<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
|_| 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 000-21326
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Anika Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-3145961
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
236 WEST CUMMINGS PARK, WOBURN, MASSACHUSETTS 01801
(Address of Principal Executive Offices) (Zip Code)
-----------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 932-6616
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
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 last 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
At August 2, 2000 there were issued and outstanding 9,934,280 shares of
Common Stock, par value $.01 per share.
1
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<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ANIKA THERAPEUTICS, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
2000 1999
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................... $5,469,430 $6,440,705
Short-term investments....................................................................... 13,681,829 8,184,870
Accounts receivable, net..................................................................... 2,115,629 2,106,452
Inventories.................................................................................. 7,234,413 5,493,701
Prepaid expenses............................................................................. 485,894 721,206
----------- -----------
Total current assets..................................................................... 28,987,195 22,946,934
----------- -----------
Property and equipment......................................................................... 8,496,529 8,116,233
Less: accumulated depreciation................................................................. 5,032,638 4,587,692
----------- -----------
Net property and equipment............................................................... 3,463,891 3,528,541
----------- -----------
Long-term investments.......................................................................... - 5,558,029
Notes receivable from officers................................................................. 353,000 353,000
Deposits....................................................................................... 124,600 124,600
----------- -----------
Total assets............................................................................. $32,928,686 $32,511,104
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................. $1,309,382 $629,080
Accrued expenses............................................................................. 1,416,613 1,552,661
Deferred revenue............................................................................. 1,934,968 1,792,505
----------- -----------
Total current liabilities................................................................ 4,660,963 3,974,246
----------- -----------
Long-term deferred revenue..................................................................... 2,650,000 2,825,000
=========== ===========
Commitments and contingencies (Note 9)......................................................... -- --
Stockholders' equity:
Redeemable convertible preferred stock; $.01 par value: authorized 750,000 shares; no shares
issued and outstanding....................................................................... -- --
Undesignated preferred stock; $.01 par value: authorized 1,250,000 shares; no shares issued
and outstanding.............................................................................. -- --
Common stock; $.01 par value: authorized 30,000,000 shares; issued 9,991,943 shares in 2000
and 1999, respectively....................................................................... 99,919 99,919
Additional paid-in capital................................................................... 31,737,212 31,959,316
Deferred compensation........................................................................ (384,570) (615,001)
Treasury stock (at cost, 57,663 and 200,863 shares in 2000 and 1999, respectively)........... (279,756) (959,870)
Accumulated deficit.......................................................................... (5,555,082) (4,772,506)
----------- -----------
Total stockholders' equity............................................................... 25,617,723 25,711,858
----------- -----------
Total liabilities and stockholders' equity............................................... $32,928,686 $32,511,104
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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<TABLE>
<CAPTION>
ANIKA THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C>
Product revenue................................................ $3,668,765 $3,433,346 $6,289,598 $6,668,996
Licensing fees................................................. 100,000 100,000 200,000 200,000
---------- ---------- ------------ -----------
Total revenue............................................... 3,768,765 3,533,346 6,489,598 6,868,996
Cost of product revenue........................................ 2,422,617 1,688,714 3,655,585 3,396,885
---------- ---------- ------------ -----------
Gross profit................................................. 1,346,148 1,844,632 2,834,013 3,472,111
Operating expenses:
Research and development..................................... 907,227 924,819 2,220,965 1,632,676
Selling, general and administrative.......................... 977,210 807,220 1,976,672 1,551,192
---------- ---------- ------------ -----------
Total operating expenses..................................... 1,884,437 1,732,039 4,197,637 3,183,868
---------- ---------- ------------ -----------
Income (loss) from operations.................................. (538,289) 112,593 (1,363,624) 288,243
Interest income, net......................................... 329,741 297,879 590,989 600,029
---------- ---------- ------------ -----------
Income (loss) before provision for income taxes................ (208,548) 410,472 (772,635) 888,272
Provision for income taxes................................... 9,941 12,584 9,941 34,563
---------- ---------- ------------ -----------
Income (loss) before cumulative effect of change in accounting
principle.................................................... (218,489) 397,888 ($782,576) 853,709
Cumulative effect of change in accounting principle............ - - - (3,625,000)
----------- ---------- ------------ ------------
Net income (loss) ............................................. $(218,489) $397,888 $(782,576) $(2,771,291)
=========== ========== ============ ============
Basic income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle......................................... $(0.02) $0.04 $(0.08) $0.09
Cumulative effect of change in accounting principle.......... - - - (0.38)
----------- ---------- ------------ ------------
Net income (loss).............................................. $(0.02) $0.04 $(0.08) (0.29)
=========== ========== ============ ============
Basic weighted average common shares outstanding............... 9,918,842 9,558,024 9,847,476 9,395,390
Diluted income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle......................................... $(0.02) $0.04 $(0.08) 0.08
Cumulative effect of change in accounting principle.......... - - - (0.36)
----------- ---------- ------------ ------------
Net income (loss).............................................. $(0.02) $0.04 $(0.08) $(0.28)
=========== ========== ============ ============
Diluted weighted average common shares outstanding............. 9,918,842 10,075,826 9,847,476 10,081,235
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ANIKA THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
Cash flows from operating activities: 2000 1999
---- ----
(AS RESTATED)
<S> <C> <C>
Net loss ($782,576) ($2,771,291)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization ......................................... 444,946 350,617
Amortization of unearned stock compensation............................. 193,039 179,708
Other long-term liabilities............................................. -- (27,508)
Deferred revenue........................................................ (32,537) 3,730,857
Changes in operating assets and liabilities:
Accounts receivable............................................. (9,177) 192,314
Inventories..................................................... (1,740,712) (703,918)
Prepaid expenses................................................ 235,312 (360,479)
Accounts payable and accrued expenses........................... 544,254 (13,211)
---------- ----------
Net cash (used for) provided by operating activities...................... (1,147,451) 577,089
---------- ----------
Cash flows from investing activities:
(Purchase) maturities of short-term investments, net.................... (5,496,959) 1,849,263
Maturities (purchase) of long-term investments, net..................... 5,558,029 (5,632,881)
Purchase of property and equipment...................................... (380,296) (781,026)
Notes receivable from officers.......................................... -- (59,000)
---------- ----------
Net cash used for investing activities.................................... (319,226) (4,623,644)
---------- ----------
Cash flows from financing activities:
Purchase of 394,800 shares of treasury stock............................ -- (1,948,980)
Proceeds from exercise of stock options and warrants..... 495,402 501,052
---------- ----------
Net cash provided by (used for) financing activities...................... 495,402 (1,447,928)
---------- ----------
Decrease in cash and cash equivalents..................................... (971,275) (5,494,483)
Cash and cash equivalents at beginning of period.......................... 6,440,705 10,712,520
---------- ----------
Cash and cash equivalents at end of period................................ $5,469,430 $5,218,037
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ANIKA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS
Anika Therapeutics, Inc. ("Anika" or the "Company") develops,
manufactures and commercializes therapeutic products and devices intended to
promote the protection and healing of bone, cartilage and soft tissue. These
products are based on hyaluronic acid ("HA"), a naturally-occurring,
biocompatible polymer found throughout the body. Due to its unique
biophysical and biochemical properties, HA plays an important role in a
number of physiological functions such as the protection and lubrication of
soft tissues and joints, the maintenance of the structural integrity of
tissues, and the transport of molecules to and within cells. The Company's
currently marketed products consist of ORTHOVISC-Registered Trademark-, which
is an HA product used in the treatment of some forms of osteoarthritis in
humans and HYVISC-Registered Trademark-, which is an HA product used in the
treatment of equine osteoarthritis. ORTHOVISC is currently approved for sale
and marketed in Canada, Europe, Turkey, Israel and Iceland. In the U.S.,
ORTHOVISC is currently limited to investigational use. The Company's initial
analysis of results from a Phase III clinical trial in late May 2000 did not
show sufficient efficacy to support the filing of a pre-market approval (PMA)
application to obtain U.S. Food and Drug Administration (FDA) approval. The
Company is conducting an in-depth analysis of the Phase III results and other
factors to determine if it will conduct additional clinical trials. The
Company manufactures AMVISC-Registered Trademark- and AMVISC-Registered
Trademark- Plus, which are HA products used as viscoelastic supplements in
ophthalmic surgery, for Bausch & Lomb Surgical, a unit of Bausch & Lomb
Incorporated. (See Note 9, Subsequent Events, to the Company's financial
statements hereof). The Company is currently developing INCERT-Registered
Trademark-, which is an HA based product designed for use in the prevention
of post-surgical adhesions. In collaboration with Orquest, Inc., Anika also
has exclusive rights to produce OSSIGEL-Registered Trademark-, an injectable
formulation of basic fibroblast growth factor combined with HA designed to
accelerate the healing of bone fractures.
In the fourth quarter of 1999, the Company performed a review of its
revenue recognition policy for revenue received from Zimmer, Inc., a division
of Bristol-Myers Squibb Co. (Zimmer), under a distribution agreement (the
"Zimmer Distribution Agreement") for ORTHOVISC, Anika's osteoarthritis
product. As a result of this review and after consultation with the
Securities and Exchange Commission, Anika revised its revenue recognition
policy for ORTHOVISC sales to Zimmer and restated its operating results for
1998 and the first three quarters of 1999. The restatement also reflects the
application of Securities and Exchange Commission Staff Accounting Bulletin
101 on revenue recognition. (See Note 3, Summary of Significant Accounting
Policies-Revenue Recognition, to the Company's financial statements hereof).
