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.
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
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
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.
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"
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.
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
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.
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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
*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 ----------- ---------- ---------- ---- ----------- ---------- ---------- ----
ITEM 7.
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.)
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.
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 13 and 24 through 35 of Form 10-K.
ITEM 9.
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.
PART III
ITEM 10.
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:
ITEM 11.
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.
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.
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.
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.
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
INDEX TO EXHIBITS
EXHIBIT NO.
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
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.
ALCIDE CORPORATION STATEMENTS OF OPERATIONS
See notes to financial statements.
ALCIDE CORPORATION STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See notes to financial statements.
ALCIDE CORPORATION STATEMENTS OF CASH FLOWS
See notes to financial statements.
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.
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 -------- ---------- -------- ----------
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
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
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
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:
Information relating to stock options outstanding and stock options exercisable at May 31, 1997 is as follows:
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.
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.
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.