**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**
| **ý**                                        |   | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                      |
|---------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|
|                                              |
| **For the fiscal year ended:  May 31, 2003** |
|                                              |
| **OR**                                            |
|                                              |
| **o**                                             |   | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 [No  Fee Required]** |

** **

**Commission file number 0-12395**

 

| **ALCIDE CORPORATION**                                                             |
|------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                             |
|                                                                               |
| **Delaware**                                                                       |   | **22-2445061** |
| (State or other jurisdiction of  incorporation or organization)                    |   | (I.R.S. Employer  Identification No.) |
|                                                                               |
| **8561 154th Avenue NE, Redmond,  Washington 98052**                               |
| (Address of principal executive offices)                                           |
|                                                                               |
| Registrant’s  telephone number, including Area Code   **(425) 882-2555** |
|                                                                               |
| Securities  Registered Pursuant to Section 12(b) of the Act:  **None**        |
|                                                                               |
| Securities  registered pursuant to Section 12(g) of the Act:                       |

 

**CommonStock - $.01 par value**

(Title of Class)

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. YES  ý  NO  o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).

Yes  o  No  ý

 

The aggregate market value ofthe voting and non-voting common equity held by non-affiliates of theRegistrant on November 29, 2002 was approximately $35,703,000, net of TreasuryStock.  On August 22, 2003, there were2,654,638 shares of common stock outstanding, net of Treasury Stock.

 

Certaininformation required by Part III hereof is incorporated by reference from theRegistrant’s definitive Proxy Statement for its 2003 Annual Meeting ofStockholders.

 

 

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## **TABLEOF CONTENTS**

 
| PART I   | Item 1.  | Business                                                                                    |
|----------|----------|---------------------------------------------------------------------------------------------|
|     |     |                                                                                        |
|     | A.       | Introduction                                                                                |
|     | B.       | Sales Development                                                                           |
|     | C.       | Research and Product Development                                                            |
|     | D.       | Patents and Trademarks                                                                      |
|     | E.       | Raw Materials                                                                               |
|     | F.       | Competition                                                                                 |
|     | G.       | Government Regulation                                                                       |
|     | H.       | Employees                                                                                   |
|     | I.       | Advertising and Promotion                                                                   |
|     | J.       | Manufacturing                                                                               |
|     |     |                                                                                        |
|     | Item 1A. | Executive Officers of the Company                                                           |
|     |     |                                                                                        |
|     | Item 2.  | Properties                                                                                  |
|     |     |                                                                                        |
|     | Item 3.  | Legal Proceeding                                                                            |
|     |     |
| PART II  | Item 5.  | Market for the Registrant’s Common Stock  and Related Stockholder Matters              |
|     |     |
|     | Item 6.  | Selected Financial Data                                                                     |
|     |     |
|     | Item 7   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|     |     |
|     | Item 7A. | Quantitative and Qualitative Disclosures  about Market Risk                                 |
|     |     |
|     | Item 8.  | Financial Statements and Supplementary Data                                                 |
|     |     |
|     | Item 9.  | Changes In and Disagreements with  Accountants on Accounting and Financial Disclosures      |
|     |     |
|     | Item 9A. | Controls and Procedures                                                                     |
|     |     |
| PART III | Item 10. | Directors and Executive Officers                                                            |
|     |     |
|     | Item 11. | Executive Compensation                                                                      |
|     |     |
|     | Item 12. | Security Ownership of Certain Beneficial  Owners and Management                             |
|     |     |
|     | Item 13. | Certain Relationships and Related  Transactions                                             |
|     |     |
| PART IV  | Item 15. | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                            |
|          |          |                                                                                             |  |  |

 

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**PART I**

 

This report contains forwardlooking statements.  These statementsrelate to future events or future financial performance.  In some cases, you can identifyforward-looking statements by terminology such as “may,” “will,” “believes”“anticipates,” “expects” “intends,” “estimates,” “predicts,” and similarexpressions, the negatives of these terms, or other terminology.  These statements are only predictions.  They reflect management’s current opinionand are designed to help readers understand management’s thinking.  By their very nature, however, suchstatements are subject to certain risks and uncertainties that could causeactual events or results to differ materially from those projected.  Some of the risks and uncertainties thatcould affect the Company’s operating results and performance are describedthroughout this report, such as in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” below.  You should review and consider these and other risks carefully.  Readers are cautioned not to place unduereliance on such forward-looking statements which speak only as of the date ofthis report.  We undertake no obligationto update publicly any forward looking statements to reflect new information,events or circumstances after the date of this Report, or to reflect theoccurrence of unanticipated events.

 

**ITEM 1.**                                                     **Business**

 

**A**.                                    **Introduction**

 

Alcide®Corporation (the “Company”) is a Delaware corporation organized in 1983 whichhas its executive offices and research laboratories at 8561 154thAvenue NE, Redmond, Washington 98052.

 

Alcide isengaged in the research, development and commercialization of unique chemicalcompounds having intense microbiocidal activity.  The Company holds substantial worldwide rights to its discoveriesthrough various patents, patent applications, trademarks and other intellectualproperty, technology, and know-how.

 

**B.****                                    SalesDevelopment**

 

The Companysells antimicrobial products to the dairy, health care and food processingindustries.  Its products include:UDDERgold®5-Star, UDDERgold® Plus, UDDERgold Platinum® andUDDERgold® Germicidal Barrier Teat Dips, Pre-Gold®Germicidal Pre-Milking Teat Dip and 4XLA® Pre- and Post-Milking TeatDip to the dairy industry; Exspor® Sterilant-Disinfectant and LD®Disinfectant to the health care industry; and SANOVA® antimicrobialintervention to the food processing industry. The Company’s sales to date have primarily been derived from theUDDERgold family of teat dips and SANOVA food processing antimicrobial.

 

Total revenuefor the fiscal year ended May 31, 2003 was $21,924,454 of which $897,177 waslicense revenue.  Export sales tointernational distributors accounted for $4,437,037, 20% of total revenue.

 

**1.****                   DairyIndustry**

 

Worldwiderevenue from dairy line products during fiscal year 2003 was $7,875,840 (including$897,177 license revenue) as compared with $9,265,736 in fiscal year 2002.  In fiscal 2003, sales to the dairy industryaccounted for 36% of the Company’s total revenue.  Loss of the sales generated by dairy line products, could have amaterial adverse effect on the Company.

 

U.S. Dairy Industry

In fiscal2003, dairy industry revenue in the United States was $3,438,803 (including$897,177 license revenue), 44% of Alcide’s total dairy industry revenue.

 

International Dairy Industry

Alcideproducts are sold to the dairy industry in Canada, Latin America, Europe andselected Asian markets through a network of distributors.  Sales to the international dairy industrywere $4,437,037 in fiscal 2003, or 56% of total dairy industry revenue.

 

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Distributor Arrangements

Alcide salesto the dairy industry are primarily to distributors who have contracted withthe Company to distribute the Company’s products.  In each case the distributor purchases product from Alcide forresale to the end user.  Loss of any ofthe Company’s distributors could have a material impact on the Company’s salesand earnings.

 

On April 26,2002, Alcide entered into an agreement licensing its technology know-how andtrademarks associated with its dairy industry products to IBA, Inc. (“IBA”) ofMillbury, MA, one of its domestic distributors, in a five year agreementbeginning June 1, 2002.  Under theagreement, IBA manufactures products using Alcide’s technology and carryingAlcide’s trademarks for direct, nonexclusive distribution through IBA’sextensive United States distribution network, and pays Alcide licensingrevenue.  Alcide revenue on productslicensed to and manufactured by IBA in fiscal year 2003 was approximately 43%lower than if such products had been manufactured and sold by Alcide.

 

Subsequent tothe end of fiscal 2003, Alcide entered into a license agreement with FerdinandEimermacher GmbH (“Eimermacher”) to manufacture and distribute teat dips usingAlcide’s technology and trademarks in Austria, Germany and Switzerland.  Eimermacher will pay Alcide licensingrevenue on all sales utilizing the Company’s technology.

 

**2.**                   **FoodProcessing Antimicrobials (SANOVA)**

 

In May 1997,the Company entered into an agreement with Novus International, Inc. for Novus’introduction and distribution of SANOVA antimicrobial to the poultryindustry.  Subsequently, effectiveDecember 1, 1998, Alcide assumed direct responsibility for distribution ofSANOVA.  In February 2001, the Companybegan to commercialize SANOVA in the red meat industry.  During fiscal 2003, Alcide continued itsexpansion of SANOVA in both the red meat and poultry industries and entered thefruit and vegetable processing, sausage and comminuted (deli) meat industries.

 

Alcide’s fiscal2003 SANOVA sales totaled $13,587,212, an increase of 11% over the $12,229,362SANOVA sales in fiscal 2002.  It isexpected that SANOVA will continue to be an important and growing contributorto the Company’s sales and income expansion. A loss or other reduction of sales to the food processing industries, ora failure or slowing of growth in those industries, could have a materialadverse impact on the Company.  Infiscal 2003, SANOVA sales accounted for 62% of total Company revenue.

 

On May 31, 2003,42 poultry operations and 10 red meat operations were using SANOVA undercontract with Alcide.  As of July 31,2003, two operations have been added and an additional seven installations werescheduled for start-up by November 2004.

 

**3.****                   HealthCare Industry**

 

The Companymarkets a line of hard surface sterilants and disinfectants which killsmicroorganisms and helps reduce the potential for disease transmission viacontaminated surfaces.  The Company’s LDdisinfectant and Exspor Sterilant-Disinfectant offer users a combination ofbroad spectrum efficacy, speed and relative safety.

 

Fiscal year2003 sales of hard surface sterilants and disinfectants were $461,402, or 2% oftotal sales, as compared with $493,592 in fiscal year 2002.

 

**4.**                   **IndustryPractices and Backlog Orders**

 

The Company’sinvoice terms for its dairy and health care industry products conform to thosein the specialty chemical industry in general, which are:  domestic-30 days, export-60 days.

 

Alcide had$184,341 of firm orders on May 31, 2003 for future delivery to dairy industrydistributors as compared to orders for future delivery at May 31, 2002 of$602,673.  The Company’s dairy industrydistributors typically place orders one to four months in advance.

 

The Company’sinvoice terms, product pricing and delivery for SANOVA food processingantimicrobials are based on contracts with each customer which typically coverone to four years.  For large customers(those using more than 15,000 gallons of SANOVA per month), Alcide providesbulk shipments of inventory to the customer and the

 

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customer is invoiced atmonth-end based on the amount of product processed or gallons of SANOVAused.  Smaller SANOVA customers arebilled at the time SANOVA components are shipped to their facilities.  Payment in either case is due fifteen tothirty days after billing.

 

**C.****                                    Researchand Product Development**

 

Recognizingthat Alcide’s long-term survival and growth is significantly dependent on thestrength of its proprietary position, specific emphasis has been placed onenhancing the Company’s knowledge and understanding of key processes in thefield of acidified sodium chlorite vis-à-vis the basis for the antimicrobialperformance of the biocidal system, the development of new assay methodologiesfor anticipated future residue determination needs and the integration of thisknowledge into the new product formulation development efforts.  The key driver for this focus is the increasinglycompetitive marketplace arising from the presence of a number of newly approvedtechnologies (Food Safety) and growing number of generic products (AnimalHealth).  New patent submissions haveemanated from this effort and more are expected in the future as the effortcontinues.

 

All of theresearch and product development activities funded by the Company during fiscal2003 were conducted under the Company’s direct supervision at contract researchfacilities or in-house.

 

A second andsignificant component of our research and development program has focused onaddressing the increasingly more stringent and sophisticated demands of theregulatory agencies that control introduction of our products to themarket.  While the Company typicallydepends on contract assistance to submit registrations in foreign markets, allsubmissions, support documentation and supportive data are generated andcompiled in-house by Alcide’s own regulatory specialists.

 

While many ofthe research and development programs undertaken by the Company and describedin this report, give evidence of possible success, the nature of research,coupled with the necessity for regulatory approval, is such that there can beno assurance of ultimate program success or that any resulting product may becommercially viable.

 

If Alcideviolates regulatory requirements at any stage, whether before or aftermarketing approval is obtained, Alcide may be fined, forced to remove a productfrom the market or experience other adverse consequences, including delay,which could materially harm our financial results.  Additionally, the Company may not be able to obtain the labelingclaims necessary or desirable for product promotion.  We also may be required to undertake post-marketing testing.  In addition, if Alcide or other partiesidentify side effects after any of our products are on the market, or ifmanufacturing problems occur, regulatory approval may be withdrawn andreformulation of our products, additional testing, changes in labeling of ourproducts, and/or additional marketing applications may be required.

 

Therequirements governing the conduct of testing, manufacturing and marketing ofAlcide products outside the United States vary widely from country tocountry.  Foreign approvals may takelonger to obtain than domestic government approvals and can involve additionaltesting.  Foreign regulatory approvalprocesses include all of the risks associated with the US government approvalprocesses.  Also, approval of a productby US regulators does not ensure approval of the same product by the healthauthorities of other countries.

 

**1.****              Food Safety**

 

During fiscal2003, Food Safety research and development activities continued to be heavilyweighted toward process validation under commercial conditions.  Teams of Alcide engineers accompanied byfield research managers conducted a number of evaluations to determine theperformance of the SANOVA process on red meats, produce, fish and poultry undera wide variety of commercial use conditions.

 

On theregulatory front, the Company initiated a number of new filings seekingapproval of the SANOVA process outside of the United States.  By fiscal year-end, submissions had beenmade and were under review in a number of key markets selected as representingsubstantial opportunities for the SANOVA process.  Submissions were also made and final approvals granted in twoadditional countries – Chile and Mexico. The Company also filed a petition to the Food and Drug Administration(“FDA”) to amend the current approval for use of acidified sodium chlorite onseafood to permit the use of a higher dose range.  Regulatory process management – for current and new filings –will continue to require a significant amount of effort in the next fiscalyear.

 

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**2.****              AnimalHealth Products**

 

During fiscal2003, new product development efforts continued to focus on the creation of newteat dip formulations that further improve performance, conditioning and otherproduct characteristics of importance to the end user.  Significant effort will continue to beplaced in the regulatory area during fiscal 2004, as current submissions forUDDERgold Platinum are processed and new submissions are lodged.

 

**D.****                                    Patentsand Trademarks**

 

The Companyconsiders protection of its technologies by United States and foreign patentsto be an important aspect of its business. No assurance can be given, however, as to the validity, enforceabilityor scope of its patent protection. Should the patents be held invalid, become ineffective against competitionor expire prior to the Company’s successful development of a market for itsproducts, there may be a material adverse impact on the Company’sbusiness.  Furthermore, the possibilityof patent infringement by third parties cannot be entirely eliminated.  In the event of such infringement by thirdparties, if the Company is not successful in terminating such infringement, theviability of the Company could be severely and adversely affected.

 

Conversely, noassurances can be given that the manufacture, use or sale of the Company’sproducts will not infringe the patent rights of others.  The Company’s competitors or others may haveor acquire patent rights that they could enforce against the Company.  If they do so, Alcide may be required toalter its products, pay licensing fees or cease activities.  If Alcide’s products conflict with patentrights of others, third parties could bring legal actions against Alcideclaiming damages and seeking to enjoin manufacturing and marketing and sales ofthe affected products.  If these legalactions are successful, in addition to any potential liability for damages, theCompany could be required to obtain a license in order to continue tomanufacture or market the affected products. The Company may not prevail in any legal action and a required licenseunder the patent may not be available on acceptable terms or at all.

