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, 1996
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
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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 (206) 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, 1996 was approximately $45,557,489. On that date, there
were 2,599,201 shares of common stock outstanding, net of Treasury Stock.
Certain sections of Registrant's definitive Proxy Statement for its 1996
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 1996 Annual Meeting of Stockholders.
Page 1 of 35 pages
Exhibit Index on Page 21
TABLE OF CONTENTS
Page
PART I Item 1. Business 3
A. Introduction 3
B. Sales Development 3
C. Research and Product Development 4
D. Patents and Trademarks 7
E. Raw Materials 9
F. Competition 9
G. Government Regulation 9
H. Employees 10
I. Advertising and Promotion 10
Item 2. Properties 10
Item 3. Legal Proceedings 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 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 13
Item 8. Financial Statements and
Supplementary Data 16
Item 9. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosures 16
PART III Item 10. Directors and Executive
Officers 17
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain
Beneficial Owners and
Management 19
Item 13. Certain Relationships and
Related Transactions 19
PART IV Item 14. Exhibits, Financial Statement
Schedules and Reports on Form
8-K 19
2
PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Alcide-Registered Trademark- Corporation 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.
B. SALES DEVELOPMENT
The Company presently sells products to the dairy, health care and
automotive industries. Its products include: UDDERgold-Registered
Trademark- Plus and UDDERgold-Registered Trademark- Germicidal Barrier Teat
Dips, Pre-Gold-Registered Trademark- Germicidal Pre-Milking Teat Dip,
silverQUICK-Registered Trademark- Udder Wash and 4XLA-Registered
Trademark- Pre- and Post-Milking Teat Dip to the dairy industry;
Exspor-Registered Trademark- Sterilant-Disinfectant and LD-Registered
Trademark- Disinfectant to the health care industry; and RenNew-A/C-Registered
Trademark- 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.
Total product sales for the fiscal year ended May 31, 1996 were
$11,145,826, with direct export sales representing approximately 29% of total
sales. All such direct export sales were for distribution in Europe.
1. DAIRY INDUSTRY
The Company sells its dairy line products in North and South America
through an exclusive distribution arrangement with ABS Global, Inc. ("ABS").
Sales of dairy line products by ABS accounted for approximately 66% of the
Company's net product sales in fiscal year 1996.
North and South American sales of the Company's animal health products,
which include UDDERgold Plus and UDDERgold Teat Dip, Pre-Gold Teat Dip,
silverQUICK Udder Wash and 4XLA Teat Dip, increased 24% to $7,361,885 from
fiscal year 1995 sales of $5,936,821.
Direct export sales of the Company's animal health products increased 18%
to $3,282,180 from fiscal year 1995 sales of $2,784,474.
Worldwide sales of dairy line products during fiscal year 1996 accounted
for approximately 95% of the Company's total sales. Should there be a loss of
the sales generated by dairy line products, it would have a material adverse
effect on the Company's business.
3
2. HEALTH CARE INDUSTRY
The Company markets a line of hard surface sterilants and disinfectants
which kill harmful microorganisms and help reduce the potential for disease
transmission via contaminated surfaces. The Company's LD Disinfectant and
Exspor Sterilant-Disinfectant offer users a combination of broad spectrum
efficacy, speed and relative safety.
Fiscal year 1996 sales of hard surface sterilants and disinfectants were
$359,628 or 3% of total sales, as compared with $399,714 in fiscal year 1995.
3. AUTOMOTIVE INDUSTRY
Fiscal year 1996 sales of RenNew-A/C Air Conditioning System Disinfectant
were $142,134 as compared with $32,095 in fiscal year 1995.
All RenNew-A/C Air Conditioning System Disinfectant sales in both fiscal
year 1996 and fiscal year 1995 were to the General Motors Corporation.
4. INDUSTRY PRACTICES AND BACKLOG ORDERS
The Company's invoice terms conform to those in the chemical industry in
general, which are: domestic-30 days, export-60 days. In January 1995, the
Company extended 90 day terms to ABS in consideration for a 2% finance fee. The
Company had $1,284,194 of firm orders for future delivery at May 31, 1996, as
compared to orders for future delivery at May 31, 1995 of $2,710,950. The
Company's distributors typically place orders one to four months in advance.
5. DISTRIBUTION SYSTEM
The line of Alcide products presently sold to the dairy industry are
typically distributed under exclusive arrangements by either a bovine artificial
insemination company or a veterinary products company in each of the countries
where Alcide's products are sold and registered. The distribution arrangements
define an exclusive territory (usually a country), establish prices at which
Alcide sells products to the distributor and specify minimum expected product
purchase volumes.
ABS Global, Inc. has had exclusive distribution rights to the Company's
products in North and South America. On May 31, 1996, Alcide notified ABS of
the Company's decision to terminate the exclusive arrangement effective November
30, 1996. Alcide and ABS are presently holding discussions on establishing a
new, non-exclusive distribution agreement. Alcide's intent is to appoint other
distributors, in addition to ABS, for North America with the objective of
obtaining broader coverage of the market. The transition to the new
distribution matrix may result in an inventory reduction by ABS during early
fiscal year 1997. This reduction may be offset by an inventory build by a
second distributor(s) later in the fiscal year.
C. RESEARCH AND PRODUCT DEVELOPMENT
In fiscal year 1996 the Company's efforts continued to focus development
activities on 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
4
Company's patented technology are broad spectrum of antimicrobial activity,
rapidity of cidal activity, safe residues and minimal or nonexistent resistant
strains. Primary weaknesses are the inconvenience of a two-part system and
potential for corrosive oxidation.
Additions and improvements to existing product categories are expected to
be funded primarily by the Company. Programs for new business 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 1996 are
described below:
PRESURGICAL SKIN ANTISEPTIC
The Company received the Food and Drug Administration's (FDA) initial
response to the New Drug Application (NDA) filed in September of 1994. While
one clinical study was determined to be "pivotal" to the demonstration of proof
of principle, FDA requested the conduct of a further three studies to further
demonstrate this effect as well as to refine understanding on user safety.
Appropriate additional studies were initiated and (in part) completed during
fiscal 1996. These studies continued into the first quarter of fiscal 1997 at
which time a complete response in the form of an NDA addendum will be submitted
to FDA to answer all outstanding clinical, chemical and pharmaceutical
questions.
Further testing of the presurgical skin disinfecting product to evaluate
the use of the same formulation as a antiseptic for injection sites or
in-dwelling catheter sites was placed on hold in order to focus resources on the
Company's response to FDA's questions on the NDA submission. It is 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 1997 following
the completion of one additional clinical test series. Pilot testing continued
on the evaluation of a modified presurgical skin antiseptic for use as a
surgeon's hand scrub as well as for potential use as a health care worker's
antiseptic hand wash.
FDA approval to market this product in food producing animals was granted
during fiscal 1996. 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.
UDDERGOLD-PLUS
The lengthy process of product registration in the international markets is
proceeding. First major launches into the European area are expected to occur
late in calendar 1997 or early in calendar 1998.
