FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2004

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from to .

Commission File Number: 0-12395

ALCIDE CORPORATION

Delaware		22-2445061
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

8561 154th Avenue North East, Redmond WA		98052
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (425) 882-2555

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES o NO ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February 29, 2004: 2,697,396, net of Treasury Stock.

ALCIDE CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets — February 29, 2004 and May 31, 2003

	Condensed Consolidated Statements of Operations - For the three and nine months ended February 29, 2004 and February 28, 2003

	Condensed Consolidated Statements of Shareholders’ Equity

	Condensed Consolidated Statements of Cash Flows - For the nine months ended February 29, 2004 and February 28, 2003

	Notes to Unaudited Condensed Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II.	OTHER INFORMATION

Item 1. Legal Proceedings

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURE

ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	February 29, 2004			May 31, 2003
Assets:

Current assets:
Cash and cash equivalents	$	4,567,517		$	2,286,641
Accounts receivable – trade, net	3,612,352			3,831,527
Inventory	1,863,547			2,097,097
Deferred and prepaid income taxes	163,126			243,413
Spare parts	1,119,037			884,226
Prepaid expenses and other current assets	465,408			468,863
Total current assets	11,790,987			9,811,767
Equipment and leasehold improvements:
SANOVA plant assets	18,026,583			17,037,502
Construction in progress	2,906,229			2,596,332
Office equipment	681,713			567,158
Laboratory, manufacturing equipment and vehicles	577,916			523,718
Leasehold improvements	90,463			73,483
Less: Accumulated depreciation and amortization	(12,304,215		)	(9,790,948		)
Total equipment and leasehold improvements, net	9,978,689			11,007,245

Goodwill	478,807			478,807
Other assets	70,885			70,885
Total Assets	$	22,319,368		$	21,368,704

Liabilities and Shareholders’ Equity:

Current liabilities:
Accounts payable	$	914,213		$	686,391
Accrued expenses	412,911			501,578
Income taxes payable	2,325			115,300
Total current liabilities	1,329,449			1,303,269
Deferred tax liability	596,817			565,287
Other long-term liabilities	—			8,140

Total Liabilities	1,926,266			1,876,696

Commitments and Contingencies

Redeemable Class “B” Preferred Stock - $.01 par value; authorized 10,000,000 shares; issued and outstanding: February 29, 2004 – 60,663; May 31, 2003 – 63,675	159,239			167,145

Shareholders’ equity:
Class “A” Preferred Stock - no par value, authorized 1,000 shares; issued and outstanding February 29, 2004 – 138; May 31, 2003 - 138	18,636			18,636

Common Stock - $.01 par value; authorized 10,000,000 shares; issued: February 29, 2004 – 3,083,355; May 31, 2003 – 3,040,597	30,833			30,406

Common treasury stock at cost February 29, 2004 – 385,959;May 31, 2003 - 385,959	(7,260,041		)	(7,260,041		)

Additional paid-in capital	22,049,051			21,502,828
Retained earnings	5,395,384			5,033,034
Total Shareholders’ Equity	20,233,863			19,324,863

Total Liabilities and Shareholders’ Equity	$	22,319,368		$	21,368,704

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended February 29 and 28,					For the Nine Months Ended February 29 and 28,
	2004		2003			2004		2003

Revenue:
Net sales	$	5,521,818	$	5,172,872		$	16,352,317	$	15,736,462

License revenue	321,974		330,722			917,387		590,876

Total revenue	5,843,792		5,503,594			17,269,704		16,327,338

Expenditures:
Cost of goods sold, exclusive ofimpairment charges	3,432,322		3,098,205			10,019,419		8,990,139

Impairment of SANOVA plant assets	—		8,460			337,816		61,761

Research and development expense	550,180		520,678			1,499,771		1,674,636

Consulting expense to related parties	15,000		15,000			45,000		45,000

Selling, general and administrative expense	1,542,210		1,430,379			4,855,250		4,355,957
Total expenditures	5,539,712		5,072,722			16,757,256		15,127,493

Operating income	304,080		430,872			512,448		1,199,845

Interest income	5,772		5,945			14,036		20,013

Interest expense	—		(15,219		)	—		(53,072		)

Other income	10,285		8,862			30,977		27,646

Income before provision for income taxes	320,137		430,460			557,461		1,194,432

Provision for income taxes	112,047		150,661			195,111		418,051

Net income	$	208,090	$	279,799		$	362,350	$	776,381

Basic earnings per common share	$	.08	$	.11		$	.14	$	.29

Diluted earnings per common share	$	.08	$	.10		$	.14	$	.29

Weighted average common stock and dilutive potential common shares outstanding:
Basic	2,689,704		2,659,910			2,666,339		2,657,352
Diluted	2,712,728		2,682,765			2,680,147		2,681,962

