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, 1997
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, 1997 was approximately $84,634,721. On that date, there
were 2,598,795 shares of common stock outstanding, net of Treasury Stock.
Certain sections of Registrant's definitive Proxy Statement for its 1997
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 1997 Annual Meeting of Stockholders.
Page 1 of 38 pages
Exhibit Index on Page 22
TABLE OF CONTENTS
Page
PART I Item 1. Business 3
A. Introduction 3
B. Sales Development 3
C. Research and Product Development 5
D. Patents and Trademarks 7
E. Raw Materials 9
F. Competition 9
G. Government Regulation 9
H. Employees 10
I. Advertising and Promotion 10
J. Manufacturing 11
Item 2. Properties 11
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 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 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 17
PART III Item 10. Directors and Executive Officers 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial
Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 20
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PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Alcide-Registered Trademark- Corporation (the "Company") is a Delaware
Corporation organized in 1983 which has its executive offices and research
laboratories at 8561 154th Avenue, N.E., Redmond, Washington 98052.
Alcide is engaged in the research, development and commercialization of
unique chemical compounds having intense microbiocidal activity. The Company
holds substantial worldwide rights to its discoveries through various
patents, patent applications, trademarks and other intellectual property,
technology, and know-how.
This report includes forward-looking statements which involve risk and
uncertainty including, without limitation, risk of dependence on patents and
trademarks, third party suppliers, market acceptance of and demand for the
Company's products, distribution capabilities, development of technology and
regulatory approval thereof. Sentences or phrases that use the words such as
"believes," "anticipates," "hopes," "plans," "may," "can," "will," and
others, are often used to flag such forward-looking statements, but their
absence does not mean a statement is not forward-looking. Such statements
reflect management's current opinion and are designed to help readers
understand management's thinking. By their very nature, however, such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation
to release publicly any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof, or to
reflect the occurrence of unanticipated events.
B. SALES DEVELOPMENT
The Company presently sells products to the dairy, health care, poultry
processing and automotive industries. Its products include:
UDDERgold-Registered Trademark- Plus and UDDERgold-Registered
Trademark-Germicidal Barrier Teat Dips, Pre-Gold-Registered Trademark-
Germicidal Pre-Milking Teat Dip, silverQUICK-Registered Trademark- Udder Wash
and 4XLA-Registered Trademark- Pre- and Post-Milking Teat Dip to the dairy
industry; Exspor-Registered Trademark- Sterilant-Disinfectant and
LD-Registered Trademark-Disinfectant to the health care industry; Sanova-TM-
antimicrobial intervention to the poultry processing industry; and
RenNew-Registered Trademark-A/C Air Conditioning System Disinfectant to the
automotive industry. The Company's sales to date have primarily been derived
from UDDERgold Plus, UDDERgold and 4XLA teat dips.
Total product sales for the fiscal year ended May 31, 1997 were
$11,768,504, with direct export sales representing approximately 31% of total
sales. Export sales were predominantly for distribution in Europe.
1. DAIRY INDUSTRY
Worldwide sales of dairy line products during fiscal year 1997 accounted
for approximately 88% 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.
3
Dairy line sales to ABS Global, Inc. for distribution in North and South
America totalled $6,473,827 for fiscal year 1997, as compared to $7,361,885 for
fiscal year 1996. The decrease in sales reflects an estimated $800,000
reduction by ABS of its Alcide product inventory during the fiscal year.
Dairy industry sales in Europe are conducted through a network of five
distributors. Their purchases accounted for $3,617,382 of sales in fiscal year
1997 and $3,282,180 in fiscal year 1996.
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 1997 sales of hard surface sterilants and disinfectants were
$364,869, or 3% of total sales, as compared with $359,628 in fiscal year 1996.
3. POULTRY PROCESSING INDUSTRY
In May, 1997 the Company entered into an agreement with Novus
International, Inc. for Novus distribution of Sanova antimicrobial to the
poultry industry. Concurrent with signing a distribution agreement on May 21,
1997 with Novus, the Company recognized its first revenue in the poultry
processing industry. Ultimate sales to poultry processors by Novus are planned
to begin during the fiscal year 1998 (following successful conclusion of
commercial plant testing).
4. AUTOMOTIVE INDUSTRY
Fiscal year 1997 sales of RenNew-A/C Air Conditioning System Disinfectant
were $37,638 as compared with $142,134 in fiscal year 1996. All RenNew-A/C Air
Conditioning System Disinfectant sales in both fiscal year 1997 and fiscal year
1996 were to the General Motors Corporation.
5. INDUSTRY PRACTICES AND BACKLOG ORDERS
The Company's invoice terms conform to those in the chemical industry in
general, which are: domestic-30 days, export-60 days. In January, 1995, the
Company extended 90 day terms to ABS in consideration for a 2% finance fee.
The Company had $2,014,234 of firm orders for future delivery at May 31,
1997, as compared to orders for future delivery at May 31, 1996 of $1,284,194.
The Company's distributors typically place orders one to four months in advance.
6. DISTRIBUTION SYSTEM
The line of Alcide products presently sold to the dairy industry has
been 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
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distribution arrangements define the territory (usually a country), establish
prices at which Alcide sells products to the distributor, and specify minimum
expected product purchase volumes.
On October 30, 1996, Alcide and ABS Global, Inc. entered into a new,
two-year nonexclusive distribution agreement for the Company's products in the
United States, and a new exclusive two-year agreement covering Canada, South
America and several other international markets. On February 7, 1997, the
Company entered into a two-year agreement with IBA, Inc. under which Alcide
granted nonexclusive distribution rights for the Company's udder care products
for a portion of the United States market covering approximately 68% of total
U.S. dairy cows.
