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 AUGUST 31, 1999
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 August 31, 1999: 2,518,030, net of Treasury Stock.
1
ALCIDE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
_____
Item 1. Financial Statements...................................................................................................
Consolidated Condensed Balance Sheets - August 31, 1999 (Unaudited)
and May 31, 1999..............................................................................................3
Unaudited Consolidated Condensed Statements of Operations - For the three months
ended August 31, 1999 and August 31, 1998.....................................................................4
Statements of Changes in Shareholders' Equity.................................................................5
Unaudited Consolidated Condensed Statements of Cash Flows - For the three months
ended August 31, 1999 and August 31, 1998.....................................................................6
Notes to Unaudited Consolidated Condensed Financial Statements................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................................9
Item 3. Legal Proceedings.....................................................................................................13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................................................14
SIGNATURE......................................................................................................................15
2
ALCIDE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS
AUGUST 31, 1999 MAY 31, 1999
--------------- ------------
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents $ 4,735,622 $ 6,391,868
Accounts receivable - trade 2,260,489 2,259,917
Inventory 1,841,989 2,064,487
Deferred and prepaid income taxes 817,336 615,000
Prepaid expenses and other current assets 306,596 311,406
--------------- ------------
Total current assets 9,962,032 11,642,678
--------------- ------------
Equipment and leasehold improvements:
Sanova plant assets 4,285,265 2,496,503
Office equipment 207,522 172,857
Laboratory and manufacturing equipment 169,136 160,028
Leasehold improvements 70,520 70,520
Less: Accumulated depreciation and amortization (588,238) (407,817)
--------------- ------------
Total equipment and leasehold improvements, net 4,144,205 2,492,091
Deferred income tax asset 862,298 862,298
Long term investments and other assets 621,052 622,920
--------------- ------------
TOTAL ASSETS $15,589,587 $15,619,987
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $1,409,633 $ 797,934
Accrued expenses 344,199 412,150
--------------- ------------
Total current liabilities 1,753,832 1,210,084
Long term payable to Novus 316,000 316,000
--------------- ------------
TOTAL LIABILITIES 2,069,832 1,526,084
--------------- ------------
Commitments and Contingencies:
Redeemable Class "B" Preferred Stock - noncumulative convertible
$.01 par value: authorized 10,000,000 shares; issued and outstanding:
May 31, 1999 - 72,525
August 31, 1999 - 72,525 190,377 190,377
--------------- ------------
Shareholders' equity:
Class "A" Preferred Stock - no par value authorized 1,000 shares;
issued and outstanding:
May 31, 1999 - 594
August 31, 1999 - 187 25,257 80,437
Common Stock $.01 par value; authorized 100,000,000 shares;
issued and outstanding:
May 31, 1999 - 2,888,968
August 31, 1999 - 2,888,968 28,889 28,889
Treasury stock at cost (7,078,386) (6,939,750)
Additional paid-in capital 19,716,222 19,702,230
Retained earnings 637,396 1,031,720
--------------- ------------
Total Shareholders' Equity 13,329,378 13,903,526
--------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,589,587 $15,619,987
=============== ============
See notes to Unaudited Consolidated Condensed Financial Statements.