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

							Additional									Total
	Class “A” Preferred Stock			Common Stock			Paid-in		Common Treasury Stock					Retained		Shareholders’
	Shares	Amount		Shares	Amount		Capital		Shares		Amount			Earnings		Equity
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

Net income														92,767		92,767

Balance August 31, 2003	138	$	18,636	3,040,597	$	30,406	$	21,502,828	(385,959	)	$	(7,260,041	)	$	5,125,801	$	19,417,630

Exercise of stock options				400	4		4,771									4,775

Tax benefit from exercise of stock options							339									339

Net income														61,493		61,493

Balance November 30, 2003	138	$	18,636	3,040,997	$	30,410	$	21,507,938	(385,959	)	$	(7,260,041	)	$	5,187,294	$	19,484,237

Exercise of stock options				21,693	217		234,531									234,748

Stock issued to employee stock ownership plan				20,665	206		303,569									303,775

Tax benefit from exercise of stock options							3,013									3,013

Net income														208,090		208,090

Balance February 29, 2004	138	$	18,636	3,083,355	$	30,833	$	22,049,051	(385,959	)	$	(7,260,041	)	$	5,395,384	$	20,233,863

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Nine Months Ended February 29 and 28,
	2004			2003
Cash Flows from Operating Activities:
Net income	$	362,350		$	776,381
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation	2,877,855			2,718,253

Asset impairment charges	337,816			61,761

Loss on disposal of assets	16,911			—

Tax benefit from exercise of stock options	3,352			9,392

Deferred income taxes	49,678			418,659

Common stock issued to employee stock ownership plan	303,775			53,906

Decrease (increase) in assets:
Accounts receivable – trade, net	219,175			(1,006,450		)
Inventory	233,550			(191,847		)
Prepaid income taxes	62,139			195,000
Spare parts	(234,811		)	(186,188		)
Prepaid expenses and other current assets	3,455			88,852
Other assets	—			3,539

Increase (decrease) in liabilities:
Accounts payable	227,822			66,560
Accrued expenses	(88,667		)	(241,398		)
Income taxes payable	(112,975		)	—
Other long-term liabilities	(8,140		)	(26,346		)
Net cash provided by operating activities	4,253,285			2,740,074

Cash Flows from Investing Activities:
Acquisition of equipment	(2,204,026		)	(1,904,794		)

Cash Flows from Financing Activities:
Redemption of Class “B” Preferred Stock	(7,906		)	(12,469		)
Exercise of stock options	239,523			53,205
Net cash provided by financing activities	231,617			40,736

Net increase in cash and cash equivalents	2,280,876			876,016
Cash and cash equivalents at beginning of period	2,286,641			2,847,581
Cash and cash equivalents at end of period	$	4,567,517		$	3,723,597

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for income taxes	$	183,366		$	10,000
Cash paid during the period for interest	$	—		$	53,072

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Alcide Corporation (the “Company”) for the three and nine month periods ended February 29, 2004 and February 28, 2003 have been prepared in accordance with the instructions to Form 10-Q. Certain information and disclosures normally included in notes to financial statements have been condensed or omitted according to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2003. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation. Certain reclassifications have been made to prior year financial statements to conform to current year presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

Stock Option Plans

The Company has two stock option plans that allow granting of options to employees, officers, directors and consultants. Options granted to directors vest immediately while all other options vest evenly over a five-year period. As allowed by Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS 148), the Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25, “Accounting for Stock issued to Employees” (APB 25).

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123.

	Three Months Ended February 29 and 28,				Nine Months Ended February 29 and 28,
	2004		2003		2004		2003

Net income, as reported	$	208,090	$	279,799	$	362,350	$	776,381

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	112,800		121,700		348,300		363,800

Pro forma net income	$	95,290	$	158,099	$	14,050	$	412,581

Earnings per share
Basic — as reported	$	.08	$	.11	$	.14	$	.29
Basic — pro forma	.04		.06		.01		.16

Diluted — as reported	.08		.10		.14		.29
Diluted — pro forma	.04		.06		.01		.15

Recently issued accounting pronouncements

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 or includes a lease within the scope of SFAS No. 13 “Accounting for Leases.” If it is determined that a lease exists, the lease and non-lease components of a combined sales arrangement must be accounted for separately. Issue 01-8 is effective prospectively for arrangements entered into, modified, or acquired in fiscal periods beginning after May 28, 2003.

