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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, 2000
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, 2000 was approximately $33,704,000. On that date, there
were 2,524,681 shares of common stock outstanding, net of Treasury Stock.
Certain sections of Registrant's definitive Proxy Statement for its 2000
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 2000 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 Page
<S> <C> <C> <C>
A. Introduction 3
B. Sales Development 3
C. Research and Product Development 5
D. Patents and Trademarks 6
E. Raw Materials 8
F. Competition 8
G. Government Regulation 9
H. Employees 10
I. Advertising and Promotion 10
J. Manufacturing 10
Item 2. Properties 11
Item 3. Legal Proceeding 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
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
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 and
poultry processing 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; and
Sanova-Registered Trademark- antimicrobial intervention to the poultry
processing 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, 2000 were
$12,440,449. Export sales to international distributors, plus product exported
by U.S. distributors to international markets accounted for $4,076,505, 33% of
total sales.
1. DAIRY INDUSTRY
Worldwide sales of dairy line products during fiscal year 2000 were
$8,121,376 as compared with $9,189,063 in FY 1999. In FY 2000 sales to the dairy
industry accounted for 65% 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 2000, dairy industry sales in the United States were
$4,044,871, 50% 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 four distributors. Sales to the international
dairy industry were $4,076,505 in fiscal 2000, 50% 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 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. (UMS) 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. Subsequently, during FY 2000, UMS began
distribution on a nonexclusive basis in Argentina, Chile, Colombia, Greece,
Japan, Taiwan and South Korea.
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. Effective December 1, 1998, Alcide
assumed direct responsibility for distribution of Sanova to the poultry
processing industry. Alcide's fiscal 2000 sales to the poultry industry were
$3,889,187. During fiscal 1999 sales to the poultry processing industry were
$1,538,887, of which $1,204,593 were contractual minimum payments by Novus.
Should there be a loss of sales to the poultry industry such loss would have a
material adverse impact on the Company.
On May 31, 2000, 18 poultry processing plants were using Sanova under
contract with Alcide. In addition, Alcide has entered into contractual
agreements for startup of 8 additional poultry processing plants during the
period June through November, 2000.
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 2000 sales of hard surface sterilants and disinfectants were
$429,886, or 3% of total sales, as compared with $440,672 in fiscal year 1999.
4. INDUSTRY PRACTICES AND BACKLOG ORDERS
The Company's invoice terms for the dairy and health care industries
conform to those in the chemical industry in general, which are: domestic-30
days, export-60 days.
Alcide had $754,040 of firm orders on May 31, 2000 for future delivery
to the dairy industry distributors as compared to orders for future delivery at
May 31, 1999 of $1,138,270. 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 2000 the Company's efforts focused primarily on
development of new and improved formulations for the Company's established
animal health business, obtaining regulatory approval for the use of Sanova in
expanded food markets and on testing directed at reducing cost and increasing
the antimicrobial performance of Sanova.
Substantially all of the research and product development activities
conducted by the Company during fiscal 2000 were funded by the Company. It is
expected that research and development programs during fiscal 2001 will again be
funded primarily by the Company and conducted under the Company's direct
supervision, either in its own laboratories, in contract laboratories or, in the
case of food antimicrobials, in commercial plant environments.
The immediate potential for expansion of Sanova technology in the
poultry, red meat and other markets has caused the Company to direct R&D
resources to this growing opportunity while maintaining product superiority and
market share stability for Alcide's established udder care products. Investments
in the development of Alcide's human preoperative skin antiseptic and
anti-infective oral care products have been de-emphasized until appropriate
strategic partners can be identified.
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.
1. FOOD DISINFECTION
During fiscal 2000 the Company's primary focus has been on the
optimization of the current poultry system to improve reliability and customer
satisfaction and to reduce cost. As a result of these efforts, the cost of the
Sanova solution on a per ounce basis has been reduced by approximately 30%.
Optimization via changes in the spray apparatus resulted in more efficient
application, further reducing the cost of Sanova.
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The first commercial plant validation test for intact beef carcasses
was completed during the final quarter of fiscal 2000 and will serve as the
basis for commercial introduction of Sanova in this market segment during FY
2001. While the initial study generated promising information on performance,
the results have limited applicability to the broader red meat market due to the
limited size and other characteristics of the facility in which the tests were
conducted.
The Company was successful during FY 2000 in obtaining U.S. Food and
Drug Administration (FDA) and U.S. Department of Agriculture (USDA) approvals
for the use of Sanova on pre-chilled poultry parts, on red meat carcasses
pre-chill and on red meat parts, trim and organs post-chill. Food Additive
Petitions were developed in late FY 2000, for submission in early FY 2001, for
Sanova application to post-chill poultry parts and to processed and formed meats
(e.g., hot dogs and other sausages). Approval was also granted during FY 2000 by
Canadian regulatory authorities for the use of Sanova on poultry processed in,
and/or shipped to, Canada.
