FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ___________________ to
______________________.
Commission File Number: 0-12395
ALCIDE CORPORATION
Delaware 22-2445061
- ------------------------------ ------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
8561 154th Avenue North East, Redmond WA 98052
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code ............. (425) 882-2555
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of November 30, 1998: 2,543,458, net of Treasury Stock.
1
ALCIDE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Condensed Balance Sheets - November 30, 1998 (Unaudited) and
May 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Unaudited Condensed Statements of Operations - For the three
and six months ended November 30, 1998 and November 30, 1997 . . . . . . .4
Statements of Changes in Shareholders' Equity. . . . . . . . . . . . . . .5
Unaudited Condensed Statements of Cash Flows - For the six
months ended November 30, 1998 and November 30, 1997 . . . . . . . . . . .6
Notes to Unaudited Condensed Financial Statements. . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 3. Legal Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K . . . . . . . . . . . . . . . . . . . 14
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
ALCIDE CORPORATION
CONDENSED BALANCE SHEETS
November 30, May 31,
1998 1998
------------ -----------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $9,188,985 $7,844,217
Short term investments 1,735,868 3,782,752
Accounts receivable - trade 3,921,636 2,268,264
Inventory 2,045,671 1,353,870
Prepaid expenses and other current assets 119,274 213,269
----------- -----------
TOTAL CURRENT ASSETS 17,011,434 15,462,372
----------- -----------
Equipment and leasehold improvements:
Office equipment 132,594 112,280
Laboratory and manufacturing equipment 150,759 145,292
Leasehold improvements 56,152 56,152
Less: Accumulated depreciation and amortization (233,680) (202,318)
----------- -----------
Total equipment and leasehold improvements, net 105,825 111,406
Deferred income tax asset 285,618 285,618
Long term investments and other assets 503,758 509,941
----------- -----------
TOTAL ASSETS $17,906,635 $16,369,337
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $661,429 $269,801
Accrued expenses 673,950 157,812
Income taxes payable 123,771 125,000
----------- -----------
TOTAL LIABILITIES 1,459,150 552,613
----------- -----------
COMMITMENTS AND CONTINGENCIES:
Redeemable Class B Preferred Stock - noncumulative convertible
$.01 par value: authorized 10,000,000 shares;
issued and outstanding:
May 31, 1998 - 81,119
November 30, 1998 - 72,525 190,377 212,936
----------- -----------
Shareholders' equity:
Class A Preferred Stock - no par value authorized 1,000 shares;
issued and outstanding 594 shares 80,437 135,307
Common Stock $.01 par value; authorized 100,000,000 shares;
issued and outstanding:
May 31, 1998 - 2,872,313
November 30, 1998 2,875,623 28,756 28,723
Treasury stock at cost (6,521,930) (6,125,794)
Additional paid-in capital 19,591,249 19,559,369
Retained earnings 3,078,596 2,006,183
----------- -----------
Total Shareholders' Equity 16,257,108 15,603,788
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,906,635 $16,369,337
----------- -----------
----------- -----------
See notes to Unaudited Condensed Financial Statements.
3
ALCIDE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
November 30, November 30,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
NET SALES $2,668,869 $3,231,276 $6,450,148 $6,423,672
Expenditures
Cost of goods sold 1,180,992 1,024,454 2,292,999 2,127,455
Royalty expense 66,732 77,253 150,948 157,065
Research and development expense 820,969 529,007 1,159,050 1,025,814
Depreciation 15,756 14,838 31,362 29,676
Consulting expense to the related parties 21,000 21,000 54,000 54,012
Other selling, general/administrative 651,305 520,645 1,395,818 1,038,487
---------- ---------- ---------- ----------
Total Expenditures 2,756,754 2,187,197 5,084,177 4,432,509
---------- ---------- ---------- ----------
Operating income (87,885) 1,044,079 1,365,971 1,991,163
Interest income 148,696 151,679 320,213 293,384
Other income --- 9,022 --- 15,763
---------- ---------- ---------- ----------
Income before provision for income taxes 60,811 1,204,780 1,686,184 2,300,310
Provision for income taxes 22,136 409,625 613,771 782,105
---------- ---------- ---------- ----------
Net income $ 38,675 $ 795,155 $1,072,413 $1,518,205
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per common share $.02 $.30 $.42 $.59
Diluted earnings per common share and
equivalents $.01 $.28 $.40 $.54
Weighted average common shares
outstanding 2,544,428 2,607,807 2,553,703 2,593,475
Weighted average common shares &
common share equivalents 2,642,412 2,852,066 2,688,061 2,837,734
See Notes to Unaudited Condensed Financial Statements.
