Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: May 31, 2002

OR

For the transition period from                  to                  

Commission file number 0-12395

ALCIDE CORPORATION
(Exact name of registrant as specified in its charter)

8561 154^th 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:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock—$.01 par value
(Title of Class)

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        The aggregate market value of voting stock held by non-affiliates of the Registrant on August 1, 2002 was approximately $38,663,000. On that date, there were 2,656,167 shares of common stock outstanding, net of Treasury Stock.

        Certain sections of Registrant's definitive Proxy Statement for its 2002 Annual Meeting of shareholders are incorporated by reference into Items 11, 12 and 13 of Part III hereof. Certain sections of Part l of this Form 10-K Annual Report are incorporated by reference into the Registrant's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders.

Page 1 of 45 pages
Exhibit Index on Page 25

TABLE OF CONTENTS

2

PART I

ITEM 1. Business

A.

Introduction

        Alcide® Corporation (the "Company") is a Delaware Corporation organized in 1983 which has its executive offices and research laboratories at 8561 154^th Avenue NE, Redmond, Washington 98052.

        Alcide is engaged in the research, development and commercialization of unique chemical compounds having intense microbiocidal activity. The Company holds substantial worldwide rights to its discoveries through various patents, patent applications, trademarks and other intellectual property, technology, and know-how.

        This report includes forward-looking statements which involve risk and uncertainty including, without limitation, risk of dependence on patents and trademarks, third party suppliers, market acceptance of and demand for the Company's products, distribution capabilities, development of technology and governmental regulatory approval thereof. Sentences or phrases that use the words such as "believes," "anticipates," "hopes," "plans," "may," "can," "will," "expects," and others, are often used to flag such forward-looking statements, but their absence does not mean a statement is not forward-looking. Such statements reflect management's current opinion and are designed to help readers understand management's thinking. By their very nature, however, such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

B.

Sales Development

        The Company presently sells antimicrobial products to the dairy, health care and food processing industries. Its products include: UDDERgold® Plus, UDDERgold Platinum® and UDDERgold® Germicidal Barrier Teat Dips, Pre-Gold® Germicidal Pre-Milking Teat Dip and 4XLA® Pre- and Post-Milking Teat Dip to the dairy industry; Exspor® Sterilant-Disinfectant and LD® Disinfectant to the health care industry; and SANOVA® antimicrobial intervention to the food processing industry. The Company's sales to date have primarily been derived from UDDERgold Plus, UDDERgold and 4XLA teat dips and SANOVA food processing antimicrobial.

        Total product sales for the fiscal year ended May 31, 2002 were $21,988,690. Export sales to international distributors accounted for $4,377,379, 20% of total sales.

1.

Dairy Industry

        Worldwide sales of dairy line products during fiscal year 2002 were $9,265,736 as compared with $9,115,088 in fiscal year 2001. In fiscal 2002, sales to the dairy industry accounted for 42% of the Company's total sales. Should there be a loss of the sales generated by dairy line products, it would have a material adverse effect on the Company.

U.S. Dairy Industry

        In fiscal 2002, dairy industry sales in the United States were $4,888,357, 53% of total Alcide sales to the dairy industry.

3

International Dairy Industry

        Alcide products are sold to the dairy industry in Canada, Latin America, Europe and selected Asian markets through a network of distributors. Sales to the international dairy industry were $4,377,379 in fiscal 2002, or 47% of total sales to the dairy industry.

Distributor Arrangements

        Alcide sales to the dairy industry are primarily to distributors who have contracted with the Company to distribute the Company's products. In each case the distributor purchases product from Alcide for resale to the end user. Loss of any of the Company's distributors could have a material impact on the Company's sales and earnings.

        On April 26, 2002, Alcide licensed its technology know-how and trademarks associated with its dairy industry products to IBA, Inc. of Millbury, MA, one of its domestic distributors, in a new five year agreement beginning June 1, 2002. Under the agreement, IBA will manufacture products using Alcide's technology and carrying Alcide's trademarks for direct, nonexclusive distribution through IBA's extensive United States distribution network, and will pay Alcide licensing revenue. Alcide revenue on products licensed to and manufactured by IBA will be approximately 44% lower than if such products had been manufactured and sold by Alcide.

        On May 20, 2002, Alcide entered into a new three year contract with Agri-Lloyd International, Ltd. to exclusively market Alcide's dairy industry products in the United Kingdom and the Republic of Ireland starting in late September 2002.

2.

Food Processing 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 poultry industry. Subsequently, effective December 1, 1998, Alcide assumed direct responsibility for distribution of SANOVA. In February 2001 the Company began to commercialize SANOVA in the red meat industry. During fiscal 2003, Alcide intends to continue the expansion of SANOVA in both the red meat and poultry industries and to enter the fruit and vegetable processing industries, as well as the industry for sausage and comminuted (deli) meat.

        Alcide's fiscal 2002 SANOVA sales have been predominately to the poultry industry and totaled $12,229,362, an increase of 46% over the $8,400,623 SANOVA sales in fiscal 2001. It is expected that SANOVA will continue to be an important and growing contributor to the Company's sales and income expansion. Should there be a loss of sales to the food processing industries, or should growth fail to materialize, there would be a material adverse impact on the Company. In fiscal 2002, SANOVA sales accounted for 56% of total Company sales.