Management has determined that at this time the revenue derived from the lease component in connection with SANOVA contracts is not material and, therefore, the Company has not separately reported lease revenue. If in the future, the amount becomes material and Issue 01-8 does not change the definition of a “lease”, the Company will be required to separately report lease revenue.

2. Accounts Receivable — Trade, Net consisted of the following:

	February 29, 2004		May 31, 2003
Domestic Distributors	$	308,803	$	372,837
International Distributors	1,100,538		1,402,504
SANOVA Customers	2,109,031		1,888,840
Other Receivables	93,980		167,346
Total Accounts Receivable – Trade, Net	$	3,612,352	$	3,831,527

The Company evaluates impairment of its trade receivables on a regular basis. The allowance for doubtful accounts was $28,000 as of February 29, 2004 and May 31, 2003, respectively, which was estimated based on collection history and known events.

3. Inventory consisted of the following:

	February 29, 2004		May 31, 2003
Raw Materials	$	510,894	$	692,480
Finished Products	540,224		484,426
SANOVA Inventory at Customer Sites	812,429		920,191
Total Inventory	$	1,863,547	$	2,097,097

4. Commitments and Contingencies

As of February 29, 2004, the Company had contracts for future startups of three poultry and eight red meat processing operations. These systems are expected to be installed in the fourth quarter of fiscal 2004 and first quarter of fiscal 2005 at an approximate total cost of $1,220,000. As of February 29, 2004, approximately $840,000 of the equipment required for these installations was on hand. Subsequent to the end of the quarter, contracts were signed for one poultry plant and thirteen red meat plants. The cost for these systems is expected to be about $1,800,000. Approximately $400,000 of the equipment required for these installations had been purchased as of February 29, 2004.

5. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares of the Company include the dilutive effect of outstanding stock options and warrants. For the three and nine month periods ended February 29, 2004, potential common shares excluded because of

their antidilutive effect were 239,326 and 246,727 shares respectively. For the three and nine month periods ended February 28, 2003, 260,392 and 242,892 shares were excluded, respectively.

Basic and diluted earnings per share were calculated as follows:

	Three Months Ended February 29 and 28,				Nine Months Ended February 29 and 28,
	2004		2003		2004		2003

Net income	$	208,090	$	279,799	$	362,350	$	776,381
Weighted average number of common shares outstanding	2,689,704		2,659,910		2,666,339		2,657,352

Basic earnings per share	$	.08	$	.11	$	.14	$	.29
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 and warrants	23,024		22,855		13,808		24,610
Weighted average common shares outstanding and dilutive potential common shares	2,712,728		2,682,765		2,680,147		2,681,962

Diluted earnings per share	$	.08	$	.10	$	.14	$	.29

6. Orders for Future Delivery

At February 29, 2004 and February 28, 2003, the Company had orders for future delivery of $263,087 and $430,918, respectively. The $263,087 orders for future delivery are scheduled for shipment in March 2004. Data for both years excludes expected sales of SANOVA because contracts with SANOVA customers do not require placement of purchase orders for future delivery.

7. Segment Information

The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information” and reports segment information in the same format as reviewed by the Company’s management (the “Management Approach”), which is organized around differences in products and services. Management has determined the Company has two reportable segments, Animal Health and Surface Disinfectants and SANOVA Food Antimicrobial Products.

The Company’s reportable segments are strategic business units that offer similar products, but to entirely different customers at substantially different selling prices and cost of goods sold structures. The Company does not have any inter-segment revenues.

The accounting policies of the segments are the same as those described in Note 2 — Summary of Significant Accounting Policies in the Company’s May 31, 2003 Form 10-K. The Company evaluates performance based on gross margin from the sale of each segment’s products and does not allocate expenses beyond gross margin to the two segments.

Segment net sales, gross margin, assets, fixed asset additions and depreciation expense are as follows:

	Three Months Ended February 29 and 28,				Nine Months Ended February 29 and 28,
	2004		2003		2004		2003
Animal Health and Surface Disinfectants
License Revenue – U.S.	$	321,974	$	330,722	$	917,387	$	590,876
Net Sales - U.S.	768,440		878,954		2,267,233		2,384,374
Net Sales - International	1,030,101		1,070,183		3,051,987		3,230,895
Total Revenue	2,120,515		2,279,859		6,236,607		6,206,145
Gross Margin	1,256,354		1,395,902		3,772,610		3,654,518

Assets (at end of period)	3,043,113		3,359,538		3,043,113		3,359,538
Fixed Asset Additions	—		—		—		—
Depreciation Expense	1,344		1,344		4,032		4,032