During fiscal 2001 the Sanova food safety R&D activity will focus
initially on commercial plant and university pilot plant testing to determine
and/or optimize application methods, exposure time and formula concentrations in
the emerging new markets for Sanova, including red meat carcass disinfection,
poultry and red meat parts post-chill and sausages.
The Company will continue to focus its regulatory activity on obtaining
food additive approval from FDA for expanded opportunities in the red meat and
poultry markets, and on obtaining U.S. Environmental Protection Agency (EPA)
clearance for use of Sanova on intact fruits and vegetables in processing
plants.
2. ANIMAL HEALTH PRODUCTS
The primary R&D focus during fiscal 2000 was on performance enhancement
of our line of teat dips and development of the next generation of Alcide animal
health products.
Maintenance of the Company's regulatory filings for the udder care
product range outside the United States continues as an important element of
Alcide's udder care strategy. During fiscal 2000 significant activity was
directed at retrieving product registrations previously held either in the name
of ABS Global, Inc. or its sub-distributors.
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.
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PATENTS -- The Company owns the following sixteen issued United States
patents:
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"
15) U.S. Patent No. 5,772,985
"Composition and Methods for Treatment of Skin Lesions"
16) U.S. Patent No. 6,063,425
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"Method for Optimizing the Efficacy of Chlorous Acid
Disinfecting Sprays for Poultry and Other Meats"
Six 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- and silverQUICK-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.
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
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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 U.S. marketplace. ABS Global, Inc., the Company's former
distributor, and at least two other U.S. distributors have introduced such
products. 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 or red meat
industries and, in the limited cases where irradiation is used, the process
involves a secondary treatment outside the processing plant. Steam, hot water
and organic acid rinses are broadly used in the red meat industry on carcasses
prior to chilling for pathogen control. The Company is not aware of any
established competing products for post-chill pathogen control application to
either red meat or poultry products. However, 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, Spain, Portugal, New Zealand, Brazil, France, Chile, Colombia,
Argentina, South Korea and India. The product is legally sold without formal
registration in the United States, Greece, Hungary and Mexico.
4XLA teat dip has been registered in Canada, The Netherlands, Republic
of Ireland, Switzerland, New Zealand, Chile, Denmark, Brazil, Portugal, Colombia
and Argentina. The product is legally sold without formal registration in the
United States, Mexico, Belgium, Italy and Spain.
UDDERgold Plus sales have been expanded to include Japan and Taiwan in
addition to the United States, without formal registrations.
Several registration amendments have been required due to the change of
distributors from ABS affiliates to UMS affiliates. This has been completed in
Canada and Italy and is pending approval in Portugal and Brazil.
2. FOOD PROCESSING ANTIMICROBIALS:
a. Poultry
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The Company's Food Additive Petition was approved by FDA in
April, 1996 and by USDA in January, 1998. Additional approval for use of the
product in Canada was received in September, 1999. 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 received permission from USDA in February, 2000 to market
and utilize the product in commercial processing plants.
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. The petition was approved in September, 1999. EPA concurrently
stated that it will exert its regulatory authority over this area. Alcide is in
the process of working with EPA to determine the specific criteria for approval.
3. 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 17 employees occupy a
6,751 square foot leased facility in Redmond, Washington. Alcide's engineering
operations and maintenance staff of 9 employees occupy a 6,240 square foot
leased office and warehouse facility in St. Louis, Missouri. In addition, the
Company employs 2 field maintenance employees, 2 Sanova technical
representatives and 1 sales management employee, all located in the southeastern
U.S.
Alcide has relationships with contract engineering and maintenance
organizations for support of its Sanova business. At year end FY 2000 such
contract services were for approximately the equivalent of 10 employees. It is
expected that, over time, the Company's dependence on contract engineering and
maintenance organizations will decrease as the Alcide staff increases.
The Company also 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 promotional activities with its distributors of animal health
products and participation in trade shows and exhibits sponsored by the poultry,
red meat and produce industries.
J. MANUFACTURING
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All manufacturing of the Company's animal health, sterilant and
disinfectant 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.
Sanova is manufactured and diluted at each customer's site, utilizing
raw materials supplied by Alcide and mixed, diluted and pumped in
micro-processor controlled equipment provided by Alcide.