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ANTI-INFECTIVE ORAL RINSE
The optimization program for this product was successfully completed in
late calendar 1995. Approval to initiate clinical testing was also received
(Certificate of Test Exemption) paving the way for a series of two human
clinical studies to be conducted in the United Kingdom during the first quarter
of fiscal 1997. Previous tests have demonstrated that Alcide formulations are
effective in human clinical trials against plaque and gingivitis. Laboratory
tests have further demonstrated that the formulation is effective IN VITRO
against Candida. A pre-IND (Investigational New Drug) submission was made to
the Antiviral Division of FDA in May, 1993 for use of an Alcide formulation in
treating oral candidiasis (a yeast infection) in AIDS patients. A second area
of potential use is for the treatment of HIV-associated gingivitis and
periodontitis.
A successful outcome in the United Kingdom studies will be the attainment
of comparable or better performance than Peridex. Achievement of this outcome
will result in the submission to FDA of an IND application requesting approval
to carry out clinical evaluations of the oral rinse treatment in AIDS patients.
POULTRY ANTIMICROBIAL
In April, 1996 the Company received FDA approval of its Secondary Indirect
Food Additive Petition (FAP) for use in poultry-processing plants. This
approval permits the direct application of the acidified sodium chlorite
chemistry to poultry carcasses during the slaughter process for the purpose of
eliminating or substantially reducing food borne microorganisms harmful to
humans. The process of in-plant testing and validation under USDA sanctioned
protocols and with scale up to full plant use will commence during the first
quarter of fiscal 1997 and is expected to be completed by mid fiscal 1997.
Testing of a related formulation on beef carcasses was completed during
fiscal 1996. This testing evaluated the effects of the Company's chemistry for
the similar reduction of food borne microorganisms harmful to humans on beef
carcasses. Additional studies will be initiated early in fiscal 1997 to provide
supportive evidence for a second FAP to be submitted for this new use area.
Evaluations will also be initiated to establish the potential for expansion into
the fish (including shrimp and shellfish) as well as fresh fruit and vegetable
areas.
INTRAMAMMARY INFUSION
The objective of this program is to provide safe and effective treatment
and control of bovine clinical and/or subclinical mastitis in lactating dairy
cattle with no milk-withholding requirements. The majority of products
presently marketed are antibiotics, the use of which requires discarding milk
for up to three days following treatment. While initial evidence of efficacy
continues to look encouraging, an unacceptable degree of tissue intolerance from
current formulations remains the single greatest hurdle to be overcome.
Toleration studies continued during fiscal 1996. A decision on the continuation
of this program based on the available data is expected to be reached by the end
of calendar 1996.
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OTHER RESEARCH AND DEVELOPMENT
On an ongoing basis the Company continues to examine the potential for new,
more effective formulations to protect and possibly enhance its market position
in the bovine mastitis treatment/prevention field.
D. PATENTS AND TRADEMARKS
PATENTS -- For fiscal year 1996, the Company owned the following ten issued
United States patents directed to its proprietary technology:
1) U.S. Patent No. 4,330,531
"Germ-Killing Materials"
2) U.S. Patent No. 4,891,216
"Disinfecting Compositions and Methods Therefor"
3) U.S. Patent No. 4,956,184
"Topical Treatment of Genital Herpes Lesions"
4) U.S. Patent No. 4,986,990
"Disinfection Method and Composition Therefor"
5) U.S. Patent No. 5,019,402
"Composition and Procedure for Disinfecting Blood and Blood
Components"
6) U.S. Patent No. 5,100,652
"Disinfecting Oral Hygiene Compositions and Process for Using the
Same"
7) U.S. Patent No. 5,185,161
"Disinfection Method and Composition Therefor"
8) U.S. Patent No. 5,252,343
"Method and Composition for Preventing and Treatment of Bacterial
Infections"
9) U.S. Patent No. 5,384,134
"Anti-Inflammatory Formulations for Inflammatory Diseases"
10) U.S. Patent No. 5,389,390
"Process for Removing Bacteria from Poultry and Other Meats"
Comparable protection has either been obtained or is being sought in
selected foreign patent offices.
Two new U.S. patent applications were filed during fiscal year 1996. Eight
additional U.S. patent applications filed prior to fiscal year 1996 are still
pending. Numerous corresponding foreign applications are also pending.
7
The Company's original patent, U.S. Patent No. Re. 31,779, expired on April
18, 1995. That patent was directed to disinfecting a substrate using a lactic
acid/sodium chlorite composition. Corresponding patents in India and New
Zealand have also expired. Corresponding patents in Canada, Europe, Israel,
Malaysia and Hong Kong will expire in 1998.
The Company considers protection of its technology by United States and
foreign patents to be an important aspect of its business. No assurance can be
given, however, as to the validity, efficacy 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.
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 name Alcide-Registered Trademark-, the other
Company marks registered in the U.S. are Exspor-Registered Trademark-,
LD-Registered Trademark-, UDDERgold-Registered Trademark-, 4XLA-Registered
Trademark-, Pre-GoldTM, DIPPINgold-Registered Trademark- silverQUICK-Registered
Trademark- and RenNew-A/C-Registered Trademark-. These apply, respectively, to
products for (1) hard surface sterilization in medical environments, (2) hard
surface disinfection, (3, 4, 5 & 6) teat disinfection, (7) teat washing and (8)
automobile air-conditioning system disinfection.
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 DIPPINgold-Registered
Trademark- has been determined to be more appropriate than UDDERgold and has
therefore been registered in a number of foreign countries. The spelling
variant DIPPINguld-Registered Trademark- has been registered in Denmark, Norway,
Finland and Sweden.
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E. RAW MATERIALS
Various Alcide products include in their formulations chemical components
available from few and in some cases only one supplier. 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 or are believed to be in the process of developing a variety of
products designed to perform some of the functions of Alcide products.
Additionally, there exist in the marketplace products that are known to be
competitive with the Company's products.
The dairy hygiene market into which UDDERgold Plus, UDDERgold, Pre-Gold and
4XLA teat dips are sold is a highly fragmented worldwide market in which major
specialty chemical companies compete. The major classes of products sold in
this market are iodophors and chlorhexidines. The Company's chlorous
acid/chlorine dioxide chemistry represents a novel chemical class. It,
accordingly, necessitates obtaining regulatory approval or registration in most
countries in which it is commercialized. The Company sells its teat dips in
each country via either an animal health or an artificial insemination company.
In the automotive air-conditioning disinfection marketplace, the Company
knows of no efficacious and EPA-registered alternative to RenNew-A/C Air
Conditioning System Disinfectant.
During late fiscal 1996, it has come to the Company's attention that
several third parties may be attempting to develop products which could infringe
upon one or more of the Company's issued U.S. and/or foreign patents. It is the
Company's intention to aggressively enforce its patent rights, both in the U.S.
and abroad, against third parties which manufacture, use or sell infringing
products.
G. GOVERNMENT REGULATION
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.
The Company's line of teat dips requires 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 and India. The product is legally sold without
formal registration in the United States, Greece, France, Hungary and Mexico.
Pending registrations are:
(1) In West Germany a New Drug Application for UDDERgold Teat Dip was
filed in February, 1989. The Company's distributor in The Netherlands is
selling product to German customers.