SANOVA Food Antimicrobial Products
Net Sales - U.S.	3,723,277		3,223,735		11,033,097		10,121,193
Gross Margin, before impairment	1,155,116		1,009,487		3,477,675		3,682,681
Gross Margin, after impairment	1,155,116		1,001,027		3,139,859		3,620,920

Assets (at end of period)	13,742,632		14,996,925		13,742,632		14,996,925
Fixed Asset Additions	536,514		438,700		2,127,321		1,822,116
Depreciation Expense	879,103		903,852		2,778,712		2,627,790

Not Segment Related
Assets (at end of period)	5,533,623		4,678,765		5,533,623		4,678,765
Fixed Asset Additions	7,277		4,468		76,705		82,678
Depreciation Expense	32,349		29,908		95,111		86,431

Total
License Revenue	321,974		330,722		917,387		590,876
Net Sales	5,521,818		5,172,872		16,352,317		15,736,462
Total Revenue	5,843,792		5,503,594		17,269,704		16,327,338
Gross Margin	2,411,470		2,396,929		6,912,469		7,275,438

Assets (at end of period)	22,319,368		23,035,228		22,319,368		23,035,228
Fixed Asset Additions	543,791		443,168		2,204,026		1,904,794
Depreciation Expense	912,796		935,104		2,877,855		2,718,253

Assets assigned to the business segments include accounts receivable, inventories, fixed assets, spare parts and goodwill. No single customer accounted for 10% or more of revenues.

8. Subsequent Events

On March 11, 2004, Alcide entered into an Agreement and Plan of Merger with Ecolab Inc., which was approved by Alcide’s board of directors. Under the terms of the agreement, a wholly-owned subsidiary of Ecolab will merge with and into Alcide, and Alcide will survive as a wholly-owned subsidiary of Ecolab. Each stockholder of Alcide will receive $21.00 per share of Alcide common stock, to be in shares of Ecolab common stock based on the average of Ecolab’s closing stock price for a ten-day period ending on the fifth day prior to the effective date of the merger. Holders of outstanding options to purchase Alcide common stock that have an exercise price equal to or greater than $21.00 per share will receive a cash payment of such options equal to $21.00, subject in certain instances to the consent of such option holders. Ecolab agreed to assume options held by certain holders of outstanding options who do not consent to receive a cash payment of $21.00 per share. Certain stockholders of Alcide who hold in the aggregate approximately 22.4% of the outstanding stock of Alcide have entered into voting agreements with Ecolab which provide that they will vote their shares in favor of the acquisition. The transaction is anticipated to be a tax-free reorganization for income tax purposes. The consummation of the merger is subject to the approval of Alcide’s stockholders and other customary closing conditions.

On March 15, 2004, a complaint was filed against Alcide and its Directors in the King County Superior Court of the State of Washington. The complaint which purports to be brought as a class action alleges that Alcide’s Directors breached their fiduciary duties in connection with their approval of the Ecolab Merger Agreement and seeks to enjoin the transaction. The Company believes that the actions of the Company and the Board were appropriate.

PART I

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Alcide Corporation (the “Company” or “Alcide”) is a Delaware Corporation organized in 1983 which has its executive offices and research laboratories at 8561 154^th Avenue N.E., Redmond, Washington 98052.

Alcide is engaged in 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.

The Company reports and controls its business through two business segments:

• Animal Health and Surface Disinfectants. This segment includes products sold to the dairy industry for prevention of mastitis infections in dairy cows under the trade names UDDERgold^® UDDERgold Plus^®, UDDERgold Platinum^®, UDDERgold 5-Star, 4XLA^® and Pre-Gold^®. All of the Company’s Animal Health revenue is generated through sales to distributors and license revenue from one distributor. These distributors re-sell directly to dairy farmers and farm cooperatives.

This business segment also includes a line of sterilants and disinfectants under the trade names of Exspor^® and LD^® sold predominantly to the health care industry to reduce the potential for disease transmission via contaminated surfaces.

• SANOVA Food Antimicrobial Products. SANOVA is an antimicrobial solution sold to poultry and meat slaughter operations and food processing companies for control of food borne pathogens such as Salmonella, E-coli 015787, Listeria, and Campylobacter. All SANOVA sales to date have been direct to the end customer/user. Typically, the SANOVA components are delivered to the customer’s site in bulk concentrate form then, at the time of use, the components are automatically mixed, diluted and dispensed through a PLC controlled mixing apparatus supplied and owned by Alcide.

Risk and Uncertainties

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 governmental 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. Forward looking 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.