ITEM 2. PROPERTIES
The Company's Sanova food antimicrobial is stored, mixed and applied on
site at each customer site by means of equipment owned by Alcide. Alcide's
aggregate cost for equipment at the 18 poultry processing plants in operation on
May 31, 2000 was $7.3 million. Each new plant utilizing the Sanova System will
require an investment estimated at between $150,000 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. Alcide asserts that
ABS' Valiant barrier teat dip infringed 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. In March, 1999, the Court granted
Alcide's motion to amend its complaint to add Ecolab and certain ABS independent
representatives as additional defendants in the suit.
Subsequently, the trial court decided there was no infringement and
dismissed the complaint. That decision is presently on appeal by Alcide to the
Court of Appeals for the Federal Circuit. The appeal is fully briefed and the
parties are awaiting oral argument. A decision on the appeal will be rendered
sometime after the oral argument which is expected in late FY 2001.
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, 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
YEAR ENDED MAY 31, 2000
First Quarter 20 12
Second Quarter 15 10 1/2
Third Quarter 24 9/16 11 3/8
Fourth Quarter 23 3/4 11 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, 2000, there were approximately 1,639 Common stockholders of
record.
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ITEM 6. SELECTED FINANCIAL DATA
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FISCAL YEARS ENDED
MAY 31, 1996 MAY 31, 1997 MAY 31, 1998 MAY 31, 1999 MAY 31, 2000
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Net sales $11,145,826 $11,768,504 $ 12,998,952 $ 11,220,528 $ 12,440,449
Net income (loss) 2,325,062 2,881,295 3,222,723 (974,463) (447,073)
Diluted earnings
(loss) per common
share and equivalents .82 1.04 1.16 (.38) (.18)
Total assets 13,768,614 15,113,672 16,369,337 15,619,987 14,530,321
Long term debt -- -- -- -- --
Redeemable Preferred
Stock 249,380 233,105 212,936 190,377 190,377
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SELECTED QUARTERLY FINANCIAL DATA FOR THE YEARS ENDED MAY 31, 1999 AND MAY 31,
2000
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Net Income (Loss)
Net Sales Gross Profit Net Income (Loss) per Share
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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)
=========== ========== =========== =====
Year Ended
May 31, 2000
1st Quarter $ 2,674,398 $ 982,690 $ (394,324) $(.16)
2nd Quarter 2,960,821 1,092,036 (199,951) (.08)
3rd Quarter 2,875,063 1,239,623 (57,406) (.02)
4th Quarter 3,930,167 1,682,382 204,608 .08
----------- ---------- ---------- -----
Total for Year $12,440,449 $4,996,731 $ (447,073) $(.18)
=========== ========== =========== =====
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 2000 AS COMPARED WITH 1999
NET SALES
Fiscal year 2000 net sales of $12,440,449 were $1,219,921 higher than
fiscal year 1999 sales which included a nonrecurring contractual minimum payment
of $1,136,703 from the Company's former Sanova distributor, Novus International,
Inc.
Sales of Sanova to the poultry industry were $3,889,187 for the 12 month
period, as this new Alcide business expanded rapidly during the fiscal year.
There were 5 poultry processing plants utilizing Alcide's Sanova System at the
start of fiscal 2000 and 18 plants utilizing the System at fiscal yearend.
The Company's animal health and surface disinfectant sales for the 12
month period were $8,551,262 vs. $9,681,641 for the previous fiscal year.
COST OF GOODS
Cost of goods as a percentage of sales was 60% for the 12 month period
ended May 31, 2000, an increase of 16 points over the 44% of net sales for the
same period last year. During the previous fiscal year the contractual minimum
payment of $1,136,703, against a cost of goods of $136,703 for a gross profit of
$1 million, accounted for roughly half of the year-to-year deterioration in cost
of goods as a percentage of sales. The balance is attributable to cost
inefficiencies associated with the startup of new processing plants utilizing
the Sanova System and a change in product mix caused by an increase in Sanova
sales which have a lower margin.
ROYALTY OBLIGATIONS
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 royalty expense for the year of $2,412,994. As a result
of the settlement no royalties were paid during fiscal 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses of $1,763,601 for the 12 month period
ended May 31, 2000 were $476,908 lower than for the 12 month period last year.
Fiscal 1999 R&D expenses included $317,000 in costs associated with the
negotiated termination of the Company's contract with Novus International, Inc.
The balance of the year-to-year difference results primarily from reduction in
plant validation testing associated with introduction of Sanova to the poultry
industry.
SELLING AND ADMINISTRATIVE EXPENSE
Other selling, general and administrative expenses of $4,024,323 for
fiscal 2000 were $674,889 higher than for fiscal 1999. The increase reflects the
addition of new employees to support the Company's expanding business
($304,277), increased engineering costs to improve the
14
<PAGE>
Sanova Food Quality System ($285,542) and increased travel expenses ($183,692)
offset by decreased legal costs ($85,752).