The following table summarizes the impact of the restatement on the quarter
and six months ended June 30, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
AS REPORTED AS RESTATED CHANGE AS REPORTED AS RESTATED CHANGE
---------------- ---------------- -------------- ---------------- --------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total revenue $3,750,275 $3,533,346 $(216,929) $6,974,853 $6,868,996 $(105,857)
Cost of sales 1,896,633 1,688,714 (207,919) 3,604,804 3,396,885 (207,919)
Gross profit 1,853,642 1,844,632 (9,010) 3,370,049 3,472,111 102,062
Income before cumulative
effect of change in accounting
principle 406,898 397,888 (9,010) 751,647 853,709 102,062
Cumulative effect of change
in accounting principle - - - - (3,625,000) (3,625,000)
Net income (loss) $406,898 $397,888 $(9,010) $751,647 $(2,771,291) $(3,522,938)
Diluted income (loss) per common
share:
Income before cumulative effect of
change in accounting principle $0.04 $0.04 - $0.07 $0.08 $0.01
Cumulative effect of change in
accounting principle - - - - $(0.36) $(0.36)
Net income (loss) $0.04 $0.04 - $0.07 $(0.28) $(0.35)
Diluted common shares outstanding 10,075,826 10,075,826 - 10,081,235 10,081,235 -
</TABLE>
5
<PAGE>
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of June
30, 2000, the results of operations for the three- and six-month periods
ended June 30, 2000 and 1999 and the cash flows for the six months ended June
30, 2000 and 1999.
The accompanying financial statements and related notes should be read
in conjunction with the Company's annual financial statements filed with the
Annual Report on Form 10-K for the year ended December 31, 1999. The results
of operations for the three and six month periods ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. (See generally "Risk Factors and Certain Factors Affecting
Future Operating Results" below).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and investments with original
maturities of 90 days or less.
FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, short-term and long-term
investments, accounts receivable, notes receivable from officers and accounts
payable. The estimated fair value of these financial instruments approximates
their carrying value, and in the case of cash equivalents, short-term and
long-term investments, is based on market quotes. The Company's cash
equivalents, short-term and long-term investments are generally obligations
of the federal government or investment-grade corporate issuers. The Company,
by policy, limits the amount of credit exposure to any one financial
institution.
INVESTMENTS IN MARKETABLE SECURITIES
The Company follows the provisions of SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Short-term investments
consist of debt securities with original maturities between three and twelve
months, which are classified as held to maturity. Long-term investments
consist of debt securities with original maturities greater than twelve
months, which are classified as held to maturity. The held to maturity
securities are carried at amortized cost which approximates fair market value
at June 30, 2000 and December 31, 1999, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.
REVENUE RECOGNITION
Product revenue is recognized upon shipment of commercial product and
represents sales of AMVISC-Registered Trademark- products, HYVISC-Registered
Trademark- and ORTHOVISC-Registered Trademark-. ORTHOVISC is sold under
several distribution contracts, including one with Zimmer. On March 15, 2000,
the Company announced that it had revised its revenue recognition policy for
sales of ORTHOVISC under its distribution agreement with Zimmer. Under the
6
<PAGE>
revised revenue recognition policy, revenue is recognized at the time of
shipment to Zimmer, based upon the minimum per unit price under the terms of
the Zimmer Distribution Agreement at the time of sale to Zimmer. Anika had
previously recognized revenue for ORTHOVISC-Registered Trademark- sales to
Zimmer based upon an estimate of the average selling price which would be
obtained by Zimmer upon sale of the ORTHOVISC to its customers. Any
additional amounts earned by Anika above the contractual minimum per unit
price will be recognized when Zimmer sells the ORTHOVISC to its customers and
Anika is able to determine its share of the actual per unit sales price.
Anika had also previously recognized revenue in 1998 and the first three
quarters of 1999 for ORTHOVISC which was held in its refrigerators at
Zimmer's request. Under the Company's revised revenue recognition policy,
this revenue will be recorded when the ORTHOVISC is shipped to Zimmer.
Amounts paid by Zimmer in excess of the amount recognized under the revised
revenue recognition policy is recorded by Anika as current deferred revenue
and amounted to $1,559,968 at June 30, 2000.
The Company also adopted the provisions of SEC Staff Accounting Bulletin
101 (SAB 101) in its 1999 operating results. The issuance of SAB 101 changes
revenue recognition practices for non-refundable up-front payments received
as part of broad supply, distribution and marketing agreements, including
$2,500,000 and $1,500,000 received from Zimmer in the fourth quarter of 1997
and the second quarter of 1998, respectively. These amounts were previously
recognized in the period received. In accordance with SAB 101, issued in
December 1999, the Company has retroactively recorded the cumulative effect
of the change in accounting principle of $3,625,000 as a charge in the first
quarter of 1999. These payments will be recognized as revenue ratably over
the 10-year term of the Zimmer Distribution Agreement. The amount received
and deferred to future periods is $3,025,000 at June 30, 2000 of which
$2,650,000 is included in long-term deferred revenue. The Company has
recognized as revenue $100,000 of the payments in each of the quarters ended
March 31 and June 30, 1999 and March 31 and June 30, 2000.
During the second quarter of 2000, the Company was informed that the
Securities and Exchange Commission issued a formal order of investigation and
required the Company to provide further information in connection with
certain revenue recognition matters relating to the Company's historical
accounting for the Zimmer distribution agreement. The Company has been
cooperating fully with the SEC. However, the Company is not in a position to
predict the probable outcome of this matter or its potential impact on the
Company's business or operations.
Advanced payments received for products are recorded as deferred revenue
and are recognized when the product is shipped.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective
assets, as follows:
Machinery and equipment..................................... 3-10 years
Furniture and fixtures...................................... 3-5 years
Leasehold improvements...................................... 4-10 years
Amortization on leasehold improvements is calculated using the
straight-line method over the shorter of the lease term or estimated life of
the asset.
INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the financial reporting and tax bases of
assets and liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters
beginning with the quarter ending September 30, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company will adopt
7
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SFAS No. 133 in its quarter ending September 30, 2000 and does not expect
that such adoption to have a material impact on the Company's results of
operations, financial position or cash flows.
As noted above, the Company adopted the provisions of SEC Staff
Accounting Bulletin 101 (SAB 101) in its restated 1999 operating results. The
issuance of SAB 101 changes revenue recognition practices for non-refundable
up-front payments received as part of broad supply, distribution and
marketing agreements. Such amounts were previously recognized in the period
received. In accordance with SAB 101, such payments will be recognized as
revenue ratably over the term of the distribution agreement.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF APB
OPINION NO.25. The Interpretation clarifies the application of Opinion 25 in
certain situations, as defined. The Interpretation is effective July 1, 2000,
but covers certain events that occur after December 15, 1998. The effects of
applying this interpretation should be applied on a prospective basis from
the effective date. The Company does not expect the adoption of the
Interpretation during the third quarter to have a material effect on the
results of the Company.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET-RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF
CREDIT RISK, requires disclosure of any significant off-balance-sheet and
credit risk concentrations. The Company has no significant off-balance-sheet
or concentration of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements.
Sales of AMVISC-Registered Trademark- products to Bausch & Lomb Surgical
accounted for 51% and 52% of product revenue for the three-month periods
ended June 30, 2000 and 1999, respectively, and 59% and 62% of the six month
periods ended June 30, 2000 and 1999, respectively. See Note 9 for a
discussion of the Bausch & Lomb supply agreement. ORTHOVISC-Registered
Trademark- sales to another customer accounted for 27% and 30% of product
sales for the second quarters of 2000 and 1999, respectively and 22% and 29%
for the six months ended June 30, 2000 and 1999, respectively. Additionally,
as of June 30, 2000, three customers, two of which are international
customers, accounted for 45%, 40% and 11% of the Company's accounts
receivable balance. As of December 31, 1999, two customers, one of which is
an international customer, represented 49% and 42%, respectively, of the
Company's accounts receivable balance.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by
the chief operating decision-maker or decision-making group, in making
decisions how to allocate resources and assess performance. The company's
chief decision-making group consists of the chief executive officer and the
chief financial officer. Based on the criteria established by SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, the
Company has one reportable operating segment, the results of which are
disclosed in the accompanying financial statements. Substantially all of the
operations and assets of the Company have been derived from and are located
in the United States.
Revenues by country of the customer in total and as a percentage of
total revenues are as follows for the three- and six-month periods ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
Country: Percent of Percent of Percent of Percent of
-------- Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $2,531,665 67.2% $2,340,321 66.2% $4,732,998 72.9% $4,807,570 70.0%
Middle East 995,000 26.4% 1,193,025 33.8% 1,512,500 23.3% 2,058,676 30.0%
Other/Europe 242,100 6.4% - 244,100 3.8% 2,750 -
---------- ----- ---------- ------ ----------- ------ ---------- -----
Total $3,768,765 100.0% $3,533,346 100.0% $6,489,598 100.0% $6,868,996 100.0%
========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
8
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4. EARNINGS PER SHARE
SFAS No. 128, EARNINGS PER SHARE, establishes standards for computing
and presenting earnings (loss) per share.
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive potential common shares
outstanding during the period. Under the treasury stock method, the dilutive
unexercised options are assumed to be exercised at the beginning of the
period or at issuance, if later. The assumed proceeds are then used to
purchase common shares at the average market price during the period. For
periods where the company has incurred a loss, potentially dilutive shares of
common stock have been excluded, as their effect would be antidilutive.