(2) In Brazil a registration dossier for UDDERgold Teat Dip was filed in
March 1995. Approval is expected in the first quarter of FY '97.
9
Alcide Corporation's 4XLA Teat Dip has been registered in New Zealand,
Canada and Denmark.
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:
(1) A Food Additive Petition for the Company's antimicrobial intervention
for poultry processing plants was submitted to FDA in September, 1994 and
approved by FDA in April, 1996. The Company is presently conducting commercial
plant tests under supervision of the United States Department of Agriculture
(USDA) as a necessary step in obtaining the agency's required approval.
(2) A New Drug Application for the Company's presurgical skin antiseptic
was submitted to FDA in September, 1994. In October, 1995, FDA requested
substantial supplemental testing and additional support for the NDA. Such
testing and support will be completed by September, 1996 and submitted to FDA.
The product cannot be marketed without FDA approval.
H. EMPLOYEES
The corporate office and laboratory staff of 11 employees occupy a 5,461
square foot facility in Redmond, Washington.
The Company has relationships with and from time to time engages the
services of university professors and other qualified consultants to assist it
in technological research and development.
The Company is not a party to any collective bargaining agreement and
considers its employee relations to be excellent.
I. ADVERTISING AND PROMOTION
The Company's advertising and promotion activities include cooperative
advertising of dairy line products with its distributors and the publication of
product, financial and corporate literature.
ITEM 2. PROPERTIES
In July, 1994, upon the expiration of its Norwalk, Connecticut lease, the
Company relocated its headquarters and laboratory facilities from Norwalk,
Connecticut to a leased 5,461 square-foot facility in Redmond, Washington. The
relocation was prompted by a desire to reduce the amount of state income taxes
the Company will pay in the future and to reduce operating and manufacturing
costs. The five-year lease for the Redmond facility provides for a monthly rent
of $4,915 through May 1997 and a monthly rent of $5,188 from June 1997 through
May 1999. Management believes the space will adequately support the Company's
needs for at least the next two years.
MANUFACTURING. All manufacturing of the Company's products is performed by
contract manufacturers having appropriate FDA registration approval for such
manufacturing. Product released for sale is dependent on quality control
testing by Alcide. The Company is not dependent on any one manufacturer. Many
qualified manufacturers regularly compete in the contract-packaging marketplace.
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ITEM 3. LEGAL PROCEEDING
On February 20, 1996, the Company was named as a defendant in a
lawsuit filed in United States District Court for the Southern District of New
York by some of the individuals who have rights to receive royalties with
respect to certain patents assigned to the Company. The complaint alleges that
the Company has not paid the required amount of royalties due the plaintiffs
pursuant to Royalty and Consolidation Agreements. The complaint seeks damages
for unpaid royalties and unjust enrichment, injunctions and other relief.
The Company has denied any wrongdoing in connection with the matters that
have been alleged and intends to defend the lawsuit vigorously. (There can be
no assurance, however, that the Company's defense will be successful, or that
the lawsuit, or any settlement or trial with regard thereto, will not have an
adverse effect on the Company or its financial condition.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
HIGH LOW
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COMMON STOCK
------------
YEAR ENDED MAY 31, 1995
First quarter 9 3/8 7 1/2
Second quarter 8 1/2 7 1/4
Third quarter 8 1/4 6 3/4
Fourth quarter 11 1/4 7 1/2
YEAR ENDED MAY 31, 1996
First quarter 26 1/4 10 1/2
Second quarter 33 16 1/2
Third quarter 29 1/4 19 3/4
Fourth quarter 26 1/4 19 1/4
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, 1996, there were approximately 2,231 Common stockholders of
record.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
------------------
MAY 31, 1992 MAY 31, 1993 MAY 31, 1994 MAY 31, 1995 MAY 31, 1996
Net product sales $4,632,548 $6,471,407 $7,645,350 $9,153,104 $11,145,826
Net income (Loss) 210,566** 810,191** 1,066,124 1,663,213 2,325,062
Net income (Loss)
per Common Share .08*, ** .29** .40 .60 .82
Total assets 9,570,625** 10,305,486 10,347,770 11,910,992 13,768,614
Long term debt --- --- --- --- ---
Redeemable Preferred
Stock 3,713,663 3,771,682 272,736 261,022 249,380
* Restated to reflect the 1-for-10 stock split on October 9, 1992.
** Restated to reflect adoption of SFAS 109 on a retroactive basis to May 31,
1991.
SELECTED QUARTERLY FINANCIAL DATA FOR THE YEARS
-----------------------------------------------
ENDED MAY 31, 1995 AND MAY 31, 1996
-----------------------------------
Net Sales Gross Profit Net Income Net Income per Share
Year Ended
May 31, 1996
1st Quarter $ 2,608,746 $ 1,707,445 $ 504,139 $.18
2nd Quarter 2,980,208 2,015,435 599,958 .21
3rd Quarter 3,044,506 1,975,454 653,951 .23
4th Quarter 2,512,366 1,709,535 567,014 .20
----------- ----------- ---------- ----
Total for Year $11,145,826 $7,407,869 $2,325,062 $.82
----------- ----------- ---------- ----
----------- ----------- ---------- ----
Year Ended
May 31, 1995
1st Quarter $1,398,931 $953,788 $208,493 $.07
2nd Quarter 2,033,647 1,356,625 394,798 .15
3rd Quarter 2,703,717 1,814,151 532,633 .20
4th Quarter 3,016,809 1,901,011 527,289 .19
---------- ---------- ---------- ----
Total for Year $9,153,104 $6,025,575 $1,663,213 $.60
---------- ---------- ---------- ----
---------- ---------- ---------- ----
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1996 AS COMPARED WITH 1995
The Company's net product sales in fiscal year 1996 were $ 11,145,826, an
increase of 22% from the previous fiscal year's $9,153,104. The increase in
fiscal year 1996 was due primarily to an 18% increase in dairy line product
sales, which products include UDDERgold Plus and UDDERgold Germicidal Barrier
Teat Dip, silverQUICK Udder Wash, 4XLA Pre- and Post-Milking Teat Dip and
Pre-Gold Germicidal Pre-Milking Teat Dip. Exports accounted for 29% or
$3,282,180 of net sales, as compared with 30% or $2,784,474 in fiscal year 1995.
Interest and nonoperating income for fiscal year 1996 was $318,677, an
increase of 16% from the prior year's $274,180. The increase reflects the
impact of higher investible liquid assets.
Cost of goods sold was $3,737,957 in fiscal year 1996, or 34% of sales, as
compared to $3,127,529 in fiscal year 1995 or 34% of sales. The stable cost of
goods as a percentage of sales is the result of a similar product mix in both
years.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal year 1996 were $1,176,563, as
compared to $959,158 in fiscal year 1995, an increase of 23%. The increase
resulted primarily from fees paid to third parties for clinical testing and
outside laboratory testing related to the Company's new product development
program. All research and development expenditures were funded by the Company
in both fiscal years 1995 and 1996.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses were $2,070,570 in fiscal year 1996, as
compared with $1,935,760 in fiscal year 1995, an increase of 7%.