On April 2, 1997, the Company notified Rhone Merieux, its exclusive
distributor in France, that Alcide had elected to terminate Rhone Merieux's
exclusive rights to the product line effective immediately. Alcide's intent is
to appoint a second, nonexclusive distributor for France, with the objective of
obtaining broader coverage of the market, particularly for its 4XLA product.
C. RESEARCH AND PRODUCT DEVELOPMENT
In fiscal year 1997, the Company's efforts continued to focus on the
development of its products for which its technology provides clear advantages
in the marketplace and for which weaknesses pose minimal impediment or
competitive disadvantage. Major strengths of the Company's patented technology
are: broad spectrum of antimicrobial activity, rapidity of cidal activity, safe
residues and minimal or nonexistent resistant strains. Primary weaknesses are
the inconvenience of a two-part system and potential for corrosive oxidation.
Additions and improvements to existing business units are expected to be
funded primarily by the Company. Programs for 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 1997 are
described below:
1. PREOPERATIVE SKIN ANTISEPTIC
The Company successfully completed the additional clinical and
pre-clinical studies necessary to respond to the Food and Drug
Administration's (FDA) initial response to the New Drug Application (NDA)
filed in September, 1994. An addendum reporting the results of these studies
was submitted to the FDA in May, 1997. A second addendum to respond to
questions relating to chemical and pharmaceutical issues is planned to be
submitted in early fiscal 1998.
Further testing of the preoperative skin antiseptic product to evaluate
use of the formulation as an antiseptic for injection sites or in-dwelling
catheter sites has continued on hold, pending responses to and final
resolution of FDA's questions on the preoperative skin antiseptic NDA
submission. It is the Company's intention that an addendum to the original
NDA (to cover this
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expanded use) will be submitted to the FDA, and this addendum is now targeted
for late in fiscal 1998, following the completion of additional clinical
testing.
Wherever possible, it is the Company's strategy to further the development
of new use areas for the skin disinfectant range by the development and
submission of addenda to the original NDA.
2. ANTI-INFECTIVE ORAL RINSE
Two human clinical tests were successfully completed in the United
Kingdom (under Certificate of Exemption status) during fiscal 1997. The
results of these two tests confirmed that the optimization program completed
in 1995 had successfully elevated the level of performance of the Oral Rinse
product to that of the leading prescription product. An Investigational New
Drug submission (IND) was filed with the FDA in April, 1997. It is the
Company's intention to identify a marketing partner which will support human
clinical evaluations of efficacy versus gingivitis.
3. FOOD DISINFECTION
In February of 1997, the Company received USDA approval to commence
commercial plant evaluations of the direct application of 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. This testing process is planned to be completed by the
end of the first quarter of fiscal 1998. It is believed that USDA approval
to begin marketing to the poultry industry will follow shortly thereafter.
A Secondary Direct Food Additive Petition (FAP) for the use of acidified
sodium chlorite solutions on red meats was submitted to the FDA in December,
1996. Testing in red meat processing plants will commence on receipt of FDA
approval.
Evaluations into the potential for use of Alcide antimicrobials in the
fish, fruits and vegetables processing industries were also conducted during
fiscal 1997.
4. INTRAMAMMARY INFUSION
The objective of this program is to provide safe and effective treatment
and control of 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. Evaluations completed during fiscal 1997
demonstrated that the use of aseptically manufactured pyrogen-free product
produces an acceptable toleration profile in dairy cows. The program will
therefore be expanded in fiscal 1998 to include evaluations of dose rate and
treatment regimes as well as to develop additional information on efficacy.
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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, 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.
PATENTS -- The Company owns the following thirteen issued United States
patents:
1) U.S. Patent No. 4,330,531
"Germ-Killing Materials"
2) U.S. Patent No. 4,891,216
"Disinfecting Compositions and Methods Therefor"
3) U.S. Patent No. 4,956,184
"Topical Treatment of Genital Herpes Lesions"
4) U.S. Patent No. 4,986,990
"Disinfection Method and Composition Therefor"
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"
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11) U.S. Patent No. 5,597,561
"Adherent Disinfecting Compositions and Method of Use in Skin
Disinfection"
12) U.S. Patent No. 5,622,725
"Wound Disinfection and Repair"
13) U.S. Patent No. 5,628,959
"Composition and Method for Sterilizing Dialyzers"
Comparable protection has either been obtained or is being sought in
selected foreign patent offices.
One new U.S. patent application was filed during fiscal year 1997.
Eight additional U.S. patent applications are pending. Numerous
corresponding foreign applications are also 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.
PATENT LITIGATION
ALCIDE V. BABSON BROTHERS. On August 19, 1996, Alcide filed suit against
Babson Brothers Company because it believed that Babson Brothers' InterSept-TM-
product, which was launched that month, infringed the claims of Alcide's United
States Patent No. 4,330,531. Alcide moved for a preliminary injunction. On
September 19, 1996, the court granted Alcide's motion for a preliminary
injunction, and on June 3, 1997, the court granted Alcide's motion for summary
judgment of infringement. The case settled on June 30, 1997, with a cash
payment to Alcide and a Consent Agreement whereby Babson Brothers was
permanently enjoined for the remaining term of the patent from making and
selling the InterSept-TM- product.
ALCIDE V. EIMERMACHER. Alcide Corporation filed suit against
Eimermacher for infringement of Alcide's German Patent No. P 28 17 942.2. On
April 17, 1997, the court held that Eimermacher was liable for infringement.
