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, and Sanova food antimicrobial.
Total product sales for the fiscal year ended May 31, 1998 were $12,998,952. Export sales to international distributors, plus product exported by ABS Global, Inc. accounted for $4,758,346, 37% of total sales.
1. DAIRY INDUSTRY
Worldwide sales of dairy line products during fiscal year 1998 were $10,114,845 as compared with $10,365,001 in FY 1997. In FY 1998 sales to the dairy industry accounted for 78% 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.
U.S. DAIRY INDUSTRY
In the United States, sales to the dairy industry are through two distributors, ABS Global, Inc. and IBA, Inc. In fiscal 1998, dairy industry sales in the United States were $5,356,499, 53% of total Alcide sales to the dairy industry.
INTERNATIONAL DAIRY INDUSTRY
Alcide products are sold to the dairy industry in Canada, Latin America and Europe through a network of five distributors. Sales to the international dairy industry were $4,758,346 in fiscal 1998, 47% of total sales to the dairy industry.
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 1998 sales of hard surface sterilants and disinfectants were $390,178, or 3% of total sales, as compared with $364,869 in fiscal year 1997.
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. Sales to Novus for fiscal year 1998 were $2,445,106 or 19% of total sales.
4. AUTOMOTIVE INDUSTRY
Fiscal year 1998 sales of RenNew-A/C Air Conditioning System Disinfectant were $48,823 as compared with $37,638 in fiscal year 1997. All RenNew-A/C Air Conditioning System Disinfectant sales in both fiscal year 1998 and fiscal year 1997 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.
Alcide had $2,062,834 of firm orders for future delivery at May 31, 1998, as compared to orders for future delivery at May 31, 1997 of $2,014,234. The Company's distributors typically place orders one to four months in advance.
6. DISTRIBUTION ARRANGEMENTS
All Alcide sales to the dairy industry and to the poultry processing industry are to distributors who have contracted with the Company to provide sales and marketing services to distribute the Company's products. In each case the distributor purchases product from Alcide for resale to the
end user. Loss of any of the Company's distributors can have a material impact on the Company's sales and earnings.
The Company's distribution contracts with ABS Global, Inc. for the U.S. market and for several international markets will expire on October 31, 1998. Discussions are presently underway between Alcide and ABS Global regarding a new multi-year nonexclusive distribution arrangement for the markets served by ABS.
The Company's distribution contract with OHF Sante Animale, subsequently assigned to Rhone Merieux and Merial for distribution of Alcide's dairy industry products in France, expired on May 31, 1998. A new, multi-year, nonexclusive agreement has been negotiated and is pending Merial approval.
C. RESEARCH AND PRODUCT DEVELOPMENT
During fiscal year 1998 the Company's efforts continued to focus on the development of 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 the new food antimicrobial business area may be funded jointly by the company and its distributors. Other development 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 1998 are described below:
1. PREOPERATIVE SKIN ANTISEPTIC
During fiscal 1998, delays were experienced in the finalization of the Company's New Drug Application (NDA) arising from the process of identifying and certifying a Good Manufacturing Practices (GMP) compliant supplier of the active material. This process was finalized during the fourth quarter of fiscal 1998 and a final NDA update to the Food and Drug Administration (FDA) relating to the chemical and pharmaceutical issues is now expected to be made during the first half of fiscal 1999. This submission will complete the requirements for the NDA.
Further testing of the preoperative skin antiseptic product to evaluate the potential use of the same formulation as an antiseptic for injection site or in-dwelling catheter site uses has been on hold pending responses to and final resolution of FDA's questions on the preoperative skin antiseptic NDA submission. It is still the Company's intention that an addendum to the original NDA to cover this
expanded use will be submitted to FDA and this is now targeted for late in fiscal 1999 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. UDDER CARE BUSINESS
The process of product registration in foreign markets continued during fiscal 1998. In addition, significant new formulation developments for potential new market sectors and for patent extension were also completed. Several new products have been successfully formulated. These have undergone "proof of principle" testing during fiscal 1998 and will continue to undergo field efficacy and toleration testing prior to market introduction during fiscal 1999.