        On May 31, 2002, 38 poultry operations and five red meat operations were using SANOVA under contract with Alcide. Additional contracts for SANOVA expansion are anticipated.

3.

Health Care Industry

        The Company markets a line of hard surface sterilants and disinfectants which kills microorganisms and helps reduce the potential for disease transmission via contaminated surfaces. The Company's LD disinfectant and Exspor Sterilant-Disinfectant offer users a combination of broad spectrum efficacy, speed and relative safety.

        Fiscal year 2002 sales of hard surface sterilants and disinfectants were $493,592, or 2% of total sales, as compared with $442,264 in fiscal year 2001.

4

4.

Industry Practices and Backlog Orders

        The Company's invoice terms for the dairy and health care industries conform to those in the chemical industry in general, which are: domestic-30 days, export-60 days.

        Alcide had $602,673 of firm orders on May 31, 2002 for future delivery to dairy industry distributors as compared to orders for future delivery at May 31, 2001 of $803,731. The Company's distributors typically place orders one to four months in advance.

        The Company's invoice terms, product pricing and delivery for food processing antimicrobials are based on contracts with each customer which typically cover one to four years. For large customers (those using more than 15,000 gallons of SANOVA per month) Alcide provides bulk shipments of inventory to the customer and the customer is invoiced at month-end based on the amount of product processed or gallons of SANOVA used. Smaller SANOVA customers are billed at the time SANOVA is shipped to their facilities. Payment in either case is due fifteen to thirty days after billing.

C.

Research and Product Development

        Recognizing that Alcide Corporation's long-term survival and growth is significantly dependent on the strength of its proprietary position, specific emphasis was placed on enhancing the Company's knowledge and understanding of key processes in the field of acidified sodium chlorite vis-à-vis the basis for the antimicrobial performance of the biocidal system, the development of new assay methodologies for anticipated future residue determination needs and the integration of this knowledge into the new product formulation development effort. The key drivers for this renewed focus are the increasingly competitive market place arising from the presence of a number of newly approved technologies (Food Safety) and increasing numbers of generic products (Animal Health). New patent submissions have emanated from this effort and more are expected in the future as the effort continues.

        All of the research and product development activities conducted by the Company during fiscal 2002 were funded by the Company, either under the Company's direct supervision at contract research facilities or in-house.

        A second and significant component of the 2002 research and development program was the emphasis placed on regulatory affairs as the Company is faced with increasingly more stringent and sophisticated demands from the regulatory agencies that control introduction of products to the market. While the Company typically depends on contract assistance to submit registrations in foreign markets, all submissions, support documentation and any supportive data that may be needed are generated and compiled in-house by Alcide's own regulatory specialists.

        While many of the research and development programs undertaken by the Company and described hereafter, give evidence of possible success, the nature of research, coupled with the necessity for regulatory approval is such that there can be no assurance of ultimate program success or that any resulting product may be commercially viable.

1.

Food Safety

        During fiscal 2002, Food Safety research and development activities were heavily weighted toward process validation under commercial conditions. Four process development engineers and one to two Food Safety technicians were devoted full-time to this activity during the fiscal year with primary activities directed toward documenting shelf-life extension for various produce items, process validation work on sausages and comminuted meats and process development for red meat parts and trim. These efforts were supported by Alcide's laboratory staff and outside consultants having expertise in produce and meat processing.

5

        Significant progress was made on the regulatory front during fiscal 2002. In order to break the label claim dead-locks that have arisen from the existence of dual Environmental Protection Agency/Food and Drug Administration jurisdiction over antimicrobial products that are to be used on produce, it was necessary to develop some innovative approaches to the various agencies. Evidence of the success of the Company's approach became apparent in the March 2002 granting by EPA of a "time-limited" approval to add pathogen reduction claims to the SANOVA label for use on produce. The Company is not aware of any other antimicrobial product that is approved for use in the produce area and that has pathogen reduction claims. Under its new approval, Alcide has a two-year period of time in which to develop and submit additional performance data to EPA in support of this new claim. Likewise, the Company's FDA approvals, that permit the use of SANOVA on what is now a wide variety of meat types, have resulted in the identification of certain gaps in United States Department of Agriculture's regulations. This has again meant that the Company has been placed in the situation of having to be the first to negotiate to close these gaps with the agency. The granting of approvals for use of SANOVA on post-chill red meats without need for labeling (early 2001) and the product's use on processed, comminuted and formed meat products (December 2001), again, without need for labeling are two examples of the success of the Company's efforts.

        In fiscal 2003, the primary focus of Alcide research and development will be in three key areas. The first of these will be the development and submission of a Food Additive Petition to further expand the dose levels of acidified sodium chlorite that are currently approved on seafood. The second area of focus is expected to be in the development of the additional performance data that will be necessary to extend the current "time-limited" SANOVA pathogen reduction claims for produce into a full claim for the product. Finally, the third key area of focus in fiscal 2003 is expected to be in the expansion of approvals for SANOVA use on foods into the international market. Several large markets with significant potential for use of the SANOVA process have already been identified and efforts will therefore be focused on the submission of an "international registration dossier" into each of these new markets seeking ultimate acceptance for all of the currently approved domestic uses.

2.