The court entered an injunction on May 22, 1997 against further manufacture
or sale of the Eimermacher product in Germany for the remaining term of the
patent. The case is in the damages stage. The Company expects the court to
enter a monetary judgment in favor of Alcide Corporation.
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.
8
If rights to trademarks selected by the Company were unavailable in a
territory, if a Company trademark registration were to become invalid, or if
the Company's business name or trademarks were to infringe the rights of
another in a territory, there would be an adverse impact on the Company.
In addition to the Company's mark Alcide-Registered Trademark-, the
other Company marks registered in the U.S. are Exspor-Registered Trademark-,
LD-Registered Trademark-, UDDERgold-Registered Trademark-, 4XLA-Registered
Trademark-, Pre-Gold-Registered Trademark-, DIPPINgold-Registered
Trademark-silverQUICK-Registered Trademark- and RenNew-Registered Trademark-.
These same marks have been registered outside of the U.S. in markets
where the Company has determined that there is a commercial opportunity for
the appropriate product area. For translation reasons, the mark
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.
E. RAW MATERIALS
Various Alcide products include in their formulations chemical components
available from few (and in some cases only one) suppliers. Formulation
alternatives exist for each single-sourced material; however, changing
formulations could result in higher raw material costs and/or the necessity to
obtain regulatory clearance for the modified formulation.
F. COMPETITION
The Company competes in substantially all of its markets on the basis of
quality and technical innovation. A number of companies have announced their
intention to introduce, or are believed to be in the process of developing, a
variety of products designed to perform some of the functions of Alcide
products. Additionally, there exist in the marketplace products that are known
to be competitive with the Company's products.
The dairy hygiene market into which UDDERgold Plus, UDDERgold, Pre-Gold
and 4XLA teat dips are sold is a highly fragmented worldwide market in which
major specialty chemical companies compete. The major classes of products
sold in this market are iodophors and chlorhexidines. The Company's 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.
G. GOVERNMENT REGULATION
1. DAIRY INDUSTRY
The Company's products sold to the dairy industry require registration for
sale in a number of international markets. UDDERgold Teat Dip has been
registered in Canada, the United Kingdom, Republic of Ireland, Denmark, The
Netherlands, Italy, Spain, Portugal, Belgium, New Zealand, Brazil, France and
India. The product is legally sold without formal registration in the United
States, Greece, Hungary and Mexico. Registrations are pending in Poland, South
Africa and Switzerland.
In West Germany, a New Drug Application for UDDERgold Teat Dip was filed
in February, 1989. The application was rejected in March, 1997. Alcide has
filed notice of suit in Germany to
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appeal the decision and has also filed a new registration application. The
Company's distributor in The Netherlands is selling product to German customers
who buy the product in The Netherlands.
4XLA Teat Dip has been registered in New Zealand, Canada and Denmark. The
product is sold without registration in France, The Netherlands, Belgium, Italy
and the United States.
In the event the Company employs distributors in other countries,
registration documents will be filed either directly by the Company or by the
specific distributor.
It is expected that substantially all new products presently under
development by Alcide Corporation will require regulatory approval.
2. POULTRY PROCESSING ANTIMICROBIALS
A Food Additive Petition for the Company's antimicrobial intervention for
poultry processing plants was submitted to the FDA in September, 1994 and
approved by the 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.
3. PREOPERATIVE SKIN ANTISEPTIC
A New Drug Application for the Company's preoperative skin antiseptic was
submitted to the FDA in September, 1994. In October, 1995, the FDA requested
substantial supplemental testing and additional support for the NDA. Such
testing and support was completed in FY 1997 and submitted to the FDA in May,
1997. The product cannot be marketed without FDA approval.
4. STERILANTS/DISINFECTANTS
The Company's line of hard surface sterilants and disinfectants are
regulated in the U.S. by the EPA and FDA. Appropriate EPA and FDA approvals
for sale and manufacturing have been obtained.
H. EMPLOYEES
The corporate office and laboratory staff of 12 employees occupy a 5,461
square foot facility in Redmond, Washington.
The Company has relationships with, and from time to time engages the
services of, university professors and other qualified consultants to assist it
in technological research and development.
The Company is not a party to any collective bargaining agreement and
considers its employee relations to be excellent.
I. ADVERTISING AND PROMOTION
The Company's advertising and promotion activities consist of cooperative
advertising of dairy line products with its distributors and the publication of
product, financial and corporate literature.
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J. MANUFACTURING
All manufacturing of the Company's products is performed by contract
manufacturers having appropriate FDA registration approval for such
manufacturing. Product release for sale is dependent on quality control
testing by Alcide. The Company is not dependent on any one manufacturer.
Many qualified manufacturers regularly compete in the contract packaging
marketplace.
ITEM 2. PROPERTIES
The five-year lease for the Company's Redmond facility provided 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.
ITEM 3. LEGAL PROCEEDING
On February 20, 1996, the Company was named as a defendant in a lawsuit
filed in United States District Court for the Southern District of New York
by Howard Alliger, Old Hill Associates, and other individuals who have rights
to receive royalties with respect to certain patents assigned to the Company.
The complaint alleges that the Company has not paid the required amount of
royalties due the plaintiffs pursuant to Royalty and Consolidation
Agreements. The complaint seeks damages for unpaid royalties and unjust
enrichment, injunctions, and other relief.