4
ALCIDE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Total
Class "A" Additional Paid Common Retained Shareholders'
Preferred Stock Common Stock in Capital Treasury Stock Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1998 1,000 $135,307 2,872,313 $28,723 $19,559,369 (309,165) ($6,125,794) $2,006,183 $15,603,788
Purchase Treasury Stock (5,000) (87,677) (87,677)
Net Income 1,033,738 1,033,738
- -----------------------------------------------------------------------------------------------------------------------------------
Balance August 31, 1998 1,000 $135,307 2,872,313 $28,723 $19,559,369 (314,165) ($6,213,471) $3,039,921 $16,549,849
Redeem Class "A"
Preferred Stock (406) (54,870) 13,913 (40,957)
Exercise of Stock Options 3,310 33 17,967 18,000
Purchase Treasury Stock (18,000) (308,459) (308,459)
Net Income 38,675 38,675
- -----------------------------------------------------------------------------------------------------------------------------------
Balance November 30, 1998 594 $80,437 2,875,623 $28,756 $19,591,249 (332,165) ($6,521,930) $3,078,596 $16,257,108
----- -------- --------- ------- ----------- -------- ----------- ---------- -----------
----- -------- --------- ------- ----------- -------- ----------- ---------- -----------
5
ALCIDE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months
Ended November 30,
-----------------------------
1998 1997
----------- ----------
OPERATING ACTIVITIES:
Net income $1,072,413 $1,518,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 31,362 29,676
Amortization of premiums and discounts (62,615) (27,655)
Deferred income tax --- 731,498
Decrease (increase) in assets:
Inventory (691,801) (227,752)
Accounts receivable - trade (1,653,372) (733,053)
Prepaid expenses and other current assets 93,995 158,989
Other assets 5,682 25,000
Increase (decrease) in liabilities:
Accounts payable 391,628 (150,985)
Accrued expenses and taxes payable 514,909 (49,569)
----------- ----------
Net cash provided by operating activities (297,799) 1,274,354
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption (acquisition) of U.S. Treasury Instruments 2,110,000 (449,712)
Acquisition of equipment (25,781) (14,353)
----------- ----------
Net cash generated by (used in) investing activities 2,084,219 (464,065)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Alcide Common Stock (396,136) (55,812)
Redemption of Class A Preferred Stock (40,957) ---
Redemption of Class B Preferred Stock (22,559) (20,169)
Stock Options exercised 18,000 318,795
----------- ----------
Net cash provided by (used in) financing activities (441,652) 242,814
----------- ----------
Net increase in cash and cash equivalents 1,344,768 1,053,103
Cash and cash equivalents at beginning of period 7,844,217 6,723,154
----------- ----------
Cash and cash equivalents at end of period $ 9,188,985 $7,776,257
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest --- ---
Cash paid during the period for income taxes 615,000 41,625
See notes to Unaudited Condensed Financial Statements.
6
ALCIDE CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited financial statements of
Alcide Corporation (the "Company") as of and for the three and six month periods
ended November 30, 1998 and 1997 have been prepared in accordance with the
instructions to Form 10-Q. Certain information and disclosures normally
included in notes to financial statements have been condensed or omitted
according to the rules and regulations of the Securities and Exchange
Commission, although the Company believes that the disclosures are adequate to
make the information presented not misleading. The accompanying unaudited
condensed financial statements should be read in conjunction with the financial
statements contained in the Company's Annual Report on Form 10 - K for the year
ended May 31, 1998. In the opinion of management, the accompanying unaudited
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals) considered necessary for a fair presentation. The
results of operations for the six month periods are not necessarily indicative
of the results to be expected for the full year.
2. Inventory consisted of the following:
NOVEMBER 30, 1998 MAY 31, 1998
----------------- ------------
Finished products $ 720,457 $ 406,627
Raw materials 1,325,214 947,243
---------- ----------
Total $2,045,671 $1,353,870
---------- ----------
---------- ----------
3. Accounts Receivable - Trade consisted of the following:
NOVEMBER 30, 1998 MAY 31, 1998
----------------- ------------
ABS Global, Inc. $ 985,945 $ 337,286
IBA, Inc. 567,103 147,843
UMS, Inc. 514,845 163,548
International Distributors 487,970 948,202
Novus International, Inc. 1,276,703 594,404
Other Receivables 89,070 76,981
---------- ----------
Total Accounts Receivable $3,921,636 $2,268,264
---------- ----------
---------- ----------
4. Taxes
The income tax provision for the six month period ended November 30, 1998
consists of:
Federal Income Taxes $552,456
State Income Taxes 61,315
--------
$613,771
--------
--------
7
5. Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards 128 (ASFAS
128@), AEarnings Per Share@ which replaced the calculation of primary and fully
diluted earnings per share with Basic and Diluted earnings per share. Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common shares and common stock equivalents outstanding during the period.
Common stock equivalents of the Company include the dilutive effect of
outstanding stock options.