INTEREST INCOME
Investable cash resources averaged $6.7 million lower during fiscal 2000
as compared to the prior fiscal year and, as a result, interest income of
$252,119 was $305,550 lower than the equivalent 12 month period last year.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method when losses occur, as in fiscal 1999 and fiscal 2000, the Company
computes the tax loss carry forward relating to the pre-tax loss, records a tax
credit on its statement of operations, and a deferred income tax asset on its
balance sheet. See notes to financial statements. The income tax benefit in
fiscal 2000 was $229,510 at an estimated effective rate of 34%. During fiscal
1999 the income tax benefit was $320,316 at an effective income tax rate of
24.7%. The difference in tax rates between fiscal 2000 and fiscal 1999 was
caused by the payment of state income taxes in fiscal 1999 related to state tax
liabilities for prior years.
The Company expects its effective tax rate for fiscal 2001 to be
approximately 36% of pre-tax income.
LIQUIDITY
The Company's cash, cash equivalents and U.S. Treasury investments
(included in long term investments and other assets) totaled $2,296,979 on May
31, 2000, an amount $4,598,147 lower than at the end of the previous fiscal
year. During fiscal 2000 net cash provided by operating activities was $742,438
(see Consolidated Statements of Cash Flows, page 28). This was offset by
acquisition of equipment and leasehold improvements primarily related to
installation of Sanova Systems at poultry plants totaling $4,990,842, by the
repurchase of Alcide Common stock for Treasury for $397,555 and by the
redemption of Class "A" Preferred stock for $46,130. The exercise of stock
options contributed cash of $94,944.
Alcide has negotiated a $10 million line of credit from US Bank as a
backup source of capital, if needed, to support the Company's growing food
safety business. The Company has not drawn on the credit line.
OUTLOOK
- Sanova Food Quality System
The size of the Company's food antimicrobial business is expanding. At
the end of fiscal 2000, 18 poultry plants were utilizing the Sanova Food
Quality System. The 18 plants process approximately 3.2 billion pounds
of poultry annually, representing approximately 10% of the total U.S.
poultry market. The Company has entered into contracts with 8 additional
processing plants for a total of 26 plants now under contract for the
use of Sanova. Further expansion within the poultry industry is
projected. In addition, Alcide plans to commercialize Sanova for
pathogen reduction in the U.S. red meat market during fiscal 2001. Each
new plant startup will require a capital investment of between $150,000
and $500,000 depending on plant size and complexity. In addition,
substantial engineering, process development and
15
<PAGE>
R&D expenditures will be required for each new Sanova market entry. Such
expenditures are planned to be on roughly the same scale as in fiscal
2000.
- Udder Care Product Distribution
Expiration of the Company's "gel patent" in the United States in May,
1999 led to the introduction of at least three competing chlorous acid
products during the past fiscal year. However, despite such new
introductions, the Company believes its products are regarded as
superior in the marketplace. Management believes that the market
position enjoyed by its products, coupled with the Company's
distribution network, will enable Alcide to maintain the same level of
udder care sales in fiscal 2001 as it achieved in fiscal 2000.
FISCAL YEAR 1999 AS COMPARED WITH 1998
NET SALES
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 reflected 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 was reflected as an expense in
fiscal 1999.
COST OF GOODS
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 was 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.
16
<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 preceding fiscal
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 ended May 31, 1998. 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.
INTEREST INCOME
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 was due to 8% lower
investable cash resources. The balance of the decrease was due to lower
prevailing interest rates.
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, was
primarily due to state taxes paid and expenses in 1999 related to settlement of
prior year's liabilities.
LIQUIDITY
The Company's cash, cash equivalents, short term investments and U.S.
Treasury investments (included in long term investments and other assets)
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 was due primarily to:
17
<PAGE>
- 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 13 and 25 through 36 of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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, 2000 is listed in the following table:
<TABLE>
<CAPTION>
POSITIONS WITH THE COMPANY AND PRINCIPAL DIRECTOR OR EXECUTIVE
OCCUPATION OR EMPLOYMENT DURING THE PAST OFFICER SINCE
NAME AGE FIVE YEARS
<S> <C> <C> <C>
Thomas L. Kempner 73 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;
IGENE Biotechnology, Inc.; Roper Starch Worldwide, Inc.;
Intermagnetics General Corporation; Northwest Airlines,
Inc. (Emeritus); CCC Information Services Group, Inc.;
Evercel, Inc.; Fuel Cell Energy; Insight Communications
Company, Inc.