ROYALTY OBLIGATIONS
The Company has an ongoing 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 1996, net
sales of $3,814,589 were covered by the royalty and consolidation agreements.
The Company anticipates paying a royalty of 8% of the net cash sales of its
products to the extent they are subject to royalty payments, which payments will
increase the Company's costs by such amount. The Company believes that it has
the ability to provide for these payments in the selling prices of its products.
13
On February 20, 1996, the Company was named as a defendant in a lawsuit
filed in United States District Court for the Southern District of New York by
some of the individuals who have rights to receive royalties with respect to
certain patents assigned to the Company. The complaint alleges that the Company
has not paid the required amount of royalties due the plaintiffs pursuant to
Royalty and Consolidation Agreements. The complaint seeks damages for unpaid
royalties and unjust enrichment, injunctions and other relief.
Alcide management believes that the Company has properly paid royalties on
products subject to such payment, and has established a reserve as of May 31,
1996, of $659,000 for the purpose of defending its position in this legal
dispute. (See Notes to Financial Statements.)
INCOME TAXES
The Company had available carry forward losses aggregating approximately
$5,539,000 at May 31, 1996 and which expire during the years 2000 to 2008.
NET INCOME
Net income for fiscal 1996 was $2,325,062, an increase of $661,849 or 40%
over the previous fiscal year. The increase was achieved by expanded domestic
and international distribution of the Company's products and by continued
control of overhead expenses, somewhat offset by increased research and
development investment.
LIQUIDITY
The Company's cash, cash equivalents and short-term investments and U.S.
Government securities totaled $7,508,437 at May 31, 1996, an increase of
$2,639,759 over the previous fiscal year. The increase was generated from
operations, primarily offset by a $772,713 investment in the repurchase of
Alcide Common Stock.
The Company anticipates that income during fiscal year 1997 will be
adequate to sustain the Company and that its cash resources will enable it to
meet its operating requirements and support capital expenditures in the ensuing
fiscal year.
ACCOUNTS RECEIVABLE
The Company sells its products to customers and distributors on terms
typical of the industry. Sales to U.S. customers are 30-day terms. Sales to
international distributors are 60-day terms. During 1995, 90 day terms were
offered to ABS, the Company's largest distributor, in exchange for a finance
charge equal to 2% of invoice amounts. In 1996, Alcide recorded finance fee
revenue of $230,895. At May 31, 1996, ABS receivables over 30 days accounted
for $1.4 million of accounts receivable.
LEASES AND CAPITAL EXPENDITURES
The Company's office and laboratory space is leased under operating leases
from unaffiliated lessors. During fiscal 1996, the Company spent $44,422 on
purchases of fixed assets. Planned capital expenditures for fiscal year 1997
are expected to be less than $100,000.
14
FISCAL YEAR 1995 AS COMPARED WITH 1994
The Company's net product sales in fiscal year 1995 were $ 9,153,104, an
increase of 20% from the previous fiscal year's $7,645,350. The increase in
fiscal year 1995 was due primarily to a 22% increase in dairy line product
sales, which products include UDDERgold Plus and UDDERgold Germicidal Barrier
Teat Dip, silverQUICK Udder Wash, 4XLA Pre- and Post-Milking Teat Dip and Pre-
Gold Germicidal Pre-Milking Teat Dip. Exports accounted for 30% or $2,784,474
of net sales, as compared with 28 % in fiscal year 1994.
Interest and nonoperating income for fiscal year 1995 was $274,180, an
increase of 52% from the prior year's $180,047. The increase reflects both
the impact of higher interest rates and higher investible liquid assets.
Cost of goods sold was $3,127,529 in fiscal year 1995, or 34% of sales, as
compared to $2,476,433 in fiscal year 1994 or 32% of sales. The increase in
Cost of Goods as a percentage of sales is primarily the result of a change in
product mix associated with the introduction of UDDERgold Plus in January, 1995.
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal year 1995 were $959,158, as
compared to $827,633 in fiscal year 1994, an increase of 16%. The increase
resulted primarily from fees paid to third parties for clinical testing and
outside laboratory testing related to the Company's new product development
program. All research and development expenditures were funded by the Company
in both fiscal years 1994 and 1995.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses were $1,935,760, in fiscal year 1995,
as compared with $1,699,064 in fiscal year 1994, an increase of 14%. The 1994
expense was reduced by $203,000 through reversal of a previous year's bad debt
reserve. Excluding the impact of the bad debt reserve, 1995 Selling and
Administrative Expenses were 2% higher than 1994 expenses.
ROYALTY OBLIGATIONS
The Company has an ongoing 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 1995, net
sales of $6,493,618 were covered by the royalty and consolidation agreements.
INCOME TAXES
The Company had available carry forward losses aggregating approximately
$9,277,000 at May 31, 1995 and which expire during the years 2000 to 2008.
NET INCOME
Net income for fiscal 1995 was $1,663,213, an increase of $597,089 or 56%
over the previous fiscal year. The increase was achieved by expanded domestic
and international distribution
15
of the Company's products and by continued control of overhead expenses,
somewhat offset by increased research and development investment.
LIQUIDITY
The Company's cash, cash equivalents and short-term investments and U.S.
Government securities totaled $4,868,678 at May 31, 1995, an increase of
$378,183 over the previous fiscal year. The increase was generated from
operations, primarily offset by a $438,741 investment in the repurchase of
Alcide Common Stock and a $1,588,883 investment in Accounts Receivable.
ACCOUNTS RECEIVABLE
The Company sells its products to customers and distributors on terms
typical of the industry. Sales to U.S. customers are 30-day terms. Sales to
international distributors are 60-day terms. On January 1, 1995, 90 day terms
were offered to ABS, the Company's largest distributor, in exchange for a
finance charge equal to 2% of invoice amounts. For the period January through
May, 1995, ABS paid Alcide $68,508 in finance fees. ABS receivables over 30
days accounted for $1.4 million accounts receivable at May 31, 1995.
LEASES AND CAPITAL EXPENDITURES
The Company's office and laboratory space is leased under operating leases
from unaffiliated lessors. During fiscal 1995, the Company spent $211,104 on
purchases of fixed assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 12 and 24 through 34 of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no disagreements on accounting and financial disclosures
with Arthur Andersen LLP with regard to the financial statements for fiscal 1996
and 1995 or with Deloitte & Touche LLP with regard to fiscal 1994. The
principal accountants' reports on financial statements of the Company for the
past year did not contain an adverse opinion or a disclaimer of opinion nor were
they qualified or modified as to uncertainty of audit scope or accounting
principles.
16
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, 1996 is listed in the following table:
POSITIONS WITH THE COMPANY AND DIRECTOR OR
PRINCIPAL OCCUPATION OR EXECUTIVE
EMPLOYMENT DURING THE PAST FIVE OFFICER SINCE
NAME AGE YEARS
Thomas L.Kempner 69 Director and Chairman of the 1983
Board of the Company; Chairman
and Chief Executive Officer of
Loeb Partners Corporation, a
private investment banking firm,
since 1979. Presently serves on
the Boards of Directors of The
Arlen Corporation; Energy
Research Corporation; IGENE
Biotechnology, Inc.; Roper Starch
Worldwide, Inc.; Intermagnetics
General; Silent Radio, Inc.; and
Northwest Airlines, Inc.