Risks and uncertainties that may affect the Company’s operating results and business performance include: the Company’s ability to protect its patents and other proprietary rights; the volume and timing of product sales; pricing; market acceptance of its products; the costs and effects of complying with laws and

regulations relating to the environment and to the manufacture, storage, distribution and labeling of the Company’s products; the ability to develop and maintain distribution and supply arrangements; the effect of the Company’s accounting policies; changes in tax, fiscal and governmental and regulatory policies; economic factors such as the worldwide economy, interest rates, currency rates and currency movements; changes in the capital markets affecting the Company’s ability to raise capital; the occurrence of litigation or claims; the loss or insolvency of a major customer, distributor or supplier; losses of or changes in executive management; the Company’s ability to continue product introductions and technological innovations; and other uncertainties and risks reported from time to time in our reports filed with the Securities and Exchange Commission. In addition, the Company notes that its stock price can be affected by fluctuations in quarterly earnings. There can be no assurance that the Company’s earnings level will meet investors’ expectations.

The March 11, 2004 announcement of the proposed transaction with Ecolab could have an adverse effect on the revenue of the Company in the near-term if customers delay, defer or cancel purchases pending consummation of the planned transaction due to potential uncertainty about the direction of the combined company’s product offerings and its support and service of existing products. To the extent that the Company’s announcement of the transaction creates uncertainty among customers such that one or more large customers, or a significant group of small customers, delays purchase decisions pending consummation of the planned transaction or cancels existing agreements, the results of operations of the Company could be negatively affected. Decreased revenue could have a variety of adverse effects, including negative consequences to the Company’s relationships with, and ongoing obligations to, customers, suppliers and others with whom the Company has business relationships. In addition, any resulting negative impact on the Company’s quarterly operating results and revenue could cause a decline in the stock price of the Company.

If the planned merger with Ecolab is not completed, the Company could suffer a number of consequences that may adversely affect the Company’s business, results of operations and stock price, including the following:

• Alcide would not realize the benefits we expect from becoming part of a combined company with Ecolab, including the potentially enhanced financial and operational position;

• activities relating to the merger and related uncertainties may divert management’s attention from the Company’s day-to-day business and cause disruptions among the Company’s employees and to its relationships with customers and business partners, thus detracting from the Company’s ability to increase revenue and minimize costs and possibly leading to a loss of revenue and market position that the Company may not be able to regain if the transaction does not occur;

• the market price of the Company’s common stock could decline following an announcement that the merger has been abandoned, to the extent that the current market price reflects a market assumption that the merger will be completed;

• Alcide could be required to pay Ecolab a $2.5 million termination fee if the merger agreement is terminated under certain specified conditions;

• Alcide would remain liable for certain costs related to the transaction, such as legal, accounting, financial advisor and financial printing fees; and

• Alcide may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.

Substantially all of the Company’s products are subject to regulatory approval of or control by various governmental agencies such as the FDA, USDA and EPA 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 relates to competitors’ products.

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 SANOVA Food Antimicrobial 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 SANOVA business involves a capital investment ranging from $20,000 to $500,000 for each user plant site (depending on the size of the operation to mix, dilute and distribute SANOVA). 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.

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. Installation costs are depreciated over the shorter of a five-year life or the contract term.

The economic vitality of the industries served by the Company’s products can have an impact on Alcide’s ability to sell its products, expand sales and maintain product price levels. Within the Animal Health business segment, the Company’s products are premium priced consistent with their superior performance. However, as dairy industry product margins are compressed, some farmers may discontinue the use of Alcide products in favor of lower priced competitors’ products. Likewise, the Company’s ability to sell and expand sales of its Food Safety products may be impacted by economic conditions within the poultry and red meat industries.

Critical Accounting Policies

• Revenue Recognition

Revenue from sales of SANOVA 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. Payment terms are generally sixty days for international distributors and thirty days for domestic distributors.

• 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 just over five years, the Company has a limited, practical basis on which to assign depreciable life. Management believes, however, based on five years experience in three plants, that well-maintained assets will be operational beyond five years and, further, that if customers decide not to renew their contracts major portions of the assets can be relocated to new customer sites. As of February 29, 2004, plant assets from four installations have been redeployed to new sites. The cost to maintain the assets is charged to operations.

Commitments and Contingencies

Leases: The Company leases certain property under non-cancelable operating leases that expire through July 2009. Insurance, utilities and maintenance expenses are borne by the Company. There are no contingent rentals or subleased rentals.

SANOVA Agreements: The Company has signed contracts with poultry and beef processing plants for SANOVA systems to be installed in the fourth quarter of FY 2004 and first quarter of 2005 which will cost approximately $3.0 million. As of February 29, 2004, $1.2 million of the equipment required was on hand for these installations.