Kenneth N. May 69 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; and 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.
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C>
Joseph A. Sasenick 60 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. Chief Executive Officer and Chairman of
the Board of Alcide Food Safety, Inc. since January,
1999. Presently serves on the Board of Directors of the
Washington Biotechnology and Biomedical Association,
Genespan Corporation and 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 62 Director of the Company; Principal of W. G. Spears, 1989
Grisanti & Brown LLC since July 1, 1999; Chairman of Key
Asset Management, the investment advisory subsidiary of
KeyCorp, since 1996. Presently serves on the Board of
Directors of United Health Group and Avatar Holdings, Inc.
John P. Richards 58 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 50 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>
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 2000 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 2000 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 2000 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with Report:
1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.
Consolidated Balance Sheets as of May 31, 1999 and May 31,
2000.
Consolidated Statements of Operations for each of the
years ended May 31, 1998, May 31, 1999 and May 31, 2000.
Consolidated Statements of Changes in Shareholders' Equity
for each of the years ended May 31, 1998, May 31, 1999 and
May 31, 2000.
Consolidated Statements of Cash Flows for each of the
years ended May 31, 1998, May 31, 1999 and May 31, 2000.
2. FINANCIAL STATEMENT SCHEDULE
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data for the Years Ended May
31, 1999 and May 31, 2000, on Page 13.
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: August 15, 2000
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 15, 2000
--------------------------
Thomas L. Kempner
/s/KENNETH N. MAY Director August 15, 2000
--------------------------
Kenneth N. May
/s/JOSEPH A. SASENICK Director, President, August 15, 2000
-------------------------- Chief Executive Officer
Joseph A. Sasenick
/s/WILLIAM G. SPEARS Director August 15, 2000
--------------------------
William G. Spears
22
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
-----------
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).
10.31 1996 Stock Option Plan for Nonemployee Directors (previously filed as
an Exhibit to Proxy Statement for meeting held October 15, 1996, 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.
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 consolidated balance sheets of Alcide
Corporation (a Delaware Corporation) and subsidiary as of May 31, 2000 and May
31, 1999, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended May 31, 2000. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alcide Corporation and
subsidiary as of May 31, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended May 31, 2000 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Seattle, Washington
June 29, 2000
24
<PAGE>
ALCIDE CORPORATION CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 6,391,868 $ 1,794,723
Accounts receivable - trade 2,259,917 2,486,046
Inventory 2,064,487 1,404,090
Prepaid income taxes 615,000 --
Components and spare parts 134,692 449,058
Prepaid expenses and other current assets 176,714 238,651
------------ ------------
Total current assets 11,642,678 6,372,568
------------ ------------
Equipment and leasehold improvements:
Sanova plant assets 2,496,503 7,365,458
Office equipment 172,857 282,673
Laboratory and manufacturing equipment 160,028 169,136
Leasehold improvements 70,520 73,483
Less: Accumulated depreciation and amortization (407,817) (1,437,892)
------------ ------------
Total equipment and leasehold improvements, net 2,492,091 6,452,858
Deferred income tax asset 862,298 1,102,331
Long term investments and other assets 622,920 602,564
------------ ------------
TOTAL ASSETS $ 15,619,987 $ 14,530,321
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 797,934 $ 594,454
Accrued expenses 412,150 376,747
------------ ------------
Total current liabilities 1,210,084 971,201
Long term payable to Novus 316,000 158,000
------------ ------------
Total liabilities 1,526,084 1,129,201
------------ ------------
Commitments and Contingencies
Redeemable Class "B" Preferred Stock - noncumulative convertible $.01
par value; authorized 10,000,000 shares;
issued and outstanding:
May 31, 1999 - 72,525
May 31, 2000 - 72,525 190,377 190,377
------------ ------------
Shareholders' equity:
Class "A" Preferred Stock - no par value;
authorized 1,000 shares; issued and outstanding:
May 31, 1999 - 594
May 31, 2000 - 138 80,437 18,636
Common Stock $.01 par value;
authorized 100,000,000 shares; issued and outstanding:
May 31, 1999 - 2,888,968
May 31, 2000 - 2,904,068 28,889 29,040
Treasury stock at cost (6,939,750) (7,254,248)
Additional paid-in capital 19,702,230 19,832,668
Retained earnings 1,031,720 584,647
------------ ------------
Total Shareholders' Equity 13,903,526 13,210,743
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,619,987 $ 14,530,321
============ ============
</TABLE>
See notes to financial statements.