 

The cost toAlcide of any litigation or other proceedings relating to intellectual propertyrights, even if resolved in Alcide’s favor, could be substantial.  Some of Alcide’s competitors may be betterable to sustain the costs of complex patent litigation because they havesubstantially greater resources.  Ifthird parties file patent applications, or are issued patents claimingtechnology also claimed by the Company in pending applications, the Company maybe required to participate in interference proceedings in the Patent TrademarkOffice, or opposition proceedings abroad, to determine priority ofinvention.  Alcide may be required toparticipate in interference or opposition proceedings involving its issuedpatents and pending applications.  TheCompany may be required to cease using the technology or license rights fromprevailing third parties as a result of an unfavorable outcome in an interferenceproceeding.  Such a prevailing party maynot offer Alcide a license on commercially acceptable terms.

 

1.               **Patents**

 

The Companyowns the following issued United States patents:

 

U.S. PatentNo. 4,891,216

“DisinfectingCompositions and Methods Therefor”

 

U.S. PatentNo. 4,956,184

“TopicalTreatment of Genital Herpes Lesions”

 

U.S. PatentNo. 4,986,990

“DisinfectionMethod and Composition Therefor”

 

U.S. PatentNo. 5,019,402

“Compositionand Procedure for Disinfecting Blood and Blood Components”

 

U.S. PatentNo. 5,100,652

“DisinfectingOral Hygiene Compositions and Process for Using the Same”

 

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U.S. PatentNo. Re. 36,064

“DisinfectionMethod and Composition Therefor”

 

U.S. PatentNo. 5,252,343

“Method andComposition for Preventing and Treatment of Bacterial Infections”

 

U.S. PatentNo. 5,389,390

“Process forRemoving Bacteria from Poultry and Other Meats”

 

U.S. PatentNo. 5,597,561

“AdherentDisinfecting Compositions and Method of Use in Skin Disinfection”

 

U.S. PatentNo. 5,628,959

“Compositionand Method for Sterilizing Dialyzers”

 

U.S. PatentNo. 5,651,977

“AdherentDisinfecting Compositions and Methods Related Thereto”

 

U.S. PatentNo. 5,667,817

“Method andComposition for the Prevention and Treatment of Female Lower Genital TractMicrobial Infections”

 

U.S. PatentNo. 5,772,985

“Compositionand Methods for Treatment of Skin Lesions”

 

U.S. PatentNo. 6,063,425

“Method forOptimizing the Efficacy of Chlorous Acid Disinfecting Sprays for Poultry andOther Meats”

 

U.S. PatentNo. 6,096,350

 “Compositions and Methods for Prevention andTreatment of Diseases Associated With Honey Bees”

 

U.S. PatentNo. 6,120,731

# **“Frozen Chlorine Dioxide-Containing Composition and MethodsRelated Thereto”**

 

U.S. PatentNo. 6,123,966

 “Stabilized Two-Part Disinfecting System andCompositions and Methods Related Thereto”

 

U.S. PatentNo. 6,524,624

“Two-PartDisinfecting Systems and Compositions and Methods Related Thereto.”

 

U.S. PatentNo. 6,328,909

“FrozenChlorine Dioxide-Containing Composition and Methods Related Thereto.”

 

Two additionalU.S. patent applications are pending. Numerous corresponding foreign applications are issued or pending.

 

The Company’soriginal patent, U.S. Patent No. Re. 31,779, expired in the United States onApril 18, 1995.  That patent wasdirected to disinfecting a substrate using a lactic acid/sodium chloritecomposition.  The Company’s secondpatent, U.S. Patent No. 4,330,531, expired in the United States on May 18,1999, and was directed to a lactic acid/sodium chlorite gel formulation.

 

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2.               **Trademarks**

 

The Companyhas sought to acquire trademark protection, primarily by the filing ofapplications for registration of its marks in a large number of countries.  There can be no assurance that a filedapplication will result in a registration; that the issuance of a trademarkregistration to the Company or the acquisition of rights through use willprovide the Company with adequate protection against infringement in a selectedterritory; that the Company will be able to expand its product line under aregistered mark in some territories; or, that the Company’s trademark rightscannot be terminated in some territories such as by petition by others claimingsuperior rights.

 

No assurancescan be given that the Company’s use of the marks and business name will notinfringe the rights of others in some territories resulting in the exposure ofthe Company to liability to the holder of the rights and a possible obligationto terminate use in such territory.

 

The Companywould be adversely impacted if rights to trademarks selected by the Company areunavailable in a territory, if a Company trademark registration were to becomeinvalid, or if the Company’s business name or trademarks are found to infringethe rights of another in a territory.

 

In addition tothe Company’s mark Alcide®, the other Company marks registered inthe U.S. are SANOVA®, Exspor® LD®, UDDERgold®,4XLA®, Pre-Gold®, DIPPINgold® and silverQUICK®.

 

These samemarks, as well as UDDERgold Platinum®, have been registered outsideof the U.S. in markets where the Company has determined that there is acommercial opportunity for the products. For translation reasons, the mark DIPPINguld® has been determinedto be more appropriate than DIPPINgold® in certain foreigncountries.  Therefore, the spellingvariant DIPPINguld® has been registered in Denmark, Norway, Finlandand Sweden.

 

**E.****                                      RawMaterials**

 

Various Alcideproducts 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/orthe necessity to obtain regulatory clearance for the changed formulation.  There can be no assurance that Alcide’sreliance on these suppliers will not result in problems with productsupply.  Interruptions in theavailability, or increases in costs, of products could have a material adverseeffect on the Company’s results of operations.

 

**F.****                                      Competition**

 

The Companycompetes in substantially all of its markets on the basis of quality andtechnical innovation.  A number ofcompanies have announced their intention to introduce, or are believed to be inthe process of developing, a variety of products designed to perform some ofthe functions of Alcide’s products. Additionally, there exist in the marketplace, products that are known tobe competitive with the Company’s products. Alcide’s competitors have, or have access to substantially greaterfinancial, technical and human resources than Alcide.  In addition, many of these competitors have significantly greaterexperience and resources than Alcide in research and development and regulatoryapproval procedures, as well as in marketing and sales and achievingmanufacturing efficiencies.

 

**1.****        DairyIndustry**

 

The market into which UDDERgold 5-Star, UDDERgold Platinum, UDDERgold,Pre-Gold and 4XLA teat dips are sold is a highly fragmented worldwide market inwhich major specialty chemical companies compete.  The major classes of products sold in this market are iodophorsand chlorhexidines.  Domestically, whereteat dips are not highly regulated, there are a large number of competitors butthe top four who control over 60% of the market are West Agro/DeLaval, IBA,Westalia Surge and Ecolab.  Globally,DeLaval and Ecolab are our key competitors. The expiration on May 18, 1999 of the Company’s U.S. patent 4,330,531,which covered Alcide’s UDDERgold formulation, allows competing lactic acidbased acidified sodium chlorite products to enter the marketplace.  ABS Global, Inc., the Company’s formerdistributor, Ecolab and Westalia Surge have introduced such products.  Management believes, however, that theexpired patent’s technology is inferior to that represented by Alcide’s morerecent patents.

 

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**2.****              FoodSafety Antimicrobials**

 

The market fordisinfection of food products is dynamic and rapidly emerging as a result ofconsumer concern and U.S. Government regulatory activity.  A number of technologies are directed atreduction of food borne pathogens.  Ofthese, trisodium phosphate sold by Rhodia and peroxyacetic acid sold by Ecolabare used within the poultry processing industry in a manner similar to theCompany’s product, SANOVA.  Chlorinedioxide and ozone are used in poultry chiller waters, but have not been broadlyaccepted by the industry.  Irradiationtechnology has been approved by USDA and FDA, but is not broadly used by thepoultry or red meat industries and, where irradiation is used, the process mayinvolve a secondary treatment outside the processing plant.  Steam, hot water, organic acid and peroxyaceticacid rinses are broadly used in the red meat industry on carcasses prior tochilling for pathogen control.  Ultrahigh pressure technology is being used in the fruit juice industry for juicepasteurization and potentially may be utilized in the future as anantimicrobial intervention for sausage and other processed food products.  Cetylpyridinium chloride and other chemicalintervention technologies may at some point in the future compete withSANOVA.  The Company is not aware of anyestablished, broadly accepted competing products for post-chill pathogencontrol application to either red meat or poultry products.  However, market conditions within the foodprocessing industry are such that additional competition is likely.

 

**G.****                                    GovernmentRegulation**

 

**1.****              DairyIndustry**

 

The Company’sproducts sold to the dairy industry require registration for sale in a numberof international markets.  UDDERgoldteat dip has been registered in Canada, the United Kingdom, Republic ofIreland, Denmark, The Netherlands, Spain, Portugal, New Zealand, Brazil, France,Italy, Chile, Colombia, Argentina, South Korea and India.  The product is legally sold without formalregistration in the United States, Greece, Hungary and Mexico.

 

4XLA teat diphas been registered in Canada, The Netherlands, Republic of Ireland, Switzerland,New Zealand, Chile, Denmark, Brazil, Portugal, Colombia and Argentina.  The product is legally sold without formalregistration in the United States, Mexico, Belgium, Italy, Spain and Cyprus.

 

UDDERgold Plussales have been expanded to include Japan and Taiwan in addition to the UnitedStates, without formal registrations.

 

UDDERgoldPlatinum has received approval as a variation of UDDERgold in the UnitedKingdom, the Netherlands, and Italy. Similar applications are pending approval in other European markets andin Canada.  The product is legally soldwithout formal registration in France.

 

**2.****              FoodProcessing Industry**

 

a.               Poultry

 

The Company’sFood Additive Petition for pre-chill use of SANOVA was approved by FDA inApril, 1996 and by USDA in January 1998. Additional approval for use of the product in Canada was received inSeptember 1999.  The product is nowactively marketed and is being utilized by a number of major poultry processingcompanies.

 

In May 2001,the Company’s Food Additive Petition for post-chill use of SANOVA on poultrywas approved by FDA and by USDA.  Theproduct is now being used for this purpose by six major processing plants.

 

b.              Red Meat

 

The Company’sFood Additive Petition was approved by FDA in March 1998 and subsequently byUSDA in February 2000.  In February2001, the Company resolved labeling issues with USDA, which determined that useof SANOVA as a post-chill application on beef would not require supplementalproduct labeling.  This event enabledthe Company to begin product commercialization and a number of customers arepresently using SANOVA for red meat carcass disinfection prior to chilling aswell as an antimicrobial intervention on beef parts and trim after chilling andboning.  During fiscal 2002 and 2003,the Company conducted several process validation studies directed at mitigatingthe

 

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initial processing andorganoleptic problems encountered with application to parts and trim.  Management believes that the processvalidation trials have been successful and will lead to further expansion inthis industry segment.

 

SANOVA use oncooked ready-to-eat sausages, comminuted meats and ready-to-eat deli productswas approved by FDA and USDA in June 2001. Subsequently, in October 2001, USDA raised issues concerning the degreeto which SANOVA use would require supplemental labeling of treatedproduct.  In January 2002, USDAconcluded that no labeling would be required. In March 2002, the Company began process validation studies undercommercial conditions with several major processing companies.  Commercialization of SANOVA use in thismarket category began in fiscal 2003.

 

c.               Fruits andVegetables

 

In December1998, Alcide submitted a Food Additive Petition to the FDA for the use ofSANOVA on raw agricultural commodities (fruits and vegetables).  The petition was approved in September1999.  The EPA concurrently stated thatit intended to exert its regulatory authority over this area.  Subsequently, in March 2001 EPA granted itsapproval for use of SANOVA on intact fruits and vegetables in processingplants.  Marketing an antimicrobialintervention under EPA authority requires supplemental registration by the EPAauthorities in each of the fifty states. These registrations have now been obtained.

 

In April 2002,the use of SANOVA on cut, sliced and processed fruits and vegetables wasgranted by the FDA, which has sole regulatory authority over this marketsegment.  This, combined with theearlier EPA approval for intact fruits and vegetables, allows for SANOVAcommercialization within a limited part of the produce industry.  Commercialization efforts began in fiscal2003.

 

d.              Seafood

 

In December2002, Alcide submitted a food additive petition to the FDA proposing the sameSANOVA concentration level as previously approved for poultry, red meat andproduce.  The petition is currently under review byFDA.

 

**3.****              Sterilants/Disinfectants**

 

The Company’sline of hard surface sterilants and disinfectants is regulated in the U.S. byEPA and FDA.  Appropriate EPA and FDAapprovals for sale and manufacturing have been obtained.

 

**H.****                                    Employees**

 

The corporateoffice and laboratory staff of 21 employees occupy a 6,751 square foot leasedfacility in Redmond, Washington. Alcide’s engineering, operations and maintenance staff of 15 employeesoccupies a 6,240 square foot leased office and warehouse facility in St. Louis,Missouri.  In addition, the Companyemploys 8 field maintenance employees, 2 technical representatives and 4 salesmanagement/marketing employees.

 

The Companyalso has relationships with, and from time to time engages the services of,university professors and other qualified consultants to assist it intechnological research and development.

 

The Company isnot a party to any collective bargaining agreement and considers its employeerelations to be excellent.

 

**I.****                                         Advertisingand Promotion**

 

The Company’sadvertising and promotion activities consist of cooperative promotionalactivities with its distributors of Animal Health products and participation intrade shows and exhibits sponsored by the poultry, red meat and produceindustries.

 

10

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**J.****                                      Manufacturing**

 

Allmanufacturing of the Company’s Animal Health and sterilant and disinfectantproducts is performed by contract manufacturers having appropriate FDAregistration approval for such manufacturing. Product released for sale is dependent on quality control testing byAlcide.  A change in contractmanufacturers, however, would require qualification of the manufacturer (if notalready qualified) by FDA and by some international FDA equivalent.  Such change could adversely affect Companysales short-term.  Many qualifiedmanufacturers regularly compete in the contract packaging marketplace.  Under the licensing arrangement with IBA,IBA is responsible for manufacturing its own products.

 

SANOVA ismanufactured and diluted at each customer’s site, utilizing raw materialssupplied by Alcide and mixed, diluted and pumped in micro-processor controlledequipment owned by Alcide.

 

**ITEM1A.****                                            ExecutiveOfficers of the Company**

 

The personslisted in the following table are the current executive officers of theCompany.  Officers are electedannually.  There is no familyrelationship among any of the directors or executive officers, and none of thepersons has been involved during the past five years in any legal proceedingsdescribed in applicable Securities and Exchange Commission regulations.

 
| **Name**            |   | **Age** |   | **Positions  with the Company and Principal Occupation or  Employment during the past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **Executive  Officer Since** |
|---------------------|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|
|                |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         |
| Joseph A.  Sasenick |   | 63      |   | Chairman of  the Board of the Company since April 2001; Director of the Company since  1991; Chief Executive Officer since 1992; President 1992 until April 2001;  Chief Operating Officer of the Company from February 1991 to February 1992;  Chief Executive Officer and Chairman of the Board of Alcide Food Safety,  Inc., a wholly owned subsidiary of Alcide Corporation, since January 1999.  Presently serves on the Board of Directors of the Washington Biotechnology  and Biomedical Association, and the Technology Alliance, a special program of  the Greater Seattle Chamber of Commerce.   Previously held senior management positions at Abbott Laboratories and  The Gillette Company. |   | 1991                         |
|                |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         |
| John P.  Richards   |   | 61      |   | President  since April 2001; Chief Financial Officer since August 1991; Secretary since  1995; Executive Vice President from 1991 until 2001.  President Alcide Food Safety since January  1999.  President of Tartan Marine  Company from June 1983 to November 1990.   Previously held various financial and operational management positions  at Abbott Laboratories from 1968 to 1983.                                                                                                                                                                                                                                                                                                      |   | 1991                         |
|                |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         |
| G. Kere Kemp        |   | 53      |   | Executive  Vice President, Chief Scientific Officer of the Company since March 1998;  previously Director, Animal Health Research and Vice President, Clinical  Research, August 1992 to March 1998. Prior to employment at Alcide, worked  for Pfizer, Inc. animal health group for sixteen years in various research  and management positions.                                                                                                                                                                                                                                                                                                                                                              |   | 1992                         |
|                |   |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                         |
| James L.  Winter    |   | 52      |   | Corporate  Vice President and General Manager, Animal Health since February 2001.  Prior to employment at Alcide, served as  General Manager and Chief Operating Officer of Universal Marketing Services,  Inc. from 1998 to 2001.  Previously  worked for ABS Global for 23 years in various sales, marketing and management  positions.  Presently serves on the  Board of Directors’ and is second Vice President of the National Mastitis  Council.                                                                                                                                                                                                                                    |   | 2001                         |

 

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**ITEM 2.****                                                     Properties**

 

The Companyleases a 6,751 square foot facility in Redmond, Washington, which is used bythe corporate office and laboratory staff. The Redmond facility has adequate capacity for the Company’s presentneeds.  The Company also leased a 6,240square foot office and warehouse facility in St. Louis, Missouri, through July2003.  Effective July 25, 2003, theAlcide engineering operations and maintenance staff relocated to a larger29,000 square foot office and warehouse facility to meet the growing demands ofthe Food Safety business.  The new St.Louis facility has adequate capacity for the Company’s present and foreseeablefuture needs.