Employment Agreements: One officer has a one year, automatically renewable, employment agreement which currently obligates the Company to a base salary of $287,929 per year. Bonus compensation of 100% of base pay can be earned at the discretion of the Board of Directors.

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 $1,129,610 in fiscal 2003, it redeemed 3,012 shares of Series 2 Stock on September 30, 2003 for $7,906. This leaves a total of $159,239 of Class “B” Preferred Stock to be redeemed. The Company also has a Class “A” Preferred Stock having a value of $18,636. The provisions of the Class “A” Preferred allow the Company to redeem the stock at its face value. The Ecolab Merger Agreement requires the Company to redeem all of the outstanding Class “A” and Class “B” Preferred stock and, therefore, the amounts to be redeemed are $177,875.

The following table summarizes the above commitments:

	Less than 1 year		FY 2005		FY 2006		FY 2007		FY 2008		FY 2009

Operating Leases	$	62,647	$	135,544	$	137,999	$	140,946	$	141,437	$	23,573

SANOVA Agreements	1,100,000		700,000		—		—		—		—

Preferred Stock Redemption	177,875		—		—		—		—		—

Employment Agreements	287,929		—		—		—		—		—

Total Contractual Commitments	$	1,628,451	$	835,544	$	137,999	$	140,946	$	141,437	$	23,573

Financial Condition and Results of Operations

Management Overview

On March 11, 2004, Alcide announced an agreement to be acquired by Ecolab Inc. (“Ecolab”) in a merger transaction. The proposed transaction is anticipated to close late in the fourth quarter of fiscal 2004 or in the first quarter of fiscal 2005. The announcement of the transaction and actions taken by the Company in preparing for the submission of the transaction to the stockholders and in planning for the integration with Ecolab may impact the results of operations and liquidity of the Company in future periods. For more information on the proposed merger see “Other Information” on page 19 and for more information on the risks associated with the merger agreement see “Risks and Uncertainties” above. A proxy statement/prospectus will be filed with the Securities and Exchange Commission in connection with the proposed merger. The proxy statement/prospectus will be

mailed to all holders of our stock and will contain important information about Alcide, Ecolab and the proposed transaction, risks relating to the transaction and the combined company, and related matters. The Company urges all of its stockholders to read the proxy statement/prospectus when it becomes available.

The economic conditions in the meat and poultry processing industries have stabilized. Within the poultry industry, processors and the Department of Agriculture have successfully met the challenges posed by the recent Avian Influenza outbreak to a far greater degree than international competitors in China, the Netherlands and Thailand. This coupled with an increase in the export quota to Russia have led to improved product pricing for U.S. poultry processors. Alcide expects to add three major new poultry customers during the fiscal fourth quarter.

The beef processing industry has also reacted appropriately to the recent “mad cow” scare and economic conditions within the industry appeared to have stabilized. During the fourth quarter of fiscal 2004, the Company expects to start SANOVA application in ten to fifteen beef operations.

The Animal Health and Surface Disinfectant business unit has been helped by improving U.S. milk prices however, sales of the Company’s ancillary product lines were down for the quarter because of an inventory build up in the second quarter. In the second quarter, UDDERgold Platinum, the next generation UDDERgold product, was launched in the Netherlands as we continue the strategy of replacing global UDDERgold sales with UDDERgold Platinum.

Alcide’s net cash provided by operating activities was $4,253,285 for the nine month period ended February 29, 2004 versus $2,740,074 for the equivalent nine month period last year. The Company has no debt and its cash and cash equivalents on February 29, 2003, were $4,567,517 an improvement of $2,280,876 since May 31, 2003. The Company expects to fund its existing operations and growth with its current cash balance plus cash generated by operations. If growth exceeds current expectations, it may be necessary to draw on the Company’s line of credit.

Net Sales

Net sales and license revenue totaling $5,843,792 for the quarter ended February 29, 2004, were 6% higher than the equivalent quarter last year. Fiscal 2004 nine month net sales and license revenue of $17,269,704 were 6% higher than nine month sales in fiscal 2003.

Sales of SANOVA food antimicrobial to the food processing industries totaled $3,723,277 for the quarter ended February 29, 2004, an amount $499,542, or 15% higher than for the third fiscal quarter last year. SANOVA sales during the nine months ended February 29, 2004, were $11,033,097 an amount $911,904, or 9% higher than the nine months last year.

The Company’s Animal Health and Surface Disinfectant revenues for the quarter ended February 29, 2004 were $2,120,515 including $321,974 in license revenue. During the third quarter last fiscal year, Animal Health and Surface Disinfectant revenues were $2,279,859 including $330,722 in license revenue. During the fiscal nine months, the Company’s Animal Health and Surface Disinfectant revenues were $6,236,607 including $917,387 in license revenue as compared to fiscal 2003 nine month revenue of $6,206,145 which included $590,876 in license revenue.