25
<PAGE>
ALCIDE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
--------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 12,998,952 $ 11,220,528 $ 12,440,449
EXPENDITURES:
Cost of goods sold 4,319,242 4,903,772 7,443,718
Royalty expense 332,881 2,412,994 --
Research and development expense 1,633,925 2,240,509 1,763,601
Depreciation and amortization 58,714 66,267 62,066
Consulting expense to related parties 96,012 100,000 96,000
Other selling, general/administrative 2,148,949 3,349,434 4,024,323
------------ ------------ ------------
8,589,723 13,072,976 13,389,708
------------ ------------ ------------
Operating income (loss) 4,409,229 (1,852,448) (949,259)
Interest income 638,016 557,669 252,119
Other income 23,836 -- 20,557
------------ ------------ ------------
Income (loss) before (provision) benefit for
income taxes 5,071,081 (1,294,779) (676,583)
(Provision) benefit for income taxes (1,848,358) 320,316 229,510
------------ ------------ ------------
Net income (loss) $ 3,222,723 $ (974,463) $ (447,073)
============ ============ ============
Basic earnings (loss) per common share $ 1.24 $ (.38) $ (.18)
============ ============ ============
Diluted earnings (loss) per common share and
equivalents $ 1.16 $ (.38) $ (.18)
============ ============ ============
Weighted average common shares outstanding 2,607,192 2,550,312 2,518,767
============ ============ ============
Weighted average common shares & common
share equivalents 2,789,491 2,550,312 2,518,767
============ ============ ============
</TABLE>
See notes to financial statements.
26
<PAGE>
ALCIDE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS "A" ADDITIONAL PAID
PREFERRED STOCK COMMON STOCK IN CAPITAL
------------------------------------- ---------- ------------- ------------ -------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------- ---------- ------------- ------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
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
Redeem Class "A" Preferred (456) (61,801) 15,671
Exercise of Stock Options 15,100 151 94,793
Purchase Treasury Stock, Net
Tax Benefit from Exercise of Stock
Options 19,974
Net Loss
------------------------------------- ---------- ------------- ------------ -------------- ------------------
Balance May 31, 2000 138 $ 18,636 2,904,068 $29,040 $19,832,668
=== ======= ========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
(ACCUMULATED SHAREHOLDERS'
COMMON TREASURY STOCK DEFICIT) EQUITY
------------------------------------------------- -------------- --------------- ---------------------
SHARES AMOUNT
------------------------------------- ----------- -------------- --------------- ---------------------
<S> <C> <C> <C> <C>
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
Redeem Class "A" Preferred (46,130)
Exercise of Stock Options 94,944
Purchase Treasury Stock, Net (23,287) (314,498) (314,498)
Tax Benefit from Exercise of Stock
Options 19,974
Net Loss (447,073) (447,073)
------------------------------------- ----------- -------------- --------------- ---------------------
Balance May 31, 2000 (384,425) ($7,254,248) $584,647 $13,210,743
========= ============ ======== ===========
</TABLE>
See notes to financial statements.
27
<PAGE>
ALCIDE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
---------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,222,723 $ (974,463) $ (447,073)
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation 58,714 205,499 1,030,075
Amortization of investment discounts/premiums (82,512) (76,246) 1,002
Common Stock issued to directors, consultants and the
employee stock ownership plan 55,081 70,998 83,057
Deferred income tax 804,611 (557,313) (220,059)
Decrease (increase) in assets:
Inventory (238,243) (710,617) 660,397
Accounts receivable - trade 230,717 8,347 (226,129)
Prepaid income taxes -- (615,000) 615,000
Replacement parts and components -- (134,692) (314,366)
Prepaid expenses and other current assets 72,702 36,555 (61,937)
Long term investments and other assets 657,907 (113,981) 19,354
Increase (decrease) in liabilities:
Accounts payable (60,007) 528,133 (203,480)
Accrued expenses and taxes payable 652,141 129,338 (35,403)
Payable to Novus -- 316,000 (158,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities 5,373,834 (1,887,442) 742,438
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investments (3,720,340) -- --
Redemption of investments 2,107,000 3,860,000 --
Acquisition of equipment and leasehold improvements (25,158) (2,586,184) (4,990,842)
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,638,498) 1,273,816 (4,990,842)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Alcide Common Stock (2,989,450) (884,954) (397,555)
Redemption of Class "A" Preferred Stock -- (40,957) (46,130)
Redemption of Class "B" Preferred Stock (20,169) (22,559) --
Stock Options exercised 395,346 109,747 94,944
----------- ----------- -----------
Net cash (used in) financing activities (2,614,273) (838,723) (348,741)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,121,063 (1,452,349) (4,597,145)
Cash and cash equivalents at beginning of year 6,723,154 7,844,217 6,391,868
----------- ----------- -----------
Cash and cash equivalents at end of year $ 7,844,217 $ 6,391,868 $ 1,794,723
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest -- -- --
Cash paid during the year for income taxes $ 71,625 $ 976,997 $ 1,600
</TABLE>
See notes to financial statements.