The Company has denied any wrongdoing in connection with the matters that
have been alleged and intends to defend the lawsuit vigorously. (There can be
no assurance, however, that the Company's defense will be successful, or that
the lawsuit, or any settlement or trial with regard thereto, will not have an
adverse effect on the Company or its financial condition.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock ("Common Stock") has been publicly traded since
May 26, 1983 in the over-the-counter market on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol ALCD.
The following table sets forth the range of the Common Stock on NASDAQ for
the fiscal quarters indicated, as reported by NASDAQ.
HIGH LOW
COMMON STOCK
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
YEAR ENDED MAY 31, 1997
First quarter 25 1/4 20 3/4
Second Quarter 22 1/4 18 1/2
Third Quarter 25 3/4 18
Fourth Quarter 31 1/2 17 3/4
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, 1997, there were approximately 2,083 Common stockholders of record.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
MAY 31, 1993 MAY 31, 1994 MAY 31, 1995 MAY 31, 1996 MAY 31, 1997
Net sales $6,471,407 $7,645,350 $9,153,104 $11,145,826 $11,768,504
Net income (Loss) 810,191* 1,066,124 1,663,213 2,325,062 2,881,295
Net income (Loss)
per Common Share .29* .40 .60 .82 1.04
Total assets 10,305,486 10,347,770 11,910,992 13,768,614 15,113,672
Long term debt --- --- --- --- ---
Redeemable Preferred
Stock 3,771,682 272,736 261,022 249,380 233,105
*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, 1996 AND MAY 31, 1997
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, 1997
1st Quarter $2,042,222 $1,419,797 $376,296 $.13
2nd Quarter 2,744,874 1,850,961 601,724 .22
3rd Quarter 2,963,436 1,856,327 707,544 .25
4th Quarter 4.017,972 2,787,544 1,195,731 .43
----------- ---------- ---------- ----
Total for Year $11,768,504 $7,914,629 $2,881,295 $1.04
----------- ---------- ---------- ----
----------- ---------- ---------- ----
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1997 AS COMPARED WITH 1996
The Company's net sales in fiscal year 1997 were $11,768,504, an increase
of 6% from the previous fiscal year's $11,145,826. During the fiscal year, ABS
Global, Inc. reduced its inventory of Alcide products by an estimated $800,000.
This sales reduction was offset by sales of $273,792 to IBA, Inc., which began
distributing Alcide udder care products in February, 1997, and by a Novus
International, Inc's. $1 million purchase of Alcide poultry antimicrobial
inventory and equipment, concurrent with the May 21, 1997 distribution
agreement.
Interest and nonoperating income for the fiscal year 1997 was $553,846, an
increase of 74% from the prior year's $318,677. The increase reflects the
impact of higher investible liquid assets and a $100,000 payment to Alcide by
Novus on February 6, 1997 to secure negotiating rights for a distribution
agreement.
Cost of goods sold was $3,853,875 in fiscal year 1997, or 33% of sales, as
compared to $3,737,957 in fiscal year 1996, or 34% of sales. The lower cost of
goods as a percentage of sales reflects the impact of the sale to Novus.
ROYALTY OBLIGATIONS
The Company has an 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 1997,
net sales of $4,248,923 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.
On February 20, 1996, the Company was named as a defendant in a lawsuit
filed in United States District Court for the Southern District of New York
by Howard Alliger, Old Hill Associates, and other individuals who have rights
to receive royalties with respect to certain patents assigned to the Company.
The complaint alleges that the Company has not paid the required amount of
royalties due the plaintiffs pursuant to Royalty and Consolidation
Agreements. The complaint seeks damages for unpaid royalties and unjust
enrichment, injunctions, and other relief.
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, 1997, of $87,000 for the purpose of defending its position in this
legal dispute. (See Notes to Financial Statements.)
14
RESEARCH AND DEVELOPMENT
Research and development expenses in fiscal year 1997 were $1,546,285, as
compared to $1,176,563 in fiscal year 1996, an increase of 31%. The increase
resulted primarily from fees paid to third parties for clinical testing and
outside laboratory testing related to the Company's new product development
program and expenses related to commercial plant testing of Sanova, the
Company's new poultry processing antimicrobial. All research and development
expenditures were funded by the Company in both fiscal years 1996 and 1997.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses were $2,026,284 in fiscal year 1997,
as compared with $2,070,570 in fiscal year 1996, a decrease of 2%.
INCOME TAXES
The Company had available carry forward losses aggregating approximately
$1,861,462 at May 31, 1997 and which expire during the years 2000 to 2008. At
the present pace of operations, it is likely that the carry forward losses will
be exhausted in FY 1998.
NET INCOME
Net Income for fiscal 1997 was $2,881,295, an increase of $556,233 or
24% over the previous fiscal year. The increase was achieved as a result of
the net sales increase and interest and non-operating income increases noted
above, offset by cost of goods and expense increases.
LIQUIDITY
The Company's cash, cash equivalents and short-term investments, and U.S.
Government securities totaled $9,910,674 at May 31, 1997, an increase of
$2,402,237 over the previous fiscal year. The increase was generated from
operations, primarily offset by a $977,580 investment in the repurchase of
Alcide Common Stock.
The Company anticipates that income during fiscal year 1998 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 FY 1997, Alcide recorded finance fee
revenue of $156,145. At May 31, 1997, ABS receivables over 30 days accounted
for $929,903 of accounts receivable.
15
LEASES AND CAPITAL EXPENDITURES
The Company's office and laboratory space is leased under operating leases
from unaffiliated lessors. During fiscal 1997, the Company spent $7,354 on
purchases of fixed assets. Planned capital expenditures for fiscal year 1998
are expected to be less than $100,000.