Cost of Goods Sold, Exclusive of Impairment Charges

The cost of goods sold before SANOVA plant asset impairment charges was 59% of total revenue for the quarter and 58% of total revenue for the nine month period ended February 29, 2004 as compared to 56% for the quarter and 55% for the corresponding nine month period one year ago.

SANOVA business segment cost of goods sold were 69% of SANOVA sales for the quarter ended February 29, 2004, as well as for the equivalent quarter last year.

Cost of goods sold before plant asset impairment charges for the SANOVA business segment was 68% for the nine month period ended February 29, 2004, as compared to 64% of net sales for the same period last year. The four point

increase in cost of goods as a percentage of sales was caused by three factors. SANOVA raw material usage increased in six plants as a result of a transition to post-chill dip operations. Secondly, the unabsorbed depreciation expense related to underutilization of equipment idled in the first quarter of 2003 continued through fiscal 2004 and lastly, capital investments made to transition to post-chill operations added to the depreciation expense component of cost of goods.

Cost of goods sold for the Animal Health and Surface Disinfectant business unit segment was 48% of net sales (excluding license revenue) for the quarter and 46% for the nine month period ended February 29, 2004 as compared to 45% of net sales for the quarter and the nine month period last year. The increase was caused primarily by product mix favoring growth in the lower margin ancillary product lines.

Research and Development Expense

Expenditures for the quarter ended February 29, 2004 were $550,180 an amount 6% higher than for the equivalent period last year. The increase reflects primarily the timing of expenditures as nine month R&D expenses of $1,499,771 were $174,865 or 10% lower than for the first nine months of fiscal 2003 reflecting the conclusion of development activities related to the Company’s new animal health products and reduction in the scope of SANOVA process validation trials.

Selling, General and Administrative Expense

Fiscal 2004 third quarter expenses of $1,542,210 were $111,831 higher than third quarter expenses in fiscal 2003. Nine month expenses of $4,855,250 were $499,293 higher than for the first nine months last year. The expense increase was caused predominantly by the patent infringement lawsuit against Bio-Cide International ($416,579 for the nine month period).

In connection with the proposed acquisition of Alcide by Ecolab, Alcide incurred significant legal and financial advisor expenses, $250,000 of which was reimbursed by Ecolab on March 16, 2004 pursuant to the terms of the merger agreement. The Company expects general administrative costs to increase in the coming period as a result of expenses incurred in connection with the proposed acquisition of the Company by Ecolab, regardless of consummation of the transaction, which expenses will be offset in part by Ecolab’s agreement to reimburse the Company, subject to certain limitations, for certain of these expenses. In addition, if the merger agreement with Ecolab is terminated by Ecolab because its stock price for the ten-day period ending on the fifth day prior to the effective date of the merger is less than $21.00 per share, Alcide will be entitled to receive reimbursement for certain expenses Alcide incurs in connection with the transaction.

Interest Income

Interest income was $5,772 for the quarter and $14,036 for the nine month period ended February 29, 2004 versus $5,945 and $20,012 for the quarter and nine month period last year. The decrease was due to lower prevailing short-term interest rates.

Interest Expense

The Company incurred no interest expense for either the quarter or nine month period ended February 29, 2004.

Outlook

• Animal Health and Surface Disinfectant Products

The worldwide dairy herd continues to decline but milk supplies continue to grow as a result of the implementation of modern dairy farming practices including the use of superior teat dip products like those sold by the Company. This increase in supply has caused milk prices in key European markets to decline over the past several years putting pressure on the profitability of dairy farms in those markets. Recently the global trend of lower milk prices has reversed in the U.S. for a number of reasons including

a reduction in the use of Somatatropin, a hormone used to enhance milk production. The Company faces increased direct competition from products similar to its products, UDDERgold, UDDERgold Platinum, UDDERgold 5-Star and 4XLA. The Company’s strategy is to maintain a performance edge over competing products. However, with increasing regulatory demands on animal health products in key global markets the time required to introduce enhanced products is longer than the Company anticipated. Because Alcide sells through distributors, both changes in the distribution network and the introduction of new products can cause the Company’s sales to shift from quarter to quarter as distributors increase or decrease their inventories of Alcide products. On an ongoing basis, management believes that its distribution network, combined with Alcide’s evolving new product introductions, will enable the Company to maintain its share of market. In the short-term, the recently improved pricing for milk products is a positive business factor for the Company’s premium priced products in the U.S. marketplace. The recent “mad cow” incident has not had a major negative impact on the U.S. dairy industry but new regulations implemented by USDA have been projected to negatively impact dairy profitability in the short run.