3
ALCIDE CORPORATION UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
AUGUST 31,
--------------------------
1999 1998
---- ----
NET SALES $2,674,398 $3,781,279
Expenditures
Cost of goods sold 1,691,708 1,112,007
Royalty expense --- 84,216
Research and development expense 442,444 338,081
Depreciation 18,294 15,606
Consulting expense to the related parties 24,000 33,000
Other selling, general/administrative 1,172,612 744,513
---------- ----------
Total Expenditures 3,349,058 2,327,423
---------- ----------
Operating income (loss) (674,660) 1,453,856
Interest income 78,000 171,517
Income (loss) before provision (benefit) for income taxes (596,660) 1,625,373
Provision (benefit) for income taxes (202,336) 591,635
---------- ----------
Net income (loss) $(394,324) $1,033,738
========== ==========
Basic earnings (loss) per common share $ (.16) $ .40
========== ==========
Diluted earnings (loss) per common share and equivalents $ (.16) $ .38
========== ==========
Weighted average common shares outstanding 2,525,863 2,562,876
========== ==========
Weighted average common shares & common share equivalents 2,525,863 2,721,290
========== ==========
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
ALCIDE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Additional
Paid in
Class "A" Preferred Stock Common Stock Capital
- ------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------
Balance May 31, 1999 594 $80,437 2,888,968 $28,889 $19,702,230
Redeem Class "A" Preferred
Stock (407) (55,180) 13,992
Purchase Treasury Stock
Net Loss
- ------------------------------------------------------------------------------------------------------
Balance August 31, 1999 187 $25,257 2,888,968 $28,889 $19,716,222
=== ======= ========= ======= ===========
Total
Retained Shareholders'
Common Treasury Stock Earnings Equity
- ------------------------------------------------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------------------------------------------------
Balance May 31, 1999 (361,138) ($6,939,750) $1,031,720 $13,903,526
Redeem Class "A" Preferred
Stock (41,188)
Purchase Treasury Stock (9,800) (138,636) (138,636)
Net Loss (394,324) (394,324)
- ------------------------------------------------------------------------------------------------------
Balance August 31, 1999 (370,938) ($7,078,386) $ 637,396 $13,329,378
========= ============ ========== ===========
5
ALCIDE CORPORATION UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31,
-------------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income (loss) $(394,324) $1,033,738
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 180,421 15,606
Amortization of premiums and discounts 251 (35,228)
Decrease (increase) in assets:
Inventory 222,498 (82,961)
Accounts receivable - trade (572) (1,039,581)
Deferred and prepared income taxes (202,336) ---
Prepaid expenses and other current assets 4,810 89,372
Long term investments and other assets 1,617 ---
Increase (decrease) in liabilities:
Accounts payable 611,699 (38,438)
Accrued expenses and taxes payable (67,951) 621,360
----------- ----------
Net cash provided by operating activities 356,113 563,868
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (1,832,535) (15,947)
----------- ----------
Net cash (used in) investing activities (1,832,535) (15,947)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Alcide Common and redemption of Class "A"
Preferred Stock (179,824) (87,677)
Net cash (used in) financing activities (179,824) (87,677)
----------- ----------
Net increase (decrease) in cash and cash equivalents (1,656,246) 460,244
Cash and cash equivalents at beginning of period 6,391,868 7,844,217
----------- ----------
Cash and cash equivalents at end of period $4,735,622 $8,304,461
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest --- ---
Cash paid during the period for income taxes --- $ 3,000
See notes to Unaudited Consolidated Condensed Financial Statements.
6
ALCIDE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited financial statements of
Alcide Corporation (the "Company") for the three month periods ended August 31,
1999 and 1998 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 consolidated 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, 1999.
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation. The results of
operations for the three month periods are not necessarily indicative of the
results to be expected for the full year.
2. Inventory consisted of the following:
AUGUST 31, 1999 MAY 31, 1999
Finished products $ 542,230 $ 792,733
Raw materials 994,764 1,100,808
Sanova inventory at customer sites 304,995 170,946
---------- ----------
Total $1,841,989 $2,064,487
========== ==========
3. Accounts Receivable - Trade consisted of the following:
AUGUST 31, 1999 MAY 31, 1999
IBA, Inc. $ 221,702 $ 184,176
UMS, Inc. 1,161,913 1,028,227
International Distributors 516,376 621,905
Sanova Customers 282,094 292,375
Other Receivables 78,404 133,234
---------- ----------
Total Accounts Receivable $2,260,489 $2,259,917
========== ==========
4. Taxes
The income tax provision (benefit) for the three month period ended August 31,
1999 consists of:
Federal Income Taxes $(203,136)
State Income Taxes 800
----------
$(202,336)
==========
7
5. Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards 128 ("SFAS
128"), "Earnings Per Share" which replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the 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 AUGUST 31,
1999 1998
---- ----
Net Income $ (394,324) $ 1,033,738
Weighted average number of Common Shares outstanding 2,525,863 2,562,876
Basic EPS $ (.16) $ .40
Assuming exercise of options reduced by the number of shares which could have
been purchased with the proceeds from exercise of such options (0 if
antidilutive) --- 158,414
----------- -----------
Weighted average Common Shares outstanding and Common Share equivalents 2,525,863 2,721,290
=========== ===========
Diluted EPS $ (.16) $ .38
6. Orders for Future Delivery
At August 31, 1999 and 1998 the Company had orders for future delivery of
$1,396,872 and $2,350,050 respectively. The reduction in orders for future
delivery at August 31, 1999, as compared to August 31, 1998, is due primarily to
the change in order terms in the Company's distributor agreements. The present
agreements require a 45 day lead time. The agreements last year required that
orders be placed 90 days in advance of expected delivery. The $1,396,872 orders
for future delivery are scheduled for shipment during the period September, 1999
through November, 1999.