The following illustrates a reconciliation of the number of shares used
in the calculation of basic and diluted net income (loss) per share for the
periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
2000 1999 2000 1999
---- ---- ---- ----
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C>
Net income (loss) available to common shareholders... ($218,489) $397,888 ($782,476) ($2,771,291)
========== ========= ========== ============
Basic weighted average common shares outstanding..... 9,918,842 9,558,024 9,847,476 9,395,390
Dilutive effect of assumed exercise of stock options
and warrants....................................... -- 517,802 -- 685,845
--------- ---------- --------- ----------
Diluted weighted average common and potential common
shares outstanding................................. 9,918,842 10,075,826 9,847,476 10,081,235
========== =========== ========= ===========
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials......................................................... $1,495,705 $ 681,936
Work in-process....................................................... 4,298,859 3,690,618
Finished goods........................................................ 1,439,849 1,121,147
--------- ---------
Total............................................................... $7,234,413 $5,493,701
========== ==========
</TABLE>
6. PROPERTY & EQUIPMENT
Property and equipment is stated at cost and consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Machinery and equipment............................................... $5,988,943 $5,704,663
Furniture and fixtures................................................ 1,836,790 1,773,390
Leasehold improvements................................................ 670,796 638,180
---------- ----------
Total............................................................... $8,496,529 $8,116,233
========== ==========
</TABLE>
7. NOTES RECEIVABLE FROM OFFICERS
Notes receivable from officers consists of loans made to one officer and
one former officer. The loan amounts are generally due at the earlier of the end
of five years from the date of the note or at the termination of the officers'
employment.
9
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The loan outstanding to a former officer is secured by a mortgage on certain
real estate. Interest accrues at annual rates between 4.4% and 6.0% and is
payable monthly over the term of the loans.
8. LICENSING AND DISTRIBUTION AGREEMENT
In November 1997, the Company entered into a long-term distribution
agreement with Zimmer that was subsequently amended in June 1998 and June
1999 (the "Zimmer Distribution Agreement"). The Zimmer Distribution Agreement
provides Zimmer with exclusive marketing and distribution rights to
ORTHOVISC-Registered Trademark- in the United States, Canada, Asia and most
of Europe. To date, the Company has received up-front non-refundable
licensing payments from Zimmer totaling $4.0 million. In addition, under the
Zimmer Distribution Agreement the Company has the potential to receive
payments aggregating up to $19.5 million upon the achievement of certain
regulatory approvals, reimbursement approvals and enumerated sales
milestones. As an alternative to a $2.5 million milestone payment due upon
FDA approval for the U.S. market, Zimmer has the right to elect to acquire
shares of the Company's Common Stock equal to the greater of: (a) $2,500,000
divided by 125% of the average daily closing price of the Common Stock for
the prior sixty (60) calendar days (but not to exceed 19.9% of the then
outstanding common stock) or (b) 9.9% of the then outstanding Common Stock.
The Zimmer Distribution Agreement provides that the amount Zimmer will pay to
the Company for ORTHOVISC will be based on a fixed percentage of Zimmer's
actual average selling price, subject to a floor. Additionally, the Zimmer
Distribution Agreement contains certain annual minimum purchase requirements
that Zimmer must order. According to the Zimmer Distribution Agreement,
Zimmer may terminate the agreement if ORTHOVISC is not approved by the FDA by
January 1, 2001. The results of the Phase III clinical trial may have an
adverse impact on the Zimmer Distribution Agreement. As a consequence of the
Phase III clinical results, completed May 2000, the Company believes it is
unlikely to receive most of the above potential payments. The Company cannot
provide any assurances that Zimmer will not terminate the agreement and/or
renegotiate a transition agreement on terms less favorable to the Company.
(See "Risk Factors and Certain Factors Affecting Future Operating
Results--Comprehensive Government Regulation, Uncertainty Regarding Success
of Clinical Trials and Dependence Upon Marketing Partners" below).
9. SUBSEQUENT EVENTS
The Company entered into a new seven-year supply agreement (the "New BLS
Agreement") with Bausch & Lomb Surgical, a unit of Bausch & Lomb Incorporated
in July 2000. Under the terms of the New BLS Agreement, the Company becomes
Bausch & Lomb's exclusive provider of AMVISC-Registered Trademark- and AMVISC
-Registered Trademark- Plus, ophthalmic viscoelastic products, in the U.S.
and international markets where approved, effective January 1, 2001. The New
BLS Agreement expires December 31, 2007 and supersedes an existing supply
contract with Bausch & Lomb that was set to expire December 31, 2001. The New
BLS Agreement is subject to early termination and/or reversion to a
non-exclusive basis under certain circumstances. The agreement lifts
contractual restrictions on the Company's sales of certain ophthalmic
products to other companies, subject to payment of royalties by Anika. In
exchange, the Company agreed to a reduction in unit selling prices effective
retroactively to April 1, 2000 and the elimination of any minimum purchase
obligations. The Company expects that, at least for the remainder of the
fiscal year, the reduction in unit prices will result in a decrease in the
Company's revenue and gross margin from Bausch & Lomb. (See "Risk Factors and
Certain Factors Affecting Future Operating Results--Dependence Upon Marketing
Partners" below).
Three putative class action complaints have been filed against the Company.
These complaints are described more fully in Part II below under Legal
Proceedings. Because these lawsuits are in their preliminary stages, the
Company is not able to predict the probable outcome of this matter or its
potential impact on the Company's business or operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF ANIKA THERAPEUTICS, INC. AND THE NOTES
THERETO APPEARING ELSEWHERE HEREIN.
The Company receives a substantial portion of its revenue from the sale
of AMVISC-Registered Trademark- and AMVISC-Registered Trademark- Plus to
Bausch & Lomb Surgical, a unit of Bausch & Lomb Incorporated. For the three
months ended June 30, 2000 and 1999, AMVISC product sales accounted for 51%
and 52% of product revenue, respectively. For the six months ended June 30,
2000 and 1999, AMVISC product sales represented 59% and 62% of product
revenue, respectively.
The Company entered into the New BLS Agreement with Bausch & Lomb
Surgical in July 2000. Under the terms of the New BLS Agreement, the Company
becomes Bausch & Lomb's exclusive provider of AMVISC and AMVISC Plus,
ophthalmic viscoelastic products, in the U.S. and international markets where
approved, effective January 1, 2001. The New BLS Agreement expires December
31, 2007 and supersedes an existing supply contract with Bausch & Lomb that
was set to expire December 31, 2001. The New BLS Agreement is subject to
early termination and/or reversion to a non-exclusive basis under certain
circumstances. The New BLS Agreement lifts contractual restrictions on the
Company's sales of certain ophthalmic products to other companies, subject to
payment of royalties by Anika. In exchange, the Company agreed to a reduction
in unit selling prices effective retroactively to April 1, 2000 and the
elimination of any minimum purchase obligations. The Company expects that, at
least for the remainder of the fiscal year, the reduction in unit prices will
result in a decrease in the Company's revenue and gross margin from Bausch &
Lomb. Although the Company intends to seek new ophthalmic product customers,
it does not expect sales to any such new customers until after 2000. (See
"Risk Factors and Certain Factors Affecting Future Operating
Results--Dependence Upon Marketing Partners" below).
In November 1997, the Company entered into the Zimmer Distribution
Agreement, which was subsequently amended in June 1998 and June 1999. The
Zimmer Distribution Agreement provides Zimmer with exclusive marketing and
distribution rights to ORTHOVISC-Registered Trademark- in the United States,
Canada, Latin America, Asia and most of Europe. Following an informal inquiry
from the Securities and Exchange Commission, the Company and its independent
auditors conducted a review of its revenue recognition policy for revenue
received from the Zimmer Distribution Contract. As a result of this review,
and after consultation with the SEC, Anika revised its revenue recognition
policy for ORTHOVISC sales to Zimmer and restated its operating results for
1998 and the first three quarters of 1999. Under the revised revenue
recognition policy, revenue will be recognized at the time of shipment to
Zimmer based upon the minimum per unit price under the Zimmer Distribution
Agreement at the time of sale to Zimmer. Anika had previously recognized
revenue for ORTHOVISC sales to Zimmer based upon an estimate of the average
selling price, which would be obtained by Zimmer upon sale of the ORTHOVISC
to its customers, as specified under the Zimmer Distribution Agreement. Any
additional amounts earned by Anika above the contractual minimum per unit
price will be recognized when Zimmer sells the ORTHOVISC to its customers and
Anika is able to determine its share of the actual per unit sales price.
Anika had also recognized revenue in 1998 and the first three quarters of
1999 for ORTHOVISC which was held in its refrigerators at Zimmer's request.
Under the Company's revised revenue recognition policy, this revenue will be
recorded when the ORTHOVISC is shipped to Zimmer. Amounts paid by Zimmer in
excess of the amount recognized under the revised revenue recognition policy
is recorded by Anika as current deferred revenue and amounted to $1,559,968
at June 30, 2000.
The Company also adopted the provisions of SEC Staff Accounting Bulletin
101 (SAB 101) in its restated 1999 operating results. The issuance of SAB 101
in December 1999 changed revenue recognition practices for non-refundable
up-front payments received as part of broad supply, distribution and
marketing agreements, and is applicable to $2,500,000 and $1,500,000,
received from Zimmer in the fourth quarter of 1997 and the second quarter of
1998, respectively. These amounts were previously recognized in the period
received. In accordance with SAB 101, the company has retroactively recorded
the cumulative effect of the change in accounting principle of $3,625,000 as
a charge in the first quarter of 1999. These payments will be recognized as
revenue ratably over the 10-year term of the distribution agreement. The
amount received and deferred to future periods is $3,025,000 at June 30, 2000
of which $2,650,000 is included in long-term deferred revenue. The Company
has recognized as revenue $100,000 of these payments in each of the quarters
ended March 31 and June 30, 2000 and March 31 and June 30, 1999. Should the
Zimmer Distribution Agreement be terminated, amounts included in deferred
revenue may be recognized as revenue upon termination.