• SANOVA

Management expects that the size of the Company’s food antimicrobial business will continue to expand. The poultry industry has continued to recover from last year’s economic downturn and as a result Alcide has been able to redeploy SANOVA systems from four of the idled sites to new customer operations. During the nine months ended February 29, 2004, the Company started four new poultry operations and seven new red meat operations. Subsequent to February 29, 2004, one new poultry operations and six new red meat operations have been added. Contracts are in-hand to start eighteen additional new operations within the next two quarters.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is not significantly exposed to market risks from changes in interest rates. At its present growth rate, the Company expects to be in a balanced cash position during fiscal 2004. The Company’s policy is to invest any excess cash resources in low risk, short-term and intermediate-term U.S. Treasury instruments and bank money market funds to minimize market risks.

The Company has no direct foreign currency exposure. All of its present transactions with international distributors are denominated in U.S. dollars.

ITEM 4. Controls and Procedures

a) The Company’s Chairman and CEO, and President and CFO, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of the end of the period covered by this quarterly report, have concluded that, as of that date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiary would be made known to them by others within those entities.

b) There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the end of the period covered by this quarterly report. There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions taken.

PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

On March 8, 2004, Alcide Corporation and Bio-Cide International Inc., through their attorneys, confirmed that the Memorandum of Understanding signed by both parties on October 2, 2003 is the final agreement of the parties with regard to settlement of the lawsuit between Alcide and Bio-Cide.

ITEM 5. Other Information

On March 11, 2004, Alcide issued a press release announcing the execution of an Agreement and Plan of Merger, dated as of March 11, 2004 (the “Merger Agreement”), by and among Ecolab, Bessy Acquisition Inc., a Delaware corporation and wholly-owned subsidiary of Ecolab (“Merger Sub”), and Alcide. In accordance with the Merger Agreement, Merger Sub will merge with and into Alcide, and Alcide will survive as a wholly-owned subsidiary of Ecolab. In the transaction, each stockholder of Alcide will receive $21.00 per share of Alcide common stock, to be paid in shares of Ecolab common stock based on the average of Ecolab’s closing stock price for a ten-day period ending on the fifth day prior to the effective date of the merger.

The consummation of the merger is subject to the approval of the stockholders of Alcide and other customary closing conditions. The merger is intended to be a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended and is expected to be treated as a purchase for financial accounting purposes, in accordance with generally accepted accounting principles.

In connection with the Merger Agreement, certain stockholders of Alcide, including executive officers and directors of Alcide and certain of their affiliates, entered into voting agreements with Ecolab in which, among other things, each such stockholder agreed, until the earlier of the consummation of the merger or the termination of the Merger Agreement, to vote shares of Alcide common stock in (i) favor of the adoption of the Merger Agreement and approval of the merger and (ii) against the approval of any proposal that would result in a change in the directors of Alcide, any change in the present capitalization of Alcide, any amendment to Alcide’s Certificate of Incorporation or Bylaws, a breach by Alcide of the Merger Agreement, impair Alcide’s ability to perform its obligations under the Merger Agreement or otherwise prevent or materially delay the consummation of the merger and the other transactions contemplated by the Merger Agreement. These stockholders collectively own approximately 22.4% of the outstanding Alcide stock as of March 11, 2004.

The foregoing description of the Merger Agreement and voting agreements does not purport to be complete and is qualified in its entirety by the terms and conditions of the Merger Agreement and voting agreements. Copies of the Merger Agreement and other documents related to the transaction are attached as exhibits to the Current Report on Form 8-K Alcide filed with the Securities and Exchange Commission on March 12, 2004.

ITEM 6. Exhibits and Reports on Form 8-K

a) Exhibits:

31.1 Certification of Periodic Report by Chairman and Chief Executive Officer of Corporation.

31.2 Certification of Periodic report by President and Chief Financial Officer of Alcide Corporation.

32.1 Certification pursuant to 18 U.S.C. Section 1350.

b) Reports on Form 8-K:

Report on Form 8-K dated January 14, 2004 reporting results of operations for the quarter ended November 30, 2003.

Report on Form 8-K dated March 11, 2004 announcing the execution of a merger agreement with Ecolab.

SIGNATURE

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

			ALCIDE CORPORATION
			The Registrant


Date: April 12, 2004			By /s/ John P. Richards
			John P. Richards
			President
			Chief Financial Officer

ALCIDE CORP 10-Q