 

**ITEM 3.****                                                     LegalProceeding**

 

The Company isthe plaintiff in a patent infringement lawsuit filed on October 31, 2002 inFederal District Court for the Western District of Washington, AlcideCorporation v. Bio-Cide International, Inc., Civil Action No. C02-2232C.  Alcide owns U.S. Patent No. Re 36,064entitled “Disinfection Method and Composition Therefor,” issued January 26,1999.  In this lawsuit, Alcide hasalleged patent infringement by Bio-Cide and seeks an injunction as well asdamages.  Bio-Cide has not filed anycounterclaims, but alleges that the patent is not infringed and isinvalid.  On May 15, 2003, Bio-Cidemoved for summary judgment of invalidity. The Court denied Bio-Cide’s motion. Alcide intends to vigorously pursue its case against Bio-Cide.  Trial is currently scheduled for February23, 2004.

 

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**PART II**

 

**ITEM 5.****                                                     Marketfor the Registrant’s Common Stock and Related Stockholder Matters**

 

The Company’scommon stock (“Common Stock”) has been publicly traded since May 26, 1983 inthe over-the-counter market on the NASDAQ National Market under the symbolALCD.

 

The followingtable sets forth the high and low stock prices of the Common Stock on NASDAQfor the fiscal quarters indicated, as reported by NASDAQ.

 
|                        |   | **High** |       | **Low** |       |
|-----------------------------|--------|----------|------------|---------|------------|
|                        |   |     |       |    |       |
| **Common Stock**            |   |     | ** ** |    | ** ** |
|                        |   |     |       |    |       |
| **Year Ended May 31, 2002** |   |     | ** ** |    | ** ** |
| First Quarter               |   | 34.00    |       | 26.95   |       |
| Second Quarter              |   | 30.80    |       | 20.40   |       |
| Third Quarter               |   | 25.75    |       | 21.96   |       |
| Fourth Quarter              |   | 25.25    |       | 22.00   |       |
|                        |   |     |       |    |       |
| **Year Ended May 31, 2003** |   |     | ** ** |    | ** ** |
| First Quarter               |   | 23.21    |       | 14.86   |       |
| Second Quarter              |   | 17.69    |       | 13.01   |       |
| Third Quarter               |   | 17.48    |       | 12.58   |       |
| Fourth Quarter              |   | 16.75    |       | 9.82    |       |

 

No dividends were declared orpaid for these periods.  The Company hasnever paid dividends on its Common Stock. The Company currently intends to retain future earnings for use in itsbusiness and, therefore, does not anticipate paying cash dividends in theforeseeable future.

 

On August 22, 2003, there wereapproximately 1,400 Common stockholders of record.

 

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**ITEM 6.****                                                     SelectedFinancial Data**

 
|                                                                  |   | **Fiscal Years Ended** |       |
|-----------------------------------------------------------------------|--------|------------------------|------------|
|                                                                  |   | **May 31,  1999**      |       | **May 31,  2000** |   | **May 31,  2001** |   | **May 31,  2002** |   | **May 31,  2003** |   |
|                                                                  |   |                   |       |   |   |   |   |   |   |   |   |
| Total Revenue                                                         |   | $                      | 11,220,528 |   | $ | 12,440,449 |   | $ | 17,957,975 |   | $ | 21,988,690 |   | $ | 21,924,454 |   |
|                                                                  |   |                   |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                     |   | (974,463               | )          | (447,073 | ) | 1,537,525  | *  | 1,781,252 |   | 1,129,610 |   |
|                                                                  |   |                   |       |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per common share  and potential common shares |   | (.38                   | )          | (.18 | ) | .58  | *  | .65 |   | .42 |   |
|                                                                  |   |                   |       |   |   |   |   |   |   |   |   |
| Total assets                                                          |   | 15,619,987             |       | 14,530,321 |   | 19,002,600 |   | 21,865,333 |   | 21,368,704 |   |
|                                                                  |   |                   |       |   |   |   |   |   |   |   |   |
| Long-term obligations                                                 |   | 316,000                |       | 158,000 |   | — |   | 26,346 |   | 8,140 |   |
|                                                                  |   |                   |       |   |   |   |   |   |   |   |   |
| Redeemable Preferred Stock                                            |   | 190,377                |       | 190,377 |   | 190,377 |   | 179,614 |   | 167,145 |   |
|                                                                       |        |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**SelectedQuarterly Financial Data for the Years Ended May 31, 2002 and May 31, 2003(unaudited)**

 
|                           |   | **Total Revenue** |       | **Gross Profit** |   | **Net Income** |   | **Diluted  Earnings  per Share** |      |
|--------------------------------|--------|-------------------|------------|------------------|--------|----------------|--------|----------------------------------|-----------|
| **Year Ended****May 31, 2002** |   |              |       |             |   |           |   |                             |      |
| First Quarter                  |   | $                 | 5,399,830  |             | $      | 2,629,130      |   | $                                | 321,101   |   | $ | .12 |   |
| Second Quarter                 |   | 5,731,980         |       | 2,772,855        |   | 438,568        |   | .16                              |      |
| Third Quarter                  |   | 5,500,252         |       | 2,586,883        |   | 540,316        |   | .20                              |      |
| Fourth Quarter                 |   | 5,356,628         |       | 2,441,291        |   | 481,267        |   | .18                              |      |
| Total for Year                 |   | $                 | 21,988,690 |             | $      | 10,430,159     |   | $                                | 1,781,252 |   | $ | .65 |   |
|                           |   |              |       |             |   |           |   |                             |      |
| **Year Ended****May 31, 2003** |   |              |       |             |   |           |   |                             |      |
| First Quarter                  |   | $                 | 5,045,192  |             | $      | 2,239,914      |   | $                                | 61,669    |   | $ | .02 |   |
| Second Quarter                 |   | 5,778,552         |       | 2,692,435        |   | 434,914        |   | .16                              |      |
| Third Quarter                  |   | 5,503,594         |       | 2,408,355        |   | 279,799        |   | .10                              |      |
| Fourth Quarter                 |   | 5,597,116         |       | 2,567,976        |   | 353,228        |   | .13                              |      |
| Total for Year                 |   | $                 | 21,924,454 |             | $      | 9,908,680      |   | $                                | 1,129,610 |   | $ | .42 |   |

 

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*                       IfStatement of Financial Accounting Standards, (“SFAS”) No. 142, “Goodwill andOther Intangible Assets”, had been in effect in fiscal 2001 and goodwill hadnot been amortized, net income for the year ended May 31, 2001 would have been$1,565,849 and diluted earnings per share would have been $.59.

 

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**ITEM 7.****                                                     Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Risk and Uncertainties**

 

Risks and uncertainties that may affect the Company’s operating resultsand business performance include: the Company’s ability to protect its patentsand other proprietary rights; the volume and timing of product sales; pricing;market acceptance of its products; the costs and effects of complying with lawsand regulations relating to the environment and to the manufacture, storage,distribution and labeling of the Company’s products; the ability to develop andmaintain distribution and supply arrangements; the effect of the Company’saccounting policies; changes in tax, fiscal and governmental and regulatorypolicies; economic factors such as the worldwide economy, interest rates,currency rates and currency movements; changes in the capital markets affectingthe Company’s ability to raise capital; the occurrence of litigation or claims;the loss or insolvency of a major customer, distributor or supplier; losses ofor changes in executive management; the Company’s ability to continue productintroductions and technological innovations; and other uncertainties and risksreported from time to time in our reports filed with the Securities andExchange Commission.  In addition, theCompany notes that its stock price can be affected by fluctuations in quarterlyearnings.  There can be no assurancethat the Company’s earnings levels will meet investors’ expectations.

 

Substantially all of the Company’s products are subject to regulatoryapproval of or control by various governmental agencies such as the FDA, USDAand EPA in the United States and their equivalents in internationalmarkets.  The exercise of control andregulatory authority by these agencies can have a material effect on theCompany’s business directly as it relates to the Company’s products andindirectly as it relates to competitors’ products.

 

Within the Animal Health and Surface Disinfectant business segment, allof the Company’s Animal Health products are sold through distributors havingexclusive or semi-exclusive rights to specified geographical territories.  The loss of a distributor can have amaterial effect on the Company’s sales, particularly, in the short-term until areplacement is found, contracted and trained in the sale of the Company’sproducts.  Further, the Company faceswell established competition in each of the markets where its Animal Healthproducts are sold.  Such competition,particularly, competition claiming equivalence to the Company’s products, canlimit the sales potential for Alcide’s products.

 

Alcide’s Food Safety products participate in a rapidly evolvingmarketplace which by its nature attracts innovation and competingtechnologies.  The Company’s SANOVAsales are based on performance, price and convenience.  Introduction of competitive products bettermeeting these customer needs can have a material impact on the Company’sability to sell and expand the use of its SANOVA products.

 

The Company’s business model for its Food Safety business involves acapital investment ranging from $20,000 to $500,000 for each user plant sitedepending on the size of the operation. The capital investments are depreciated over a five-year life whilecustomer contracts range from one to four years.  If a substantial number of customers elect not to renew theircontracts, non-productive assets would exist until new customers arefound.  However, the Company’sexperience, after more than four and one half years in the Food Safetybusiness, is that all but three customers have renewed their contracts.

 

Occasionally, the Company also incurs installation costs of between$80,000 and $120,000 to install the SANOVA equipment components at the customersite and connect the components with plumbing and electrical interfaces to putthe system into operation.  Installationcosts are depreciated over the shorter of a five-year life or the contractterm.

 

The economic vitality of the industries served by the Company’sproducts can have an impact on Alcide’s ability to sell its products, expandsales and maintain product price levels. Within the Animal Health business segment, the Company’s products arepremium priced consistent with their superior performance.  However, as dairy industry product marginsare compressed, some farmers may discontinue the use of Alcide products in favorof lower priced competitors’ products.

 

Likewise, the Company’s ability to sell and expand sales of its FoodSafety products may be impacted by economic conditions within the poultry andred meat industries.  During the fiscalyear ended May 31, 2003, three Alcide poultry customers elected not to useSANOVA as a direct result of economic conditions.  Two of the three customers have allowed their SANOVA agreement toexpire.

 

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**Critical AccountingPolicies**

**•****                                         **Revenue Recognition

Revenue from sales of SANOVA food antimicrobials is recognized based onthe terms of the Company’s contracts with individual customers.  For customers using more than 15,000 gallonsof SANOVA per month, Alcide provides bulk shipments of inventory to thecustomer and the customer is invoiced at month-end with revenue recognizedbased on the amount of product processed or gallons of SANOVA used.  All other customers are invoiced and revenueis recognized at the time SANOVA is shipped to their facilities.  Payment in either case is due fifteen tothirty days after billing.

 

Animal Health and Surface Disinfectant sales are recognized at the timeof shipment to distributors or to end users. The Company provides a limited warranty to its distributors which limitsthe Company’s obligation to replacement of defective product.  Such replacements have, for the past severalyears, been less than .1% of net sales. The distributors have no contractual right to return unsold product.

 

•                                          Depreciation and Book Value of SANOVA PlantAssets

Capital investments for SANOVA plant assets are depreciated over afive-year life, while customer contracts range from one year to fouryears.  As the SANOVA food antimicrobialbusiness has been in existence for less than five years, the Company has a limited,practical basis on which to assign depreciable life.  Management believes, however, based on over four and one halfyears experience, that well-maintained assets will be operational beyond fiveyears and, further, that if customers decide not to renew their contracts, theassets can be relocated to new customer sites. The cost to maintain the assets is charged to operations.

 

**Commitmentsand Contingencies**

 

Leases:  The Company leasescertain property under non-cancelable operating leases that expire through July2009.  Insurance, utilities andmaintenance expenses are borne by the Company. There are no contingent rentals or sublease rentals.

 

SANOVA Agreements:  The Companyhas signed contracts with poultry and beef processing plants for SANOVA systemsto be installed in FY 2004, which will cost approximately $1,650,000.  As of May 31, 2003, $1,050,000 of theequipment required had been purchased and recorded as construction in progress.  Additionally, the Company had $1,545,000 ofSANOVA equipment components as of May 31, 2003 to support future anticipatedgrowth.

 

Employment Agreements:  Oneofficer has a one year, automatically renewable, employment agreement whichcurrently obligates the Company to a base salary of $273,266 per year.  Bonus compensation of 100% of base pay canbe earned at the discretion of the Board of Directors.

 

Redeemable Class “B” Preferred Stock: On September 30th of each year, the Company redeems a portion of itsoutstanding Series 2 Class “B” Preferred Stock.  The amount redeemed is equal to .7% of the Company’s prior yearnet income.  As the Company recorded netincome of $1,129,610 in fiscal 2003, it will redeem 3,012 shares of Series 2Stock on September 30, 2003 for $7,907. This will leave a total of $159,238 of Class “B” Preferred Stock to beredeemed in subsequent fiscal years. The amounts to be redeemed subsequent to September 2003 depend uponfuture net income and are not yet known.

 

Thefollowing table summarizes the above commitments.

 
|                                            |   | **Less than 1 year** |      | **FY 2005** |   | **FY 2006** |   | **FY 2007** |    | **FY 2008** |   | **FY 2009** |   |
|-------------------------------------------------|--------|----------------------|-----------|-------------|--------|-------------|--------|-------------|---------|-------------|--------|-------------|--------|
| Operating Leases                                |   | $                    | 233,592   |        | $      | 135,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |
| SANOVA Agreements                               |   | 600,000              |      | —      |   | —      |   | —      |    | —      |   | —      |   |
| Employment Agreements                           |   | 273,266              |      | —      |   | —      |   | —      |    | —      |   | —      |   |
| Redeemable Class “B” Preferred  Stock |   | 7,907                |      | —      |   | —      |   | —      |    | —      |   | —      |   |
| Total Contractual Commitments                   |   | $                    | 1,114,765 |        | $      | 135,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |

 

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**Financial Condition and Results of Operations**

 

**Fiscal Year 2003 asCompared with 2002**

 

**Net Sales**

 

Netsales and license revenue totaling $21,924,454 for the fiscal year ended May31, 2003, was at substantially the same level as prior year net sales of$21,988,960.

 

Salesof SANOVA food antimicrobial to the poultry and red meat industries were$13,587,212 for fiscal year 2003, 11% or $1,357,850 higher than for theprevious fiscal year.  As of May 31,2003, there were SANOVA systems installed at 38 poultry processing plants and12 red meat plants.  Six of the poultryplants were using SANOVA applications both pre-chill and post-chill, thusbringing the total to 56 operations at the end of fiscal 2003.  Two of the poultry operations and two of thered meat operations were not revenue producing at the end of the fiscal year.

 

SANOVAsales to the poultry industry during fiscal 2003 were adversely affected byeconomic conditions within the poultry industry, which in turn, caused SANOVAcustomers to reduce their use of SANOVA, discontinue using antimicrobialinterventions altogether, or in the case of one plant, switch to a lower pricedcompetitor’s product.  The followingtable shows the difference in sales during fiscal 2003 as compared to sales in2002 for these customers.