Animal Health Products

        Primarily, developments in support of this business unit during fiscal 2002 focused on two key areas: the finalization of formulation efforts for a new teat dip product targeted for ultimate introduction into the US market; and the regulatory approval and launch of the Company's newest product into the European market. Significant discoveries in the basic chemistry and excipient interaction areas have led to unique findings which management believes are patentable. As a part of these efforts, elements of the chemistry discoveries of the last year were also submitted for patent approval to further extend the proprietary coverage of the Company's teat dip technology.

        Within Europe, submissions have now been made in all key markets seeking approval for the Company's first new product introduction in this market area in ten years. UDDERgold Platinum represents an advance over the original UDDERgold product in both performance and conditioning capabilities. Approvals and launches have already occurred in France and Hungary with more expected during 2003. Approval for the new product was also attained in Canada during fiscal 2002.

        During fiscal 2003, new product development efforts will continue focus ing on the creation of formulations that further improve performance, conditioning and other product characteristics of importance to the end user. Significant effort will continue to be placed in the regulatory area as the approvals for UDDERgold Platinum continue processing.

D.

Patents and Trademarks

        The Company considers protection of its technologies by United States and foreign patents to be an important aspect of its business. No assurance can be given, however, as to the validity, enforceability or scope of its patent protection. Should the patents be held invalid, become ineffective

6

against competition or expire prior to the Company's successful development of a market for its products, there may be a material adverse impact on the Company's business. Furthermore, the possibility of patent infringement by third parties cannot be entirely eliminated. In the event of such infringement by third parties, if the Company is not successful in terminating such infringement, the viability of the Company could be severely and adversely affected.

        Conversely, no assurances can be given that the manufacture, use or sale of the Company's products will not infringe the patent rights of others. In the event of infringement or alleged infringement, the Company's ability to market its products could be adversely affected and the viability of the Company could be severely and adversely affected.

1.

Patents

        The Company owns the following issued United States patents:

U.S. Patent No. 4,891,216
"Disinfecting Compositions and Methods Therefor"

U.S. Patent No. 4,956,184
"Topical Treatment of Genital Herpes Lesions"

U.S. Patent No. 4,986,990
"Disinfection Method and Composition Therefor"

U.S. Patent No. 5,019,402
"Composition and Procedure for Disinfecting Blood and Blood Components"

U.S. Patent No. 5,100,652
"Disinfecting Oral Hygiene Compositions and Process for Using the Same"

U.S. Patent No. Re. 36,064
"Disinfection Method and Composition Therefor"

U.S. Patent No. 5,252,343
"Method and Composition for Preventing and Treatment of Bacterial Infections"

U.S. Patent No. Re. 37,263
"Anti-inflammatory Formulations for Inflammatory Diseases"

U.S. Patent No. 5,389,390
"Process for Removing Bacteria from Poultry and Other Meats"

U.S. Patent No. 5,597,561
"Adherent Disinfecting Compositions and Method of Use in Skin Disinfection"

U.S. Patent No. 5,628,959
"Composition and Method for Sterilizing Dialyzers"

U.S. Patent No. 5,651,977
"Adherent Disinfecting Compositions and Methods Related Thereto"

U.S. Patent No. 5,667,817
"Method and Composition for the Prevention and Treatment of Female Lower Genital Tract Microbial Infections"

U.S. Patent No. 5,772,985
"Composition and Methods for Treatment of Skin Lesions"

7

U.S. Patent No. 6,063,425
"Method for Optimizing the Efficacy of Chlorous Acid Disinfecting Sprays for Poultry and Other Meats"

U.S. Patent No. 6,096,350
"Compositions and Methods for Prevention and Treatment of Diseases Associated With Honey Bees"

U.S. Patent No. 6,120,731
"Frozen Chlorine Dioxide-Containing Composition and Methods Related Thereto"

U.S. Patent No. 6,123,966
"Stabilized Two-Part Disinfecting System and Compositions and Methods Related Thereto"

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

        The Company's original patent, U.S. Patent No. Re. 31,779, expired in the United States on April 18, 1995. That patent was directed to disinfecting a substrate using a lactic acid/sodium chlorite composition. The Company's second patent, 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.

2.

Trademarks

        The Company has sought to acquire trademark protection, primarily by the filing of applications for registration of its marks in a large number of countries. There can be no assurances that a filed application will result in a registration; that the issuance of a trademark registration to the Company or the acquisition of rights through use will provide the Company with adequate protection against infringement in a selected territory; that the Company will be able to expand its product line under a registered mark in some territories; or, that the Company's trademark rights cannot be terminated in some territories such as by petition by others claiming superior rights.

        No assurances can be given that the Company's use of the marks and business name will not infringe the rights of others in some territories resulting in the exposure of the Company to liability to the holder of the rights and a possible obligation to terminate use in such territory.

        If rights to trademarks selected by the Company were unavailable in a territory, if a Company trademark registration were to become invalid or if the Company's business name or trademarks were to infringe the rights of another in a territory, there would be an adverse impact on the Company.

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

        These same marks, as well as UDDERgold Platinum®, have been registered outside of the U.S. in markets where the Company has determined that there is a commercial opportunity for the appropriate product area. For translation reasons, the mark DIPPINguld® has been determined to be more appropriate than DIPPINgold® in certain foreign countries. Therefore, the spelling variant DIPPINguld® has been registered in Denmark, Norway, Finland and Sweden.