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," "expects,"
and others, are often used to flag such forward-looking statements, but their
absence does not mean a statement is not forward-looking. Such statements
reflect management's current opinion and are designed to help readers understand
management's thinking. By their very nature, however, such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to release publicly any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof, or to reflect the occurrence of
unanticipated events.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the three month period ended August 31, 1999 were $2,674,398,
$1,106,881 lower than the equivalent three month period last year, which
included revenue from Novus International, Inc. of $1,154,988 related to a
contractual minimum payment.
The net loss of $394,324 is a reversal from the net income of $1,033,738 for the
three month period ended August 31, 1998, reflecting the negative impact of
several events which occurred during the three month periods, including:
- - The contractual minimum payment of $1,154,988 from the Company's former
distributor, Novus International, Inc. in fiscal 1999. This payment
contributed $636,000 to net income for the first quarter last year. The
agreement with Novus ended November 30, 1998, and the payment for the
quarter ended August 31, 1998 was the final payment received from Novus.
- - First quarter FY 2000 expenses totaling $544,160 for maintenance,
engineering and research and development to support the expansion of the
Company's food safety business within the poultry industry. These
expenditures contributed approximately $359,150 to the loss for the
quarter, but are intended to lead to improved future financial performance
and expansion of the Company's food safety business.
9
- - A decrease of $621,010 in sales of the Company's animal health products to
international markets formerly covered by distribution arrangements with
ABS Global. The ABS agreements terminated October 31, 1998. Establishment
of new distribution has been delayed by depletion of ABS and ABS
sub-distributor inventories of Alcide product and by delays in transferring
local product registration.
Cost of goods as a percentage of net sales was 63% for the three month period
ended August 31, 1999, an increase of 34 points over the 29% of net sales for
the same period last year. Sanova cost of goods during the quarter with no
corresponding minimum profit as occurred in the prior year accounted for 80% of
the difference. The balance of the increase is due primarily to a difference in
product mix.
Royalty expenses for the first quarter last year totaled $84,216. As a result of
the May, 1999 settlement of the royalty rights holders' lawsuit against the
Company, the Company's obligation to pay royalties ended.
Research and development expenses of $442,444 for the three month period ended
August 31, 1999 were $104,363 higher than for the first three months last year.
This increase is primarily due to testing to support Sanova cost reduction
programs and validation trials in commercial plants.
Other selling, general and administrative expenses of $1,172,612 for the three
months ended August 31, 1999 were $428,099 higher than for the equivalent period
last year. The increase reflects costs incurred to manage the Sanova projects
following termination of the Novus agreement of approximately $456,765.
Interest income of $78,000 for the three month period ended August 31, 1999 was
$93,517 lower than the equivalent three month period last year primarily because
the Company's investable cash resources were roughly 46% lower during the most
recent quarter as compared to the equivalent period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, short term investments and U.S. Treasury
investments totaled $5,238,629 on August 31, 1999, an amount $1,656,497 lower
than at the end of the previous fiscal year. The reduction is due primarily to
an investment of $1,788,762 in new Sanova installations.
During the quarter the Company negotiated a $10 million unrestricted line of
credit from US Bank as a backup source of capital, if needed, to support
Alcide's growing food safety business. As of August 31, 1999 the Company had not
drawn on the credit line.
YEAR 2000 ISSUES
The Company has developed and is implementing a comprehensive plan to address
issues related to Year 2000. The organizational simplicity of Alcide's business
structure, which relies heavily on third party manufacturers and a network of
third party distributors, limits the direct financial impact on the Company to
become Year 2000 compliant.