3. ANTI-INFECTIVE ORAL RINSE
While it was the Company's intention to proceed into the broader human clinical phase of evaluations for efficacy of the mouth rinse product versus gingivitis within the United States during fiscal 1998, discussions and investigations with potential licensees led instead to the conduct of an alternative series of tests on oral cavity changes following treatment. These were completed during the last quarter. A broader series of human clinical tests is now planned to begin during the first half of fiscal 1999.
4. FOOD DISINFECTION
During fiscal 1998, the Company received final USDA approval to commence the commercial plant installation and operation of a purpose designed system for the application of acidified sodium chlorite to poultry carcasses. The process, known as the Sanova Food Quality System (SFQ), is intended to eliminate or substantially reduce food borne microorganisms of potential harm to humans on poultry carcasses during the slaughter process. The Company successfully introduced the system in the United States during 1998 and will continue to broaden the business base through further installations during fiscal 1999. In addition, the registration process for the SFQ system has been expanded outside of the USA to include preparation of the support documentation that is necessary for approvals for use in Europe, Canada and South America.
During January, 1998, the FDA issued a notice of approval permitting the use of the Sanova system on red meats (beef, pork and sheep). A protocol proposing the commercial plant testing of the Sanova system to establish performance to USDA satisfaction was also submitted and approved during 1998. As a result, the first commercial plant installation for a beef plant is now scheduled to commence testing during the second quarter of fiscal 1999.
The evaluation of the use of acidified sodium chlorite solutions for microbial reductions on fresh fruits and vegetables was successfully completed during fiscal 1998. At present the U.S. Environmental Protection Agency (EPA) regulates this field. The Company expects to submit an approval request during the first fiscal quarter.
Evaluations into the potential for expansion into the fish (shrimp and shellfish) areas continued during fiscal 1998.
5. INTRAMAMMARY INFUSION
The objective of this program is to provide safe and effective treatment and control of bovine clinical and/or subclinical mastitis in lactating dairy cattle with no milk-withholding requirements which would provide the Alcide product with distinct market advantages as compared to antibiotics, which require milk withdrawal during treatment and several days thereafter. Evaluations completed during fiscal 1998 finalized the formulation development effort and confirmed the creation of a well tolerated product for therapeutic treatment schedules. The fiscal 1999 program will evaluate residue profiles and dose rate/treatment regimes. On the successful completion of these programs it is anticipated that a Investigational New Animal Drug (INAD) submission will be made to the FDA.
On an ongoing basis the Company continues to examine the potential for new, more effective formulations to protect and possibly enhance its market position in the surface area sterilant/disinfectant field, in the disinfection of foods and in the bovine mastitis treatment/prevention field.
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, enforceability 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 sixteen 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"
14) U.S. Patent No. 5,651,977 "Adherent Disinfecting Compositions and Methods Related Thereto"
15) U.S. Patent No. 5,667,817 "Method and Composition for the Prevention and Treatment of Female Lower Genital Tract Microbial Infections"
16) "U.S. Patent No. 5,772,985 "Composition and Methods for Treatment of Skin Lesions"
Two new U.S. patent applications were filed during fiscal year 1998. Four additional U.S. patent applications are pending, as well as two reissue applications corresponding to patents 7) and 8) above. Numerous corresponding foreign applications are issued or 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.
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 DIPPINguld-Registered Trademark- has been determined to be more appropriate than DIPPINgold-Registered Trademark- in certain foreign countries. Therefore, the spelling variant DIPPINguld-Registered Trademark- has been registered in Denmark, Norway, Finland and Sweden.
The Company markets its antimicrobial to the poultry processing industry through Novus International, Inc. under the mark Sanova-TM-, which has been registered to Novus. Under the terms of the agreement with Novus the Sanova mark is being transferred and will be owned by Alcide Corporation. This mark will cover antimicrobial applications in other food processing applications once such applications are approved by the appropriate regulatory authority.
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 acidified sodium chlorite 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.
The market for disinfection of poultry and other food products is dynamic and rapidly emerging as a result of consumer concern and U.S. Government regulatory activity. A number of technologies are directed at reduction of food borne pathogens. Of these, trisodium phosphate is used in a manner similar to the Company's product, Sanova. Chlorine dioxide and ozone have been tested in poultry chiller waters but have not been broadly accepted by the industry. Irradiation technology has been approved by USDA and FDA but is not broadly used by the poultry industry and, in the limited cases where irradiation is used, the process involves a secondary treatment outside the poultry processing plant. Market conditions within the food processing industry are such that additional competition is likely.