FISCAL YEAR 1996 AS COMPARED WITH 1995
The Company's net 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.
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.
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%.
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.
16
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 13 and 24 through 35 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
1997, 1996 and 1995. 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.
17
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, 1997 is listed in the following table:
POSITIONS WITH THE COMPANY AND PRINCIPAL OCCUPATION OR DIRECTOR OR EXECUTIVE OFFICER
Name Age EMPLOYMENT DURING THE PAST FIVE YEARS SINCE
Thomas L. Kempner 70 Director and Chairman of the Board of the Company; Chairman 1983
and Chief Executive Officer of Loeb Partners Corporation,
a private investment banking firm, since 1979. Presently
serves on the Boards of Directors of Energy Research
Corporation; IGENE Biotechnology, Inc.; Roper Starch
Worldwide, Inc.; Intermagnetics General; Northwest
Airlines, Inc.; and CCC Information Services Group, Inc.
Kenneth N. May 66 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. 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 55 Executive Vice President, Chief Financial Officer of the 1991
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.
18
Joseph A. Sasenick 57 Director of the Company; President and Chief Executive 1991
Officer of the Company since February 1992; President and
Chief Operating Officer of the Company from February 1991
to February 1992. Presently serves as Chairman of the
Washington Biotechnology and Biomedical Association.
Previously held top management positions at Abbott
Laboratories and The Gillette Company.
William G. Spears 59 Director of the Company; Chairman of the Board of Spears, 1989
Benzak, Salomon & Farrell, an investment advisory
subsidiary of KeyCorp. since 1994. Presently serves on the
Board of Directors of United HealthCare Corp. Chairman,
HealthCare Chaplaincy Board of Trustees and Vice Chairman
of Quinnipiac College Board of Trustees.
Aaron Stern 72 Director of the Company; Chairman of the Board and Chief 1989
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 1997 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 1997
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 1997 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with Report:
1. FINANCIAL STATEMENTS
Independent Auditors' Report.
Balance Sheets as of May 31, 1996 and May 31, 1997.
Statements of Operations for each of the years ended
May 31, 1995, May 31, 1996 and May 31, 1997.
Statements of Changes in Shareholders' Equity for each
of the years ended May 31, 1995, May 31, 1996 and May
31, 1997.
Statements of Cash Flows for each of the years ended
May 31, 1995, May 31, 1996 and May 31, 1997.
2. FINANCIAL STATEMENT SCHEDULE
Notes to Financial Statements
Selected Quarterly Financial Data for the Years Ended
May 31, 1996 and May 31, 1997, on Page 13.
3. EXHIBITS
See Index to Exhibits on Page 22.
(b) Reports on Form 8-K.
On May 30, 1997, the Company filed Form 8-K,
Distributor Agreement by and between Alcide Corporation
and Novus International, Inc., dated May 21, 1997.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALCIDE CORPORATION
(Registrant)
By s/JOSEPH A. SASENICK
-------------------------------------
Joseph A. Sasenick, President
Chief Executive Officer
By s/JOHN P. RICHARDS
-------------------------------------
John P. Richards, Executive Vice President
Chief Financial Officer (Principal Accounting
Officer)
Date: July 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
s/THOMAS L. KEMPNER Director July 15, 1997
- ---------------------------------
Thomas L. Kempner
s/KENNETH N. MAY Director July 15, 1997
- ---------------------------------
Kenneth N. May
s/JOSEPH A. SASENICK Director, President, July 15, 1997
- --------------------------------- Chief Executive Officer
Joseph A. Sasenick
s/WILLIAM G. SPEARS Director July 15, 1997
- ---------------------------------
William G. Spears
s/AARON STERN Director July 15, 1997
- ---------------------------------
Aaron Stern
21
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).
10.15 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).
10.19 1993 Incentive Stock Option Plan (previously filed as an Exhibit to
Proxy Statement for meeting held December 7, 1993, and incorporated
herein by reference).
10.20 Distributor Agreement by and between the Company and ABS Global, Inc.,
dated October 30, 1996, covering the United States (previously filed
as an exhibit to Form 10-Q of the Registrant for the quarter ended
November 30, 1996, and incorporated herein by reference).
10.21 Distributor Agreement by and between the Company and ABS Global, Inc.,
dated October 30, 1996, covering several international markets
(previously filed as an exhibit to Form 10-Q of the Registrant for the
quarter ended November 30, 1996, and incorporated herein by
reference).
10.22 Distributor Agreement by and between the Company and IBA Inc., dated
February 7, 1997, covering territories in the United States
(previously filed as an exhibit to Form 10-Q of the Registrant for the
quarter ended February 28, 1997, and incorporated herein by
reference).
10.23 Distributor Agreement by and between the Company and Novus
International, Inc., dated May 21, 1997 (previously filed on Form 8-K
on May 30, 1997, and incorporated herein by reference).