8

E.

Raw Materials

        Various Alcide products include in their formulations chemical components available from few (and in some cases only one) suppliers. Formulation alternatives exist for each single-sourced material; however, changing formulations could result in higher raw material costs and/or the necessity to obtain regulatory clearance for the changed formulation.

F.

Competition

        The Company competes in substantially all of its markets on the basis of quality and technical innovation. A number of companies have announced their intention to introduce, or are believed to be in the process of developing, a variety of products designed to perform some of the functions of Alcide products. Additionally, there exist in the marketplace, products that are known to be competitive with the Company's products.

        The dairy market into which UDDERgold Plus, UDDERgold Platinum, UDDERgold, Pre-Gold and 4XLA teat dips are sold is a highly fragmented worldwide market in which major specialty chemical companies compete. The major classes of products sold in this market are iodophors and chlorhexidines. The expiration on May 18, 1999 of the Company's U.S. patent 4,330,531, which covered Alcide's UDDERgold formulation, allows competing lactic acid based acidified sodium chlorite products to enter the marketplace. ABS Global, Inc., the Company's former distributor, and at least two other U.S. distributors have introduced such products. Management believes, however, that the expired patent's technology is inferior to that represented by Alcide's more recent patents.

        The market for disinfection of food products is dynamic and rapidly emerging as a result of consumer concern and U.S. Government regulatory activity. A number of technologies are directed at reduction of food borne pathogens. Of these, trisodium phosphate and peroxyacetic acid are used within the poultry processing industry in a manner similar to the Company's product, SANOVA. Chlorine dioxide and ozone have been tested in poultry chiller waters, but have not been broadly accepted by the industry. Irradiation technology has been approved by USDA and FDA, but is not broadly used by the poultry or red meat industries and, in the limited cases where irradiation is used, the process may involve a secondary treatment outside the processing plant. Steam, hot water, organic acid and peroxyacetic acid rinses are broadly used in the red meat industry on carcasses prior to chilling for pathogen control. Ultra high pressure technology is being used in the fruit juice industry for juice pasteurization and potentially may be utilized in the future as an antimicrobial intervention for sausage and other processed food products. Cetylpyridinium chloride and other chemical intervention technologies may at some point in the future compete with SANOVA. The Company is not aware of any established competing products for post-chill pathogen control application to either red meat or poultry products. However, market conditions within the food processing industry are such that additional competition is likely.

G.

Government Regulation

1.

Dairy Industry

        The Company's products sold to the dairy industry require registration for sale in a number of international markets. UDDERgold teat dip has been registered in Canada, the United Kingdom, Republic of Ireland, Denmark, The Netherlands, Spain, Portugal, New Zealand, Brazil, France, Italy, Chile, Colombia, Argentina, South Korea and India. The product is legally sold without formal registration in the United States, Greece, Hungary and Mexico.

        4XLA teat dip has 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 formal registration in the United States, Mexico, Belgium, Italy, Spain and Cyprus.

9

        UDDERgold Plus sales have been expanded to include Japan and Taiwan in addition to the United States, without formal registrations.

        UDDERgold Platinum has been released in Hungary after receiving approval as a variation of the UDDERgold product. Similar applications are pending approval in other European markets, as well as Canada.

2.

Food Processing Industry 



a.

Poultry

        The Company's Food Additive Petition for pre-chill use of SANOVA was approved by FDA in April, 1996 and by USDA in January 1998. Additional approval for use of the product in Canada was received in September 1999. The product is now actively marketed and is being utilized by a number of major poultry processing companies.

        In May 2001 the Company's Food Additive Petition for post-chill use of SANOVA on poultry was approved by the FDA and by USDA. The product is now being used for this purpose by four major processing plants.

b.

Red Meat

        The Company's Food Additive Petition was approved by FDA in March 1998 and subsequently by USDA in February 2000. In February 2001 the Company resolved labeling issues with USDA, which determined that use of SANOVA as a post-chill application on beef would not require supplemental product labeling. This event enabled the Company to begin product commercialization. Four customers are presently using SANOVA for red meat carcass disinfection prior to chilling and two customers are utilizing the product as an antimicrobial intervention on beef parts and trim after chilling and boning. During the year, the Company conducted several process validation studies directed at mitigating the initial processing and organoleptic problems encountered with application to parts and trim. Management believes that the process validation trials have been successful and hopes that this should lead to further expansion in this industry segment.

        SANOVA use on cooked ready-to-eat sausages, comminuted meats and ready-to-eat deli products was approved by FDA and USDA in June 2001. Subsequently, in October 2001, USDA raised issues concerning the degree to which SANOVA use would require supplemental labeling of treated product. In January 2002, USDA concluded that no labeling would be required. Subsequently, in March 2002, the Company began process validation studies under commercial conditions with several major processing companies. Commercialization of SANOVA use in this market category is expected to begin during this fiscal year.

c.