Kenneth N. May 65 Director of the Company; Retired 1995
in August, 1989 as Chairman,
Chief Executive Officer and a
director of Holly Farms Foods,
Inc., completing 19 years with
that company. Previously held
positions as Professor of Poultry
Science at Mississippi State
University and the University of
Georgia. Consultant for and
director of Hudson Foods, Inc.;
technical advisor and consultant
to the National Broiler Council
on food safety matters. Serves
on the Board of Directors of
Embrex, Inc. Dr. May has been
active in the Poultry Science
Association and the National
Broiler Council, and has served
on various committees for the
USDA.
John P.Richards 54 Executive Vice President, Chief 1991
Financial Officer of the Company;
President of Tartan Marine
Company from June 1983 to
November 1990. Previously held
various financial and operational
management positions at Abbott
Laboratories from 1968 to 1983.
17
Joseph A. Sasenick 56 Director of the Company; 1991
President and Chief Executive
Officer of the Company since
February 1992; President and
Chief Operating Officer of the
Company from February 1991 to
February 1992. Presently serves
on the Board of Directors of the
Washington Biotechnology and
Biomedical Association. Managing
Director/Partner of Vista
Resource Group from 1988 to
February 1991. Previously held
top management positions at
Abbott Laboratories and The
Gillette Company.
William G. Spears 58 Director of the Company; Chairman 1989
of the Board of Spears, Benzak,
Salomon & Farrell, an investment
advisory subsidiary of KeyCorp.
Presently serves on the Boards of
Directors of United HealthCare
Corp. and Osborn Communications
Corp. Chairman, September 1996,
HealthCare Chaplaincy Board of
Trustees and Vice Chairman of
Quinnipiac Board of Trustees.
Aaron Stern 71 Director of the Company; Chairman 1989
of the Board and Chief Executive
Officer of Dr. Aaron Stern, M.D.,
Ph.D., P.C., a professional
corporation; practicing
psychoanalyst; corporate
consultant; corporate director
and Adjunct Professor of
Psychology and Psychoanalysis at
Columbia University, all of which
positions have been held for more
than the past five years;
Director and Senior Advisor,
Tiger Management Corporation.
19
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 1996 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Sections captioned
"Share Ownership by Directors, Executive Officers and Certain Beneficial Owners"
contained in the Company's definitive Proxy Statement for its 1996 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 1996 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' Reports.
Balance Sheets as of May 31, 1995 and May 31, 1996.
Statements of Operations for each of the years ended May 31,
1994, May 31, 1995 and May 31, 1996.
Statements of Changes in Shareholders' Equity (Deficit) for each
of the years ended May 31, 1994, May 31, 1995 and May 31, 1996.
Statements of Cash Flows for each of the years ended May 31,
1994, May 31, 1995 and May 31, 1996.
2. FINANCIAL STATEMENT SCHEDULE
Notes to Financial Statements
Selected Quarterly Financial Data for the Years Ended May 31,
1995 and May 31, 1996, on Page 12.
3. EXHIBITS
See Index to Exhibits on Page 21.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by Registrant during the
quarter ending May 31, 1996.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALCIDE CORPORATION
(Registrant)
By /s/Joseph A. Sasenick
------------------------------------------
Joseph A. Sasenick, President
Chief Executive Officer
By s/John P. Richards
------------------------------------------
John P. Richards, Executive Vice President
Chief Financial Officer (Principal Accounting
Officer)
Date: July 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
s/Thomas L. Kempner Director July 29, 1996
- ----------------------------
Thomas L. Kempner
s/Kenneth N. May Director July 29, 1996
- ----------------------------
Kenneth N. May
s/Joseph A. Sasenick Director, President, July 29, 1996
- ---------------------------- Chief Executive Officer
Joseph A. Sasenick
s/William G. Spears Director July 29, 1996
- ----------------------------
William G. Spears
s/Aaron Stern Director July 29, 1996
- ----------------------------
Aaron Stern
20
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).
10.2 Indenture of Sub-lease dated August 1, 1989 by and between the Company
and K & L Marketing, Inc. (previously filed as an exhibit to Amendment
No. 1 to Registration Statement No. 33-28628 on Form S-3 filed July
21, 1989, 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).
10.5 Agreement by and between the Company and American Breeders Service
(ABS) a division of W.R. Grace & Co. dated September 25, 1986
(previously filed as an exhibit to Form 10-Q of the Registrant for the
quarter ended August 29, 1986, and incorporated herein by reference).
10.9 Agreement by and between the Company and The Procter & Gamble Company
dated January 4, 1988 (previously filed as an exhibit to Form 10-K for
the fiscal year ended May 28, 1988 as amended on Form 8, and
incorporated herein by reference).
10.11 Agreement by and between the Company and Handelsonderneming E.
Heemskerk dated December 31, 1991 (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).
10.12 Agreement by and between the Company and OHF Sante Animale dated
January 30, 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).
10.14 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).
10.15 Agreement by and between the Company and Handelsonderneming E.
Heemskerk dated May 31, 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).
10.17 Agreement by and between the Company and Universal Marketing Services
dated May 3, 1993 (previously filed as an exhibit to Form 10-K of the
Registrant for the fiscal year ended May 31, 1993, and incorporated
herein by reference).
10.18 Agreement by and between the Company and American Breeders Service
dated June 15, 1993 (previously filed as an exhibit to Form 10-K of
the Registrant for the fiscal year ended May 31, 1994, 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).
11.1 Computation of Earnings Per Share of Common Stock of the Company.
21
ARTHUR ANDERSEN LLP
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Alcide Corporation:
We have audited the accompanying balance sheets of Alcide Corporation (a
Delaware Corporation) as of May 31, 1996 and 1995, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Alcide Corporation as of May 31, 1994,
were audited by other auditors whose report dated June 21, 1994, expressed an
unqualified opinion on those statements.