 

Estimatednegative impact in fiscal year 2003 caused by poultry industry profitability:

 
|                  |   | **Reduced  Net Sales** |      | **Reduced  Gross Margin** |   | **Reduced  Income Before Tax** |   |
|-----------------------|--------|------------------------|-----------|---------------------------|--------|--------------------------------|--------|
|                  |   |                   |      |                      |   |                           |   |
| Idle Plants           |   | $                      | 1,376,000 |                      | $      | 960,000                        |   | $ | 960,000 |   |
| Reduced Plant Thruput |   | 276,000                |      | 193,000                   |   | 193,000                        |   |
| Asset Impairment      |   | —                 |      | —                    |   | 100,000                        |   |
| Bad Debt Allowance    |   | —                 |      | —                    |   | 27,000                         |   |
|                  |   |                   |      |                      |   |                           |   |
|                  |   | $                      | 1,652,000 |                      | $      | 1,153,000                      |   | $ | 1,280,000 |   |

 

TheCompany’s Animal Health and Surface Disinfectant revenues for fiscal year 2003were $8,337,242, an amount 15% or $1,422,086 lower than for fiscal 2002,reflecting primarily changes in distributor inventory levels during the firstfour months of fiscal 2003.  In theUnited Kingdom, the Company established a new distributor relationship withAgri-Lloyd beginning September 15, 2002 while the Company’s previousdistributor liquidated its inventory of Alcide products resulting in a $280,000sales reduction from the prior year.  Lastly, IBA, theCompany’s largest distributor, transitioned from a distributor arrangement withAlcide to a licensing arrangement and this transition had the effect ofreducing sales to IBA by an estimated $750,000 during fiscal 2003.  The gross margin impact of the salesreduction to IBA is estimated at approximately $200,000 attributable entirelyto distributor inventory reduction which occurred during the first quarter asIBA sold through its existing inventory of Alcide produced products and begandistributing IBA produced products.

 

**Cost of Goods Sold**

 

Costof goods sold was 55% of total revenue for fiscal 2003 a two point increasewhen compared to the 53% of net sales in fiscal 2002.

 

Costof goods sold as a percentage of net sales for the SANOVA (Food Safety)business segment, was 64% of sales for fiscal 2003 as compared to 60% of salesin fiscal 2002.  The increase as apercentage of net sales was caused primarily by the underutilization ofequipment during production stoppages and reductions at SANOVA customer plantsduring fiscal 2003 as the Company continued to record depreciation expense withno offsetting sales revenue.  (See abovetable for the impact on gross margin).

 

Costof goods sold for the Animal Health and Surface Disinfectant business segmentwas 45% of net sales (excludes license revenue) for fiscal 2003 versus 43% ofnet sales in fiscal 2002.  The increasedcost of goods sold as a percentage of net sales for the segment was causedprimarily by a shift in product mix as a result of the aforementioneddistributor

 

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inventoryreductions which affected sales of products UDDERgold® Plus and UDDERgold®to a greater degree than lower margin ancillary products.

 

**Research and DevelopmentExpense**

 

Reflecting the conclusion ofdevelopment activities related to the Company’s new animal health products andthe reduction in the cost of SANOVA process validation trials, research anddevelopment expenses in fiscal 2003 of $2,158,287 were $481,590 lower than infiscal 2002.

 

**Selling, General andAdministrative Expense**

 

Selling, general andadministrative expense of $5,955,313 was $827,627 higher than in fiscal2002.  Major components of the increasewere a $156,000 increase in liability and property insurance costs, anestimated $140,000 increase related to additional staff and staff expenses toenter the fish markets, a $27,000 allowance for doubtful accounts related to areceivable from a poultry customer in Puerto Rico, $105,000 in legal and otherexpenses incurred in connection with the Company’s patent infringement lawsuitagainst Bio-Cide International, $95,000 to write down the value of SANOVAassets at idle plants, $96,000 in animal health marketing expenses incurred tolaunch UDDERgold 5-Star and to solidify the Animal Health and SurfaceDisinfectant business segment and an estimated $40,000 increase in legal andother costs to comply with evolving SEC and NASDAQ regulations.

 

**InterestIncome and Interest Expense**

 

Interestincome was $25,059 for the fiscal year ended May 31, 2003, a substantialdecrease from the $71,728 earned during fiscal 2002.  The decrease was due to lower prevailing short-term interestrates.

 

Fiscal2003 interest expense of $57,116 was substantially lower than the 88,597incurred during fiscal 2002 as a direct result of lower interest rates andtotal repayment in March 2003 of all line of credit advances.

 

**IncomeTaxes**

 

During fiscal 2003, theCompany recorded income tax expense of $610,500 at an effective tax rate of35%, as compared to income tax expense of $838,235 at an effective rate of 32%during fiscal 2002.  The lower rate recordedfor fiscal 2002 reflects primarily the cumulative prior years benefits ofresearch and development tax credits and extraterritorial income exclusions.

 

The Company expects itseffective rate for fiscal 2004 to be approximately 34% to 36% of pretax income.

 

**Fiscal Year 2002 as Compared with 2001**

 

**Net Sales**

 

Fiscal year 2002 sales of$21,988,690 were 22% higher than fiscal 2001 sales reflecting, primarily,increased SANOVA sales volume.

 

Sales of SANOVAantimicrobial for the fiscal year ended May 31, 2002 were $12,229,362, anincrease of $3,828,739, or 46% versus SANOVA sales during the preceding fiscalyear.  The SANOVA sales increase is adirect result of operations added during fiscal 2001 and fiscal 2002.  As of May 31, 2002, 38 poultry operationsand 5 red meat operations were utilizing the SANOVA system to improve thequality of their product.

 

The Company’s Animal Healthand Surface Disinfectant sales for the fiscal year ended May 31, 2002 were$9,759,328, an increase of $201,976, or 2% over fiscal 2001 reflecting a$841,374 increase in surface disinfectant and ancillary product sales todistributors offset by a decrease of $639,398 in sales of teat dips.

 

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**Cost of Goods Sold**

 

Cost of goods sold was 53% of net sales for fiscal 2002 as compared to50% of net sales for fiscal 2001.

 

Cost of goods sold for the Animal Health and Surface Disinfectantsegment increased from 41% of net sales during fiscal 2001 to 43% of net salesin fiscal 2002.  The increased cost ofgoods sold as a percentage of net sales for the segment was caused primarily bythe transition to a new distributor and new product launch in France andincreased sales in a new line of ancillary products which have a lower grossmargin.

 

Cost of goods sold as a percentage of sales for the SANOVA businesssegment were 60% of net sales for fiscal 2002 versus 59% of net sales forfiscal 2001.  The increase as apercentage of sales was caused primarily by the under-utilization of equipmentduring production stoppages at two SANOVA customers during part of fiscal 2002.

 

**Research and DevelopmentExpense**

 

Research and development expenses of $2,639,877 for the fiscal yearended May 31, 2002, were 6% or $160,026 higher than incurred in fiscal2001.  The increase was caused primarilyby filling staff positions that were vacant during the preceding year coupledwith a $101,000 increase in expenses paid to regulatory consultants hired toassist in registration of SANOVA for new product categories.

 

**Selling, General andAdministrative Expense**

 

Selling, general and administrative expense of $5,127,686 for fiscalyear 2002 was $876,327, or 21% higher than expenses for fiscal 2001.  Major components of the increase were$293,000, or 14% increase in engineering, selling and administrative expense tosupport the 46% increase in SANOVA sales revenue coupled with a $318,000increase in marketing expenses to solidify the Animal Health and SurfaceDisinfectant business segment and a $154,000 increase in variable compensationexpense.

 

If SFAS No. 142 had been in effect during fiscal 2001 and goodwillrecorded in February 2001 had not been amortized, selling general andadministrative expense would have been $4,207,831 instead of $4,251,359.

 

**Interest Income andInterest Expense**

 

Interest income was $71,728 for the fiscal year ended May 31, 2002, asubstantial decrease from the $139,333 earned during fiscal 2001.  The decrease was due to lower investablecash resources and lower prevailing short-term interest rates.

 

Fiscal 2002 interest expense of $88,597 was substantially higher thanthe $18,229 incurred during fiscal 2001 as a direct result of borrowing on theCompany’s line of credit to support asset purchases for the growing SANOVAbusiness.

 

**Income Taxes**

 

During fiscal 2002, the Company recorded income tax expense of $838,235at an effective tax rate of 32%, as compared to income tax expense of $825,360at an effective rate of 34.9% during fiscal 2001.  The lower rate recorded for fiscal 2002 reflects primarily thecumulative benefit of research and development tax credits and extraterritorialincome exclusion.

 

**Liquidity and CapitalResources**

 

The Company’s cash and cash equivalents totaled $2,286,641 on May 31,2003 as compared to $2,847,581 on May 31, 2002.  During fiscal 2003, net cash provided by operating activities was$3,846,314.  The Company repaid the $2million draw on its $10 million line of credit during fiscal year 2003.  Cash resources were used for the acquisitionof equipment totaling $2,332,670.  TheCompany also received $53,205 as cash receipts from the exercise of stockoptions and redeemed a portion of its Class B Preferred Stock for $12,469.  At this time, the Company expects to fundits existing 

 

19

----

 

operations and growth with cashgenerated by operations.  If growthexceeds current expectations, it may be necessary to take advances on theCompany’s line of credit.

 

**Outlook**

 

•                  SANOVA Food Quality System

Management expects the size of the Company’s food antimicrobialbusiness will continue to expand.  Theaddition of customers during fiscal 2003 is expected to cause a furtherincrease in SANOVA sales as the annualized effect is realized during fiscal2004.  In addition, the Company expectsto add new customers during fiscal 2004. As of July 31, 2003, two new customers had been added and an additionalseven installations were scheduled for start-up by November 2004.

 

•                  Animal Health and Surface DisinfectantProducts

The worldwide dairy herd is decreasing slightly as cows become moreproductive partly through the increased use of mastitis prevention productssuch as those marketed by Alcide.  Inaddition, the Company now faces direct competition from products similar to itsproducts.  Despite these conditions,management believes that the market position enjoyed by its products, coupledwith the strength of the Company’s distribution network will enable Alcide tomaintain or improve its level of udder care sales in fiscal 2004.

 

**RecentlyIssued Accounting Pronouncements**

 

In November2002, the EITF issued a final consensus on Issue 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” Issue 00-21 provides guidance on how and when to recognize revenues onarrangements requiring delivery of more than one product or service.  Issue 00-21 is effective prospectively forarrangements entered into in fiscal periods beginning after June 15, 2003.  Companies may also elect to apply theprovisions of Issue 00-21 to existing arrangements and record the income statementimpact as a cumulative effect of a change in accounting principle.  The provisions of this statement are notexpected to have a material impact on the Company’s financial position orresults of operations.

 

In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  For guaranteesissued or modified after December 31, 2002, a liability shall be recognized forthe fair value of the obligation undertaken in issuing the guarantee.  The disclosure requirements are effectivefor interim and annual financial statements for periods ending after December15, 2002.  See Note 9 (the commitmentsand contingencies note) for disclosures required by FIN 45.  The adoption of FIN 45 did not have amaterial effect on the Company’s consolidated financial statements.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and**Disclosure.”* *SFAS No. 148 amends SFAS No. 123 “Accounting for Stock-BasedCompensation,”**to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to requiredisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  The annualdisclosure provisions are effective for fiscal years ending after December 15,2002.  The Company adopted thedisclosure requirements of this standard in fiscal 2003 and the adoption ofSFAS 148 did not have a material effect on its consolidated financialstatements.

 

On May 15,2003, the FASB issued SFAS No. 150 “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.”  The statement requires issuer to classify asliabilities (or assets in some circumstances) three classes of freestandingfinancial instruments that embody obligations for the issuer.  Generally, the statement is effective forfinancial instruments entered into or modified after May 31, 2003 and isotherwise effective at the beginning of the first interim period after June 15,2003.  The provisions of this statementare not expected to have a material impact on the Company’s financial positionor results of operations.

 

In May 2003,the EITF issued a final consensus on Issue 01-8, “Determining Whether anArrangement Contains**a Lease.”  Issue 01-8 provides guidance on determining whether anarrangement is or includes a lease within the scope of SFAS No. 13 “Accountingfor Leases.”* *If it is determined that a leaseexists, the lease and non-lease 

 

20

----

 

components ofa combined sales arrangement must be accounted for separately.  Issue 01-8 is effective prospectively forarrangements entered into, modified, or acquired in fiscal periods beginningafter May 28, 2003.  We are in theprocess of evaluating the impact of Issue 01-8, if any, on our financialposition or results of operations.

 

**ITEM7A****.****                                            Quantitativeand Qualitative Disclosures About Market Risk**

 

The Company isnot significantly exposed to market risks arising from changes in interestrates.  At its present growth rate, theCompany expects to be in a balanced cash position during fiscal 2004.  The Company’s policy is to invest any excesscash resources in low risk, short-term and intermediate-term U.S. Treasuryinstruments and bank money market funds to minimize market risks.

 

The Companyhas no direct foreign currency exposure. All of its present transactions with international distributors aredenominated in U.S. dollars.

 

**ITEM 8****.****                                                     FinancialStatements and Supplementary Data**

 

Reference is made to pages 13,14 and 29 through 43****of Form 10-K.

 

**ITEM 9****.****                                                     ChangesIn and Disagreements with Accountants on Accounting and Financial Disclosures**

 

On May 24, 2002, the Company dismissed Arthur Andersen LLP (Andersen)as its independent auditors and appointed KPMG LLP (KPMG) as the Company’sindependent auditors.  The decision notto renew the engagement of Andersen and to select KPMG was approved by theCompany’s Board of Directors upon the recommendation of its AuditCommittee.  The change in the Company’scertifying accountant was reported on Form 8-K and Form 8-K/A filed with theSecurities and Exchange Commission on May 29, 2002 and June 21, 2002,respectively.

 

**ITEM9A****.****                                            Controlsand Procedures**

 

Under the supervision of and with the participation of the Company’smanagement, including the Company’s Chairman and Chief Executive Officer andthe President and Chief Financial Officer, the Company has evaluated theeffectiveness and design and operation of its disclosure controls and proceduresas of the end of the fourth quarter of 2003 and, based on their evaluation, theChairman and Chief Executive Officer and the President and Chief FinancialOfficer have concluded that these disclosure controls and procedures areeffective in ensuring that all material information required to be disclosed inthe reports that the Company files or submits under the Securities Exchange Actof 1934 have been made known to them in a timely fashion.  There were no changes in the Company’sinternal controls over financial reporting that occurred during the fourthquarter that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

21

----

 

**PARTIII**

 

**ITEM10****.****                                              Directorsand Executive Officers**

 

Thisinformation is incorporated by reference from the Sections captioned “Item1-Election of Directors” and “Section 16(a) Beneficial Ownership ReportingCompliance” contained in the Company’s definitive Proxy Statement for its 2003Annual Meeting of Shareholders. Information regarding executive officers is presented under the heading“Executive Officers of the Company” in Part I, Item 1A of this Report.

 

**ITEM11****.****                                              ExecutiveCompensation**

 

This information is incorporated by reference from the Sectionscaptioned “Compensation of Directors,” “Executive Compensation,” “2003 Reportof Compensation/Stock Option Committee,” “Stock Performance Graph,” “SummaryCompensation Table,” “Option Grants in Last Fiscal Year,” “Option Exercises andFiscal Year Option Values,” and “Employment Contracts, Termination ofEmployment and Change-in-Control Arrangements” contained in the Company’sdefinitive Proxy Statement for its 2003 Annual Meeting of Shareholders.

 

**ITEM12****.****                                              SecurityOwnership of Certain Beneficial Owners and Management**

 

Thisinformation is incorporated by reference from the Section captioned “ShareOwnership by Directors, Executive Officers and Certain Beneficial Owners”contained in the Company’s definitive Proxy Statement for its 2003 AnnualMeeting of Shareholders.