Fruits and Vegetables

        In December 1998 Alcide submitted a Food Additive Petition to the FDA for the use of SANOVA on raw agricultural commodities (fruits and vegetables). The petition was approved in September 1999. The EPA concurrently stated that it intended to exert its regulatory authority over this area. Subsequently, in March 2001 EPA granted its approval for use of SANOVA on intact fruits and vegetables in processing plants. Marketing an antimicrobial intervention under EPA authority requires supplemental registration by the EPA authorities in each of the fifty states. The Company began to receive such state approvals during the fourth fiscal quarter of 2002 and at fiscal year end approximately one half of the states had approved SANOVA use on intact fruits and vegetables.

        In April 2002, the use of SANOVA on cut, sliced and processed fruits and vegetables was granted by the FDA, which has sole regulatory authority over this market segment. This, combined with the earlier EPA approval for intact fruits and vegetables, now allows for SANOVA commercialization

10

within a limited part of the produce industry. Commercialization efforts are expected to begin during this fiscal year.

3.

Sterilants/Disinfectants

        The Company's line of hard surface sterilants and disinfectants are regulated in the U.S. by the EPA and FDA. Appropriate EPA and FDA approvals for sale and manufacturing have been obtained.

H.

Employees

        The corporate office and laboratory staff of 22 employees occupy a 6,751 square foot leased facility in Redmond, Washington. Alcide's engineering, operations and maintenance staff of 15 employees occupy a 6,240 square foot leased office and warehouse facility in St. Louis, Missouri. In addition, the Company employs 7 field maintenance employees, 2 technical representatives and 4 sales management/marketing employees.

        The Company also has relationships with, and from time to time engages the services of, university professors and other qualified consultants to assist it in technological research and development.

        The Company is not a party to any collective bargaining agreement and considers its employee relations to be excellent.

I.

Advertising and Promotion

        The Company's advertising and promotion activities consist of cooperative promotional activities with its distributors of Animal Health products and participation in trade shows and exhibits sponsored by the poultry, red meat and produce industries.

J.

Manufacturing

        All manufacturing of the Company's Animal Health and sterilant and disinfectant products is performed by contract manufacturers having appropriate FDA registration approval for such manufacturing. Product released for sale is dependent on quality control testing by Alcide. A change in contract manufacturers, however, would require qualification of the manufacturer (if not already qualified) by the FDA and by some international FDA equivalent. Such change could adversely affect Company sales short-term. Many qualified manufacturers regularly compete in the contract packaging marketplace. Under the new licensing arrangement with IBA, (see Distributor Arrangements on page 4) IBA will be responsible for manufacturing its own products.

        SANOVA is manufactured and diluted at each customer's site, utilizing raw materials supplied by Alcide and mixed, diluted and pumped in micro-processor controlled equipment owned by Alcide.

ITEM 1A. Executive Officers of the Company

        The persons listed in the following table are the current executive officers of the Company. Officers are elected annually. There is no family relationship among any of the directors or executive

11

officers, and none of the persons has been involved during the past five years in any legal proceedings described in applicable Securities and Exchange Commission regulations.

ITEM 2. Properties

        The Company's SANOVA food antimicrobial is stored, mixed and applied on site at each customer's plant by means of equipment owned by Alcide. Alcide's aggregate cost for equipment at processing plants on May 31, 2002 was $14,400,000. In addition, the Company had purchased SANOVA equipment components and construction in progress totaling $3,000,000 on May 31, 2002. Each new plant utilizing the SANOVA System will require an investment estimated at between $20,000 and $500,000, depending on plant size.

12

ITEM 3. Legal Proceeding

        None.

ITEM 4. Submission of Matters to a Vote of Security Holders

        None.

13

PART II

ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters

        The Company's common stock ("Common Stock") has been publicly traded since May 26, 1983 in the over-the-counter market on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol ALCD.

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

        No dividends were declared or paid for these periods. The Company has never paid dividends on its Common Stock. The Company currently intends to retain future earnings for use in its business and, therefore, does not anticipate paying cash dividends in the foreseeable future.

        On August 1, 2002, there were approximately 1,440 Common stockholders of record.

ITEM 6. Selected Financial Data

14

Selected Quarterly Financial Data for the Years Ended May 31, 2001 and May 31, 2002 (unaudited)

*

If Statement of Financial Accounting Standards, ("SFAS") No. 142, "Goodwill and Other Intangible Assets", had been in effect in fiscal 2001 and goodwill had not 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. For the last two quarters of fiscal 2001, net income would have been $258,452 and $319,485 respectively and diluted earnings per share would have been $.10 and $.12, respectively.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Risk and Uncertainty

        This report includes forward looking statements which involve risk and uncertainty including, without limitation, risk of dependence on patents, trademarks, third party suppliers, market acceptance of and demand for the Company's products, distribution capabilities and the development of technology and government regulatory approval thereof.

        Sentences or phrases that use words such as "believes", "anticipates", "hopes", "plans", "may", "can", "will", "expects" and others are often used to flag such forward looking statements but their absence does not necessarily mean a statement is not forward looking. Such statements reflect management's current opinion and are designed to help readers understand management's thinking. By their very nature, however, such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expected or projected. Readers are cautioned not to place undo reliance on these forward looking statements which speak only as of the date hereof. The Company undertakes no obligation to release publicly any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

        Substantially all of the Company's products are subject to regulatory approval of or control by various governmental agencies such as the Food and Drug Administration, Department of Agriculture and Environmental Protection Agency in the United States and their equivalents in international markets. The exercise of control and regulatory authority by these agencies can have a material effect on the Company's business directly as it relates to the Company's products and indirectly as it may relate to competitors' products.