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RESULTS OF OPERATIONS
PRODUCT REVENUE. Product revenue for the three months ended June 30,
2000 was $3,668,765, an increase of $235,419 or 6.9%, over the $3,433,346
recorded in the prior year corresponding quarter. Product revenue associated
with ORTHOVISC increased by $440,999 in the second quarter of 2000 compared
to the second quarter of 1999, and includes $475,177 and $45,535,
respectively, of previously deferred revenue. Sales of AMVISC -Registered
Trademark- products to Bausch & Lomb Surgical decreased by $88,051 compared
with the second quarter of 1999, reflecting lower prices effective April 1,
2000 under the New BLS Agreement, partially offset by higher unit volumes.
(See Note 9, Subsequent Events, to the Company's financial statements
hereof). Product revenue for the six months ended June 30, 2000 was
$6,289,598 a decrease of $379,398, or 5.7%, over the $6,668,996 recorded in
the comparable prior period. The decrease was primarily attributable to lower
ORTHOVIC -Registered Trademark- sales to the Company's Turkish distributor
and lower AMVISC -Registered Trademark- product sales to Bausch & Lomb
during the first quarter of 2000. During the first quarter of 2000 ORTHOVISC
sales to the Turkish distributor were lower as a result of the distributor
leveling inventories in response to an earthquake last year. During the
second quarter 2000, sales to Anika's Turkish distributor were $995,000 as
compared to $1,136,000 in the second quarter of 1999.
LICENSING FEES. For the first two quarters of 2000 and 1999, licensing
fees of $100,000 per quarter represent the amortization of amounts received
in 1997 and 1998, in accordance with the Company's change in accounting
principle required by SAB 101 for such fees.
GROSS PROFIT. Gross profit for the three months ended June 30, 2000 was
$1,346,148, a decrease of $498,484 or 27.0% from $1,844,632 recorded in the
prior year corresponding quarter. Gross profit as a percentage of product
sales for the three months ended June 30, 2000 decreased to 36.7% from 53.7%
in the prior year corresponding quarter. Gross profit for the six months
ended June 30, 2000 was $2,834,013 compared with $3,472,111 for the first six
months of 1999. Gross profit as a percentage of product sales for the six
months ended June 30, 2000 decreased to 45.1% from 52.1% for the first half
of 1999. These decreases are primarily attributable to: (i) lower unit prices
of AMVISC products under the Company's New BLS Agreement with Bausch & Lomb
Surgical, (ii) lower manufacturing cost absorption as the Company has scaled
down certain manufacturing operations and (iii) the impact of reduced
manufacturing levels implemented in June 2000. The Company expects that, at
least for the remainder of the fiscal year, the reduction in unit prices will
result in a decrease in the Company's revenue and gross margin from Bausch &
Lomb Surgical. (See "Risk Factors and Certain Factors Affecting Future
Operating Results--Dependence Upon Marketing Partners" below). The Company
also intends to reduce its production plans and utilize existing inventory to
meet customer needs in the second half of 2000. There can be no assurances
that these steps will reduce manufacturing costs.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three months ended June 30, 2000 decreased by $17,592 to $907,227 from
$924,819 recorded in the prior year corresponding quarter. Research and
development was $407,000 lower in the second quarter of 2000 compared with
the first quarter of 2000, reflecting lower ORTHOVISC clinical trial costs.
Research and development expenses for the six months ended June 30, 2000
increased $588,289, or 36%, compared to the same period in 1999. This
increase is related to ORTHOVISC clinical trial and analysis expenses in the
first quarter of 2000.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended June 30, 2000 increased by $169,990 or
21.1% to $977,210 from $807,220 in the prior year corresponding quarter. For
the six months ended June 30, 2000, selling, general and administrative
expenses increased $425,480 or 27.4% compared to the same period in the prior
year. The increase was primarily attributable to higher professional fees
associated with corporate matters.
NET INTEREST INCOME. The Company's net interest income increased by
$31,862 to $329,741 for the three months ended June 30, 2000 from $297,879 in
the prior year corresponding quarter. The increase is attributable to higher
average interest rates. Net interest income for the six months ended June 30,
2000 was $590,989 compared with $600,029 for the same period in 1999. The
decrease is attributable to lower average cash balances during the first six
months of 2000.
INCOME TAXES. The Company recorded minimal income tax expense for the
three and six-month periods ended June 30, 2000 due to the net loss from
operations. Income tax expense for the quarter ended June 30, 1999 was
minimized due to the utilization of net operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had cash, cash equivalents and short and
long-term investments of $19.2 million and working capital of $24.3 million
versus cash, cash equivalents and short and long-term investments of $20.2
million and working capital of $19.0 million at December 31, 1999.
Investments at June 30, 2000 consist of commercial paper of various
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maturities of less than one year.
During the first half of 2000, the Company used $1,740,000 in connection
with a planned increase in inventories. Also, during the first half of 2000,
the Company utilized $381,000 for capital expenditures, primarily laboratory
and manufacturing and office equipment.
In October 1998, the Board of Directors approved a stock repurchase
program under which the Company was authorized to repurchase up to $4 million
of Anika common stock with the total number of shares repurchased under the
plan not to exceed 9.9% of the total issued and outstanding shares. Through
December 31, 1999, the Company had repurchased 762,100 shares at an average
cost per share of $5.08 for an aggregate cash purchase price of approximately
$3,873,000. During the three and six month periods ended June 30, 2000, the
Company has not repurchased any Anika common stock. During the six months
ended June 2000 the Company received $495,402 from the exercise of stock
options.
The Company's future capital requirements and the adequacy of available
funds will depend, however, on numerous factors, including market acceptance
of its existing and future products, the successful commercialization of
products in development, progress in its product development efforts, the
magnitude and scope of such efforts, progress with preclinical studies,
clinical trials and product clearances by the FDA and other agencies, the
cost, timing requirements of its efforts to expand its manufacturing
capabilities, the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, and the development of strategic alliances for the
marketing of certain of its products.
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RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND,"
"ESTIMATE," "PLAN" AND OTHER EXPRESSIONS WHICH ARE PREDICTIONS OF OR INDICATE
FUTURE EVENTS AND TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS
IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING BUT NOT LIMITED
TO STATEMENTS REGARDING: FUTURE SALES, POSSIBLE DEVELOPMENT OF NEW PRODUCTS,
THE INITIAL ANALYSIS OF RESULTS FROM THE PHASE III CLINICAL TRIAL OF
ORTHOVISC-REGISTERED TRADEMARK-, POSSIBLE REGULATORY APPROVAL OF NEW OR
POTENTIAL PRODUCTS, CONTINUATION OF THE ZIMMER DISTRIBUTION AGREEMENT,
PERFORMANCE UNDER THE NEW BLS AGREEMENT, AND THE OUTCOME AND IMPACT OF THE
SEC INVESTIGATION AND PUTATIVE CLASS ACTION COMPLAINTS. THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENT COULD DIFFER MATERIALLY FROM ANTICIPATED
RESULTS, PERFORMANCE OR ACHIEVEMENT, EXPRESSED OR IMPLIED IN SUCH
FORWARD-LOOKING STATEMENTS. ADDITIONAL FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE ARE SET FORTH HEREIN AND IN THE "MANAGEMENT'S DISCUSSIONS AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" BEGINNING ON PAGE
11 OF THIS REPORT ON FORM 10-Q. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT WHETHER AS A RESULT
OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
COMPREHENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. The Company's
products, product development activities, manufacturing processes, and current
and future sales and marketing are subject to extensive and rigorous regulation
by the FDA and comparable agencies in foreign countries. In the United States,
the FDA regulates the marketing, advertising, promotion, and distribution of
medical devices, drugs, and biologics, as well as testing, manufacturing,
labeling, record keeping, and reporting activities for such products.
Medical products regulated by the FDA are generally classified as
medical devices, drugs and/or biologics. Product development and approval
within the FDA framework takes a number of years and involves the expenditure
of substantial resources. There can be no assurance that the FDA will grant
approval for the Company's new products on a timely basis or at all, or that
FDA review will not involve delays that will adversely affect the Company's
ability to commercialize additional products or expand permitted uses of
existing products, or that the regulatory framework will not change, or that
additional regulation will not arise at any stage of the Company's product
development process which may adversely affect approval of or delay an
application or require additional expenditures by the Company. In the event
the Company's future products are regulated as human drugs or biologics, the
FDA's review process typically would be substantially longer and more
expensive than the review process to which they are currently subject as
devices.