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 respects, the financial position of Alcide Corporation as of May
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
s/Arthur Andersen LLP
Seattle, Washington
June 28, 1996
22
DELOITTE &
TOUCHE LLP
Stamford Harbor Park Telephone: (203) 351-4600
333 Ludlow Street Facsimile: (203) 351-4797
P.O. Box 10098
Stamford, CT 06904
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Alcide Corporation
Redmond, Washington
We have audited the accompanying balance sheet of Alcide Corporation (not
presented separately herein) as of May 31, 1994 and the related statements of
operations, changes in shareholders' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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
misstatements. 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 statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at May 31, 1994 and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
s/Deloitte & Touche LLP
June 21, 1994
23
May 31,
-------------------------------
1995 1996
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 2,770,157 $ 5,365,895
Short term investments 983,889 1,032,634
Accounts receivable - trade 2,583,905 2,585,427
Inventory 562,197 928,500
Prepaid expenses and other current assets 161,710 125,547
----------- -----------
Total current assets 7,061,858 10,038,003
----------- -----------
Equipment and leasehold improvements:
Office equipment 80,864 92,656
Laboratory and manufacturing equipment 99,774 132,404
Leasehold improvements 56,152 56,152
Less: Accumulated depreciation and amortization (37,128) (86,582)
----------- -----------
Total equipment and leasehold improvements, net 199,662 194,630
----------- -----------
Deferred income tax asset 3,524,409 2,421,191
----------- -----------
Other assets 1,125,063 1,114,790
----------- -----------
TOTAL ASSETS $11,910,992 $13,768,614
----------- -----------
----------- -----------
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $379,198 $374,440
Accrued expenses and taxes payable 807,217 1,083,840
----------- -----------
Total liabilities 1,186,415 1,458,280
----------- -----------
COMMITMENTS AND CONTINGENCIES
Redeemable Class B Preferred Stock - noncumulative convertible $.01 par value;
authorized 10,000,000 shares
issued and outstanding:
May 31, 1995 - 99,437
May 31, 1996 - 95,002 261,022 249,380
----------- -----------
Shareholders' equity:
Class "A" Preferred Stock - no par value
authorized 1,000 shares; issued and
outstanding 1,000 shares 135,307 135,307
Common Stock $.01 par value;
authorized 100,000,000 shares;
issued and outstanding:
May 31, 1995 - 2,787,838
May 31, 1996 - 2,791,538 27,878 27,915
Treasury stock at cost (1,441,132) (2,213,845)
Additional paid-in capital 18,164,399 18,209,412
Accumulated Deficit (6,422,897) (4,097,835
----------- -----------
Total Shareholders' Equity 10,463,555 12,060,954
----------- -----------
TOTAL LIABILITIES, AND SHAREHOLDERS' EQUITY $11,910,992 $13,768,614
----------- -----------
----------- -----------
See notes to financial statements.
24
ALCIDE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31,
---------------------------
1994 1995 1996
---- ---- ----
NET SALES
$7,645,350 $9,153,104 $11,145,826
---------- ---------- ----------
EXPENDITURES:
Cost of goods sold 2,476,433 3,127,529 3,737,957
Research and development expense 827,633 959,158 1,176,563
Depreciation and amortization 28,651 30,390 49,454
Consulting expense to related parties 60,000 60,000 96,150
Royalty expense 593,068 697,531 807,940
Other selling, general/administrative 1,699,064 1,935,760 2,070,570
Relocation expense 263,030 73,355 ---
---------- ---------- ----------
5,947,879 6,883,723 7,938,634
---------- ---------- ----------
Operating income 1,697,471 2,269,381 3,207,192
Interest income 180,047 227,841 294,881
Other income (expense) (7,128) 46,339 23,796
---------- ---------- ----------
Income before provision for income taxes 1,870,390 2,543,561 3,525,869
Provision for income taxes 804,266 880,348 1,200,807
---------- ---------- ----------
Net income $1,066,124 $1,663,213 $2,325,062
---------- ---------- ----------
---------- ---------- ----------
---------- ---------- ----------
Net income per common share $ 0.40 $ 0.60 $ 0.82
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares & common share equivalents 2,654,424 2,765,962 2,832,088
---------- ---------- ----------
---------- ---------- ----------
See notes to financial statements.
25
ALCIDE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Class "A" Additional
Preferred Stock Common Stock Paid In
Capital
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - May 31, 1993 (restated) 1,000 135,307 2,387,620 23,876 14,739,210
Purchase of Treasury Stock
ESOP Stock Granted
Conversion of Series 1 Preferred Stock 379,101 3,791 3,559,986
Accretion of Series 1 Preferred (140,578)
Redemption Value
Net Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1994 1,000 135,307 2,766,721 27,667 18,158,618
Accretion of Series 1 Redemption Value (167)
Exercise of Stock Options 412 4 (4)
Purchase Treasury Stock
Exchange of Series 1 for Common Stock 20,705 207 5,952
and Series 2 Stock
Net Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1995 1000 $135,307 2,787,838 $27,878 $18,164,399
Exercise of Stock Options 3,700 37 26,013
Purchase Treasury Stock
Tax Benefit from Exercise of Non-Qualified Stock Options 19,000
Net Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1996 1,000 $135,307 2,791,538 $27,915 $18,209,412
----- -------- --------- ------- -----------
----- -------- --------- ------- -----------
Total
Common Treasury Stock Accumulated Shareholder's
Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
Balance - May 31, 1993 (restated) (5,000) (43,344) (9,152,234) 5,702,815
Purchase of Treasury Stock (98,780) (1,019,047) (1,019,047)
ESOP Stock Granted 6,500 60,000 60,000
Conversion of Series 1 Preferred Stock 3,563,777
Accretion of Series 1 Preferred
Redemption Value (140,578)
Net Income 1,066,124 1,066,124
- ---------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1994 (97,280) (1,002,391) (8,086,110) 9,233,091
Accretion of Series 1 Redemption Value (167)
Exercise of Stock Options ----
Purchase Treasury Stock (56,100) (438,741) (438,741)
Exchange of Series 1 for Common Stock 6,159
and Series 2 Stock
Net Income 1,663,213 1,663,213
- ---------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1995 (153,380) ($1,441,132) ($6,422,897) $10,463,555
Exercise of Stock Options 26,050
Purchase Treasury Stock (38,957) (772,713) (772,713)
Tax Benefit from Exercise of Non-Qualified Stock Options 19,000
Net Income 2,325,062 2,325,062
- ---------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1996 (192,337) ($2,213,845) ($4,097,835) $12,060,954
-------- ----------- ----------- -----------
-------- ----------- ----------- -----------
See notes to financial statements.
26
ALCIDE CORPORATION STATEMENTS OF CASH FLOWS
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,066,124 $1,663,213 $2,325,062
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 28,651 30,390 49,454
Common Stock issued to directors, consultant and
the employee stock ownership plan 60,000 --- 62,003
(Gain) Loss on sales of equipment (35,000) 5,265 ---
Provision for doubtful accounts (102,000) --- ---
Deferred income tax 752,651 822,940 1,103,218
---------- ---------- ----------
1,770,426 2,521,808 3,539,737
---------- ---------- ----------
Decrease (increase) in assets:
Inventory (66,600) (281,984) (366,303)
Accounts receivable - trade (55,542) (1,588,883) (1,522)
Prepaid expenses and other current assets (61,585) 34,042 55,163
Other assets --- 5,456 10,273
Increase (decrease) in liabilities:
Accounts payable 114,710 147,586 (4,758)
Accrued expenses and taxes payable (103,756) 196,886 276,623
---------- ---------- ----------
Net cash provided by operating activities 1,597,653 1,034,911 3,509,213
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investments (1,000,000) (1,993,958) (1,048,745)
Redemption of investments --- 1,000,000 1,000,000
Acquisition of equipment (8,214) (212,265) (44,422)
Increase in other assets (103,563) --- ---
Sale of equipment 35,000 --- ---
---------- ---------- ----------
Net cash provided by (used in) investing activities (1,076,777) (1,206,223) (93,167)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Alcide Common and Series 1 Stock (1,094,793) (444,463) (846,358)
Stock Options exercised --- --- 26,050
---------- ---------- ----------
Net cash (used in) financing activities (1,094,793) (444,463) (820,308)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (573,917) (615,775) 2,595,738
Cash and cash equivalents at beginning of year 3,959,849 3,385,932 2,770,157
---------- ---------- ----------
Cash and cash equivalents at end of year $3,385,932 $2,770,157 $5,365,895
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $7,128 --- ---
Cash paid during the year for income taxes $59,000 $29,000 $87,000
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion of Series 1 redemption value $140,578 $167 ---
See notes to financial statements.