11.0 Computation of Earnings Per Share of Common Stock of the Company.
23.1 Consent of Independent Public Accountants.
22
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, 1997 and 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for each of the three
years ended May 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of Alcide Corporation as of May 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
July 1, 1997
23
ALCIDE CORPORATION BALANCE SHEETS
May 31,
--------------------------
1996 1997
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 5,365,895 $ 6,723,154
Short term investments 1,032,634 2,086,900
Accounts receivable - trade 2,585,427 2,498,981
Inventory 928,500 1,115,627
Prepaid expenses and other current assets 125,547 285,971
---------- ----------
Total current assets 10,038,003 12,710,633
---------- ----------
Equipment and leasehold improvements:
Office equipment 92,656 100,010
Laboratory and manufacturing equipment 132,404 132,404
Leasehold improvements 56,152 56,152
Less: Accumulated depreciation and amortization (86,582) (143,604)
---------- ----------
Total equipment and leasehold improvements, net 194,630 144,962
---------- ----------
Deferred income tax asset 2,421,191 1,090,229
---------- ----------
Other assets 1,114,790 1,167,848
---------- ----------
TOTAL ASSETS $13,768,614 $15,113,672
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $374,440 $329,808
Accrued expenses and taxes payable 1,083,840 493,046
---------- ----------
Total liabilities 1,458,280 822,854
---------- ----------
COMMITMENTS AND CONTINGENCIES
Redeemable Class B Preferred Stock -
noncumulative convertible $.01 par value;
authorized 10,000,000 shares
issued and outstanding:
May 31, 1996 - 95,002
May 31, 1997 - 88,802 249,380 233,105
---------- ----------
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, 1996 - 2,791,538
May 31, 1997 - 2,799,408 27,915 27,994
Treasury stock at cost (2,213,845) (3,191,425)
Additional paid-in capital 18,209,412 18,302,377
Accumulated Deficit (4,097,835) (1,216,540)
---------- ----------
Total Shareholders' Equity 12,060,954 14,057,713
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,768,614 $15,113,672
---------- ----------
---------- ----------
See notes to financial statements.
24
ALCIDE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31,
---------------------------
1995 1996 1997
---- ---- ----
NET SALES $9,153,104 $11,145,826 $11,768,504
---------- ----------- -----------
EXPENDITURES:
Cost of goods sold 3,127,529 3,737,957 3,853,875
Royalty expense 697,531 807,940 437,877
Research and development expense 959,158 1,176,563 1,546,285
Depreciation and amortization 30,390 49,454 57,022
Consulting expense to related parties 60,000 96,150 96,014
Other selling, general/administrative 1,935,760 2,070,570 2,026,284
Relocation expense 73,355 --- ---
---------- ----------- -----------
6,883,723 7,938,634 8,017,357
---------- ----------- -----------
Operating income 2,269,381 3,207,192 3,751,147
Interest income 227,841 294,881 427,316
Other income 46,339 23,796 126,530
---------- ----------- -----------
Income before provision for income taxes 2,543,561 3,525,869 4,304,993
Provision for income taxes 880,348 1,200,807 1,423,698
---------- ----------- -----------
Net income $ 1,663,213 $ 2,325,062 $2,881,295
---------- ----------- -----------
---------- ----------- -----------
Net income per common share $ 0.60 $ 0.82 $ 1.04
---------- ----------- -----------
---------- ----------- -----------
Weighted average common shares &
common share equivalents 2,765,962 2,832,088 2,783,064
---------- ----------- -----------
---------- ----------- -----------
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, 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
and Series 2 Stock 20,705 207 5,952
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
Exercise of Stock Options 7,870 79 69,965
Purchase Treasury Stock
Tax Benefit from Exercise of Non-Qualified
Stock Options 23,000
Net Income
- -----------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1997 1,000 $135,307 2,799,408 $27,994 $18,302,377
----- -------- --------- ------- -----------
----- -------- --------- ------- -----------
TOTAL
COMMON TREASURY STOCK ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
- -----------------------------------------------------------------------------------------------------------
SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------
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
and Series 2 Stock 6,159
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
Exercise of Stock Options 70,044
Purchase Treasury Stock (48,382) (977,580) (977,580)
Tax Benefit from Exercise of Non-Qualified
Stock Options 23,000
Net Income 2,881,295 2,881,295
- -----------------------------------------------------------------------------------------------------------
Balance May 31, 1997 (240,719) ($3,191,425) ($1,216,540) $14,057,713
------- ---------- ---------- -----------
------- ---------- ---------- -----------
See notes to financial statements.
26
ALCIDE CORPORATION STATEMENTS OF CASH FLOWS
1995 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,663,213 $2,325,062 $2,881,295
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 30,390 49,454 57,022
Common Stock issued to directors, consultant and
the employee stock ownership plan --- 62,003 52,000
Loss on sales of equipment 5,265 --- ---
Deferred income tax 822,940 1,103,218 1,330,962
Decrease (increase) in assets:
Inventory (281,984) (366,303) (187,127)
Accounts receivable - trade (1,588,883) (1,522) 86,446
Prepaid expenses and other current assets 34,042 55,163 (137,424)
Other assets 5,456 10,273 (53,058)
Increase (decrease) in liabilities:
Accounts payable 147,586 (4,758) (44,632)
Accrued expenses and taxes payable 196,886 276,623 (590,794)
---------- ---------- ----------
Net cash provided by operating activities 1,034,911 3,509,213 3,394,690
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investments (1,993,958) (1,048,745) (2,104,266)
Redemption of investments 1,000,000 1,000,000 1,050,000
Acquisition of equipment (212,265) (44,422) (7,354)
---------- ---------- ----------
Net cash provided by (used in) investing activities (1,206,223) (93,167) (1,061,620)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Alcide Common and redemption of Class B
Preferred Stock (444,463) (846,358) (1,045,855)
Stock Options exercised --- 26,050 70,044
---------- ---------- ----------
Net cash (used in) financing activities (444,463) (820,308) (975,811)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (615,775) 2,595,738 1,357,259
Cash and cash equivalents at beginning of year 3,385,932 2,770,157 5,365,895
---------- ---------- ----------
Cash and cash equivalents at end of year $2,770,157 $5,365,895 $6,723,154
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest --- --- ---
Cash paid during the year for income taxes $29,000 $87,000 $41,000
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion of Series 1 redemption value $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: Sales to Novus International, Inc. are recorded
at the greater of minimum payments set forth in the contract or actual
products shipped. All other sales are recorded at the time of shipment to
end users or to distributors who take title to products at the time of
shipment. One distributor accounted for $6,584,970 or 72% of net sales and
$7,905,048 or 71% of net sales and $6,891,749 or 59% in the years ended May
31, 1995, May 31, 1996 and May 31, 1997, respectively. Accounts receivable
due from this customer were $1,879,670 at May 31, 1996 and $1,646,162 at
May 31, 1997. Export sales were $2,784,474 or 30% of net sales in 1995
and $3,282,180 or 29% of net sales in 1996 and $3,617,382 or 31% of net
sales in 1997. All such direct export sales transactions occurred in the
United States for ultimate distribution predominantly in Europe.