It has been necessary to upgrade the Company's accounting software which
controls internal and external reporting, sales order and billing records, cost
accounting inventory records, accounts
10
payable and cash management processes. The costs incurred to accomplish the
upgrade were approximately $10,000 and were recorded as an expense during
fiscal 1998. All such upgrades have been completed.
Further, the Company identified a need to upgrade computer software which
controls certain laboratory analytical instruments. The upgrade was completed
during the Company's fiscal 1999 third quarter at a cost of $12,297.
Lastly, the Company has surveyed each of its raw material suppliers,
manufacturing resources and distributors to assure their Year 2000 readiness.
All business related computer systems are fully Year 2000 compatible. Critical
raw materials and manufacturing requirements are available from multiple sources
and the Company can serve its distributors without reliance on computers.
OUTLOOK
- - Sanova Food Quality System
The size of the Company's food antimicrobial business is expanding. At the
end of fiscal 1999, five poultry plants were utilizing the Sanova Food
Quality System. At September 30, 1999, eleven plants, having an annual
capacity of 450 million birds, 6% of the U.S. market, were using the Sanova
System. The eleven plants are expected to generate annual sales of
approximately $3.7 million. The Company has announced a goal to increase to
twenty plants using the System by the end of fiscal 2000. Each new plant
will require an Alcide capital investment of $300,000 to $400,000.
Investments in research, development and engineering during the fiscal
first quarter to optimize the Sanova System and formulation will continue,
but at a decreased rate, during the Company's second quarter. The Company
has identified a number of programs to reduce Sanova cost while maintaining
the present high level antimicrobial performance. These cost reduction
programs will be transitioned into existing Sanova installations during the
second quarter.
- - Animal Health Products
The Company's distribution agreements with ABS Global, Inc. expired on
October 31, 1998 and were not renewed. Effective November 1, 1998 Alcide
entered into a new four year agreement with IBA, Inc. to expand IBA's
territory to cover the entire United States. In addition, the present
Universal Marketing Services, Inc. contract has been amended to include the
additional territories of Canada, Italy, Portugal and the Czech Republic as
exclusive UMS territories and the United States as a non-exclusive
territory.
Management believes that the combined distribution coverage provided by IBA
and UMS has the potential to equal or surpass that previously provided by
ABS for the territories of the United States, Canada, Italy, Portugal and
the Czech Republic.
In November, 1998, ABS Global, Inc. began distributing an udder care
product which competes with Alcide's udder care products. Subsequently, at
least one other national distributor has introduced a product similar to
Alcide's UDDERgold technology. The transition from ABS to two
11
new expanded distributors, IBA and UMS, coupled with new competing
technology, may have an impact on future Alcide sales in the U.S.
market.
Recently ABS introduced its new line of udder care products in both the
United Kingdom and Italian markets. The degree to which these new products
will impact Alcide's udder care sales cannot be determined at this time.
12
ITEM 3. LEGAL PROCEEDINGS:
ALCIDE PATENT INFRINGEMENT LAWSUIT AGAINST ABS GLOBAL, INC. IN THE U.S.:
On October 6, 1999, Judge Barbara Crabb granted defendant's motion for summary
judgement of non-infringement of Claim 1 of Alcide's '531 patent under the
doctrine of equivalents. The court concluded that ABS's Valiant Barrier Teat Dip
does not infringe Claim 1 of Alcide's patent, and if Claim 1 is not infringed,
no other claim is infringed, since all other claims are dependent on Claim 1.
Alcide's attorneys believe that the court's opinion contains a number of errors
with respect to the chemistry and composition of the ABS product. Accordingly,
the attorneys recommend appealing the court's decision to the Federal Circuit
Court. It is likely that Alcide will decide to file the appeal as recommended.
ALCIDE'S PATENT INFRINGEMENT LAWSUIT AGAINST ABS GLOBAL, INC. IN THE UNITED
KINGDOM:
During September, 1999, Alcide became aware that ABS was in the process of
introducing its Valiant teat dip in the United Kingdom, where Alcide believes
the Valiant product infringes its patent. On October 1, 1999, Alcide filed a
patent infringement suit against ABS in the UK. As of this date there has been
no court action on Alcide's lawsuit.
13
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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: October 14, 1999 By /s/ John P. Richards
--------------------------------------
John P. Richards
Executive Vice President
Chief Financial Officer
15