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, Chile, Argentina 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 filed an appeal to the German court but this has also been rejected. A new registration application is being prepared for filing. 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, Chile, Argentina, 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. FOOD PROCESSING ANTIMICROBIALS:
a. Poultry
The Company's Food Additive Petition was approved by FDA in April, 1996 and by USDA in January, 1998. The product is now actively marketed and is being utilized by a number of major poultry processing companies.
b. Red Meats
The Company's Food Additive Petition was approved by FDA in March, 1998. Alcide plans to begin conducting a commercial plant test under supervision of the USDA in late 1998, as a necessary step in obtaining the agency's required approval.
c. Fruits and Vegetables
Alcide has conducted tests that it believes necessary to obtain regulatory approval to market its product as an antimicrobial intervention for fruits and vegetables. The Company plans to submit its application to the EPA in September, 1998.
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.
K. SUBSEQUENT EVENT
On August 3, 1998, the Company agreed with Novus International, Inc. to open discussions regarding renegotiation of the agreement between Alcide and Novus dated May 21, 1997, for distribution of the Company's products to the poultry industry. The terms and conditions that govern the relationship between Novus and Alcide during the renegotiation period, which ends October 31, 1998, were filed on Form 8-K on August 11, 1998.
ITEM 2.
ITEM 2. PROPERTIES
The five-year lease for the Company's Redmond facility provides for a monthly rent of $5,188 through May, 1999. Management believes the space will adequately support the Company's office and laboratory needs for at least the next year.
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.
On November 17, 1997, the Company moved for leave to file an amended answer, including a counter claim, against certain plaintiffs. The proposed amended answer alleges that plaintiffs are precluded from obtaining the relief sought in their complaint because, if the agreements at issue were found to support such relief, they would constitute an unfair transaction from the Company's point of view and a breach of fiduciary responsibility by the plaintiffs who were officers and directors of the Company at the time of those agreements and who were self interested in approving the agreements on the Company's behalf. Further, if the Company is held liable in whole or part for any of the obligations asserted by the plaintiffs, the Company is entitled to recover all such obligations from the plaintiffs. The motion has been fully briefed but the court has not yet issued a decision or scheduled oral argument.
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 qfor the fiscal quarters indicated, as reported by NASDAQ.
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, 1998, there were approximately 1,731 Common stockholders of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA FOR THE YEARS ENDED MAY 31, 1997 AND MAY 31, 1998
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1998 AS COMPARED WITH 1997
Fiscal year 1998 sales of $12,998,952 were 10% higher than fiscal year 1997 sales of $11,768,504. The sales increase was caused primarily by the $2,445,106 sales of Sanova food antimicrobial to Novus International, Inc. During fiscal 1997, sales to Novus were $1 million, representing an up-front, one time purchase by Novus of Alcide's prototype application equipment and inventory at the time that Novus entered into a distribution agreement with Alcide.
Interest income for fiscal 1998 was $638,016, a 49% increase over fiscal 1997 interest income of $427,316. The increase is due entirely to an increase of funds available for investment.
Cost of goods sold was $4,319,242 in fiscal year 1998, or 33% of net sales as compared to $3,853,875 in fiscal year 1997, which was also 33% of net sales. During the fiscal year there were no material changes in the unit cost components of cost of goods, nor did Alcide change its selling prices during the year, and therefore, on balance, cost of goods as a percentage of sales remained essentially unchanged.
ROYALTY OBLIGATIONS
The Company has an 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 1998, net sales of $4,161,018 were covered by the royalty and consolidation agreements compared to $4,248,923 in fiscal 1997.
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.
RESEARCH AND DEVELOPMENT
Research and Development expenses in fiscal year 1998 were $1,633,925 as compared to $1,546,285 in fiscal 1997. The 6% increase over fiscal 1997 was caused primarily by inflationary increases for salaries and laboratory supplies and by the testing required to support USDA approval of Sanova for poultry processing plants.