28
<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. Animal health and disinfectant sales are recorded at
the time of shipment to distributors or to end users 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 and money market accounts redeemable on demand.
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 of 1999 and paid in Alcide's
fiscal fourth quarter of 1999. 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 2000.
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.
29
<PAGE>
g. Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, 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. Recently Issued Accounting Pronouncements: In June, 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments
and for hedging activities by requiring that all derivatives be recognized
on the balance sheet and measured at fair value. SFAS 137, issued August,
1999, postpones for one year the mandatory effective date for SFAS 133 to
January 1, 2001. The Company has not and does not plan to invest in
derivatives.
In November of 1999, the SEC released Staff Accounting Bulletin
Number 101 -- Revenue Recognition in Financial Statements. This bulletin
will become effective for the Company for the fourth quarter of the fiscal
year ending May 31, 2001. This bulletin establishes more clearly defined
revenue recognition criteria than previously existing accounting
pronouncements. The Company believes that the effects of this bulletin
will not be material to its financial position or the results of its
operations.
i. Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.
j. 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,
-------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Dairy industry - U.S. $5,356,499 $ 5,009,025 $ 4,044,871
- International 4,758,346 4,180,038 4,076,505
--------- --------- ---------
Total dairy industry 10,114,845 9,189,063 8,121,376
Poultry processing industry 2,445,106 1,538,887 3,889,187
Healthcare industry 390,178 440,672 429,886
Automotive industry 48,823 51,906 ---
</TABLE>
In fiscal 2000, two of the Company's distributors in the dairy industry
have each accounted for greater than 10% of total revenues. Their combined
sales in FY 1998, FY 1999 and FY 2000 were $1,181,721, $4,109,603 and
$5,740,069 respectively.
30
<PAGE>
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, 1999 and
May 31, 2000, is as follows:
<TABLE>
<CAPTION>
Investment Classification Amortized Cost Fair Value
------------------------- -------------- ----------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Held-to-maturity:
Long term $503,257 $502,255 $508,750 $495,155
</TABLE>
<TABLE>
<CAPTION>
Investment Classification Gross Unrealized Gains Maturity
------------------------- ---------------------- --------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Held-to-maturity $ 5,493 $ (7,100) 3-4 years 2-3 years
</TABLE>
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, 1999 May 31, 2000
------------ ------------
<S> <C> <C>
Raw materials $1,100,808 $ 681,049
Finished products 792,733 212,047
Sanova inventory at customer sites 170,946 510,994
------- -------
Total $2,064,487 $1,404,090
========== ==========
</TABLE>
6. ACCRUED EXPENSES:
At May 31, accrued expenses were comprised of the following:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Accrued royalties $ 4,113 $ ---
Accrued employee salaries, incentive and benefits 38,330 97,671
Payable to Novus -- short term 158,000 158,000
Accrued consulting and outside services 92,150 62,000
Accrued patent, trademark and legal expenses 85,000 39,065
Other accrued expenses 34,557 20,011
------ ------
$412,150 $376,747
======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
a. Leases:
31
<PAGE>
The Company leases certain property and vehicles under noncancelable
operating leases that expire through May, 2004. Insurance, utilities and
maintenance expenses are borne by the Company.
There are no contingent rentals or sublease rentals.
Future annual lease commitments are as follows:
FY 2001 $ 175,037
FY 2002 176,355
FY 2003 169,259
FY 2004 116,787
Lease payments in FY 2000, FY 1999 and FY 1998 were $115,587, $62,256 and
$62,256 respectively.
b. Employment Agreements:
One officer has an employment agreement which obligates the Company to a
salary of $231,645 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 typically 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.
8. INCOME TAXES:
A summary of the provision (benefit) for income taxes follows:
<TABLE>
<CAPTION>
FY 1998 FY 1999 FY 2000
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ 854,353 $(592,866) $(543,251)
State and local 189,394 148,232 ---
---------- ---------- ----------
$1,043,747 $(444,634) $(543,251)
---------- ---------- ----------
Deferred
Federal $ 804,611 $ 124,318 $ 313,741
---------- ---------- ----------
$1,848,358 $(320,316) $(229,510)
========== ========== ==========
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FY 1998 FY 1999 FY 2000
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes 2.4% (9.3%) --
----- ----- -----
Effective income tax rate 36.4% 24.7% 34.0%
===== ===== =====
</TABLE>
32
<PAGE>
At May 31, 1999 and May 31, 2000, the deferred tax assets were comprised
of the following:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Operating loss carry forward $ 613,372 $1,066,485
Temporary differences (51,816) (276,281)
Research & experimental credits carry forward 42,538 51,525
Alt. Minimum tax carry forward 258,204 260,602
-------- ----------
Total deferred tax asset $ 862,298 $1,102,331
======== ==========
</TABLE>
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. Common stock
equivalents, excluded because of their antidilutive effect, were 73,038
shares in FY 2000 and 107,204 shares in FY 1999.