The Company provides a limited warranty to distributors of its products
which limits the Company's obligation to replacement of defective product.
Such returns for replacements have for the past several years been less
than .1% of net sales.
b. Cash and cash equivalents consist of short-term interest-bearing
instruments, primarily 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. Litigation Expense: The expected costs to defend the Company in law
suits filed against it are recorded in the period in which the Company
becomes aware of the action.
e. Depreciation and Amortization: Office, laboratory and manufacturing
equipment is being depreciated over the five-year estimated useful life of
the assets by the straight-line method.
Leasehold improvements are being amortized over the lives of leases by the
straight-line method.
f. Income Taxes: The Company accounts for income taxes using the
liability method. Under this method, the Company computes deferred income
taxes based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
28
g. Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
h. Earnings per Share: Earnings per share for the 1995, 1996 and 1997
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.
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
classified as "held-to-maturity" and are carried at amortized cost.
Information regarding securities held at May 31, 1997, is as follows:
INVESTMENT CLASSIFICATION AMORTIZED COST FAIR VALUE
------------------------- -------------- ----------
Held-to-maturity:
Current $2,086,900 $2,098,013
Long Term 1,100,620 1,102,750
---------- ----------
$3,187,520 $3,200,763
---------- ----------
---------- ----------
INVESTMENT CLASSIFICATION GROSS UNREALIZED MATURITY
------------------------- ---------------- --------
Gains Losses
Held-to-maturity $ 13,243 $ -0- 1-2 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:
May 31, 1996 May 31, 1997
------------ ------------
Raw Materials $808,345 $973,907
Finished Products $120,155 $141,720
Total $928,500 $1,115,627
-------- ----------
-------- ----------
29
5. ACCRUED EXPENSES:
At May 31, accrued expenses were comprised of the following:
1996 1997
---- ----
Accrued royalties $87,670 $108,549
Accrued employee salaries, incentive
and benefits 296,170 267,228
Reserve for defending against potential
royalty claim 659,000 87,000
Other accrued expenses 41,000 30,269
--------- ---------
$1,083,840 $493,046
--------- ---------
--------- ---------
6. COMMITMENTS AND CONTINGENCIES:
a. Leases:
Effective July, 1994, the Company occupied office and laboratory space in
Redmond, Washington under a five-year noncancellable lease expiring May 31,
1999. Insurance, utilities and maintenance expenses are borne by the
Company.
There are no contingent rentals or sublease rentals.
The annual lease commitments for the Redmond, Washington facility are
$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 $330,000 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 in FY 1995, $514,977 in FY 1996, and $85,497 in FY 1997,
to establish a reserve for the purpose of defending its position in this
legal dispute. During fiscal 1997, the Company incurred legal fees of
$657,497 related to extensive discovery and legal research in connection
with the dispute and to defend its position in this lawsuit. Such costs
were charged against a reserve established in prior periods. It is
30
believed that the Company has completed substantially all discovery work in
connection with the dispute (see Note 5).
Royalty payments earned by patent holders for the fiscal years ended May
31, 1995, 1996, and 1997 were $369,208, $305,167 and $352,380 respectively.
d. Distribution Agreements:
The Company has entered into agreements with each of its distributors of
products sold to the dairy industry. Such agreements describe the
territories covered, product pricing, and expected product purchases during
the term of the agreement. Each such agreement has been filed with the SEC
and is incorporated herein by reference.
The Company has entered into an agreement with Novus International, Inc.
for Sanova-TM-, its poultry processing antimicrobial. The agreement grants
worldwide rights to Novus for antimicrobials sold to the poultry processing
industry and also grants negotiating rights to Novus for other food
processing industries.
7. INCOME TAXES:
A summary of the provision for income taxes follows:
FY 1995 FY 1996 FY 1997
------- ------- -------
Current
Federal $51,998 $97,589 $93,166
State and local 1,068 --- ---
-------- ---------- ----------
$53,066 $97,589 $93,166
Deferred
Federal $827,282 $1,103,218 $1,330,532
-------- ---------- ----------
$880,348 $1,200,807 $1,423,698
-------- ---------- ----------
-------- ---------- ----------
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows:
FY 1995 FY 1996 FY 1997
------- ------- -------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Other 0.6% 0.1% (0.9%)
----- ----- -----
Effective income tax rate 34.6% 34.1% 33.1%
----- ----- -----
----- ----- -----
At May 31, 1996 and May 31, 1997, the deferred tax assets were comprised of
the following:
1996 1997
---- ----
Operating loss carry forward $1,883,353 $632,897
Temporary Differences 239,807 1,188
Credits carry forward 110,509 194,837
Alt. Minimum tax carry forward 187,522 261,307
---------- ----------
Total deferred tax asset $2,421,191 $1,090,229
---------- ----------
---------- ----------
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
31
losses aggregating $1,861,462 at May 31, 1997 and which expire during the
years 2000 to 2008. The Company anticipates that the carry forward losses
will be utilized in FY 1998.