SELLING AND ADMINISTRATIVE EXPENSE
Other selling, general and administrative expenses were $2,148,949 in fiscal 1998, a 6% increase over fiscal 1997 expenses of $2,026,284. The difference was primarily due to an increase in marketing and promotion expense and an increase in legal fees due to product litigation, offset by a $185,415 reduction in executive bonus expense.
INCOME TAX
The Company's Statements of Operations for fiscal 1998 includes a provision for income taxes of $1,848,358 which is a tax rate of 36.4% of income before provision for income taxes. The provision for income taxes in fiscal 1997 was $1,423,698, or a tax rate of 33.1%. The difference in tax rates is due primarily to a 2.4% provision for state taxes in fiscal 1998, while no such provision was made in fiscal 1997.
NET INCOME
Net income for fiscal 1998 was $3,222,723, an increase of $341,428 or 12% over the previous fiscal year. The increase was achieved as a result of the net sales increase and interest income increases noted above, offset by an increase in operating expenses and the income tax provision.
LIQUIDITY
The Company's cash, cash equivalents and investments in U.S. Government securities totaled $12,131,229 at May 31, 1998, a $2,220,555 increase over the previous fiscal year end. The increase was generated from operations primarily offset by a $2,934,369 repurchase of Alcide Common Stock.
The Company anticipates that income during fiscal 1999 will be adequate to sustain the Company and that its cash resources will enable it to meet its operating requirements and support its capital needs 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 on 30-day terms. Sales to international distributors are on 60-day terms. During the past three fiscal years Alcide offered extended terms up to 120 days to ABS Global, Inc., its largest distributor, in exchange for a finance charge equal to 2% of invoice amounts. In February, 1998, ABS resumed normal 30-day payment terms to Alcide. This had the effect of reducing accounts receivable from ABS by $1,308,876 at May 31, 1998 as compared with May 31, 1997.
LEASES AND CAPITAL EXPENDITURES
The Company's office and laboratory space is leased under operating leases from unaffiliated lessors. During fiscal 1998 the Company spent $25,158 on the purchase of fixed assets. Planned capital expenditures for laboratory and office equipment for fiscal year 1999 are expected to be less than $100,000. In addition, the Company may elect to invest capital to supply Sanova Food Quality
Systems to poultry processing plants to expand the sale of the Company's Sanova antimicrobial compound. Investments in Sanova equipment are estimated to be $300,000 to $500,000 per processing plant and as many as 20 plants may be started in fiscal 1999. If such capital investments were made in Sanova Food Quality Systems, the Company would expect to offset a portion of the capital investment cost with increased sales revenue.
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 investable 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 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.
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.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 14 and 25 through 36 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 1998, 1997 and 1996. 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, 1998 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 1998 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 1998 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 1998 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, 1997 and May 31, 1998. Statements of Operations for each of the years ended May 31, 1996, May 31, 1997 and May 31, 1998. Statements of Changes in Shareholders' Equity for each of the years ended May 31, 1996, May 31, 1997 and May 31, 1998. Statements of Cash Flows for each of the years ended May 31, 1996, May 31, 1997 and May 31, 1998.
2. FINANCIAL STATEMENT SCHEDULE
Notes to Financial Statements. Selected Quarterly Financial Data for the Years Ended May 31, 1997 and May 31, 1998, on Page 14.
3. EXHIBITS
See Index to Exhibits on Page 23.
(b) Reports on Form 8-K.
None
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, 1998
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, 1998 - ------------------------------- Thomas L. Kempner
/s/Kenneth N. May Director July 15, 1998 - ------------------------------- Kenneth N. May
/s/Joseph A. Sasenick Director, President, July 15, 1998 - ------------------------------- Chief Executive Officer Joseph A. Sasenick
/s/William G. Spears Director July 15, 1998 - ------------------------------- William G. Spears
INDEX TO EXHIBITS
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, 1998 and 1997, and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years ended May 31, 1998. 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, 1998 and 1997, 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 June 19, 1998
ALCIDE CORPORATION BALANCE SHEETS MAY 31,
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.
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 at the end of each fiscal quarter. 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 $7,905,048 or 71% of net sales and $6,891,749 or 59%, and $6,532,471 or 50% in the years ended May 31, 1996, May 31, 1997 and May 31, 1998, respectively. Accounts receivable due from this customer were $1,646,162 at May 31, 1997 and $337,286 at May 31, 1998. Sales through the Company's four European distributors accounted for $2,697,254 or 24% of net sales in 1996, $3,194,221 or 27% of net sales in 1997 and $2,915,591 or 22% of net sales in 1998. Accounts receivable due from these customers were $672,983 at May 31, 1997 and $1,111,750 at May 31, 1998.