15

        Within the Animal Health and Surface Disinfectant business segment, all of the Company's Animal Health products are sold through distributors having exclusive or semi-exclusive rights to specified geographical territories. The loss of a distributor can have a material effect on the Company's sales, particularly, in the short-term until a replacement is found, contracted and trained in the sale of the Company's products. Further, the Company faces well established competition in each of the markets where its Animal Health products are sold. Such competition, particularly, competition claiming equivalence to the Company's products, can limit the sales potential for Alcide's products.

        Alcide's Food Safety products participate in a rapidly evolving marketplace which by its nature attracts innovation and competing technologies. The Company's SANOVA sales are based on performance, price and convenience. Introduction of competitive products better meeting these customer needs can have a material impact on the Company's ability to sell and expand the use of its SANOVA products.

        The Company's business model for its Food Safety business involves a capital investment ranging from $20,000 to $500,000 for each user plant site depending on the size of the operation. The capital investments are depreciated over a five-year life while customer contracts range from one to four years. If a substantial number of customers elect not to renew their contracts, non-productive assets would exist until new customers are found. However, the Company's experience after four years in the Food Safety business is that all 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 customer site and connect the components with plumbing and electrical interfaces to put the system into operation. The capital investments are depreciated over a five-year life. Installation costs are depreciated over the shorter of a five-year life or the contract term.

Critical Accounting Policies

•

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

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

•

Depreciation and Book Value of SANOVA Plant Assets
Capital investments for SANOVA plant assets are depreciated over a five-year life, while customer contracts range from one year to four years. As the SANOVA food antimicrobial business 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 four years experience, that well-maintained assets will be operational beyond five years and, further, that if customers decide not to renew their contracts, the assets can be relocated to new customer sites. The cost to maintain the assets is charged to operations.

16

Commitments and Contingencies

        Leases: The Company leases certain property and vehicles under non-cancelable operating leases that expire through May 2004. Insurance, utilities and maintenance expenses are borne by the Company. There are no contingent rentals or sublease rentals.

        Line of Credit Payable: The Company has a $10,000,000 unrestricted line of credit with US Bank. The line of credit's current expiration date is August 31, 2003. Two unsecured advances of $1,000,000 each have been taken on the line of credit, one in February 2001 and another in June 2001. Currently, both advances are due in September 2002. The interest rates are approximately 4.3% for the first advance and 3.9% for the second. Interest is paid monthly.

        SANOVA Agreements: The Company has signed contracts with poultry and beef processing plants for SANOVA systems to be installed in FY 2003, which will cost approximately $2,100,000. As of May 31, 2002, $1,200,000 of the equipment required had been purchased and recorded as construction in progress. The Company had also purchased an additional $1,800,000 of SANOVA equipment components on May 31, 2002 to support future anticipated growth.

        Employment Agreements: One officer has a one year, automatically renewable, employment agreement which obligates the Company to a salary of $260,253 per year. Bonus compensation of 100% of base pay can be 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 its outstanding Series 2 Class "B" Preferred Stock. The amount redeemed is equal to .7% of the Company's prior year net income. As the Company recorded net income of $1,781,252 in fiscal 2002, it will redeem 4,750 shares of Series 2 Stock on September 30, 2002 for $12,469.00. This will leave a total of $167,145 of Class "B" Preferred Stock to be redeemed in subsequent fiscal years.

        The Company currently has no commitments beyond fiscal 2004 other than the redemption of Class "B" Preferred Stock. The future amounts to be redeemed depend upon future net income and are not yet known. The following table summarizes the above commitments.

17

Financial Condition and Results of Operations

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 SANOVA antimicrobial for the fiscal year ended May 31, 2002 were $12,229,362, an increase of $3,828,739, or 46% versus SANOVA sales during the preceding fiscal year. The SANOVA sales increase is a direct result of operations added during fiscal 2001 and fiscal 2002. On May 31, 2002, 38 poultry operations and 5 red meat operations were utilizing the SANOVA system to improve the quality of their product.

        The Company's Animal Health and 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 to distributors offset by a decrease of $639,398 in sales of teat dips.

Cost of Goods Sold

        Cost of goods sold was 53% of net sales for fiscal 2002 as compared to 50% of net sales for fiscal 2001. (See page 34 for net sales and gross margin by business segment).

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

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

Research and Development Expense

        Research and development expenses of $2,639,877 for the fiscal year ended May 31, 2002, were 6% or $160,026 higher than incurred in fiscal 2001. The increase was caused primarily by filling staff positions that were vacant during the preceding year coupled with a $101,000 increase in expenses paid to regulatory consultants hired to assist in registration of SANOVA for new product categories.

Selling, General and Administrative Expense

        Selling, general and administrative expense of $5,127,686 for fiscal year 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 to support the 46% increase in SANOVA sales revenue coupled with a $318,000 increase in marketing expenses to solidify the Animal Health and Surface Disinfectant business segment and a $154,000 increase in variable compensation expense.

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

18

Interest Income and Interest Expense

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

        Fiscal 2002 interest expense of $88,597 was substantially higher than the $18,229 incurred during fiscal 2001 as a direct result of borrowing on the Company's line of credit to support asset purchases for the growing SANOVA business.