 

**Equity CompensationPlan Information**

 

The followingtable provides certain information about the Company’s equity compensationplans in effect as of the end of fiscal year 2003, including the Company’s 1993Stock Option Plan, 1996 Stock Option Plan for Nonemployee Directors and 2001Stock Incentive Plan.

 
|                                                    |   |                                                                                                 |                                                                               |    |   | **(c)**                                                                                                                                               |    |
|---------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                    |   | **(a)**                                                                                              |                                                                               |    |   | **Number of  Securities  Remaining Available for  Future Issuance Under  Equity Compensation Plans  (excluding securities  reflected in column (a))** |    |
|                                                    |   | **Number of  Securities  to be Issued Upon  Exercise of  Outstanding Options,  Warrants and Rights** |                                                                               | **(b)** |   |                                                                                                                                                  |
| **Plan Category**                                       |   |                                                                                                 | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** |    |   |
| Equity Compensation Plans  Approved by Shareholders     |   | 328,496                                                                                              |                                                                               | $       | 20.90  |                                                                                                                                                  | 238,904 |   |
| Equity Compensation Plans  Not Approved by Shareholders |   | None                                                                                                 |                                                                               | N/A     |   | N/A                                                                                                                                                   |    |
|                                                         |        |                                                                                                      |                                                                                    |         |        |                                                                                                                                                       |         |  |

 

**ITEM13****.****                                              CertainRelationships and Related Transactions**

 

Thisinformation is incorporated by reference from the Section captioned “CertainTransactions” contained in the Company’s definitive Proxy Statement for its2003 Annual Meeting of Shareholders.

 

22

----

 

**PART IV**

 

**ITEM15****.****                                              Exhibits,Financial Statement Schedules and Reports on Form 8-K**

 

(a)                                  Documentsfiled as part of the report:

 
|   | 1.     | Consolidated  Financial Statements                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                            |
|   |   | Reports of Independent Public Accountants.                                                                                      |
|   |   | Consolidated Balance Sheets as of May 31, 2002 and May 31, 2003.                                                                |
|   |   | Consolidated Statements of Operations for  each of the years ended May 31, 2001, May 31, 2002 and May 31, 2003.                 |
|   |   | Consolidated Statements of Shareholders’  Equity for each of the years ended May 31, 2001, May 31, 2002 and May 31,  2003. |
|   |   | Consolidated Statements of Cash Flows for  each of the years ended May 31, 2001, May 31, 2002 and May 31, 2003.                 |
|   |   |                                                                                                                            |
|   |   | Notes to Consolidated Financial Statements.                                                                                     |
|   |   |                                                                                                                            |
|   | 2.     | Financial  Statement Schedules                                                                                                  |
|   |   |                                                                                                                            |
|   |   | None.                                                                                                                           |
|   |   |                                                                                                                            |
|   | 3.     | Exhibits                                                                                                                        |
|   |   |                                                                                                                            |
|   |   | See Index to  Exhibits on Page 25**.**                                                                                          |

 

(b)                                 Reportson Form 8-K.

 

Report on Form8-K dated April 14, 2003, reporting results of operations for the fiscalquarter ended February 28, 2003.

 

23

----

 

**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly 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, Chairman                           |
|                        |   | Chief  Executive Officer                                |
|                        |   |                                                    |
|                        |   |                                                    |
|                        |   | By                                                      | /s/ John P.  Richards |   |
|                        |   | John P.  Richards, President                            |
|                        |   | Chief  Financial Officer (Principal Accounting Officer) |
|                        |   |                                                    |
| Date:  August 19, 2002 |   |                                                    |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated:

 

 
| /s/ Thomas  L. Kempner  |                     | Director            | August 19,  2003 |
|-------------------------|--------------------------|---------------------|------------------|
| Thomas L.  Kempner      |                     |                |
|                    |                     |                |
|                    |                     |                |
| /s/ Charles  Baker      |                     | Director            | August 19,  2003 |
| Charles  Baker          |                     |                |
|                    |                     |                |
|                    |                     |                |
| /s/ Joseph  A. Sasenick |                     | Director,  Chairman | August 19,  2003 |
| Joseph A.  Sasenick     | Chief  Executive Officer |                |
|                    |                     |                |
|                    |                     |                |
| /s/ William  G. Spears  |                     | Director            | August 19,  2003 |
| William G.  Spears      |                     |                |

 

24

----

 

**INDEXTO EXHIBITS**

 

**Exhibit No.**

 
| 3.1    |   | Certificate  of Incorporation (previously filed as an exhibit to Registration Statement  No. 2-79954 on Form S-1 filed October 22, 1982, and incorporated herein by  reference).                                                                                                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2    |   | By-Laws  (previously filed as an exhibit to Form 10-K of the Registrant for the fiscal  year ended May 31, 1984 and incorporated herein by reference).                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 3.3    |   | Amendments  to the By-Laws, as amended on November 20, 1986, October 8, 1987, July 18,  1989, September 13, 1990, August 20, 1991, November 8, 1991, February 4,  1992, August 20, 1992 and October 14, 1997.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14  |   | Agreement by  and between the Company and Holstein Genetika KFT dated May 1, 1992  (previously filed as an exhibit to Form 10-K of the Registrant for the fiscal  year ended May 31, 1992, and incorporated herein by reference).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16  |   | Second  amendment dated April 8, 1993 to employment agreement for Joseph A. Sasenick  dated February 11, 1991 and first amendment to employment agreement dated  February 4, 1992 (previously filed as exhibits to form 10-K of the Registrant  for the fiscal years ended May 31, 1991 and 1992, respectively and  incorporated herein by reference).**                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19  |   | 1993  Incentive Stock Option Plan (previously filed as an Exhibit to Proxy  Statement for meeting held December 7, 1993, and incorporated herein by  reference).**                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.24  |   | Distributor  Agreement by and between the Company and Ingenieursbureau Ir. P.C. Heemskerk  b.v., dated June 1, 1997, covering territories of The Netherlands, Denmark,  Belgium, Germany, Luxembourg, Sweden and Finland (previously filed as an  exhibit to Form 10-Q of the Registrant for the quarter ended February 28,  1998, and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.25  |   | Distributor  Agreement by and between the Company and Ingenieursbureau Ir. P.C. Heemskerk  b.v., dated September 4, 1997, covering the territory of France (previously  filed as an exhibit to Form 10-Q of the Registrant for the quarter ended  February 28, 1998, and incorporated herein by reference).                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.26  |   | Distributor  Agreement by and between the Company and Universal Marketing Services, Inc.,  dated January 30, 1998, covering territories of the United Kingdom, Spain and  the Republic of Ireland (previously filed as an exhibit to Form 10-Q of the  Registrant for the quarter ended February 28, 1998, and incorporated herein  by reference).                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.27  |   | Amendment  dated August 3, 1998 to distributor Agreement by and between the Company and  Novus International, Inc., dated May 21, 1997 (previously filed on Form 8-K  of the Registrant on August 11, 1998, and incorporated herein by reference).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.28  |   | Distributor  Agreement by and between the Company and Merial Societe Par Actions  Simplifiee, dated September 1, 1998, covering the territory of France  (previously filed as an exhibit to Form 10-Q of the Registrant for the  quarter ended August 31, 1998, and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.29  |   | Distributor  Agreement by and between the Company and IBA, Inc., dated November 1, 1998,  covering the United States (previously filed as an exhibit to Form 10-Q of  the Registrant for the quarter ended November 30, 1998, and incorporated  herein by reference).                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.30  |   | Transfer of  Assets and Assignment of Contracts by and between the Company and Novus  International, Inc. dated November 11, 1998 (previously filed as an exhibit  to Form 10-Q of the Registrant for the quarter ended November 30, 1998, and  incorporated herein by reference).                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.31  |   | 1996 Stock  Option Plan for Nonemployee Directors (previously filed as an exhibit to  Proxy Statement for meeting held October 15, 1996, and incorporated herein by  reference).**                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.32  |   | Distributor  Agreement by and between the Company and Sfan Laboratoire dated May 28, 2001,  covering the territories of France, Algeria, Morocco and Tunisia (previously  filed as an exhibit to Form 10-Q of the Registrant for the quarter ended  August 31, 2001, and incorporated herein by reference).                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.33  |   | 2001 Stock  Incentive Plan (previously filed as an exhibit to Form 10-Q of the Registrant  for the quarter ended November 30, 2001, and incorporated herein by reference).**                                                                                                                                                                                         |

 

25

----

 
| 10.34  |   | Distributor  Agreement by and between the Company and Agri-Lloyd International LTD, dated  May 15, 2002, covering the United Kingdom. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                  |
| 10.35  |   | Licensing  Agreement by and between the Company and IBA, Inc., dated April 26, 2002,  covering the United States and Mexico.          |
|   |   |                                                                                                                                  |
| 23.1   |   | Consent of  Independent Public Accountants.***                                                                                        |
|   |   |                                                                                                                                  |
| 31.1   |   | Certification  of Chairman and Chief Executive Officer pursuant to Rule 13a-14a.***                                                   |
|   |   |                                                                                                                                  |
| 31.2   |   | Certification  of President and Chief Financial Officer pursuant to Rule 13a-14a.***                                                  |
|   |   |                                                                                                                                  |
| 32.1   |   | Certification  pursuant to 18 U.S.C. Section 1350.***                                                                                 |

 

----

** Management contract,compensatory plan or arrangement.

 

***Filed herewith.

 

26

----

 

IndependentAuditors’ Report

 

The Board of Directors and Shareholders

Alcide Corporation:

 

We have audited the accompanying consolidatedbalance sheets of Alcide Corporation and subsidiary (the Company) as of May 31,2003 and 2002, and the related consolidated statements of operations,shareholders’ equity and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits. The 2001 financial statements of theCompany were audited by other auditors who have ceased operations. Thoseauditors expressed an unqualified opinion on those financial statements, beforethe revision described in Note 2 to the financial statements, in their reportdated June 29, 2001.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 2003 and 2002consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of May 31, 2003 and2002, and the results of their operations and their cash flows for the yearsthen ended in conformity with accounting principles generally accepted in theUnited States of America.

 

As discussed above, the 2001 financialstatements of the Company were audited by other auditors who have ceasedoperations. As described in Note 2, these financial statements have beenrevised to include the transitional disclosures required by Statement ofFinancial Accounting Standards No. 142, Goodwill and Other Intangible Assets,which was adopted by the Company as of June 1, 2001. In our opinion, thedisclosures for 2001 in Note 2 are appropriate. However, we were not engaged toaudit, review, or apply any procedures to the 2001 financial statements of theCompany other than with respect to such disclosures and, accordingly, we do notexpress an opinion or any other form of assurance on the 2001 financialstatements taken as a whole.

 

 
| /s/ KPMG LLP        |   |
|---------------------|--------|
|                |
| Seattle, Washington |
| July 2, 2003        |

 

27

----

 

Report ofIndependent Public Accountants

 

 

The Board of Directors andShareholders of Alcide Corporation:

 

We have audited theaccompanying consolidated balance sheets of Alcide Corporation (a DelawareCorporation) and subsidiary as of May 31, 2001 and 2000, and the relatedconsolidated statements of operations, changes in shareholders’ equity and cashflows for each of the three years in the period ended May 31, 2001.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Alcide Corporation and subsidiary as of May 31, 2001 and2000, and the results of their operations and their cash flows for each of thethree years in the period ended May 31, 2001 in conformity with accountingprinciples generally accepted in the United States.

 
| /s/ ARTHUR  ANDERSEN LLP |   |
|--------------------------|--------|
|                     |
| Seattle,  Washington     |
| June 29,  2001           |

 

The report of Arthur AndersenLLP (Andersen) is a copy of a report previously issued by Andersen on June 29,2001.  We have not been able to obtain are-issued report from Andersen. Andersen has not consented to the inclusion of its report in this AnnualReport on Form 10-K.  The report ofAndersen refers to certain financial statements not included herein.  Because Andersen has not consented to theinclusion of its report in this Annual Report, it may be more difficult for youto seek remedies against Andersen and your ability to seek relief againstAndersen may be impaired.

 

28

----

 

**Alcide Corporation**

**ConsolidatedBalance Sheets**

** **
|                                                                                                                                                                                                       |   | **May 31,** |           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|----------------|
|                                                                                                                                                                                                       |   | **2002**    |           | **2003** |   |
| **Assets:**                                                                                                                                                                                                |   |        | ** **     |   | ** ** |
| Current assets:                                                                                                                                                                                            |   |        | ** **     |   | ** ** |
| Cash and cash equivalents                                                                                                                                                                                  |   | $           | 2,847,581      |   | $ | 2,286,641 |   |
| Accounts receivable – trade, net                                                                                                                                                                      |   | 2,849,103   |           | 3,831,527 |   |
| Inventory                                                                                                                                                                                                  |   | 1,823,691   |           | 2,097,097 |   |
| Deferred and prepaid income taxes                                                                                                                                                                          |   | 434,200     |           | 243,413 |   |
| Spare parts                                                                                                                                                                                                |   | 652,620     |           | 884,226 |   |
| Prepaid expenses and other current assets                                                                                                                                                                  |   | 412,118     |           | 468,863 |   |
| Total current  assets                                                                                                                                                                                      |   | 9,019,313   |           | 9,811,767 |   |
| Equipment and leasehold improvements:                                                                                                                                                                      |   |        | ** **     |   | ** ** |
| SANOVA plant assets                                                                                                                                                                                        |   | 14,376,961  |           | 17,037,502 |   |
| Construction in progress                                                                                                                                                                                   |   | 3,009,716   |           | 2,596,332 |   |
| Office equipment                                                                                                                                                                                           |   | 553,539     |           | 567,158 |   |
| Laboratory, manufacturing equipment and  vehicles                                                                                                                                                          |   | 451,824     |           | 523,718 |   |
| Leasehold improvements                                                                                                                                                                                     |   | 73,483      |           | 73,483 |   |
| Less:   Accumulated depreciation and amortization                                                                                                                                                     |   | (6,118,278  | )              | (9,790,948 | ) |
| Total equipment and leasehold improvements, net                                                                                                                                                            |   | 12,347,245  |           | 11,007,245 |   |
| Goodwill                                                                                                                                                                                                   |   | 478,807     |           | 478,807 |   |
| Other assets                                                                                                                                                                                               |   | 19,968      |           | 70,885 |   |
| **Total Assets**                                                                                                                                                                                           |   | **$**       | **21,865,333** | ** ** | **$** | **21,368,704** | ** ** |
|                                                                                                                                                                                                       |   |        |           |   |   |
| **Liabilities and Shareholders’ Equity:**                                                                                                                                                             |   |        | ** **     |   | ** ** |
| Current liabilities:                                                                                                                                                                                       |   |        | ** **     |   | ** ** |
| Accounts payable                                                                                                                                                                                           |   | $           | 743,514        |   | $ | 686,391 |   |
| Accrued expenses                                                                                                                                                                                           |   | 616,953     |           | 501,578 |   |
| Line of credit payable                                                                                                                                                                                     |   | 2,000,000   |           | — |   |
| Income taxes payable                                                                                                                                                                                       |   | 10,000      |           | 115,300 |   |
| Total current liabilities                                                                                                                                                                                  |   | 3,370,467   |           | 1,303,269 |   |
| Deferred tax liability                                                                                                                                                                                     |   | 94,837      |           | 565,287 |   |
| Other long-term liabilities                                                                                                                                                                                |   | 26,346      |           | 8,140 |   |
| **Total Liabilities**                                                                                                                                                                                      |   | 3,491,650   |           | 1,876,696 |   |
|                                                                                                                                                                                                       |   |        |           |   |   |
| Commitments and Contingencies                                                                                                                                                                              |   |        | ** **     |   | ** ** |
|                                                                                                                                                                                                       |   |        |           |   |   |
| Redeemable Class “B” Preferred Stock -  noncumulative convertible $.01 par value; authorized 10,000,000 shares;  issued and outstanding:  May 31, 2002 – 68,425; May 31, 2003 – 63,675 |   | 179,614     |           | 167,145 |   |
|                                                                                                                                                                                                       |   |        |           |   |   |
| Shareholders’ equity:                                                                                                                                                                                 |   |        | ** **     |   | ** ** |
| Class “A” Preferred Stock - no par value;  authorized 1,000 shares; issued and outstanding:  May 31, 2002 - 138; May 31, 2003 - 138                                                              |   | 18,636      |           | 18,636 |   |
| Common Stock $.01 par value; authorized  10,000,000 shares; issued:  May 31, 2002 - 3,031,292; May 31, 2003 – 3,040,597                                                                               |   | 30,313      |           | 30,406 |   |
| Common treasury  stock at costMay 31, 2002 - 375,959; May 31, 2003 – 385,959                                                                                                                          |   | (7,144,721  | )              | (7,260,041 | ) |
| Additional paid-in capital                                                                                                                                                                                 |   | 21,386,417  |           | 21,502,828 |   |
| Retained earnings                                                                                                                                                                                          |   | 3,903,424   |           | 5,033,034 |   |
| **Total Shareholders’ Equity**                                                                                                                                                                        |   | 18,194,069  |           | 19,324,863 |   |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                                        |   | **$**       | **21,865,333** | ** ** | **$** | **21,368,704** | ** ** |

 

See accompanying notes to consolidated financial statements.