The Company's ORTHOVISC-Registered Trademark- product will have to meet
regulatory requirements of a Class III device by the FDA. Class III devices
are those that generally must receive pre-market approval (PMA) by the FDA to
ensure their safety and effectiveness (e.g. life-sustaining, life-supporting
and implantable or new devices which have not been found to be substantially
equivalent to legally marketed devices) and require clinical testing to
ensure safety and effectiveness and FDA approval prior to marketing and
distribution. In order for the Company to commercially distribute
ORTHOVISC-Registered Trademark- in the U.S., it must obtain FDA approval of a
PMA. The PMA approval process can be expensive, uncertain and lengthy. A
number of devices for which pre-market approval has been sought have never
been approved for marketing. The review of an application often occurs over a
protracted time period and may take two years or more from the filing date to
complete. The Company submitted a PMA for ORTHOVISC-Registered Trademark- in
December 1997. In October 1998, the Company was notified by the FDA that the
CompanY'S PMA application for ORTHOVISC -Registered Trademark- was not
approvable and that additional clinical data would be required to demonstrate
the effectiveness of ORTHOVISC-Registered Trademark-. The Company submitted
an IDE to the FDA in February 1999 and received approval in late March 1999
to commence a second Phase III clinical study. The Company received initial
results from the Phase III clinical trial in late May 2000 that did not show
sufficient efficacy to support the filing of a PMA application. There can be
no assurances that: (i) further analysis of the clinical data or any
additional clinical data will support the efficacy of ORTHOVISC-Registered
Trademark-, (ii) the Company will undertake any additional clinical trials of
ORTHOVISC-Registered Trademark-, (iii) it will be able to successfully
complete an additional clinical trial, or (iv) additional clinical trials
will support a PMA application and/or FDA approval in a timely manner or at
all. The results of the Phase III clinical trial may adversely impact the
Company's distribution agreement for ORTHOVISC-Registered Trademark- with
Zimmer. Zimmer has the right to terminate the agreement if
ORTHOVISC-Registered Trademark- is not approved by the FDA by January 1, 2001
(See "Dependence Upon Marketing Partners" below). There also can be no
assurance that any delay in receiving FDA approvals will not adversely affect
the Company's competitive position. Furthermore, even if the Company were to
receive a PMA, the approval may include significant limitations on the
indications and other claims sought for use for which the product may be
marketed.
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The Company's developmental HA products, including INCERT-Registered
Trademark- have not obtained regulatory approval in the U.S. for
investigational use and/or commercial marketing and sale. The Company
believes that INCERT-Registered Trademark- will be regulated as a Class III
medical device. In order to undertake clinical trials in the U.S. to support
a PMA, the Company is currently evaluating various clinical trial design
alternatives. There can be no assurance that the Company will be permitted to
undertake clinical trials of this or other future products in the U.S. or
that clinical trials will demonstrate that the products are safe and
effective or otherwise satisfy the FDA's PMA requirements.
Orquest has not received regulatory approval in the U.S. for the
commercial marketing and sale of OSSIGEL-Registered Trademark-.
OSSIGEL-Registered Trademark- will be regulated as a Class III medical device
with the FDA's Center of Biologics Research and Review as the lead review
center. There can be no assurance that clinical trials of OSSIGEL -Registered
Trademark- will demonstrate that OSSIGEL-Registered Trademark- is safe and
effective or otherwise satisfy FDA requirements.
Once obtained, marketing clearance can be withdrawn by the FDA due to
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial clearance. The Company may be required to make
further filings with the FDA under certain circumstances. The FDA's regulations
require agency approval of a PMA supplement for certain changes if they affect
the safety and effectiveness of an approved device, including, but not limited
to, new indications for use, labeling changes, the use of a different facility
to manufacture, process or package the device, changes in manufacturing methods
or quality control systems and changes in performance or design specifications.
Failure by the Company to receive approval of a PMA supplement regarding the use
of a different manufacturing facility or any other change affecting the safety
or effectiveness of an approved device on a timely basis, or at all, would have
a material adverse effect on the Company's business, financial condition and
results of operations. The FDA could also limit or prevent the manufacture or
distribution of the Company's products and has the power to require the recall
of such products. Significant delay or cost in obtaining, or failure to obtain
FDA clearance to market products, any FDA limitations on the use of the
Company's products, or any withdrawal or suspension of clearance by the FDA
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, all FDA-approved products manufactured by the Company must be
manufactured in compliance with FDA's Good Manufacturing Practices ("GMP")
regulations or, for medical devices, FDA's Quality System Regulations ("QSR").
Ongoing compliance with GMP, QSR and other applicable regulatory requirements is
monitored through periodic inspection by state and federal agencies, including
the FDA. The FDA may inspect the Company and its facilities from time to time to
determine whether the Company is in compliance with regulations relating to
medical device and manufacturing companies, including regulations concerning
manufacturing, testing, quality control and product labeling practices. There
can be no assurance that the Company will be able to comply with current or
future FDA requirements applicable to the manufacture of products.
FDA regulations depend heavily on administrative interpretation and there
can be no assurance that the future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. In addition, changes in the existing regulations or adoption of new
governmental regulations or policies could prevent or delay regulatory approval
of the Company's products.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, refusal of
the FDA to grant pre-market clearance or pre-market approval for devices,
withdrawal of approvals and criminal prosecution.
In addition to regulations enforced by the FDA, the Company is subject
to other existing and potential future federal, state, local and foreign
regulations. International regulatory bodies often establish regulations
governing product standards, packing requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax requirements. To
enable the Company to market ORTHOVISC-Registered Trademark- in Europe, the
Company was required to receive a "CE" marking certification, an
international symbol of quality and compliance with the applicable European
medical device directive. In October 1996, the Company received an EC Design
Examination and an EC Quality System Certificate from a European Notified
Body, which entitles the Company to affix a CE marking on
ORTHOVISC-Registered Trademark- for the treatment of osteoarthritis in
synovial joints. There can be no assurance that the Company will be able to
achieve and/or maintain compliance required for CE marking or other foreign
regulatory approvals for any or all of its products or that it will be able
to produce its products in a timely and
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profitable manner while complying with applicable requirements. Federal, state,
local and foreign regulations regarding the manufacture and sale of medical
products are subject to change. The Company cannot predict what impact, if any,
such changes might have on its business. The requirements relating to the
conduct of clinical trials, product licensing, pricing and reimbursement also
vary widely from country to country.
The process of obtaining approvals from the FDA and other regulatory
authorities can be costly, time consuming, and subject to unanticipated delays.
There can be no assurance that approvals of the Company's products will be
granted or that the Company will have the necessary funds to develop certain of
such products. Any failure to obtain, or delay in obtaining, such approvals
could adversely affect the ability of the Company to market its products.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. From its
inception up until December 31, 1996 and in 1999, the Company had incurred
annual operating losses. As of June 30, 2000, the Company had an accumulated
deficit of $5,555,082. The continued development of the Company's products
will require the commitment of substantial resources to conduct research and
preclinical and clinical development programs, and to establish sales and
marketing capabilities. The ability of the Company to reach sustained
profitability is highly uncertain. To achieve sustained profitability the
Company must, among other things, successfully complete development of
certain of its products, obtain regulatory approvals and establish sales and
marketing capabilities for certain of its products. There can be no assurance
that the Company will be able to achieve sustained profitability.
COMPETITION. The Company competes with many companies, including, among
others, large pharmaceutical companies and specialized medical products
companies. Many of these companies have substantially greater financial and
other resources, larger research and development staffs, more extensive
marketing and manufacturing organizations and more experience in the regulatory
process than the Company. The Company also competes with academic institutions,
governmental agencies and other research organizations which may be involved in
research, development and commercialization of products. Because a number of
companies are developing HA products for similar applications, the successful
commercialization of a particular product will depend in part upon the ability
of the Company to complete clinical studies and obtain FDA marketing and foreign
regulatory approvals prior to its competitors. There can be no assurance that
the Company will be able to compete against current or future competitors or
that competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of the
Company's products, including ORTHOVISC-Registered Trademark- and
INCERT-Registered Trademark-, as well as the products of the Company's
collaborative partners, including OSSIGEL-Registered Trademark-, will require
clinical trials to determine their safety and efficacy in humans for various
conditions. In late May 2000, the Company's initial analysis of results from
the Phase III clinical trial of ORTHOVISC-Registered Trademark- did not show
sufficient efficacy to support the filing of a PMA application to obtain FDA
approval. There can be no assurances that: (i) further analysis of the
clinical data or any additional clinical data will support the efficacy of
ORTHOVISC-Registered Trademark-, (ii) the Company will undertake any
additional clinical trials of ORTHOVISC -Registered Trademark-, (iii) it will
be able to successfully complete an additional clinical trial, or (iv)
additional clinical trials will support a PMA application and/or FDA approval
in a timely manner or at all. In order to undertake clinical trials in the
U.S. to support a PMA of INCERT, the Company is currently evaluating various
clinical trial design alternatives. There can be no assurance that the
Company or its collaborative partners will not encounter problems that will
cause it to delay, suspend or terminate clinical trials. In addition, the
Company cannot provide any assurance that such clinical trials, if completed,
will ultimately demonstrate these products to be safe and efficacious.
DEPENDENCE UPON MARKETING PARTNERS. The Company does not plan to directly
market and sell its current products to end-users. Therefore, the Company's
success will be dependent upon the efforts of its marketing partners and the
terms and conditions of the Company's relationships with such marketing
partners. In addition, there can be no assurances that such marketing partners
will not seek to renegotiate their current agreements on terms less favorable to
the Company. The Company entered into a new seven-year supply agreement with
Bausch & Lomb Surgical, a unit of Bausch & Lomb Incorporated in July 2000. Under
the terms of the agreement, the Company becomes Bausch & Lomb Surgical's
exclusive provider of AMVISC-Registered Trademark- and AMVISC-Registered
Trademark- Plus, ophthalmic viscoelastic products, in the U.S. and international
markets where approved, effective January 1, 2001. The new agreement expires
December 31, 2007, superseding an existing supply contract with Bausch & Lomb
Surgical that was set to expire December 31, 2001. The new agreement is subject
to early termination and/or reversion to a non-exclusive basis under certain
circumstances. The agreement lifts contractual restrictions on the Company's
sales of certain ophthalmic products to other companies, subject to payment of
royalties by Anika. In exchange, the Company agreed to a reduction in unit
selling prices effective retroactively to April 1, 2000 and the elimination of
minimum purchase obligations.