Income Taxes

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

        The Company expects its effective rate for fiscal 2003 to be approximately 33% to 35% of pretax income.

Fiscal Year 2001 as Compared with 2000

Net Sales

        Fiscal year 2001 net sales of $17,957,975 were $5,517,526, 44% higher than fiscal year 2000 sales.

        Sales of SANOVA food antimicrobial for fiscal 2001 were $8,400,623, an increase of $4,511,436, 116% vs. SANOVA sales during the preceding fiscal year. Twenty-eight poultry plants, processing approximately five billion pounds of poultry annually and representing roughly 16% of the total chicken market, were utilizing the SANOVA System to improve the quality of their product at fiscal year end. One beef plant was using the SANOVA System at fiscal year end. The Company's Animal Health and Surface Disinfectant sales for the twelve month period ended May 31, 2001 were $9,557,352, an increase of $1,006,090, 12% over fiscal 2000. The sales increase occurred primarily through increased sales to the Company's established distributors.

Cost of Goods Sold

        Cost of goods sold as a percentage of sales was 50% for the fiscal year ended May 31, 2001, a decrease of ten points from the 60% of net sales for the same period last year. Cost of goods sold for the Animal Health and Surface Disinfectant business segment was at 41% in both fiscal 2000 and fiscal 2001. SANOVA cost of goods sold as a percentage of sales improved substantially from 102% to 59% from FY 2000 to FY 2001 and this growing business segment accounted for the entire improvement in cost of goods as a percentage of sales. (See Segment Reporting, page 34).

Research and Development Expense

        Research and development expenses of $2,479,851 for the fiscal year ended May 31, 2001 were $684,598, or 38% higher than for fiscal 2000 primarily as a result of process development engineering expenses related to development of SANOVA applications for red meat parts/trim and red meat carcass interventions.

Selling, General and Administrative Expense

        Selling, general and administrative expenses of $4,251,359 for fiscal 2001 were $196,622, or 5% higher than for fiscal 2000. The increase reflects the addition of new employees to support the Company's 44% sales increase.

19

Interest Income, Net

        Interest income, net of interest expense was $121,104 for fiscal 2001, an amount $131,015 lower than in fiscal 2000. The decreased amounts of interest result essentially from lower investable cash resources in fiscal 2001 as compared to the previous fiscal year, and also to interest expense of $18,229, while no such interest expense was incurred in the previous fiscal year.

Income Taxes

        During fiscal 2001, the Company recorded income tax expense of $825,360 at an effective tax rate of 34.9%, as compared to an income tax benefit recorded for fiscal 2000 in the amount of $229,510 at an estimated effective rate of 34% of the pre-tax loss incurred in fiscal 2000. The increase in the tax rate from fiscal 2000 to fiscal 2001 was due to income subject to state taxation.

Liquidity and Capital Resources

        The Company's cash equivalents, short-term investments and US Treasury instruments totaled $2,847,581 on May 31, 2002 as compared to $2,332,782 on May 31, 2001. During fiscal 2002, net cash provided by operating activities was $4,737,487. An additional $1,000,000 was generated through a draw on the Company's $10,000,000 line of credit (resulting in a cumulative $2,000,000 draw on the line of credit). These cash resources were used for the acquisition of equipment totaling $5,359,256. The Company also received $147,814 as cash receipts from the exercise of stock options and redeemed a portion of its Class B Preferred Stock for $10,763. At this time, the Company expects to fund its existing operations and growth with cash generated by operations. If growth exceeds current expectations, it may be necessary to take additional advances on the Company's line of credit.

Outlook

•

SANOVA Food Quality System
Management expects the size of the Company's food antimicrobial business will continue to expand. During fiscal 2002, 14 operations were added to the SANOVA business and sales increased 46% as compared to the prior year. The addition of customers during the fiscal year, is expected to cause a further increase in SANOVA sales as the annualized effect is realized during fiscal 2003. In addition, the Company expects to add new customers during fiscal 2003. As of July 31, 2002 four such operations were added and an additional three new installations were progressing through start-up.



•

Animal Health and Surface Disinfectant Products
The worldwide dairy herd is decreasing slightly as cows become more productive partly through the increased use of mastitis prevention products such as those marketed by Alcide. In addition, the Company now faces direct competition from products similar to its products UDDERgold®, UDDERgold Plus, and 4XLA®. Despite these conditions, management believes that the market position enjoyed by its products, coupled with the strength of the Company's distribution network will enable Alcide to maintain or improve its level of udder care sales in fiscal 2003.

Recently Issued Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002 (effective for the Company on June 1, 2003). The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value

20

of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. Management is currently assessing the impact of this statement on the Company's financial position and results of operations.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001 (effective for the Company on June 1, 2002). This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and replaces the provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of Segments of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of segments of a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. Under SFAS No. 144, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell. Adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," (effective January 1, 2003) which replaces Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and states that an entity's commitment to an exit plan, by itself, does not create a present obligation that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The Company does not expect the adoption of SFAS No. 146 to have a material impact upon the Company's financial position or results of operations.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

        The Company is not significantly exposed to market risks arising from changes in interest rates as its cash and marketable securities of $2,847,581 at May 31, 2002 are in close approximation to its short term borrowings and, therefore, changes in prevailing interest rates paid for borrowing would tend to be offset by changes in interest received for investments.