The Company provides a limited warranty to its distributors which limits the Company's obligation to replacement of defective product. Such 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 U.S. Treasury based money market accounts redeemable on demand. These investments are carried at amortized 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. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation.
3. INVESTMENTS:
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 and May 31, 1998, is as follows:
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:
5. ACCRUED EXPENSES:
At May 31, accrued expenses were comprised of the following:
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 commitment for the Redmond, Washington facility is $62,256 in fiscal year 1999.
b. Employment Agreements: One officer has an employment agreement which obligates the Company to a salary of $210,109 per year. Bonus compensation of 100% of base pay can be earned.
c. Royalty Agreement: The Company has an 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 $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. No reserve was established in FY 1998. During fiscal 1998, the Company incurred legal fees of $131,666 to defend its position in this lawsuit; $87,000 of those fees were charged against the previously established reserve. 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, 1996, 1997, and 1998 were $305,167, $352,380, and $332,881, 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, 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:
A reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows:
At May 31, 1997 and May 31, 1998, the deferred tax assets were comprised of the following:
The temporary differences result primarily from reserves recorded in the financial statements which will be deductible for tax reporting when paid.
8. 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 year. 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 year. Common stock equivalents of the Company include the dilutive effect of outstanding stock options.
Basic and Diluted earnings per share were calculated as follows:
COMPUTATION OF EARNINGS PER COMMON SHARE
9. 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 7,683 shares of Series 2 Stock on September 30, 1997, for $20,169. Based on fiscal 1998 net income, the Company will redeem 8,594 shares of Series 2 stock for $22,559 on September 30, 1998. 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.
10. STOCK OPTIONS:
The Company had an incentive stock option plan, which expired in May 1993. No additional grants may be issued under this plan. The Company replaced this plan with a new plan effective December, 1993, which includes both incentive stock options and nonstatutory stock options. Nonstatutory stock options may be granted to employees, directors, officers and consultants. 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. Under this plan there are 120,750 options available for grant as of May 31, 1998.
The Company also has a stock option plan for nonemployee directors. 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. Under this plan there are 45,071 options available for grant as of May 31, 1998.
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 2008. The Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion 25 ("APB 25"), under which no compensation cost has been recognized. In 1996, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards 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, 1998 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, 1997 and 1998:
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 1998 was $26.99 per share using the assumptions of expected volatility of 72.2%, expected option lives of 7.5 years, risk-free rate of interest of 6.6% and no expected dividends. During 1997, the weighted average grant-date fair value of stock options granted was $14.05 per share using the assumptions of expected volatility of 51%, expected option lives of 7.5 years, risk-free rate of interest of 6.7% and no expected dividends. 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, risk-free rate of interest of 6.0% and no expected dividends.
11. RELATED PARTY TRANSACTIONS:
a. Consulting Agreements Loeb Partners Corporation. During the fiscal year ended May 31, 1998, 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, 1998, the Company paid Dr. Kenneth N. May 264 shares of Alcide Common stock having an aggregate purchase price of $12,012 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 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 $3,573,937 since 1983. During fiscal years 1998 and 1997, 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., $21,865 and $22,114; Loeb Investors Co. VIII, $863 and $873, respectively.
Thomas L. Kempner is the managing partner of both Loeb Investors Co. V and Loeb Investors Co. VIII.
12. 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 1998, 1997 and 1996 were approximately $67,000, $60,500, and $62,000, respectively.
CORPORATE OFFICE 8561 154th Avenue NE Redmond, Washington 98052 Phone: (425) 882-2555 Fax: (425) 861-0173
AUDITORS Arthur Andersen LLP 801 Second Avenue, Suite 800 Seattle, WA 98104
COMMON STOCK LISTING NASDAQ (Symbol - ALCD)
TRANSFER AGENT AND REGISTRAR American Securities Transfer and Trust, Incorporated 938 Quail Street, Suite 101 Lakewood, Colorado 80515