 

29

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**Alcide Corporation**

**ConsolidatedStatements of Operations**

 
|                                                                             |   | **For the Years Ended May 31****,** |       |
|----------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                             |   | **2001**                            |       | **2002** |   | **2003** |   |
|                                                                             |   |                                |       |   |   |   |   |
| Revenue:                                                                         |   |                                |       |   |   |   |   |
| Net sales                                                                        |   | $                                   | 17,957,975 |   | $ | 21,988,690 |   | $ | 21,027,277 |   |
| License revenue                                                                  |   | —                              |       | — |   | 897,177 |   |
| Total revenue                                                                    |   | 17,957,975                          |       | 21,988,690 |   | 21,924,454 |   |
|                                                                             |   |                                |       |   |   |   |   |
| Expenditures:                                                                    |   |                                |       |   |   |   |   |
| Cost of goods sold                                                               |   | 8,917,868                           |       | 11,558,531 |   | 12,015,774 |   |
| Research and development  expense                                                |   | 2,479,851                           |       | 2,639,877 |   | 2,158,287 |   |
| Consulting expense to related  parties                                           |   | 96,000                              |       | 74,000 |   | 60,000 |   |
| Selling, general and  administrative expense                                     |   | 4,251,359                           |       | 5,127,686 |   | 5,955,313 |   |
| Total expenditures                                                               |   | 15,745,078                          |       | 19,400,094 |   | 20,189,374 |   |
|                                                                             |   |                                |       |   |   |   |   |
| Operating income                                                                 |   | 2,212,897                           |       | 2,588,596 |   | 1,735,080 |   |
| Interest income                                                                  |   | 139,333                             |       | 71,728 |   | 25,059 |   |
| Interest expense                                                                 |   | (18,229                             | )          | (88,597 | ) | (57,116 | ) |
| Other income                                                                     |   | 28,884                              |       | 47,760 |   | 37,087 |   |
| Income before provision for  income taxes                                        |   | 2,362,885                           |       | 2,619,487 |   | 1,740,110 |   |
| Provision for income taxes                                                       |   | (825,360                            | )          | (838,235 | ) | (610,500 | ) |
| Net income                                                                       |   | $                                   | 1,537,525  |   | $ | 1,781,252 |   | $ | 1,129,610 |   |
| Basic earnings per common  share                                                 |   | $                                   | .60        |   | $ | .67 |   | $ | .42 |   |
| Diluted earnings per common  share                                               |   | $                                   | .58        |   | $ | .65 |   | $ | .42 |   |
| Weighted average common stock  and dilutive potential common shares outstanding: |   |                                |       |   |   |   |   |
| Basic                                                                            |   | 2,572,898                           |       | 2,643,467 |   | 2,658,469 |   |
| Diluted                                                                          |   | 2,655,117                           |       | 2,720,006 |   | 2,680,012 |   |

 

See accompanying notes toconsolidated financial statements.

 

30

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####  

#### **Alcide Corporation**

**Consolidated Statements of Shareholders’Equity**

** **
|                                       |   | **Class “A”  Preferred Stock** |   | **Common  Stock** |   | **Additional  Paid in Capital** |      | **Common  Treasury Stock** |   | **Retained  Earnings** |       | **Total  Shareholders’  Equity** |       |
|--------------------------------------------|--------|------------------------------------------|--------|-------------------|--------|---------------------------------|-----------|----------------------------|--------|------------------------|------------|---------------------------------------|------------|
|                                       |   | **Shares**                               |   | **Amount**        |   | **Shares**                      |      | **Amount**                 |   |                   | **Shares** |                                  | **Amount** |   |   |   |
| Balance May 31, 2000                       |   | 138                                      |   | $                 | 18,636 |                            | 2,904,068 |                       | $      | 29,040                 |       | $                                     | 19,832,668 |   | (384,425 | ) | $ | (7,254,248 | ) | $ | 584,647 |   | $ | 13,210,743 |   |
|                                       |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   |   |   |   |   |
| Exercise of Stock Options                  |   |                                     |   |              |   | 90,263                          |      | 903                        |   | 465,940                |       |                                  |       |   |   |   |   | 466,843 |   |
| Purchase Treasury Stock                    |   |                                     |   |              |   |                            |      |                       |   |                   |       | (5,000                                | )          | (138,750 | )  |   |   | (138,750 | ) |
| Stock Contributed to ESOP                  |   |                                     |   |              |   |                            |      |                       |   |                   |       | 8,466                                 |       | 109,833 |   |   |   | 109,833 |   |
| Tax Benefit from Exercise of Stock Options |   |                                     |   |              |   |                            |      |                       |   | 498,764                |       |                                  |       |   |   |   |   | 498,764 |   |
| Stock Issued for Officers’ Bonuses    |   |                                     |   |              |   | 13,488                          |      | 135                        |   | 225,265                |       |                                  |       |   |   |   |   | 225,400 |   |
| Issued Stock Warrants                      |   |                                     |   |              |   |                            |      |                       |   | 99,540                 |       |                                  |       |   |   |   |   | 99,540 |   |
| Net Income                                 |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   | 1,537,525 |   | 1,537,525 |   |
|                                       |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   |   |   |   |   |
| Balance May 31, 2001                       |   | 138                                      |   | $                 | 18,636 |                            | 3,007,819 |                       | $      | 30,078                 |       | $                                     | 21,122,177 |   | (380,959 | ) | $ | (7,283,165 | ) | $ | 2,122,172 |   | $ | 16,009,898 |   |
|                                       |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   |   |   |   |   |
| Exercise of Stock Options                  |   |                                     |   |              |   | 23,473                          |      | 235                        |   | 147,579                |       |                                  |       |   |   |   |   | 147,814 |   |
| Stock Contributed to ESOP                  |   |                                     |   |              |   |                            |      |                       |   |                   |       | 5,000                                 |       | 138,444 |   |   |   | 138,444 |   |
| Tax Benefit from Exercise of Stock Options |   |                                     |   |              |   |                            |      |                       |   | 116,661                |       |                                  |       |   |   |   |   | 116,661 |   |
| Net Income                                 |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   | 1,781,252 |   | 1,781,252 |   |
|                                       |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   |   |   |   |   |
| Balance May 31, 2002                       |   | 138                                      |   | $                 | 18,636 |                            | 3,031,292 |                       | $      | 30,313                 |       | $                                     | 21,386,417 |   | (375,959 | ) | $ | (7,144,721 | ) | $ | 3,903,424 |   | $ | 18,194,069 |   |
|                                       |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   |   |   |   |   |
| Exercise of Stock Options                  |   |                                     |   |              |   | 6,034                           |      | 60                         |   | 53,145                 |       |                                  |       |   |   |   |   | 53,205 |   |
| Purchase Treasury Stock                    |   |                                     |   |              |   |                            |      |                       |   |                   |       | (10,000                               | )          | (115,320 | ) |   |   | (115,320 | ) |
| Stock Contributed to ESOP                  |   |                                     |   |              |   | 3,271                           |      | 33                         |   | 53,873                 |       |                                  |       |   |   |   |   | 53,906 |   |
| Tax Benefit from Exercise of Stock Options |   |                                     |   |              |   |                            |      |                       |   | 9,393                  |       |                                  |       |   |   |   |   | 9,393 |   |
| Net Income                                 |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   | 1,129,610 |   | 1,129,610 |   |
|                                       |   |                                     |   |              |   |                            |      |                       |   |                   |       |                                  |       |   |   |   |   |   |   |
| Balance May 31, 2003                       |   | 138                                      |   | $                 | 18,636 |                            | 3,040,597 |                       | $      | 30,406                 |       | $                                     | 21,502,828 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,033,034 |   | $ | 19,324,863 |   |

 

See accompanying notes toconsolidated financial statements.

 

31

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#### **Alcide Corporation**

#### **ConsolidatedStatements of Cash Flows**

 
|                                                                               |   | **For the Years Ended May 31,** |      |
|------------------------------------------------------------------------------------|--------|---------------------------------|-----------|
|                                                                               |   | **2001**                        |      | **2002** |   | **2003** |   |
| **Cash Flows from Operating Activities:**                                          |   |                            |      |   |   |   |   |
| Net income                                                                         |   | $                               | 1,537,525 |   | $ | 1,781,252 |   | $ | 1,129,610 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                            |      |   |   |   |   |
| Depreciation                                                                       |   | 1,938,818                       |      | 2,741,568 |   | 3,672,670 |   |
| Amortization of investment premiums and  goodwill                                  |   | 44,530                          |      | 483 |   | — |   |
| Stock bonus to officers                                                            |   | 225,400                         |      | — |   | — |   |
| Common Stock contributed to the employee  stock ownership plan                     |   | 109,833                         |      | 138,444 |   | 53,906 |   |
| Tax benefit from exercise of stock options                                         |   | 498,764                         |      | 116,661 |   | 9,393 |   |
| Deferred income taxes                                                              |   | 292,155                         |      | 734,793 |   | 495,808 |   |
| Decrease (increase) in assets:                                                     |   |                            |      |   |   |   |   |
| Accounts receivable - trade, net                                                   |   | (141,764                        | )         | (221,293 | ) | (982,424 | ) |
| Inventory                                                                          |   | (630,258                        | )         | 210,657 |   | (273,406 | ) |
| Prepaid income taxes                                                               |   | (96,359                         | )         | (167,620 | ) | 165,429 |   |
| Spare parts                                                                        |   | (9,145                          | )         | (194,417 | ) | (231,606 | ) |
| Prepaid expenses and other current assets                                          |   | (136,884                        | )         | (54,637 | ) | (56,745 | ) |
| Long-term investments and other assets                                             |   | 23,232                          |      | 57,108 |   | (50,917 | ) |
| Increase (decrease) in liabilities:                                                |   |                            |      |   |   |   |   |
| Accounts payable                                                                   |   | 572,365                         |      | (423,305 | ) | (57,123 | ) |
| Accrued expenses and taxes payable                                                 |   | 258,759                         |      | (8,553 | ) | (10,075 | ) |
| Other long-term liabilities                                                        |   | (158,000                        | )         | 26,346 |   | (18,206 | ) |
|                                                                               |   |                            |      |   |   |   |   |
| Net cash provided by operating activities                                          |   | 4,328,971                       |      | 4,737,487 |   | 3,846,314 |   |
|                                                                               |   |                            |      |   |   |   |   |
| **Cash Flows from Investing Activities:**                                          |   |                            |      |   |   |   |   |
| Purchase of short-term investments                                                 |   | (974,372                        | )         | — |   | — |   |
| Sale of investments                                                                |   | —                          |      | 1,493,196 |   | — |   |
| Goodwill and other intangibles                                                     |   | (422,795                        | )         | — |   | — |   |
| Acquisition of equipment and leasehold  improvements                               |   | (5,215,517                      | )         | (5,359,256 | ) | (2,332,670 | ) |
|                                                                               |   |                            |      |   |   |   |   |
| Net cash used in investing activities                                              |   | (6,612,684                      | )         | (3,866,060 | ) | (2,332,670 | ) |
|                                                                               |   |                            |      |   |   |   |   |
| **Cash Flows from Financing Activities:**                                          |   |                            |      |   |   |   |   |
| Purchase of Alcide Common Stock                                                    |   | (138,750                        | )         | — |   | (115,320 | ) |
| Redemption of Class “B” Preferred Stock                                  |   | —                          |      | (10,763 | ) | (12,469 | ) |
| Borrowing (repayment) on line of credit                                            |   | 1,000,000                       |      | 1,000,000 |   | (2,000,000 | ) |
| Exercise of stock options                                                          |   | 466,843                         |      | 147,814 |   | 53,205 |   |
|                                                                               |   |                            |      |   |   |   |   |
| Net cash provided by (used in) financing  activities                               |   | 1,328,093                       |      | 1,137,051 |   | (2,074,584 | ) |
|                                                                               |   |                            |      |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | (955,620                        | )         | 2,008,478 |   | (560,940 | ) |
| Cash and cash equivalents at beginning of  year                                    |   | 1,794,723                       |      | 839,103 |   | 2,847,581 |   |
| Cash and cash equivalents at end of year                                           |   | $                               | 839,103   |   | $ | 2,847,581 |   | $ | 2,286,641 |   |
|                                                                               |   |                            |      |   |   |   |   |
| **Supplemental Disclosures of Cash Flow Information:**                             |   |                            |      |   |   |   |   |
| Cash paid during the year for interest                                             |   | $                               | 18,229    |   | $ | 88,597 |   | $ | 57,116 |   |
| Cash paid during the year for income taxes                                         |   | $                               | 130,800   |   | $ | 250,900 |   | $ | 40,000 |   |
| Warrants issued in business acquisition                                            |   | $                               | 99,540    |   | $ | — |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

 

32

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**Alcide Corporation**

###### **Notesto Consolidated Financial Statements**

 

1.                                       General:

 

AlcideCorporation (the “Company”) is engaged in the research, development andcommercialization of unique chemical compounds having intense microbiocidal activity.  The Company holds substantial worldwiderights to its discoveries through various patents, patent applications,trademarks and other intellectual property, technology and know-how.

 

2.                                       Natureof Business and Summary of Significant Accounting Policies:

 

a.               Basisof Presentation:  The consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiary, Alcide Food Safety, Inc. All inter-company accounts and balances have been eliminated.

 

b.              RevenueRecognition:  Animal Health and SurfaceDisinfectant sales are recognized at the time of shipment to distributors or toend users.  The Company provides alimited warranty to its distributors which limits the Company’s obligation toreplacement of defective product.  Replacementshave, for the past several years, been less than .1% of net sales.  The distributors have no contractual rightto return unsold product.

 

Revenue recognition from sales of SANOVA food antimicrobials isdetermined by the terms of the Company’s contracts with individualcustomers.  For customers using morethan 15,000 gallons of SANOVA per month, Alcide provides bulk shipments ofinventory to the customer and the customer is invoiced at month-end with revenuerecognized based on the amount of product processed or gallons of SANOVAused.  All other customers are invoicedand revenue is recognized at the time SANOVA is shipped to theirfacilities.  Payment in either case isdue fifteen to thirty days after billing.

 

c.               Cashand cash equivalents consist of demand deposits, short-term, interest-bearinginstruments with maturity of 90 days or less at time of purchase and moneymarket accounts.