Basic and Diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
November 30, November 30,
--------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
Net Income $38,675 $795,155 $1,072,413 $1,518,205
Weighted average number of Common Shares
outstanding 2,544,428 2,607,807 2,553,703 2,593,475
Basic EPS $.02 $.30 $.42 $.59
Assuming exercise of options reduced by the number
of shares which could have been purchased with the
proceeds from exercise of such options 97,984 244,259 134,358 244,259
--------- --------- ---------- ----------
Weighted average Common Shares outstanding and
Common Share equivalents 2,642,412 2,852,066 2,688,061 2,837,734
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Diluted EPS $.01 $.28 $.40 $.54
6. Orders for Future Delivery
At November 30, 1998 and 1997 the Company had orders for future delivery of
$1,582,706 and $2,373,926, respectively. The $1,582,706 orders for future
delivery are scheduled for shipment during the period December, 1998 through
March, 1999. The reduction in orders for future delivery at November 30, 1998,
as compared to November 30, 1997, is due primarily to the timing and receipt of
orders from the Company's largest distributor in Europe. Management believes
that the future order pattern is not indicative of expected second half
activity.
8
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Alcide 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the 3 month period ended November 30, 1998, were $2,668,869,
$562,407 lower than the equivalent 3 month period last year, which included
revenue from Novus International of $530,012 related to a contractual minimum
payment.
Net sales for the half year ended November 30, 1998 were $6,450,148 versus
$6,423,672 for the first 6 months last year. The first half this year included
contractual minimum revenue from Novus totaling $1,136,703 versus $1,265,195 for
the 6 month period last year.
Net income of $1,072,413 for the 6 month period was $445,792 lower than the
equivalent 6 month period last year and reflects the negative impact of
several unusual events which occurred during the second quarter including:
- - Alcide decided not to ship product ordered by its former distributor, ABS
Global, Inc. for the months of October and November, 1998. Sales to ABS
for the six month period ended November 30, 1998 were $2,499,752, compared
to $3,405,228 for the equivalent period last year.
- - Negotiated settlement costs relating to the termination of distribution
agreement with Novus. Costs of $354,000 are being recognized in Alcide's
second quarter, although Alcide's obligation to pay this amount will not
occur until sometime in the future, possibly as late as
9
November, 1999. Of this amount $317,000 is categorized as research and
development expense and $37,000 as trademark expense which is included in
other selling, general and administrative expense.
- - Operating expenses totaling $308,000 incurred by Alcide for testing and for
support of the Sanova-Registered Trademark- business in anticipation of the
Novus contract termination.
In total, the above adversely affected Alcide's first half net income by
approximately $734,000.
Cost of goods as a percentage of net sales was 36% for the six month period
ended November 30, 1998, an increase of 3 points over the 33% for the same
period last year. Sanova cost of goods during the second quarter with no
corresponding minimum profit as occurred in the prior year account for one-third
of the difference. The balance is due, primarily, to increased warehousing,
freight and handling costs incurred in building inventory to support the
transition to two new distributors for the Company's mastitis prevention
products.
Research and development expenses of $1,159,050 for the six months ended
November 30, 1998 were $133,236, 13% higher than for the first half last year.
This increase is primarily due to recognition of $317,000 as part of the
agreement to reimburse Novus for research and development expenses.
Other selling, general and administrative expenses of $1,395,818 for the six
months ended November 30, 1998 were $357,331 higher than for the first half last
year. The increase reflects the impact of higher salaries, executive bonuses
and employee travel expense.
Interest income of $320,213 for the six months ended November 30, 1998 was
$26,829, 9% higher than interest income for the equivalent period last year.
The increase is attributable to the Company's larger balances in its cash and
marketable securities accounts compared to the equivalent period last year.
LIQUIDITY
The Company's cash, cash equivalents, short term investments and U.S. Treasury
instruments totaled $11,428,611 on November 30, 1998, an amount $702,618 lower
than at the end of the previous fiscal year due to increases in the amounts
receivable from Novus and ABS. Management anticipates that these receivable
balances will be collected. The Company plans to continue to operate profitably
in fiscal 1999 and believes resources are sufficient to meet its anticipated
operating needs.
YEAR 2000 ISSUES
The Company has developed and is implementing a comprehensive plan to address
issues related to Year 2000. The organizational simplicity of Alcide's business
structure, which relies heavily on third party manufacturers and a network of
third party distributors, greatly limits the direct financial impact on the
Company to become fully Year 2000 compliant.
It has been necessary to upgrade the Company's accounting software which
controls internal and external reporting, sales order and billing records, cost
accounting inventory records, accounts payable and cash management processes.
The costs incurred to accomplish the upgrade were approximately $10,000 and were
recorded as an expense during fiscal 1998.