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 September 30, 1994, the Company issued to holders of any outstanding
Series 1 Stock, in a recapitalization, one share of Class B Stock to be
designated as Series 2 Redeemable Preferred Stock ("Series 2 Stock") and
0.2 share of Common Stock. Commencing on September 30, 1994, the Company
created a sinking fund to be funded, on that day and on the 30th day of
September of each year thereafter, at a rate equal to 0.7% of the Company's
prior fiscal year's net income, if any, at $2.625 per share plus declared
and unpaid dividends in any amount equal to the sinking fund payment. The
Company was required to redeem 6,200 shares of Series 2 Stock on September
30, 1996, for $16,275. Based on fiscal 1997 net income, the Company will
redeem 7,683 shares of Series 2 stock for $20,169 on September 30, 1997.
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.
The Stock Option Plan for Nonemployee Directors was approved by the
shareholders at the Company's October 15, 1996 annual meeting. 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.
Options are exercisable within 10 years from the date the option was
granted. Options outstanding were granted at the market price or higher on
the date of grant and will expire during the period July 2000 through June
2007. The Company accounts for its stock option plans under the guidelines
of Accounting Principles Board Opinion No. 25 ("APB 25"), under
32
which no compensation cost has been recognized. In 1996, the Company
adopted Statement of Financial Accounting Standards No. 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 plan is as follows:
FY 1995 FY 1996 FY 1997
------- ------- -------
No. of Weighted Avg. No. of Weighted Avg No. of Weighted Avg
------ ------------- ------ ------------ ------ ------------
Shares Share $ Shares Share $ Shares Share $
------ ------- ------ ------- ------ -------
Outstanding at beginning of year 281,210 $7.66 302,756 $7.55 335,556 $8.90
Granted 30,000 8.63 39,750 20.58 17,602 22.01
Exercised (1,000) 5.00 (3,700) 7.04 (7,870) 8.90
Canceled (7,454) 16.39 (3,250) 28.35 (3,000) 42.03
------- ----- ------- ----- ------- -----
Outstanding at end of year 302,756 $7.55 335,556 $8.90 342,288 $9.28
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Exercisable at end of year 254,925 $7.47 275,225 $7.31 286,338 $7.44
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Information relating to stock options outstanding and stock options
exercisable at May 31, 1997 is as follows:
Range of Exercise Prices Options Outstanding Options Exercisable
------------------------ ------------------------------------------ ----------------------------
No. of Shares Weighted Avg. Life Weighted Avg. $/Sh. No. of Shares Wtd. Avg.$/Sh.
------------- ------------------ ------------------- ------------- --------------
$4.10 - $7.75 211,469 3.93 $6.08 209,269 $6.07
$8.63 - $11.63 76,787 6.16 9.79 65,787 9.49
$19.75 - $25.00 54,032 8.55 21.09 11,282 20.96
------- ---- ----- ------- -----
342,288 5.16 $9.28 286,338 $7.44
------- ---- ----- ------- -----
------- ---- ----- ------- -----
Had compensation cost for these stock option plans been determined in
accordance with SFAS 123, the Company's "Net income" and "Net income per
common share" would have decreased to the following pro forma amounts for
the years ended May 31, 1996 and 1997:
FY 1996 FY 1997
------- -------
Net Income As reported $2,325,062 $2,881,295
Pro forma $2,254,515 $2,780,416
Net Income per common share As reported $.82 $1.04
Pro forma $.80 $1.00
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.
33
The fair value of each stock option granted is valued on the date of grant
using the Black-Scholes option pricing model. The weighted average
grant-date fair value of stock options granted during 1997 was $14.05 per
share using the assumptions of expected volatility of 51%, expected option
lives of 7.5 years and a risk-free rate of interest of 6.7%. During 1996,
the weighted average grant-date fair value of stock options granted was
$12.86 per share using the assumptions of expected volatility of 51%,
expected option lives of 7.5 years and a risk-free rate of interest of
6.0%.
10. RELATED PARTY TRANSACTIONS:
a. Consulting Agreements
Loeb Partners Corporation. During the fiscal year ended May 31, 1997, 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, 1997, the Company
paid Dr. Kenneth N. May 516 shares of Alcide Common stock having an
aggregate purchase price of $12,014 plus $24,000 cash for consulting
services in the field of pathogen control on poultry and other food
products.
b. Royalty and Consolidation Agreement
The Company has an 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 $3,241,055 since 1983. During fiscal years 1997 and 1996,
the amounts indicated below were paid to the following individuals and
entities, certain of whose principals were members of the Board: Loeb
Investors Co. V., $22,114 and $19,543; Loeb Investors Co. VIII, $873 and
$772, respectively.
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 1997, 1996 and 1995 were
approximately $60,500, $62,000, and $38,000, respectively.
34
12. NEW ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board Issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128), which is effective for periods beginning after December 15,
1997. SFAS 128 establishes new standards for computing and presenting
earnings per share (EPS). Companies will now report basic EPS and diluted
EPS compared to primary and fully diluted EPS, which were previously
reported. Under the new standard, the Company's basic EPS for the year
ended May 31, 1997, would be $1.12, and the diluted EPS would be $1.04.
35