 

d.              Costsof advertising, product promotion and trade shows are expensed asincurred.  Amounts expensed in fiscalyear 2003, fiscal year 2002 and fiscal year 2001 were $207,965, $188,957, and$158,929, respectively.

 

e.               Normalrepair and maintenance costs that do not extend the useful life of a capitalasset are expensed as incurred.  Spareparts required for SANOVA plant maintenance are expensed when used.

 

f.                 Inventoryis recorded at the lower of cost or market on a first-in, first-out basis.

 

g.              Depreciationand Amortization:  Office, laboratory,computer equipment and automobiles are recorded at cost and depreciated overestimated useful lives of three to five years by the straight-line method.  Leasehold improvements are amortized overthe lives of the leases by the straight-line method.

 

Equipment provided by Alcide and installed at food processing plants tomix, distribute and apply SANOVA is recorded at cost and depreciated by thestraight-line method over the five-year estimated, useful life of the assets.

 

h.              Impairmentof Long-Lived Assets:  For long-livedassets, including equipment, the Company evaluates the carrying value of theassets by comparing the estimated future cash flows generated from the use ofthe assets and their eventual disposition with the assets’ reported net bookvalue.  The carrying value of an assetis evaluated for impairment when events or changes in circumstances occur whichmay indicate the carrying amount of the asset may not be recoverable.

 

33

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i.                  Impairmentof Goodwill:  Through May 31, 2001, theCompany amortized goodwill over its estimated life. As of June 1, 2001, theCompany early-adopted the provisions of SFAS No. 142 “Goodwill and OtherIntangible Assets”, and ceased amortization of goodwill.  If SFAS No. 142 had been in effect in fiscal2001, adjusted net income, basic earnings per share and diluted earnings pershare would have been $1,565,849, $0.61, and $0.59, respectively.  Adjusted net income of $1,565,849 iscalculated by adding back amortization expense of $28,324 (goodwill amortizationof $43,528 net of tax effect of approximately 34.9%) to fiscal 2001 net incomeof $1,537,525.

 

Beginning June 1, 2001, the Company assesses goodwill for impairment byapplying a fair value based test at least annually.  The Company compares the fair value of the reporting unit thegoodwill is assigned to, Animal Health and Surface Disinfectants, to itscarrying value.  If the fair value ofthe reporting unit is greater than the carrying value, goodwill is notimpaired.  If the fair value of thereporting unit is less than the carrying value, the difference between theimplied fair value of the reporting unit’s goodwill and its carrying value willbe recorded as an impairment loss.  TheCompany has performed the fair value based assessment of goodwill as of June 1,2001.  Based upon this assessment,management believes goodwill was not impaired upon the implementation of thisstandard.  The Company also performedthe fair value based assessment during the fourth quarter of 2002 and 2003, anddetermined that goodwill had not been impaired in either period based upon thisstandard.

 

j.                  IncomeTaxes:  Income taxes are accounted forunder the asset and liability method. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. Tax benefits that the Company receives upon an employee’s exercise ofnonqualified stock options are recorded as an increase to additional paid-incapital.

 

k.               Useof Estimates:  The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

l.                  Stock-BasedCompensation:  The Company hasstock-based compensation plans for employees and directors. The Company grantsstock options to employees and directors with an exercise price equal to thefair market value of the shares at the date of grant.  The Company accounts for stock option grants to employees anddirectors under the recognition and measurement provisions of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations.  TheCompany has adopted the disclosure—only provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.” Accordingly, no compensation cost has been recognized for these stockoption grants.  Awards under the planvest over periods ranging from immediate vesting to five years, depending uponthe type of award.

 

34

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The following table illustrates the effect on net income and earningsper share if the fair value based method had been applied to all outstandingand unvested awards in each period presented, using the Black-Scholes valuationmodel.

 
|                                                                                                                                                |   | **For Years  Ended May 31,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                                                                                |   | **2001**                     |      | **2002** |   | **2003** |   |
| Net income , as reported                                                                                                                            |   | $                            | 1,537,525 |   | $ | 1,781,252 |   | $ | 1,129,610 |   |
|                                                                                                                                                |   |                         |      |   |   |   |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards, net of related tax effects |   | (272,244                     | )         | (481,054 | ) | (457,960 | ) |
|                                                                                                                                                |   |                         |      |   |   |   |   |
| Pro forma net income                                                                                                                                |   | $                            | 1,265,281 |   | $ | 1,300,198 |   | $ | 671,650 |   |
|                                                                                                                                                |   |                         |      |   |   |   |   |
| Earnings per share                                                                                                                                  |   |                         |      |   |   |   |   |
| Basic — as reported                                                                                                                            |   | .60                          |      | .67 |   | .42 |   |
| Basic — pro forma                                                                                                                              |   | .49                          |      | .49 |   | .25 |   |
|                                                                                                                                                |   |                         |      |   |   |   |   |
| Diluted — as reported                                                                                                                          |   | .58                          |      | .65 |   | .42 |   |
| Diluted — pro forma                                                                                                                            |   | .48                          |      | .49 |   | .25 |   |

 

Thefair value of each stock option granted is valued on the date of grant usingthe Black-Scholes option pricing model. The weighted average grant-date fair value of stock options grantedduring fiscal 2003 was $11.67 per share using the assumptions of expectedvolatility of 67.0%, expected option lives of 7.5 years, risk-free rate ofinterest of 4.2% and no expected dividends. During fiscal 2002, the weighted average grant-date fair value of stockoptions granted was $21.43 per share using the assumptions of expectedvolatility of 89.2%, expected option lives of 7.5 years, risk-free rate ofinterest of 5.0% and no expected dividends. During fiscal 2001, the weighted average grant date fair value of stockoptions granted was $13.84 per share using the assumptions of expectedvolatility of 59.4%, expected option lives of 7.5 years, risk-free rate ofinterest of 5.8% and no expected dividends.

 

m.            RecentlyIssued Accounting Pronouncements:  InNovember 2002, the EITF issued a final consensus on Issue 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables.”  Issue 00-21 provides guidance on how and when to recognizerevenues on arrangements requiring delivery of more than one product orservice.  Issue 00-21 is effectiveprospectively for arrangements entered into in fiscal periods beginning afterJune 15, 2003.  Companies may also electto apply the provisions of Issue 00-21 to existing arrangements and record theincome statement impact as a cumulative effect of a change in accountingprinciple.  The provisions of thisstatement are not expected to have a material impact on the Company’s financialposition or results of operations.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” For guarantees issued or modified after December 31, 2002, a liabilityshall be recognized for the fair value of the obligation undertaken in issuingthe guarantee.  The disclosurerequirements are effective for interim and annual financial statements forperiods ending after December 15, 2002. See Note 9 (the commitments and contingencies note) for disclosuresrequired by FIN 45.  The adoption of FIN45 did not have a material impact on the Company’s financial position orresults of operations.

 

In December 2002, the FASB, issued SFAS No. 148, “Accounting forStock-Based Compensation Transition and**Disclosure.”* *SFAS No. 148 amends SFAS No. 123 “Accounting for Stock-BasedCompensation,”**to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to requiredisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  The annualdisclosure

 

35

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provisions areeffective for fiscal years ending after December 15, 2002.  The adoption of the disclosure requirementsof this standard in fiscal 2003 did not have a material impact on the Company’sfinancial position or results of operations.

 

On May 15, 2003, the FASB issued SFAS No. 150 “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  The statement requires issuerto classify as liabilities (or assets in some circumstances) three classes offreestanding financial instruments that embody obligations for the issuer.  Generally, the statement is effective forfinancial instruments entered into or modified after May 31, 2003 and isotherwise effective at the beginning of the first interim period after June 15,2003.  The provisions of this statementare not expected to have a material impact on the Company’s financial positionor results of operations.

 

In May 2003, the EITF issued a final consensus on Issue 01-8,“Determining Whether an Arrangement Contains**a**Lease.” Issue 01-8 provides guidance on determining whether an arrangement is orincludes a lease within the scope of SFAS No. 13 “Accounting for Leases.”* *If it is determined that a leaseexists, the lease and non-lease components of a combined sales arrangement mustbe accounted for separately.  Issue 01-8is effective prospectively for arrangements entered into, modified, or acquiredin fiscal periods beginning after May 28, 2003.  We are in the process of evaluating the impact of Issue 01-8, ifany, on our financial position or results of operations.

 

n.              Certainreclassifications have been made to prior year financial statements to conformto the current year presentation.

 

o.              Concentrationof Risk:  Various Company productsinclude in their formulations chemical components available from few (and insome cases only one) suppliers. Formulation alternatives exist for each single-sourced material;however, changing formulations could result in higher raw material costs and/orthe necessity to obtain regulatory clearance for the changed formulation.

 

All manufacturing of the Company’s Animal Health and sterilant anddisinfecting products is performed by contract manufacturers having appropriateFDA registration approval for such manufacturing.  A change in contract manufacturers, however, would requirequalification of the manufacturer (if not already qualified) by FDA and by someinternational FDA equivalent.  Suchchange could adversely affect Company sales short-term.

 

3.                                       SegmentReporting:

 

The Companyfollows the provisions of SFAS No. 131 “Disclosures about Segments of anEnterprise and Related Information” and reports segment information in the sameformat as reviewed by the Company’s management (the “Management Approach”),which is organized around differences in products and services.  Management has determined the Company hastwo reportable segments, Animal Health and Surface Disinfectants and SANOVAFood Antimicrobial Products.

 

The Company’sreportable segments are strategic business units that offer similar products,but to entirely different customers at substantially different selling pricesand cost of goods sold structures.  TheCompany does not have inter-segment revenues. International sales include sales to international distributors andsales through U.S. distributors that are shipped directly to foreign countries.

 

The accountingpolicies of the segments are as described in Note 2 — Summary of SignificantAccounting Policies.  The Companyevaluates performance based on gross margin from the sale of each segment’sproducts and does not allocate expenses beyond gross margin to the two segments.

 

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Segment net sales, gross marginand assets are as follows:

 
|                                        |   | **FY 2001** |   | **FY 2002** |   | **FY 2003** |   |
|---------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| **Animal Health and Surface Disinfectants** |   |        |   |        |   |        |   |
| License Revenue - U.S.                      |   | $           | — |        | $      | —      |   | $ | 897,177 |   |
| Net Sales - U.S.                            |   | 5,027,340   |   | 5,381,949   |   | 3,003,028   |   |
| Net Sales - International                   |   | 4,530,012   |   | 4,377,379   |   | 4,437,037   |   |
| Total Revenue                               |   | 9,557,352   |   | 9,759,328   |   | 8,337,242   |   |
| Gross Margin                                |   | 5,609,888   |   | 5,536,850   |   | 4,999,331   |   |
|                                        |   |        |   |        |   |        |   |
| Assets (at end of period)                   |   | 3,253,716   |   | 2,687,026   |   | 3,510,917   |   |
| Fixed Asset Additions                       |   | 26,891      |   | —      |   | —      |   |
| Depreciation Expense                        |   | 2,240       |   | 5,376       |   | 5,376       |   |
| Goodwill Amortization                       |   | 43,528      |   | —      |   | —      |   |
|                                        |   |        |   |        |   |        |   |
| **SANOVA**                                  |   |        |   |        |   |        |   |
| Net Sales - U.S.                            |   | 8,400,623   |   | 12,229,362  |   | 13,587,212  |   |
| Gross Margin                                |   | 3,430,219   |   | 4,893,309   |   | 4,909,349   |   |
|                                        |   |        |   |        |   |        |   |
| Assets (at end of period)                   |   | 11,874,410  |   | 15,176,245  |   | 14,504,133  |   |
| Fixed Asset Additions                       |   | 3,768,606   |   | 3,541,443   |   | 2,247,158   |   |
| Depreciation Expense                        |   | 1,870,884   |   | 2,661,179   |   | 3,550,892   |   |
|                                        |   |        |   |        |   |        |   |
| **Not Segment Related**                     |   |        |   |        |   |        |   |
| Assets (at end of period)                   |   | 3,874,474   |   | 4,002,062   |   | 3,353,654   |   |
| Fixed Asset Additions                       |   | 125,884     |   | 138,997     |   | 85,512      |   |
| Depreciation Expense                        |   | 65,694      |   | 75,013      |   | 116,402     |   |
|                                        |   |        |   |        |   |        |   |
| **Total**                                   |   |        |   |        |   |        |   |
| License Revenue                             |   | —      |   | —      |   | 897,177     |   |
| Net Sales                                   |   | 17,957,975  |   | 21,988,690  |   | 21,027,277  |   |
| Total Revenue                               |   | 17,957,975  |   | 21,988,690  |   | 21,924,454  |   |
| Gross Margin                                |   | 9,040,107   |   | 10,430,159  |   | 9,908,680   |   |
|                                        |   |        |   |        |   |        |   |
| Assets (at end of period)                   |   | 19,002,600  |   | 21,865,333  |   | 21,368,704  |   |
| Fixed Asset Additions                       |   | 3,921,381   |   | 3,680,440   |   | 2,332,670   |   |
| Depreciation Expense                        |   | 1,938,818   |   | 2,741,568   |   | 3,672,670   |   |
| Goodwill Amortization                       |   | 43,528      |   | —      |   | —      |   |
|                                             |        |             |        |             |        |             |        |  |  |  |

 

Assets assigned to the business segments include accounts receivable,inventories, fixed assets, spare parts and goodwill.

 

No single customer accountedfor 10% or more of revenues in fiscal 2003 or fiscal 2002.  In fiscal 2001, two of the Company’sdistributors in the dairy industry each accounted for greater than 10% of totalrevenues.  One distributor accounted for$2,546,687 of sales, in fiscal 2001 and another distributor accounted for$2,701,709 of sales in fiscal 2001.

 

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4.                                       AccountsReceivable –Trade consisted of the following:

 
|                              |   | **May 31,  2002** |      | **May 31,  2003** |   |
|-----------------------------------|--------|-------------------|-----------|-------------------|--------|
| Domestic distributors             |   | $                 | 349,942   |              | $      | 372,837 |   |
| International distributors        |   | 813,155           |      | 1,402,504         |   |
| SANOVA customers                  |   | 1,580,444         |      | 1,888,840         |   |
| Other receivables                 |   | 105,562           |      | 167,346           |   |
|                              |   |              |      |              |   |
| Total Accounts Receivable - Trade |   | $                 | 2,849,103 |              | $      | 3,831,527 |   |

 

The Companyevaluates impairment of its trade receivables on a regular basis.  During the third quarter of fiscal year2003, the Company recorded an allowance for doubtful accounts of $27,000 toreflect the Company’s probable loss relating to receivables from one of itscustomers that filed for Chapter 11 bankruptcy protection.  The allowance for doubtful accounts was$28,000 and $1,000 as of May 31, 2003 and May 31, 2002, respectively, which wasestimated based on collection history and known events.

 

5.                                       Inventory consisted of the following:

 
|                               |   | **May 31,  2002** |      | **May 31,  2003** |   |
|------------------------------------|--------|-------------------|-----------|-------------------|--------|
| Raw materials                      |   | $                 | 307,922   |              | $      | 692,480 |   |
| Finished Products                  |   | 630,517           |      | 484,426           |   |
| SANOVA inventory at customer sites |   | 885,252           |      | 920,191           |   |
|                               |   |              |      |              |   |
| Total Inventory                    |   | $                 | 1,823,691 |              | $      | 2,097,097 |   |

 

6.                                       Acquisitionof Universal Marketing Services’ Business:

 

On February 1,2001, the Company purchased assets from Universal Marketing Services, Inc. fora total purchase price of $1,622,828. The purchase price consisted of cash reduced by the outstanding balanceof accounts receivable from UMS and a warrant to purchase 7,000 shares of theCompany’s Common Stock at $29.25 per share. The warrant has been valued at $99,540 using the Black-Scholes modelwith assumptions of expected volatility of 68.5%, contractual warrant life ofthree years and risk-free rate of interest of 4.7%.  The purchase price was allocated to the acquired assets based ontheir fair market value and the residual balance, $522,335, was recorded asgoodwill.  During fiscal 2001, goodwillwas being amortized based on a 48 month estimated useful life.  As of May 31, 2001, accumulated amortizationwas $43,528.  As of May 31, 2003, noportion of the warrant had been exercised as the market value of the stock wassubstantially lower than the warrant exercise price.