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There can be no assurances that the Company will achieve incremental
sales of its ophthalmic products to Bausch & Lomb Surgical and/or other
companies sufficient to offset the effects of the price reduction to Bausch &
Lomb Surgical. The Company expects that, at least for the remainder of the
fiscal year, the reduction in unit prices will result in a decrease in the
Company's revenue and gross margin from Bausch & Lomb Surgical. In addition,
under certain circumstances, (i) Bausch & Lomb Surgical may have the right to
terminate the agreement and/or (ii) the agreement may revert to a
non-exclusive basis; in each case, the Company cannot make any assurances
such circumstances will not occur. For the six months ended June 30, 2000 and
1999, sales of AMVISC-Registered Trademark- products to Bausch & Lomb
Surgical accounted for 59% and 62% of product revenues. The Company does not
expect to have incremental business under the new agreement until after 2000.
The Zimmer Distribution Agreement provides Zimmer with exclusive
marketing and distribution rights to ORTHOVISC-Registered Trademark- in the
United States, Canada, Latin America, Asia and most of Europe. The results of
the Phase III clinical trial may adversely impact the Company's distribution
agreement for ORTHOVISC with Zimmer. According to the Zimmer Distribution
Agreement, Zimmer may terminate the agreement if ORTHOVISC -Registered
Trademark- is not approved by the FDA by January 1, 2001. The Company cannot
provide any assurances that Zimmer will not terminate the agreement or
renegotiate a transition in connection with its termination on terms less
favorable to the Company. Any such termination is likely to have a material
adverse effect on the Company's ability to market ORTHOVISC-Registered
Trademark-, which may have a material adverse effect on the Company's future
operating results. ORTHOVISC-Registered Trademark- sales to Zimmer accounted
for 8% and 3% of product revenue for the six months ended June 30, 2000 and
1999, respectively. There can be no assurance that Zimmer will place
additional orders in 2000.
Furthermore, upon FDA approval, the Zimmer Distribution Agreement
provides for a $2.5 million milestone payment and increased minimum purchases
by Zimmer. Based on the initial analysis of results of the Phase III clinical
trial of ORTHOVISC-Registered Trademark-, the Company believes it will be
unlikely it will be able to earn most of the milestone payment or that Zimmer
will be subject to the increased minimum purchase requirements. In addition,
there can be no assurance that the Company and/or Zimmer will obtain European
or other reimbursement approvals or if such approvals are obtained, they will
be obtained on a timely basis or at a satisfactory level of reimbursement.
The Company will need to obtain the assistance of additional marketing
partners for new products which are brought to market and existing products
brought to new markets. There can be no assurance that such additional partners
will be available or that such partners will agree to market the Company's
products on acceptable terms. The failure to establish strategic partnerships
for the marketing and distribution of the Company's products on acceptable terms
would have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE OF FUTURE PRODUCTS. The Company's success
will depend in part upon the acceptance of the Company's future products by the
medical community, hospitals and physicians and other health care providers, and
third-party payors. Such acceptance may depend upon the extent to which the
medical community perceives the Company's products as safer, more effective or
cost-competitive than other similar products. Ultimately, for the Company's new
products to gain general market acceptance, it will also be necessary for the
Company to develop marketing partners for the distribution of its products.
There can be no assurance that the Company's new products will achieve
significant market acceptance on a timely basis, or at all. Failure of some or
all of the Company's future products to achieve significant market acceptance
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success
will depend, in part, on its ability to obtain and enforce patents, protect
trade secrets, obtain licenses to technology owned by third parties when
necessary, and conduct its business without infringing the proprietary rights of
others. The patent positions of pharmaceutical, medical products and
biotechnology firms, including the Company, can be uncertain and involve complex
legal and factual questions. There can be no assurance that any patent
applications will result in the issuance of patents or, if any patents are
issued, whether they will provide significant proprietary protection or
commercial advantage, or will not be circumvented by others. In the event a
third party has also filed one or more patent applications for any of its
inventions, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office ("PTO") to determine priority
of invention (see below), which could result in failure to obtain or the loss of
patent protection for the inventions and the loss of any right to use the
inventions. Even if the eventual outcome is favorable to the Company, such
interference proceedings could result in substantial cost to the Company. Filing
and prosecution of patent applications, litigation to establish the validity and
scope of patents, assertion of patent infringement
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claims against others and the defense of patent infringement claims by others
can be expensive and time consuming. There can be no assurance that in the event
that any claims with respect to any of the Company's patents, if issued, are
challenged by one or more third parties, that any court or patent authority
ruling on such challenge will determine that such patent claims are valid and
enforceable. An adverse outcome in such litigation could cause the Company to
lose exclusivity covered by the disputed rights. If a third party is found to
have rights covering products or processes used by the Company, the Company
could be forced to cease using the technologies or marketing the products
covered by such rights, could be subject to significant liabilities to such
third party, and could be required to license technologies from such third
party. Furthermore, even if the Company's patents are determined to be valid,
enforceable, and broad in scope, there can be no assurance that competitors will
not be able to design around such patents and compete with the Company using the
resulting alternative technology.
The Company has a policy of seeking patent protection for patentable
aspects of its proprietary technology. The Company co-owns certain United
States patents and a patent application which claim certain adhesion
prevention uses and certain drug delivery uses of HA, and solely owns patents
directed to certain manufacturing processes. The Company also holds an
exclusive license from Tufts University to use technologies claimed in a
United States patent application which has been granted a Notice of Allowance
from the U.S. Patent Office for the anti-metastasis applications of HA
oligosaccharides. The Company's patents expire between 2007 and 2015 and the
license expires upon expiration of all related patents. The Company intends
to seek patent protection with respect to products and processes developed in
the course of its activities when it believes such protection is in its best
interest and when the cost of seeking such protection is not inordinate.
However, no assurance can be given that any patent application will be filed,
that any filed applications will result in issued patents or that any issued
patents will provide the Company with a competitive advantage or will not be
successfully challenged by third parties. The protections afforded by patents
will depend upon their scope and validity, and others may be able to design
around the Company's patents. The Company's issued patents and any patents
which arise from the Company's licensed application would provide competitive
protection, if at all, only in the United States. The Company has not, to
date, pursued foreign patents equivalent to those issued or applied for in
the United States.
Other entities have filed patent applications for or have been issued
patents concerning various aspects of HA-related products or processes. There
can be no assurance that the products or processes developed by the Company
will not infringe the patent rights of others in the future. Any such
infringement may have a material adverse effect on the Company's business,
financial condition and results of operations. In particular, the Company has
received notice from the PTO that a third party is attempting to provoke a
patent interference with respect to one of the Company's co-owned patents
covering the use of INCERT-Registered Trademark- for post-surgical adhesion
prevention. Although the Company believes that an interference may be
declared by the PTO, it is too early to determine the merits of the
interference or the effect, if any, the interference will have on the
Company's marketing of INCERT-Registered Trademark- for this use. The
existence of the interference proceeding may have a negative impact on the
marketing of the INCERT-Registered Trademark- product, and no assurance can
be given that the company would be successful in any such interference
proceeding. If the third-party interference were to be decided adversely to
the Company, involved claims of the Company's patent would be cancelled, the
Company's marketing of the INCERT-Registered Trademark- product may be
materially and adversely affected and the third party may enforce patent
rights against the Company which could prohibit the sale and use of the
INCERT -Registered Trademark- products, which could have a material adverse
effect on the Company's future operating results.
The Company also relies upon trade secrets and proprietary know-how for
certain unpatented aspects of its technology. To protect such information,
the Company requires all employees, consultants and licensees to enter into
confidentiality agreements limiting the disclosure and use of such
information. There can be no assurance that these agreements provide
meaningful protection or that they will not be breached, that the Company
would have adequate remedies for any such breach, or that the Company's trade
secrets, proprietary know-how, and technological advances will not otherwise
become known to others. In addition, there can be no assurance that, despite
precautions taken by the Company, others have not and will not obtain access
to the Company's proprietary technology. Further, there can be no assurance
that third parties will not independently develop substantially equivalent or
better technology.
Pursuant to the new BLS Agreement, the Company has agreed to grant
Bausch & Lomb Surgical a royalty-free, worldwide, exclusive license to the
Company's manufacturing and product inventions which relate to
AMVISC-Registered Trademark- products, effective on December 31, 2007, the
termination date of the agreement. Upon expiration of the New BLS Agreement,
there can be no assurance that Bausch & Lomb Surgical will continue to use
the Company to manufacture AMVISC-Registered Trademark- and AMVISC-Registered
Trademark- Plus. If Bausch & Lomb Surgical discontinues the use of the
Company as a manufacturer after such time, the Company's business, financial
condition and results of operations would be materially and adversely
affected.
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RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations
are dependent upon the continued operation of its manufacturing facility in
Woburn, Massachusetts. The operation of biomedical manufacturing plants
involves many risks, including the breakdown, failure or substandard
performance of equipment, natural and other disasters, and the need to comply
with the requirements of directives of government agencies, including the
FDA. In addition, the Company relies on a single supplier for syringes and a
small number of suppliers for a number of other materials required for the
manufacturing and delivery of its HA products. Furthermore, manufacturing
processes and research and development efforts of the Company involve animals
and products derived from animals. The utilization of animals in research and
development and product commercialization is subject to increasing focus by
animal rights activists. The activities of animal rights groups and other
organizations that have protested animal based research and development
programs or boycotted the products resulting from such programs could cause
an interruption in the Company's manufacturing processes and research and
development efforts. The occurrence of material operational problems,
including but not limited to the events described above, could have a
material adverse effect on the Company's business, financial condition and
results of operations during the period of such operational difficulties.