27
ALCIDE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. GENERAL:
Alcide Corporation (the "Company") is engaged in the research, development
and commercialization of unique chemical compounds having intense
microbiocidal activity. The Company holds substantial worldwide rights to
its discoveries through various patents, patent applications, trademarks
and other intellectual property, technology and know-how.
All of the products presently sold by the Company are surface area
disinfectants; therefore, financial information by business segment is not
provided.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Revenue Recognition: All sales are recorded at the time of shipment.
One distributor accounted for $5,032,437 or 66% of net sales and
$5,936,821 or 65% of net sales and $6,865,046 or 62% in the years
ended May 31, 1994, May 31, 1995 and May 31, 1996, respectively.
Accounts receivable due from this customer were $2,135,700 at May 31,
1995 and $1,879,670 at May 31, 1996. Export sales were $2,150,606 or
28% of net sales in 1994 and $2,784,474 or 30% of net sales in 1995
and $3,282,180 or 29% of net sales in 1996. All such direct export
sales were for distribution in Europe.
(b) Cash and cash equivalents consist of short-term interest-bearing
instruments, primarily money market accounts with maturities of three
months or less. These investments are carried at cost which
approximates market.
(c) Royalties: Provisions in royalty agreements provide for the payment
of 8% of net cash sales of applicable products.
(d) Depreciation and Amortization: Office, laboratory and manufacturing
equipment is being depreciated over the five-year estimated useful
life of the assets by the straight-line method.
Leasehold improvements are being amortized over the lives of leases by
the straight-line method.
(e) Income Taxes: The Company accounts for income taxes using the
liability method. Under this method, the Company computes deferred
income taxes based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
(f) 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.
(g) Earnings per Share: Earnings per share for the 1994, 1995 and 1996
fiscal years were based upon the weighted average number of shares
outstanding during each of the periods, plus the effect of Common
Stock equivalents from stock options and convertible securities.
28
3. INVESTMENTS:
The Company adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," effective June 1, 1994. Under SFAS 115, debt securities that
the Company has both the intent and ability to hold to maturity are carried
at amortized cost. All of the Company's debt securities have been
classified as "held-to-maturity." The adoption of SFAS 115 did not have a
material effect on the financial statements. Information regarding
securities held at May 31, 1996, is as follows:
Investment Classification Amortized Cost Fair Value
------------------------- -------------- ----------
Held-to-maturity:
Current $1,032,634 $1,029,284
Long Term 1,109,908 1,133,281
----------- -----------
$2,142,542 $2,162,565
Investment Classification Gross Unrealized Maturity
------------------------- ---------------- --------
Gains Losses
Held-to-maturity $23,373 $3,350 1-3 years
Investments consist entirely of debt obligations of the United States.
4. INVENTORY:
Inventory is recorded at the lower of cost or market on a first-in, first-
out basis, as follows:
Finished Raw
Total Products Materials
----- -------- ---------
May 31, 1995 $562,197 $75,861 $486,336
May 31, 1996 $928,500 $120,155 $808,345
5. ACCRUED EXPENSES:
At May 31, accrued expenses were comprised of the following:
1995 1996
------- -------
Accrued royalties $75,531 $87,670
Accrued employee salaries, incentive and benefits 282,356 296,170
Reserve for defending against potential royalty claim 352,800 659,000
Other accrued expenses 96,530 41,000
------- -------
$807,217 $1,083,840
------- -------
------- -------
6. COMMITMENTS AND CONTINGENCIES:
a. Leases:
Effective July, 1994, the Company occupied office and laboratory space in
Redmond, Washington under a five-year noncancellable lease expiring May 31,
1999. Insurance, utilities and maintenance expenses are borne by the
Company.
There are no contingent rentals or sublease rentals.
29
The annual lease commitments for the Redmond, Washington facility are
$58,980 in fiscal year 1997; and $62,256 in fiscal year 1998 and fiscal
year 1999.
b. Employment Agreements:
Two officers have employment agreements, which combined obligate the
Company to salaries of $297,000 per year. Bonus compensation of 100% of
base pay can be earned.
c. Royalty Agreement:
The Company has an ongoing obligation pursuant to certain royalty and
consolidation agreements to pay patent holders a royalty of 50% of license
revenues and 8% of net cash sales of its covered products subject to such
agreements.
On February 20, 1996, the Company was named as a defendant in a lawsuit
filed in United States District Court for the Southern District of New York
by some of the individuals who have rights to receive royalties with
respect to certain patents assigned to the Company. The complaint alleges
that the Company has not paid the required amount of royalties due the
plaintiffs pursuant to Royalty and Consolidation Agreements. The complaint
seeks damages for unpaid royalties and unjust enrichment, injunctions and
other relief.
The Company has denied any wrongdoing in connection with the matters that
have been alleged and intends to defend the lawsuit vigorously. The
Company has included in royalty expense in the accompanying income
statement $292,800 and $514,977 in FY 1995 and FY 1996 to establish a
reserve for the purpose of defending its position in this legal dispute.
Royalty payments to patent holders for the fiscal years ended May 31, 1994,
1995, and 1996 were $593,068, $404,731 and $292,963 respectively.
d. Distribution Agreement:
A distributor has had exclusive distribution rights to the Company's
products in North and South America. On May 31, 1996 the Company notified
this distributor of the Company's decision to terminate the distributor's
exclusive arrangement, effective November 30, 1996. The Company and the
distributor are presently holding discussions on establishing a new non-
exclusive distribution agreement. The Company intends to appoint other
distributors for North America with the objective of obtaining broader
coverage of the market.
7. INCOME TAXES:
A summary of the provision for income taxes follows:
FY 1994 FY 1995 FY 1996
------- ------- -------
Current
Federal $31,493 $51,998 $97,589
State and local 23,254 1,068 ---
-------- -------- ----------
$54,747 $53,066 $97,589
Deferred
Federal $534,136 $827,282 $1,103,218
State and local 215,383 - - - - - -
-------- -------- ----------
$804,266 $880,348 $1,200,807
-------- -------- ----------
-------- -------- ----------
30
A reconciliation between the statutory federal income tax rate and the effective
income tax rate is as follows:
FY 1994 FY 1995 FY 1996
------- ------- -------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State and local income taxes net of federal tax benefit 8.4% --- ---
Other 0.5% 0.6 0.1%
---- ---- ----
Effective income tax rate 42.9% 34.6% 34.1%
----- ----- -----
----- ----- -----
At May 31, 1995 and May 31, 1996, the deferred tax assets were comprised of the
following:
1995 1996
---- ----
Operating loss carry forward $3,154,337 $1,883,353
Temporary Differences 150,633 239,807
Credits carry forward 110,136 110,509
Alt. Minimum tax carry forward 109,303 187,522
---------- ------------
Total deferred tax asset $3,524,409 $2,421,191
---------- ------------
---------- ------------
The temporary differences result primarily from reserves recorded in the
financial statements which will be deductible for tax reporting when paid.