10
Further, the Company has identified a need to upgrade computer software which
controls certain laboratory analytical instruments. The laboratory instrument
software upgrade is estimated to cost approximately $20,000 and is targeted for
completion during the Company's fiscal third quarter.
Lastly, the Company is in the process of surveying each of its raw material
suppliers, manufacturing resources and distributors to assure their Year 2000
readiness.
Alcide management believes that the risks facing the Company relating to Year
2000 issues are minimal, however, there can be no assurance of this. All
business related computer systems are fully Year 2000 compatible. Critical raw
materials and manufacturing requirements are available from multiple sources and
the Company can serve its distributors without reliance on computers.
OUTLOOK
- - Sanova Food Quality System Distribution
On October 8, 1998, the Company and Novus International, Inc. announced the
termination of their May 21, 1997 agreement to market the Sanova Food
Quality System. As a result of this decision Alcide will now sell and
distribute Sanova directly to the poultry processing industry. The Company
expects to invest capital of $300,000 to $400,000 to equip each new plant.
On November 11, 1998, Alcide and Novus signed a contract which delineates
the terms under which Alcide will purchase equipment already installed in
five operating poultry plants and related spare parts inventory from Novus.
The asset purchase agreement is being filed as an exhibit to this Form
10-Q. Purchase of the assets is contingent on certain USDA approvals.
- - Udder Care Product Distribution
The Company's distribution agreements with ABS Global, Inc. expired on
October 31, 1998, and will not be renewed. On November 1, 1998, Alcide
entered into a new four year contract with IBA, Inc. to expand IBA
territory to cover the entire United States. The contract is being filed
as an exhibit to this Form 10-Q. The present Universal Marketing Services,
Inc. contract has been amended to include the additional territories of
Canada, Italy, Portugal and the Czech Republic as exclusive UMS
territories, and the United States as a nonexclusive UMS territory.
Management believes that the combined distribution coverage provided by IBA
and UMS has the potential to equal or surpass that previously provided by
ABS for the territories of the United States, Canada, Italy, Portugal and
the Czech Republic. Alcide is seeking new distributors to cover
territories in Mexico and South America previously served by ABS.
In November, 1998, ABS Global, Inc. began distributing an udder care
product which competes with Alcide's udder care products. Alcide
management believes that the product infringes an Alcide patent and,
consequently, on December 18, 1998, Alcide filed a patent infringement suit
against ABS in U.S. District Court for the Western District of Wisconsin,
seeking a preliminary injunction and treble damages for their willful
infringement.
At this point it is difficult to predict the impact that the change in
distributors, the introduction of a competing product by ABS and Alcide's
patent infringement suit against ABS will have on the Company's sales of
its udder care products.
11
ITEM 3. LEGAL PROCEEDING
On October 20, 1998, the Company filed a suit in U.S. District Court for the
Western District of Wisconsin against its former distributor, ABS Global, Inc.,
to collect past due balances owed to the Company by ABS. At the time the suit
was filed, ABS owed Alcide approximately $1.4 million. At November 30, 1998,
the amount owed was reduced by ABS to approximately $986,000. A trial date is
expected in early spring, 1999.
ABS has responded to Alcide's claim with several counter claims, including
claims that the Company has interfered with contracts between ABS and its
distributors and that the Company has made false and disparaging statements
about ABS and its business.
Alcide management believes that the debt collection suit will be resolved in
Alcide's favor or that the remaining balance will be paid before trial. The
Company's management believes that the ABS counter claims have no merit and that
these issues will be resolved in Alcide's favor.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Shareholders voted on two proposals at the Annual Meeting of stockholders on
October 13, 1998, as described in the Company's proxy statement.
1. Votes for election of Directors of the Corporation for the ensuing
year were as follows:
FOR WITHHELD
--- AUTHORITY
---------
Thomas L. Kempner 2,346,619 31,931
Kenneth N. May, Ph.D. 2,370,903 7,647
Joseph A. Sasenick 2,370,947 7,603
William G. Spears 2,348,163 30,387
2. Votes for the ratification of the Board's selection of Arthur Andersen
LLP as independent auditors of the Company for the fiscal year ending
May 31, 1999.
FOR AGAINST ABSTAIN
--- ------- -------
2,365,122 3,090 10,338
13
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 10.29
Nonexclusive Distributor Agreement by and between the Company and IBA, Inc.,
dated November 1, 1998, covering the United States.
EXHIBIT 10.30*
Transfer of Assets and Assignment of Contracts Agreement and Addendum by and
between the Company and Novus International, Inc., dated November 11, 1998.
Reports on Form 8-K
- -------------------
None.
* Confidential treatment has been requested for this Exhibit.
14
SIGNATURE
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
The Registrant
Date: January 13, 1999 By /s/ John P. Richards
--------------------------------------
John P. Richards
Executive Vice President
Chief Financial Officer
15