weighted average number of common shares
outstanding 2,578,945 2,607,192 2,550,312
Basic Earnings (Loss) Per Share $ 1.12 $ 1.24 $ (.38)
Assuming exercise of options reduced by
the number of shares which could have been
purchased with the proceeds from exercise
of such options (0 if antidilutive) 204,119 182,299 0
--------- --------- ---------
Weighted average common shares outstanding
and common share equivalents 2,783,064 2,789,491 2,550,312
--------- --------- ---------
--------- --------- ---------
Diluted Earnings (Loss) Per Share $1.04 $1.16 $(.38)
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. 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.
34
<PAGE>
b. Class "A" Preferred Stock
The nonvoting Class "A" Preferred Stock has a preference with respect to
both dividends and liquidation at its stated value of $135.30 per share.
During fiscal 1999, Alcide offered to redeem Class "A" Preferred Stock at
a price of $101.00 per share. Four hundred six shares were redeemed. The
Company has the option to force redemption at any time by payment of
$135.30 per share.
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. On September 30, 1998 the Company redeemed 8,594 shares of Series
2 stock for $22,559. As the Company incurred a loss in fiscal 1999, it has
no obligation to redeem Series 2 stock on September 30, 1999. 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.
11. 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 96,750 options available for
grant as of May 31, 1999.
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 43,404 options available for grant as of May 31,
1999.
Options are exercisable within 10 years from the date the option was
granted. Options will expire during the period July 2000 through March
2009. 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.
35
<PAGE>
The status of the plans are as follows:
<TABLE>
<CAPTION>
FY 1997 FY 1998 FY 1999
------- ------- -------
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 337,634 $8.84 344,366 $9.22 289,188 $11.78
Granted 17,602 22.01 20,897 35.90 27,167 30.34
Exercised (7,870) 8.90 (75,325) 6.87 (16,655) 6.59
Canceled (3,000) 42.03 (750) 20.25 (1,500) 23.10
----- ----- -------
Outstanding at end of year 344,366 $9.22 289,188 $11.78 298,200 $13.70
------- ------- -------
------- ------- -------
Exercisable at end of year 286,338 $7.44 233,888 $8.76 237,899 $9.89
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
Information relating to stock options outstanding and stock options
exercisable at May 31, 1999 is as follows:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
PRICES OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------ ------------------------------------------------ -----------------------------
NO. OF SHARES WEIGHTED AVG. LIFE WTD AVG. $/SH. NO. OF SHARES WTD. AVG.$/SH.
------------- ------------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$4.10 - $7.75 126,547 1.92 $5.61 126,547 $5.61
$8.63 - $11.93 80,157 4.69 10.40 73,656 9.82
$15.00 - $63.00 91,496 7.43 28.98 37,696 23.60
------ ------
298,200 4.36 $13.70 237,899 $9.89
------- -------
------- -------
</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, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
FY 1997 FY 1998 FY 1999
------- ------- -------
<S> <C> <C> <C> <C>
Net Income (loss) As reported $2,881,295 $3,222,723 $(974,463)
Pro forma $2,780,416 $2,983,590 $(1,121,418)
Basic earnings (loss) per common share
As reported $1.12 $1.24 $ (.38)
Pro forma $1.08 $1.14 $ (.44)
Diluted earnings (loss) per common
share and equivalents As reported $1.04 $1.16 $ (.38)
Pro forma $1.00 $1.07 $ (.44)
</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. 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-
36
<PAGE>
date fair value of stock options granted during 1999 was
$20.60 per share using the assumptions of expected volatility of 61.7%,
expected option lives of 7.5 years, risk-free rate of interest of 5.3% and
no expected dividends. During 1998, the weighted average grant-date fair
value of stock options granted 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.
12. RELATED PARTY TRANSACTIONS:
a. Consulting Agreements
LOEB PARTNERS CORPORATION. During the fiscal year ended May 31, 1999,
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, 1999, the Company
paid Dr. Kenneth N. May 275 shares of Alcide Common stock having an
aggregate purchase price of $11,619, plus $18,381 cash for consulting
services in the field of pathogen control on poultry and other food
products.
b. Royalty and Consolidation Agreement
In May, 1999, the Company settled the lawsuit brought against it in
February, 1996, by certain persons who were parties to the Royalty and
Consolidation Agreement with the Company. The settlement amount paid to
royalty rights holders who were plaintiffs in the lawsuit was $2,038,081.
A proportionate payment of $174,431 was made to royalty rights holders who
were not plaintiffs in the suit against Alcide. Loeb Partners Corporation
was a non-plaintiff royalty rights holder and, as part of the settlement
agreement, Loeb V received payment from Alcide of $67,542 and Loeb VIII
received $2,667. Loeb Partners Corporation was also a limited partner of
Old Hill Associates, a plaintiff in the suit against the Company and
received $17,007 in royalty settlement payments through Old Hill
Associates. The settlement relieves Alcide of all past and future
obligations under the Royalty and Consolidation Agreement. All of the
Company's decisions relating to payment of royalties, the lawsuit and
settlement thereof were made by disinterested members of the Board.
13. 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 1999, 1998 and 1997 were
approximately $71,000, $67,000 and $60,500, respectively.
37
<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 20, 1999
38
<PAGE>
CORPORATE OFFICE
8561 154th Avenue NE
Redmond, Washington 98052
Phone: (425) 882-2555
Fax: (425) 861-0173
E-mail: [email protected]
Website: www.alcide.com
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
12039 W. Alameda Parkway, Suite Z-2
Lakewood, Colorado 80228
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 6,391,868
<SECURITIES> 0
<RECEIVABLES> 2,259,917
<ALLOWANCES> 0
<INVENTORY> 2,064,487
<CURRENT-ASSETS> 11,642,678
<PP&E> 2,899,908
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0
190,377
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</TABLE>