The Company had available carry forward losses aggregating approximately
$5,539,273 at May 31, 1996 and which expire during the years 2000 to 2008.
8. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK:
a. Authorized Capital
The authorized capital of the Company is 100,000,000 shares of $.01 par
value Common Stock, 1,000 shares of no par value Class A Preferred Stock
and 10,000,000 shares of $.01 par value Class B Preferred Stock.
The Company has not declared dividends on any of its classes of stock.
b. Class A Preferred Stock
The nonvoting Class A Preferred Stock has preference in liquidation for
$135,307, its stated value. Holders have the right to receive an annual
noncumulative dividend of 6% of the stated value amount, if a dividend is
declared and paid on Common Stock. The stock is redeemable at any time by
the Company.
c. Redeemable Class B Preferred Stock - Series 1 and 2.
On December 28, 1993 the stockholders approved an offer to exchange
outstanding shares of Series 1 Stock for Common Stock. The Company's
stockholders also approved an amendment to the Certificate of Designations,
Preferences and Rights of the Series 2 Preferred Stock of the Company with
respect to sinking fund amounts. The Company commenced an offering on
January 10, 1994 to exchange stock at a rate of 0.2757 share of Common
Stock for each share of Series 1 Stock. The offer expired on May 31, 1994
with the exchange of 1,375,049 shares, 93% of the total outstanding Series
1 Stock into 379,101 shares of Common Stock.
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
31
Preferred Stock ("Series 2 Stock") and 0.2 share of Common Stock.
Commencing on September 30, 1994, the Company created a sinking fund to be
funded, on that day and on the 30th day of September of each year
thereafter, at a rate equal to 0.7% of the Company's prior fiscal year's
net income, if any, at $2.625 per share plus declared and unpaid dividends
in any amount equal to the sinking fund payment. The Company was required
to redeem 4,435 shares of Series 2 Stock on September 30, 1995, for
$11,641. Based on fiscal 1996 net income, the Company will redeem 6,200
shares of Series 2 stock for $16,275 on September 30, 1996. 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.
9. STOCK OPTIONS:
The Company had an Incentive Stock Option Plan, which expired in May 1993,
and a nonstatutory stock option plan under which options may be granted to
employees, directors, officers and consultants. A new stock option plan
was approved by the shareholders at the Company's December 7, 1993 Annual
Meeting. 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.
Options are exercisable within 10 years from the date the option was
granted. Options outstanding were granted at the market price or higher on
the date of grant and will expire during the period January 1997 through
January 2005. The status of the plan is as follows:
Aggregate
Options Exercise Price Exercise Price
-------- --------------- --------------
Fiscal Year Ended May 31, 1995
Outstanding at May 31, 1994 281,210 $4.10 to $63.80 $2,153,855
Granted 30,000 $7.75 to $8.625 258,750
Terminated 7,454 $5.00 to $60.00 122,201
Exercised 1,000 5.00 5,000
-------- --------------- ----------
Outstanding at May 31, 1995 302,756 $4.10 to $63.80 $2,285,404
-------- --------------- ----------
-------- --------------- ----------
Exercisable 254,925 $4.10 to $63.80 $1,903,504
-------- --------------- ----------
-------- --------------- ----------
Fiscal Year Ended May 31, 1996
Outstanding at May 31, 1995 302,756 $4.10 to $63.80 $2,285,404
Granted 39,750 $20.25 to $25.00 818,000
Terminated 3,250 $27.25 to $37.80 92,137
Exercised 3,700 $6.70 to $7.75 26,050
-------- --------------- ----------
Outstanding at May 31, 1996 335,556 $4.10 to $63.80 $2,985,217
-------- --------------- ----------
-------- --------------- ----------
Exercisable 275,225 $4.10 to $63.80 $2,012,929
-------- --------------- ----------
-------- --------------- ----------
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes financial
accounting and reporting standards for stock-based employee compensation
plans and for the issuance of equity instruments to acquire goods and
services from non-employees. The Company plans to adopt SFAS No. 123 for
its stock-based employee compensation plans in fiscal 1997 through pro
forma disclosure only.
32
10. RELATED PARTY TRANSACTIONS:
a. Consulting Agreements
Loeb Partners Corporation. During the fiscal year ended May 31, 1996, 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 is a 100% wholly-owned operating subsidiary.
The Company believes that the terms of its consulting agreement with Loeb
are at least as favorable to the Company as could have been provided by
unaffiliated third parties. The consulting agreement provides the Company
with the sole option of paying Loeb either in cash or in stock options for
executive services, thus removing any conflict of interest which might have
arisen as a consequence of Loeb's direct and indirect stock holding in the
Company. Additionally, whenever an issue arose which, in the opinion of a
majority of disinterested members of the Board of Directors, presented a
potential conflict of interest between Loeb and the Company, Mr. Kempner
abstained from voting on such issue.
Kenneth N. May. During the fiscal year ended May 31, 1996, the Company
paid Dr. Kenneth N. May 600 shares of Alcide Common stock having an
aggregate purchase price of $12,150, plus $24,000 cash for consulting
services in the field of pathogen control on poultry and other food
products.
The Company believes that the terms of its consulting agreement with Dr.
May are at least as favorable to the Company as could have been provided by
unaffiliated third parties.
b. Royalty and Consolidation Agreement
The Company has an ongoing obligation pursuant to certain royalty and
consolidation agreements to pay to patent holders, some of whom were
founders of and early investors in the Company, a royalty of 50% of its
license revenues and 8% of its net sales of its covered manufactured
products subject to said agreements. As the Company does not presently
anticipate entering into sublicense agreements for products requiring
royalty payment, its obligation to pay a royalty of 50% of its license
revenues should have no material impact on the financial condition of the
Company. The Company does anticipate paying a royalty of 8% of the net
sales of its products to the extent they are subject to royalty payments,
which payments will increase the Company's costs by such amount. Payments
have aggregated $2,888,674 since 1983. During fiscal years 1996 and 1995,
the amounts indicated below were paid to the following individuals and
entities, certain of whose principals were members of the Board: Old Hill
Associates, $60,360 and $80,506; Loeb Investors Co. V., $19,543 and
$24,629; Loeb Investors Co. VIII, $729 and $973, respectively.
Loeb Investors Co. V and Loeb Investors Co. VIII are partners with others
in Old Hill Associates. Thomas L. Kempner is the managing partner of both
Loeb Investors Co. V and Loeb Investors Co. VIII.
11. 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 1996, 1995 and 1994 were
approximately $62,000, $38,000 and $62,000, respectively.
33