NO ASSURANCE OF GROWTH OR ABILITY TO MANAGE GROWTH. The Company's future
success depends on substantial growth in product sales. There can be no
assurance that such growth can be achieved or, if achieved, can be sustained.
There can be no assurance that even if substantial growth in product sales
and the demand for the Company's products is achieved, the Company will be
able to (i) develop the necessary manufacturing capabilities; (ii) obtain the
assistance of additional marketing partners; (iii) attract, retain and
integrate the required key personnel; or (iv) implement the financial,
accounting and management systems needed to manage growing demand for its
products, should it occur. Failure of the Company to successfully manage
future growth could have a material adverse effect on the Company's business,
financial condition and results of operations.
THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES.
In the U.S. and other markets, health care providers, such as hospitals and
physicians, that purchase health care products, such as the Company's
products, generally rely on third party payors, including Medicare, Medicaid
and other health insurance and managed care plans, to reimburse all or part
of the cost of the health care product. The Company depends upon the
distributors for its products to secure reimbursement. Reimbursement by a
third party payor may depend on a number of factors, including the payor's
determination that the use of the Company's products are clinically useful
and cost-effective, medically necessary and not experimental or
investigational. Since reimbursement approval is required from each payor
individually, seeking such approvals can be a time consuming and costly
process which, in the future, could require the Company or its marketing
partners to provide supporting scientific, clinical and cost-effectiveness
data for the use of the Company's products to each payor separately.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and third party payors are increasingly
attempting to contain the costs of health care products and services by
limiting both coverage and the level of reimbursement for new therapeutic
products and by refusing in some cases to provide coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. In addition, Congress and certain state legislatures have
considered reforms that may affect current reimbursement practices, including
controls on health care spending through limitations on the growth of
Medicare and Medicaid spending. There can be no assurance that third party
reimbursement coverage will be available or adequate for any products or
services developed by the Company. Outside the U.S., the success of the
Company's products is also dependent in part upon the availability of
reimbursement and health care payment systems. Lack of adequate coverage and
reimbursement provided by governments and other third party payors for the
Company' products and services could have a material adverse effect on the
Company's business, financial condition and results of operations.
NEED FOR ADDITIONAL FUNDS; LIQUIDITY. The Company had cash, cash
equivalents and short-term investments of $19.2 million as of June 30, 2000.
The Company's future capital requirements and the adequacy of available funds
will depend, however, on numerous factors, including market acceptance of its
existing and future products, the successful commercialization of products in
development, progress in its product development efforts, the magnitude and
scope of such efforts, progress with preclinical studies, clinical trials and
product clearances by the FDA and other agencies, the cost and timing of its
efforts to expand its manufacturing capabilities, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, and the
development of strategic alliances for the marketing of certain of its
products. To the extent that funds generated from the Company's operations,
together with the Company's existing capital resources and are insufficient
to meet future requirements, the Company will be required to obtain
additional funds through equity or debt financings, strategic alliances with
corporate partners and others, or through other sources. The terms of any
future equity financings may be dilutive to the Company's stockholders and
the terms of any debt financings may contain restrictive covenants which
limit the Company's
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ability to pursue certain courses of action. The ability of the Company to
obtain financing is dependent on the status of the Company's future business
prospects as well as conditions prevailing in the relevant capital markets. No
assurance can be given that any additional financing will be made available to
the Company or will be available on acceptable terms should such a need arise.
EXPOSURE TO PRODUCT LIABILITY CLAIMS. The testing, marketing and sale of
human health care products entail an inherent risk of allegations of product
liability, and there can be no assurance that substantial product liability
claims will not be asserted against the Company. Although the Company has not
received any material product liability claims to date and has an insurance
policy of $1,000,000 per occurrence and $5,000,000 in the aggregate to cover
such claims should they arise, there can be no assurance that material claims
will not arise in the future or that the Company's insurance will be adequate to
cover all situations. Moreover, there can be no assurance that such insurance,
or additional insurance, if required, will be available in the future or, if
available, will be available on commercially reasonable terms. Any product
liability claim, if successful, could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent on the
members of its management and scientific staff, the loss of one or more of
whom could have a material adverse effect on the Company. In addition, the
Company believes that its future success will depend in large part upon its
ability to attract and retain highly skilled, scientific, managerial and
manufacturing personnel. The Company faces significant competition for such
personnel from other companies, research and academic institutions,
government entities and other organizations. There can be no assurance that
the Company will be successful in hiring or retaining the personnel it
requires. In particular, the Company can provide no assurances that the
initial analysis of results from Phase III clinical trial of
ORTHOVISC-Registered Trademark- will not impact its ability to attract and
retain the personnel it requires. The failure to hire and retain such
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
ENVIRONMENTAL REGULATION. The Company is subject to a variety of local,
state and federal government regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic, or other
hazardous substances used in the manufacture of the Company's products. Any
failure by the Company to control the use, disposal, removal or storage of
hazardous chemicals or toxic substances could subject the Company to
significant liabilities, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS RELATING TO INTERNATIONAL OPERATIONS. During the six months ended
June 30, 2000 and 1999, approximately, 27% and 30%, respectively, of the
Company's product sales were generated in international markets through
marketing partners. The Company's representatives, agents and distributors
which sell products in international markets are subject to the laws and
regulations of the foreign jurisdictions in which they operate and in which
the Company's products are sold. A number of risks are inherent in
international sales and operations. For example, the volume of international
sales may be limited by the imposition of government controls, export license
requirements, political instability, trade restrictions, changes in tariffs,
difficulties in managing international operations, import restrictions and
fluctuations in foreign currency exchange rates. Such changes in the volume
of sales may have an adverse effect on the Company's business, financial
condition and results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE; NO CONTROL OVER MARKET MAKING. The
market price of shares of the Company's Common Stock may be highly volatile.
Factors such as announcements of new commercial products or technological
innovations by the Company or its competitors, disclosure of results of clinical
testing or regulatory proceedings, governmental regulation and approvals,
developments in patent or other proprietary rights, public concern as to the
safety of products developed by the Company and general market conditions may
have a significant effect on the market price of the Company's Common Stock. In
particular, the Company's stock price declined significantly in October 1998
following the Company's announcement that the FDA had notified the Company that
its PMA for ORTHOVISC-Registered Trademark- was not approvable and that
additional clinical data would be required to demonstrate the effectiveness of
ORTHOVISC-Registered Trademark- and again in May 2000 following the Company's
announcements that initial analysis of results from the Phase III clinical trial
of ORTHOVISC-Registered Trademark- did not show sufficient efficacy to support
the filing of a PMA application to obtain FDA approval and that the SEC had
issued a formal order of investigation and required the Company to provide
information in connection with certain revenue recognition matters. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
material announcements by the Company or its competitors, governmental
regulatory action, conditions in the health care industry generally or in the
medical products industry specifically, or other events or factors, many of
which are beyond the Company's control. In addition, the stock market has
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experienced extreme price and volume fluctuations which have particularly
affected the market prices of many medical products companies and which often
have been unrelated to the operating performance of such companies. The
Company's operating results in future quarters may be below the expectations of
equity research analysts and investors. In such event, the price of the Common
Stock would likely decline, perhaps substantially.
No person is under any obligation to make a market in the Common Stock or
publish research reports on the Company, and any person making a market in the
Common Stock or publishing research reports on the Company may discontinue
market making or publishing such reports at any time without notice. There can
be no assurance that an active public market in the Common Stock will be
sustained.
POSSIBLE ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain
provisions of the Company's Restated Articles of Organization and Amended and
Restated By-laws could have the effect of discouraging a third party from
pursuing a non-negotiated takeover of the Company and preventing certain changes
in control. These provisions include a classified Board of Directors, advance
notice to the Board of Directors of stockholder proposals, limitations on the
ability of stockholders to remove directors and to call stockholder meetings,
the provision that vacancies on the Board of Directors be filled by a majority
of the remaining directors. In addition, the Board of Directors adopted a
Shareholders Rights Plan in April 1998. The Company also is subject to Chapter
110F of the Massachusetts General Laws which, subject to certain exceptions,
prohibits a Massachusetts corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
These provisions could discourage a third party from pursuing a takeover of the
Company at a price considered attractive by many stockholders, since such
provisions could have the effect of preventing or delaying a potential acquiror
from acquiring control of the Company and its Board of Directors.
SEC INVESTIGATION AND SECURITIES CLASS ACTION LITIGATION. The Securities
and Exchange Commission ("SEC") issued a formal order of investigation and
required the Company to provide information in connection with certain
revenue recognition matters. These matters, relating to the Company's
historical accounting for sales of its product under a long-term supply and
distribution agreement, were also the subject of the Company's previous March
15, 2000 disclosure concerning an informal SEC inquiry and the restatement of
results for 1998 and the first three quarters of 1999. The Company has been
cooperating fully; however, the Company is not in a position to predict the
probable outcome of this matter or its potential impact on the Company's
business or operations. Three putative class action complaints have been
filed against the Company. See "Legal Proceedings." Because these lawsuits
are in their preliminary stages, the Company is not able to predict the
probable outcome of this matter or its potential impact on the Company's
business or operations.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS. The Company has historically
derived the majority of our revenues from a small number of customers, most
of whom resell our products to end users and most of whom are significantly
larger companies. The Company's failure to generate as much revenue as
expected from these customers or the failure of these customers to purchase
Anika's products would seriously harm its business. For the six months ended
June 30, 2000, Bausch & Lomb Surgical accounted for 59% of product revenues
and 40% of the accounts receivable balance and Biomeks accounted for 22% of
product revenues and 45% of the accounts receivable balance. Accordingly,
present and future customers may terminate their purchasing arrangements with
the Company, significantly reduce or delay their orders or seek to
renegotiate their agreements on terms less favorable to the Company.