 

In July 2001,the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142,“Goodwill and Other Intangible Assets”. SFAS No. 141 required business combinations initiated after June 30,2001 to be accounted for using the purchase method of accounting and broadenedthe criteria for recording intangible assets separate from goodwill.  The provisions of SFAS No. 141 and SFAS No.142 were “early-adopted” by the Company on June 1, 2001.  With the adoption of these standards certainamounts previously included in other intangible assets were reclassified asgoodwill, since under the new standards they did not meet the criteria forreporting as separate, identifiable, indefinite-lived assets.

 

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7.                                       AccruedExpenses:

 

Accruedexpenses were: 

 
|                                               |   | **May 31,  2002** |    | **May 31,  2003** |   |
|----------------------------------------------------|--------|-------------------|---------|-------------------|--------|
| Accrued employee salaries, incentive and  benefits |   | $                 | 376,591 |              | $      | 332,900 |   |
| Accrued consulting and outside services            |   | 55,636            |    | 110,735           |   |
| Other accrued expenses                             |   | 184,726           |    | 57,943            |   |
|                                               |   |              |    |              |   |
| Total Accrued Expenses                             |   | $                 | 616,953 |              | $      | 501,578 |   |

 

8.                                       Lineof Credit Payable:

 

In September2002, the Company extended its $10,000,000 unrestricted line of credit with USBank.  The new expiration date isSeptember 30, 2004.

 

Two advancesof $1,000,000 each have been taken on the line of credit.  The Company repaid both advances in March2003.

 

9.                                       Commitmentsand Contingencies:

 

a.               Leases:  The Company leases certain property undernon-cancelable operating leases that expire through July 2009.  Insurance, utilities and maintenanceexpenses are borne by the Company. There are no contingent rentals or sublease rentals.

 

Future annuallease commitments are as follows:

 

| FY 2004 |   | $ | 233,592 |
|---------|--------|---|---------|
| FY 2005 |   | $ | 135,544 |
| FY 2006 |   | $ | 137,999 |
| FY 2007 |   | $ | 140,946 |
| FY 2008 |   | $ | 141,437 |
| FY 2009 |   | $ | 23,573  |

 

Lease paymentsin fiscal year 2003, fiscal year 2002 and fiscal year 2001 were $172,766,$179,878 and $175,037, respectively.

 

b.              SANOVAAgreements:  The Company has signedagreements with poultry and beef processing plants for SANOVA systeminstallations in fiscal 2004, at a cost of approximately $1,650,000.  As of May 31, 2003, $1,050,000 of theequipment required had been purchased and recorded as construction in progress.

 

c.               EmploymentAgreements:  One officer has a one year,automatically renewable, employment agreement which currently obligates theCompany to a base salary of $273,266 per year. Bonus compensation of 100% of base pay can be earned at the discretionof the Board of Directors.

 

d.              DistributionAgreements:  The Company enters intoagreements with each of its major dairy industry distributors.  The agreements typically describe theterritories covered, product pricing and expected product purchases during theterms of the agreements.

 

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10.                                 IncomeTaxes:

 

A summary ofthe provision for income taxes follows:

 
|            |   | **FY 2001** |    | **FY 2002** |   | **FY 2003** |   |
|-----------------|--------|-------------|---------|-------------|--------|-------------|--------|
| Current         |   |        |    |        |   |        |   |
| Federal         |   | $           | 34,441  |        | $      | 10,000      |   | $ | 111,000 |   |
| State and local |   | —      |    | —      |   | 4,300       |   |
|            |   | $           | 34,441  |        | $      | 10,000      |   | $ | 115,300 |   |
|            |   |        |    |        |   |        |   |
| Deferred        |   |        |    |        |   |        |   |
| Federal         |   | $           | 769,653 |        | $      | 788,547     |   | $ | 482,100 |   |
| State and local |   | 21,266      |    | 39,688      |   | 13,100      |   |
| Total           |   | $           | 825,360 |        | $      | 838,235     |   | $ | 610,500 |   |

 

Areconciliation between the statutory federal income tax rate and the effectiveincome tax rate is as follows:

 
|                                |   | **FY 2001** |   | **FY 2002** |   | **FY 2003** |   |
|-------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Statutory federal income tax rate   |   | 34.0        | %      | 34.0        | %      | 34.0        | %      |
| State taxes, net of federal benefit |   | .9          | %      | 1.0         | %      | 1.0         | %      |
| Cumulative prior years tax credits  |   | —      |   | (3.0        | )%     | —      |   |
| Effective income tax rate           |   | 34.9        | %      | 32.0        | %      | 35.0        | %      |

 

The componentsof the deferred tax assets and liabilities are as follows:

 
|                                            |   | **May 31,  2002** |    | **May 31,  2003** |   |
|-------------------------------------------------|--------|-------------------|---------|-------------------|--------|
| Deferred tax assets:                            |   |              |    |              |   |
| Operating loss carryforwards                    |   | $                 | 759,935 |              | $      | 625,394 |   |
| Allowance for doubtful accounts                 |   | —            |    | 9,800             |   |
| Stock option timing differences                 |   | 42,170            |    | 9,669             |   |
| Research and experimental credits  carryforward |   | 92,798            |    | 130,326           |   |
| Alternative minimum tax carryforward            |   | 284,053           |    | 385,053           |   |
| Total deferred tax assets                       |   | 1,178,956         |    | 1,160,242         |   |
|                                            |   |              |    |              |   |
| Deferred tax liabilities:                       |   |              |    |              |   |
| Depreciation                                    |   | 995,734           |    | 1,426,588         |   |
| Amortization                                    |   | 12,188            |    | 24,375            |   |
| Other                                           |   | 95,650            |    | 129,703           |   |
| Total deferred tax liabilities                  |   | 1,103,572         |    | 1,580,666         |   |
|                                            |   |              |    |              |   |
| Net deferred tax asset (liability)              |   | $                 | 75,384  |              | $      | (420,424 | ) |

 

Temporarydifferences result from the use of straight-line deprecation for equipment inthe financial statements versus the use of accelerated depreciation for taxreporting, the timing of stock option exercises and other miscellaneousbook/tax timing differences.  TheCompany has not established a valuation allowance against the deferred taxasset as management believes it is more likely than not that the tax benefitswill be realized in the future based on historical levels of pre-tax income andexpected future taxable income.  Thegross operating loss carryforward of approximately $1,787,000 and the researchand experimental credits carryforward will begin to expire in 2019.

 

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11.                                 EarningsPer Share:

 

Basic earningsper share is computed by dividing net income by the weighted average number ofcommon shares outstanding during the year. Diluted earnings per share is computed by dividing net income by theweighted average number of common shares and potential common sharesoutstanding during the year.  Potentialcommon shares of the Company include the dilutive effect of outstanding stockoptions and warrants.  Potential commonshares, excluded because of their antidilutive effect were 255,342 shares infiscal year 2003, 92,290 shares in fiscal year 2002 and 51,790 shares in fiscalyear 2001.

 

Basic anddiluted earnings per share were calculated as follows:

 

**Computation ofEarnings Per Common Share**

 
|                                                                                                                                                        |   | **For the  Years Ended May 31,** |      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-----------|
|                                                                                                                                                        |   | **2001**                         |      | **2002** |   | **2003** |   |
| Net income                                                                                                                                                  |   | $                                | 1,537,525 |   | $ | 1,781,252 |   | $ | 1,129,610 |   |
| Weighted average number of common shares  outstanding                                                                                                       |   | 2,572,898                        |      | 2,643,467 |   | 2,658,469 |   |
| Basic earnings per share                                                                                                                                    |   | $                                | .60       |   | $ | .67 |   | $ | .42 |   |
| Assuming exercise of options and warrants  reduced by the number of shares which could have been purchased with the  proceeds from exercise of such options |   | 82,219                           |      | 76,539 |   | 21,543 |   |
| Weighted average common shares outstanding  and dilutive potential common shares                                                                            |   | 2,655,117                        |      | 2,720,006 |   | 2,680,012 |   |
|                                                                                                                                                        |   |                             |      |   |   |   |   |
| Diluted earnings per share                                                                                                                                  |   | $                                | .58       |   | $ | .65 |   | $ | .42 |   |

 

12.                                 Shareholders’Equity and Redeemable Preferred Stock:

 

a.  Authorized Capital

The authorizedcapital of the Company is 10,000,000 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 nonvotingClass “A” Preferred Stock has a preference with respect to both dividends andliquidation at its stated value of $135.30 per share.  During fiscal 1999, Alcide offered to redeem Class “A” PreferredStock at a price of $101.00 per share. Eight hundred sixty-two shares have been redeemed.  The Company has the option to forceredemption at any time by payment of $135.30 per share.

 

c.  Redeemable Class “B” Preferred Stock -Series 1 and 2.

On September30, 1994, the Company issued to holders of any outstanding Series 1 Stock, in arecapitalization, one share of non-voting Class “B” Stock to be designated asSeries 2 Redeemable Preferred Stock (“Series 2 Stock”) and 0.2 share of CommonStock.  Commencing on September 30,1994, the Company created a sinking fund to be funded, on that day and on the30th day of September of each year thereafter, at a rate equal to0.7% of the Company’s prior fiscal year’s net income, if any.  On September 30th of each year,the Company redeems Series 2 Stock at $2.625 per share plus declared and unpaiddividends equal to the sinking fund payment. As the Company recorded net income of $1,129,610 in fiscal 2003, it willredeem 3,012 shares of Series 2 Stock on September 30, 2003 for $7,907.  The Company may redeem any or all of theissued and outstanding Series 2 Stock at its option, at any time, at theredemption price of $2.625 per share.

 

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13.                                 StockOptions:

 

The Companyhad an incentive stock option plan that expired in May 1993.  No additional grants may be issued underthis plan. With shareholder approval, the Company replaced this plan with a newplan effective December 1993, which allowed for the issue of both incentivestock options and nonqualified stock options. In October 2001, shareholders approved a new plan which replaced theun-expired portion of the 1993 plan. Nonqualified stock options may be granted to employees, directors,officers and consultants.  The optionexercise price for incentive stock options may not be less than the fair marketvalue of the Common Stock on the date of the grant of the option.  Nonqualified stock options are granted withan exercise price equal to 100% or greater of the fair market value of theCommon Stock on the date of grant. Under this plan there are 204,550 options available for grant as of May31, 2003.

 

The Companyalso has a stock option plan for nonemployee directors which was approved byshareholders in October 1996.  Optionsgranted under the plan are granted with an exercise price equal to 100% of thefair market value of the Common Stock on the date of grant.  Under this plan there are 34,354 optionsavailable for grant as of May 31, 2003.

 

Options areexercisable within ten years from the date of option grant.  Options awarded to officers and employeestypically vest over a five-year period. Options awarded to nonemployee board members vest immediately.  Options will expire during the periodDecember 2003 through October 2012.  TheCompany accounts for its stock option plans under the guidelines of AccountingPrinciples Board Opinion 25 (“APB 25”), under which no compensation cost hasbeen recognized.  In 1996, the Companyadopted the disclosure provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” effective for years beginning after May 31, 1996.  The Company has continued to measurecompensation cost for employee stock compensation plans under the guidelines ofAPB 25, as allowed by SFAS No. 123.

 

The status ofthe plans are as follows:

 
|                             |   | **FY 2001**        |   | **FY 2002**                 |   | **FY 2003**        |    |
|----------------------------------|--------|--------------------|--------|-----------------------------|--------|--------------------|---------|
|                             |   | **No. of  Shares** |   | **Weighted  Avg.  Share $** |   | **No. of  Shares** |    | **Weighted  Avg.  Share $** |   | **No. of  Shares** |   | **Weighted  Avg.  Share $** |   |
| Outstanding at beginning of year |   | 316,483            |   | $                           | 14.16  |               | 260,787 |   | $ | 18.05 |   | 316,626 |   | $ | 21.13 |   |
| Granted                          |   | 44,393             |   | 20.32                       |   | 93,370             |    | 25.43 |   | 36,704 |   | 16.66 |   |
| Exercised                        |   | (94,089            | )      | 6.22                        |   | (24,231            | )       | 7.13 |   | (6,034 | ) | 8.82 |   |
| Cancelled                        |   | (6,000             | )      | 15.25                       |   | (13,300            | )       | 16.38 |   | (18,800 | ) | 20.39 |   |
| Outstanding at end of year       |   | 260,787            |   | $                           | 18.05  |               | 316,626 |   | $ | 21.13 |   | 328,496 |   | $ | 20.90 |   |
|                             |   |               |   |                        |   |               |    |   |   |   |   |   |   |
| Exercisable at end of year       |   | 170,087            |   | $                           | 15.98  |               | 167,676 |   | $ | 18.78 |   | 197,996 |   | $ | 20.03 |   |

 

Informationrelating to stock options outstanding and stock options exercisable at May 31,2003 is as follows:

 
|                  |   | **Options  Outstanding** |   |          |   |
|-----------------------|--------|--------------------------|--------|---------------|--------|
| **Range of Exercise** |   |                     |   | **Weighted**  |   |   |   | **Options  Exercisable** |   |
| **Prices**            |   | **No . of  Shares**      |   | **Avg. Life** |   | **Wtd. Avg.  $/Sh.** |   | **No. of  Shares** |   | **Wtd. Avg.  $/Sh.** |   |
| $  8.63 - $11.94 |   | 60,300                   |   | 1.09          |   | $ | 10.15 |   | 59,600 |   | $ | 10.13 |   |
| $12.00 - $20.00       |   | 96,786                   |   | 7.40          |   | $ | 16.52 |   | 38,286 |   | $ | 15.99 |   |
| $20.25 - $63.00       |   | 171,410                  |   | 5.92          |   | $ | 27.15 |   | 100,110 |   | $ | 27.56 |   |
|                  |   | 328,496                  |   | 5.47          |   | $ | 20.90 |   | 197,996 |   | $ | 20.07 |   |

 

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14.                                 RelatedParty Transactions:

 

ConsultingAgreements:

Loeb Partners Corporation During the fiscalyears ended May 31, 2003, 2002 and 2001 the Company paid Loeb PartnersCorporation $60,000 each year in cash for executive and management servicesprovided by Mr. Kempner, a member of the Company’s Board of Directors, and Mr.Mintz, Managing Director of Loeb Partners Corporation.  Mr. Kempner holds approximately 51% of thevoting equity of Loeb Holding Corporation, of which Loeb Partners Corporationis a 100% wholly-owned operating subsidiary.

 

Kenneth N. May During the fiscal year endedMay 31, 2002, Dr. May earned $14,000 for consulting services in the field ofpathogen control on poultry and other food products.  Dr. May retired from the Company’s Board of Directors in October2001 and is no longer a related party. During fiscal 2001, he earned $36,000.

 

15.                                 EmployeeStock Ownership Plan:

 

The Companyhas an employee stock ownership plan (the Plan).  Employees who are at least age 21 and have completed one year ofservice are eligible to participate. The Company may make discretionary contributions to the Plan.  Compensation expense is recognized based onthe fair value of the Company’s common stock as of the date the shares arepurchased and contributed to the Plan. The ESOP plan year ends on December 31 while the Company’s fiscal yearends on May 31.  During the ESOP planyears ended December 31, 2000, 2001 and 2002, the Company’s contributions wereapproximately $124,000, $226,000 and $290,000. During the Company’s fiscal years ended May 31, 2001, 2002 and 2003, theCompany recorded ESOP expense of $189,921, $257,646 and $303,330.  The Company estimates its annualcontribution to the Plan and accrues a liability over the fiscal yearconsistent with the estimate.

 

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