        Further, at its present growth rate, the Company expects to be in a balanced cash position during fiscal 2003.

        Lastly, the Company's policy is to invest any excess cash resources in low risk, short-term and intermediate-term US Treasury instruments and bank money market funds to minimize market risks.

        The Company has no foreign currency exposure. All of its transactions with international distributors are denominated in US dollars.

ITEM 8. Financial Statements and Supplementary Data

        Reference is made to pages 13 and 28 through 41 of Form 10-K.

ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures

        On May 24, 2002, Alcide Corporation decided to dismiss Arthur Andersen LLP (Andersen) as its independent auditors and appoint KPMG LLP (KPMG) as the Company's independent auditors. The decision not to renew the engagement of Andersen and to select KPMG was approved by the Company's Board of Directors upon the recommendation of its Audit Committee.

        The change in the Company's certifying accountant was reported on Form 8-K and Form 8-K/A filed with the Securities and Exchange Commission on May 29, 2002 and June 21, 2002, respectively.

21

PART III

ITEM 10. Directors and Executive Officers

        This information is incorporated by reference from the Sections captioned "Item 1-Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's definitive Proxy Statement for its 2002 Annual 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.

ITEM 11. Executive Compensation

        For the fiscal year ended May 31, 2002, directors who do not have a consulting or an employment agreement with the Company received $1,000 cash compensation per Board of Directors meeting attended and committee meeting attended, unless held concurrently, a $6,000 cash retainer and a grant of stock options having an aggregate exercise price of $25,000 based on the fair market value of the Common Stock on the date of grant. In the past fiscal year, this compensation applied to William G. Spears and Charles A. Baker. It did not apply to Kenneth N. May who had a consulting arrangement with the Company, to Thomas L. Kempner who benefited indirectly from a consulting arrangement between the Company and Loeb Partners Corporation or to Joseph A. Sasenick, who received a salary as an officer of the Company.

        The following table summarizes compensation earned in fiscal years ended May 31, 2002, 2001 and 2000 by the Chief Executive officer and three other executive officers whose aggregate salary and bonus exceeded $100,000 in the most recent fiscal year (the "Named Executive Officers").

Summary Compensation Table

(1)

Mr. Winter joined the Company on February 1, 2001.

(2)

All other compensation represents amounts paid by the Company for disability and life insurance premiums.

22

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

        This information is incorporated by reference from the Section captioned "Share Ownership by Directors, Executive Officers and Certain Beneficial Owners" contained in the Company's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders.

ITEM 13. Certain Relationships and Related Transactions

        This information is incorporated by reference from the Section captioned "Certain Transactions" contained in the Company's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

Documents filed with Report:



1.

Consolidated Financial Statements

Reports of Independent Public Accountants.
Consolidated Balance Sheets as of May 31, 2001 and May 31, 2002.
Consolidated Statements of Operations for each of the years ended May 31, 2000, May 31, 2001 and May 31, 2002.
Consolidated Statements of Shareholders' Equity for each of the years ended May 31, 2000, May 31, 2001 and May 31, 2002.
Consolidated Statements of Cash Flows for each of the years ended May 31, 2000, May 31, 2001 and May 31, 2002.

Notes to Consolidated Financial Statements.

2.

Financial Statement Schedules

None.

3.

Exhibits

See Index to Exhibits on Page 24.

(b)

Reports on Form 8-K.

Reports on Form 8-K dated May 24, 2002 and Form 8-K/A dated June 21, 2002, reporting change in accountants.

23

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 19, 2002

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

24

INDEX TO EXHIBITS

25

**

Management contract, compensatory plan or arrangement.

26

Report of Independent Public Accountants

        The Board of Directors and Shareholders of Alcide Corporation:

        We have audited the accompanying consolidated balance sheet of Alcide Corporation and subsidiary as of May 31, 2002, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alcide Corporation and subsidiary as of May 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 7 to the consolidated financial statements, effective June 1, 2001, the Company changed its method of accounting for purchased goodwill and certain intangibles in fiscal year 2002.

(signed) KPMG LLP

Seattle, Washington
June 28, 2002

27

Report of Independent Public Accountants

        The Board of Directors and Shareholders of Alcide Corporation:

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

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alcide Corporation and subsidiary as of May 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2001 in conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Seattle, Washington
June 29, 2001

        The report of Arthur Andersen LLP (Andersen) is a copy of a report previously issued by Andersen on June 29, 2001. We have not been able to obtain a re-issued report from Andersen. Andersen has not consented to the inclusion of its report in this Annual Report on Form 10-K. The report of Andersen refers to financial statements for the year ended May 31, 2000 not included herein. Because Andersen has not consented to the inclusion of its report in this Annual Report, it may be more difficult for you to seek remedies against Andersen and your ability to seek relief against Andersen may be impaired.

28

Alcide Corporation

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

29

Alcide Corporation

Consolidated Statements of Operations

See accompanying notes to consolidated financial statements.

30

Alcide Corporation

Consolidated Statements of Shareholders' Equity

See accompanying notes to consolidated financial statements.

31

Alcide Corporation

Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements.

32

ALCIDE CORPORATION