Furthermore, in any future negotiations the Company may be subject to the
perceived or actual leverage the customers may have given their relative size
and importance to the Company. Any termination, change, reduction or delay in
orders could seriously harm the Company's business, financial condition and
results of operations. Accordingly, unless and until the Company diversifies
and expands its customer base, Anika's future success will significantly
depend upon the timing and size of future purchases by its largest customers
and the financial and operational success of these customers.
The loss of any one of the Company's major customers or the delay of
significant orders from such customers, even if only temporary, could reduce
or delay the Company's recognition of revenues, harm its reputation in the
industry and reduce its ability to accurately predict cash flow, and, as a
consequence, could seriously harm the Company's business, financial condition
and results of operations.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. The SEC issued a
formal order of investigation and required the Company to provide information
in connection with certain revenue recognition matters. These matters,
relating to the Company's historical accounting for sales of its product
under a long-term supply and distribution agreement, were also the subject of
the Company's previous March 15, 2000 disclosure concerning an informal SEC
inquiry and the restatement of results for 1998 and the first three quarters
of 1999. The Company has been cooperating fully. However, the Company is not
in a position to predict the probable outcome of this matter or its potential
impact on the Company's business or operations.
2. PUTATIVE CLASS ACTION COMPLAINTS. Three putative class action
complaints have been filed against the Company, J. Melville Engle and Sean
Moran, former chief financial officer, in the United States District Court for
the District of Massachusetts (the "Court") on behalf of a class of all
purchasers of the Company's shares between April 15, 1998 and May 30, 2000
(the "Class"). The first, filed on or about June 8, 2000, is captioned
CASAZZA, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN
MORAN. The second, filed on or about June 26, 2000, is captioned
NEMETH-COSLETT, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND
SEAN MORAN. The third, filed on or about August 2, 2000, is captioned
ROCKEFELLER, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN
MORAN. Each of these putative class action complaints encompasses the same
class period and covers almost identical allegations.
All three complaints allege that the Company and the individual
defendants violated the federal securities laws by, inter alia, making
material misrepresentations and omissions in certain public disclosures
during the period between April 15, 1998 and May 30, 2000. The alleged
misrepresentations and omissions relate to the Company's historical revenue
recognition policies and its restatement of revenues for 1998 and the first
three quarters of 1999. All three complaints seek an unspecified amount of
monetary damages as well as costs and expenses. In addition, the CASAZZA and
NEMETH-COSLETT complaints seek equitable and/or injunctive relief to restrict
the defendants from disposing of various assets in order to assure adequate
funds are available for the claimed damages. On or about August 7, 2000,
certain alleged members of the Class filed a motion to appoint lead plaintiff
and lead counsel, as well as a motion for consolidation of related cases. The
Court has not yet ruled on these motions. The Company plans to defend
vigorously these lawsuits. Because these lawsuits are in their preliminary
stages, the Company is not able to predict the probable outcome of this
matter or its potential impact on the Company's business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 7, 2000, the Company held its 2000 Annual Meeting of
Stockholders (the "Annual Meeting"). At the Annual Meeting, Stockholders of
the Company were asked to consider: (1) a proposal to elect two Class I
Directors of the Company to serve until the 2003 annual meeting of
stockholders and until their successors are duly elected and qualified (the
"Election Proposal") and (2) a proposal to approve an amendment to the 1993
Stock Option Plan, as amended, (the "Plan") to increase the number of shares
available for issuance under the Plan (the "Plan Proposal").
With respect to the Election Proposal, Joseph L. Bower and Eugene A.
Davidson, Ph.D were nominated as Class I Directors of the Company. Dr. Bower
received 8,215,599 shares voted in favor of his election and 205,524 votes
were withheld. Dr. Davidson received 8,209,209 shares voted in favor of his
election and 211,914 votes were withheld. Drs. Bower and Davidson were
therefore elected as Class I Directors. Other Directors of the Company whose
terms of office continued after the Annual Meeting are Samuel F. McKay and
Harvey S. Sadow, Ph.D (Class II Directors), and J. Melville Engle and Steven
E. Wheeler (Class III Directors). On May 9, 2000, prior to the Annual
Meeting, the Company announced Jonathan D. Donaldson's resignation from the
Board of Directors.
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The stockholders also approved the Plan Proposal, as described in the
Company's proxy statement. There were 7,689,658 shares voted in favor of the
proposal, 667,604 shares voted against it, and 63,861 shares abstaining.
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT NO. DESCRIPTION
(3) Articles of Incorporation and Bylaws:
3.1 The Amended and Restated Articles of Organization of the
Company, incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form 10 (file no.
000-21326), filed with the Securities and Exchange
Commission on March 5, 1993.
3.2 The Amended and Restated Bylaws of the Company, incorporated
herein by reference to Exhibit 3.4 to the Company's
quarterly report on Form 10-QSB for the period ended
November 30, 1996 (file no. 000-21326), filed with the
Securities and Exchange Commission on January 14, 1997.
3.3 Amendment to the Amended and Restated Articles of
Organization of the Company, incorporated herein by
reference to Exhibit 3.1 to the Company's quarterly report
on Form 10-QSB for the period ended November 30, 1996 (file
no. 000-21326), filed with the Securities and Exchange
Commission on January 14, 1997.
(4) Instruments Defining the Rights of Security Holders
4.1 Shareholder Rights Agreement dated as of April 6, 1998
between the Company and Firstar Trust Company, incorporated
herein by reference to Exhibit 4.1 of the Company's
Registration Statement of Form 8-A12B (File no. 001-14027),
filed with the Securities and Exchange Commission on April
7, 1998.
(10) Material Contracts
*10.1 Letter Agreement dated February 13, 1998 between the
Company and Michael R. Slater.
*10.2 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Michael R.
Slater.
*10.3 Letter Agreement dated April 15, 1998 between the Company
and Charles H. Sherwood.
*10.4 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Charles H.
Sherwood.
*10.5 Letter Agreement dated March 30, 2000 by and among the
Company and Douglas R. Potter.
*10.6 Non-Disclosure and Non-Competition Agreement dated April 3,
2000 by and among the Company and Douglas R. Potter.
*10.7 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Douglas R.
Potter.
*10.8 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Edward Ross, Jr.
23
<PAGE>
10.9 Anika Therapeutics, Inc. 1993 Stock Option Plan, as amended,
incorporated herein by reference to the Company's Proxy
Statement (file no. 001-14027), filed with the Securities
and Exchange Commission on April 28, 2000.
* (27) Financial Data Schedule.
* Filed herewith.
(b) Reports on Form 8-K: None
24
<PAGE>
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 in Woburn,
Massachusetts on August 14, 2000.
ANIKA THERAPEUTICS, INC.
August 14, 2000 By: /S/ DOUGLAS R. POTTER
----------------------
Douglas R. Potter
PRINCIPAL FINANCIAL & ACCOUNTING OFFICER
<PAGE>
EXHIBIT INDEX
(a) EXHIBIT NO. DESCRIPTION
(3) Articles of Incorporation and Bylaws:
3.1 The Amended and Restated Articles of Organization of the
Company, incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form 10 (file no.
000-21326), filed with the Securities and Exchange
Commission on March 5, 1993.
3.2 The Amended and Restated Bylaws of the Company, incorporated
herein by reference to Exhibit 3.4 to the Company's
quarterly report on Form 10-QSB for the period ended
November 30, 1996 (file no. 000-21326), filed with the
Securities and Exchange Commission on January 14, 1997.
3.3 Amendment to the Amended and Restated Articles of
Organization of the Company, incorporated herein by
reference to Exhibit 3.1 to the Company's quarterly report
on Form 10-QSB for the period ended November 30, 1996 (file
no. 000-21326), filed with the Securities and Exchange
Commission on January 14, 1997.
(4) Instruments Defining the Rights of Security Holders
4.1 Shareholder Rights Agreement dated as of April 6, 1998
between the Company and Firstar Trust Company, incorporated
herein by reference to Exhibit 4.1 of the Company's
Registration Statement of Form 8-A12B (File no. 001-14027),
filed with the Securities and Exchange Commission on April
7, 1998.
(10) MATERIAL CONTRACTS
*10.1 Letter Agreement dated February 13, 1998 between the
Company and Michael R. Slater.
*10.2 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Michael R.
Slater.
*10.3 Letter Agreement dated April 15, 1998 between the
Company and Charles H. Sherwood.
*10.4 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Charles H.
Sherwood.
*10.5 Letter Agreement dated March 30, 2000 by and among the
Company and Douglas R. Potter.
*10.6 Non-Disclosure and Non-Competition Agreement dated
April 3, 2000 by and among the Company and Douglas R.
Potter.
*10.7 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Douglas R.
Potter.
25
<PAGE>
*10.8 Change in Control, Bonus and Severance Agreement dated
April 26, 2000 by and among the Company and Edward
Ross, Jr.
10.9 Anika Therapeutics, Inc. 1993 Stock Option Plan, as
amended, incorporated herein by reference to the
Company's Proxy Statement (file no. 001-14027), filed
with the Securities and Exchange Commission on
April 28, 2000.
*(27) Financial Data Schedule
*Filed herewith.
(b) Reports on Form 8-K: None