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,
---------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) $3,222,723 $ (974,463) $ (447,073)
Weighted average number of common shares
outstanding 2,607,192 2,550,312 2,518,767
Basic Earnings (Loss) Per Share $ 1.24 $ (.38) $ (.18)
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) 182,299 0 0
--------- --------- ---------
Weighted average common shares outstanding
and common share equivalents 2,789,491 2,550,312 2,518,767
========= ========= =========
Diluted Earnings (Loss) Per Share $ 1.16 $ (.38) $ (.18)
========= ========= =========
</TABLE>
33
<PAGE>
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.
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. Eight hundred sixty-two shares have been
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. As the Company incurred a loss in fiscal 2000, it has no
obligation to redeem Series 2 stock on September 30, 2000. 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 allows for the
issue of 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
65,450 options available for grant as of May 31, 2000.
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 41,321 options available for grant as of May 31,
2000.
Options are exercisable within 10 years from the date of option grant.
Options will expire during the period July, 2000 through April, 2010. 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
34
<PAGE>
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.
The status of the plans are as follows:
<TABLE>
<CAPTION>
FY 1998 FY 1999 FY 2000
------- ------- -------
No. of Weighted Avg. No. of Weighted Avg. No. of Weighted Avg.
------ ------------- ------ ------------- ------ -------------
Shares Share $ Shares Share $ Shares Share $
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 344,366 $ 9.22 289,188 $11.78 298,200 $13.70
Granted 20,897 35.90 27,167 30.34 38,333 15.13
Exercised (75,325) 6.87 (16,655) 6.59 (15,100) 6.29
Canceled (750) 20.25 (1,500) 23.10 (4,950) 18.10
------- ------- -------
Outstanding at end of year 289,188 $11.78 298,200 $13.70 316,483 14.16
======= ======= =======
Exercisable at end of year 233,888 $ 8.76 237,899 $ 9.89 240,182 $11.32
======= ====== ======= ====== ======= ======
</TABLE>
Information relating to stock options outstanding and stock options
exercisable at May 31, 2000 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 - $7.75 110,347 .92 5.77 110,347 5.77
$8.63 - $12.75 85,640 3.93 10.16 76,839 9.91
$13.38 - $63.00 120,496 7.11 24.69 52,996 24.94
------- ------
316,483 4.11 14.16 240,182 11.32
======= =======
</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, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
FY 1998 FY 1999 FY 2000
------- ------- -------
<S> <C> <C> <C>
Net Income (loss) As reported $3,222,723 $ (974,463) $(447,073)
Pro forma $2,983,590 $(1,121,418) $(699,878)
Basic earnings (loss) per common share
As reported $ 1.24 $ (.38) $ (.18)
Pro forma $ 1.14 $ (.44) $ (.28)
Diluted earnings (loss) per common
share and equivalents As reported $ 1.16 $ (.38) $ (.18)
Pro forma $ 1.07 $ (.44) $ (.28)
</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
35
<PAGE>
the date of grant using the Black-Scholes option pricing model. The
weighted average grant-date fair value of stock options granted during
2000 was $10.06 per share using the assumptions of expected volatility of
57.2%, expected option lives of 7.5 years, risk-free rate of interest of
6.3% and no expected dividends. During 1999, the weighted average
grant-date fair value of stock options granted 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.
12. RELATED PARTY TRANSACTIONS:
Consulting Agreements
LOEB PARTNERS CORPORATION. During the fiscal year ended May 31, 2000, 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, 2000, Dr. May earned
$36,000 for consulting services in the field of pathogen control on
poultry and other food products. By agreement with Dr. May, payment of the
consulting fees have been deferred.
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 2000, 1999 and 1998 were
approximately $83,000, $71,000 and $67,000, respectively.
36
<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
Independent Public Accountants
------------------------------
Arthur Andersen LLP
801 Second Avenue, Suite 800
Seattle, WA 98104
Common Stock Listing
--------------------
NASDAQ
(Symbol - ALCD)
Transfer Agent and Registrar
----------------------------
Computershare Trust Company, Inc.
12039 W. Alameda Parkway, Suite Z-2
Lakewood, Colorado 80228
37
