<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MARCH 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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 May 9, 2000 there were issued and outstanding 9,934,280 shares of Common
Stock, par value $.01 per share.
1
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ANIKA THERAPEUTICS, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $8,946,312 $6,440,705
Short-term investments................ 5,159,546 8,184,870
Accounts receivable, net.............. 1,811,927 2,106,452
Inventories........................... 6,792,994 5,493,701
Prepaid expenses...................... 475,183 721,206
------- ----------
Total current assets.............. 23,185,962 22,946,934
---------- ----------
Property and equipment.................. 8,207,190 8,116,233
Less: accumulated depreciation.......... 4,802,221 4,587,692
--------- ---------
Net property and equipment........ 3,404,969 3,528,541
---------- ----------
Long-term investments................... 5,646,465 5,558,029
Notes receivable from officers.......... 294,000 353,000
Deposits................................ 124,600 124,600
---------- ----------
Total assets...................... $32,655,996 $32,511,104
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $421,412 $629,080
Accrued expenses...................... 1,755,079 1,552,661
Deferred revenue...................... 2,433,240 1,792,505
---------- ----------
Total current liabilities......... 4,609,731 3,974,246
---------- ----------
Long-term deferred revenue.............. 2,725,000 2,825,000
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............ 31,829,531 31,959,316
Deferred compensation................. (474,982) (615,001)
Treasury stock (at cost, 166,913 and
200,863 shares in 2000 and 1999,
respectively).......... (796,610) (959,870)
Accumulated deficit................... (5,336,593) (4,772,506)
---------- ----------
Total stockholders' equity........ 25,321,265 25,711,858
---------- ----------
Total liabilities and
stockholders' equity.............. $32,655,996 $32,511,104
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ANIKA THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31,
2000 1999
---- ----
(AS RESTATED)
<S> <C> <C>
Product revenue................................................. $2,620,833 $3,235,650
Licensing fees.................................................. 100,000 100,000
------- -------
Total revenue................................................. 2,720,833 3,335,650
Cost of product revenue......................................... 1,232,968 1,708,171
--------- ---------
Gross profit.................................................. 1,487,865 1,627,479
Operating expenses:
Research and development...................................... 1,313,738 707,857
Selling, general and administrative........................... 999,462 743,972
------- -------
Total operating expenses........................................ 2,313,200 1,451,829
--------- ---------
Income (loss) from operations................................... (825,335) 175,650
Interest income, net.......................................... 261,248 302,150
------- -------
Income (loss) before provision for income taxes................. (564,087) 477,800
Provision for income taxes.................................... -- 21,979
--------- ---------
Income (loss) before cumulative effect of change in accounting
principle..................................................... (564,087) 455,821
Cumulative effective of change in accounting principle.......... -- (3,625,000)
--------- ---------
Net loss........................................................ ($564,087) ($3,169,179)
========= ==========
Basic income (loss) per share:
Income (loss) before cumulative effect of change in accounting ($0.06) $0.05
principle.....................................................
Cumulative effect of change in accounting principle........... -- (0.38)
--------- ---------
Net loss...................................................... ($0.06) ($0.33)
--------- ---------
Basic weighted average common shares outstanding................ 9,804,284 9,514,381
========= =========
Diluted income (loss) per share:
Income (loss) before cumulative effect of change in accounting ($0.06) $0.05
principle.....................................................
Cumulative effect of change in accounting principle........... -- (0.36)
------- ----------
Net loss...................................................... ($0.06) ($0.31)
======= ==========
Diluted weighted average common shares outstanding.............. 9,804,284 10,077,488
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ANIKA THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($564,087) ($3,169,179)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ........................ 214,529 179,656
Amortization of unearned stock compensation............ 77,842 92,974
Other long-term liabilities............................ -- (13,621)
Deferred revenue....................................... 540,735 3,513,928
Changes in operating assets and liabilities:
Accounts receivable............................ 294,525 684,729
Inventories.................................... (1,299,293) 13,264
Prepaid expenses............................... 246,024 (205,937)
Accounts payable and accrued expenses.......... (5,250) 242,958
--------- ----------
Net cash (used for) provided by operating activities..... (494,975) 1,338,772
--------- ----------
Cash flows from investing activities:
Decrease in short-term investments, net................ 3,025,324 (4,078,066)
Increase in long-term investments, net................. (88,436) --
Purchase of property and equipment..................... (90,957) (395,176)
Notes receivable from officers......................... 59,000 (59,000)
--------- -----------
Net cash provided by (used for) investing activities..... 2,904,931 (4,532,242)
--------- -----------
Cash flows from financing activities:
Purchase of 394,800 shares of treasury stock........... -- (1,910,596)
Proceeds from exercise of stock options and warrants. 95,650 --
------ -----------
Net cash provided by (used for) financing activities..... 95,650 (1,910,596)
------ -----------
Increase (decrease) in cash and cash equivalents......... 2,505,607 (5,104,067)
Cash and cash equivalents at beginning of period......... 6,440,705 10,712,520
--------- ----------
Cash and cash equivalents at end of period............... $8,946,312 $5,608,453
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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ANIKA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
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, 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 and the Company
commenced a Phase III clinical trial in the U.S. and Canada in late April 1999
and the final patient completed the six month follow-up period in late February
2000. 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 subsidiary of
Bausch & Lomb, Incorporated. 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., under a 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. (See REVENUE RECOGNITION below.) The
following table summarizes the impact of the restatement on the quarter ended
March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 1999
AS REPORTED AS RESTATED CHANGE
<S> <C> <C> <C>
Total revenue................................................................. $3,224,578 $3,335,650 $111,072
Cost of sales................................................................. 1,708,171 1,708,171 --
Gross profit.................................................................. 1,516,407 1,627,479 111,072
Income before cumulative effect of change in accounting principle............. 344,749 455,821 111,072
Cumulative effect of change in accounting principle........................... -- (3,625,000) (3,625,000)
Net income (loss)............................................................. $344,749 ($3,169,179) ($3,513,928)
Diluted income(loss) per common share:
Income before cumulative effect of change in accounting principle............. $0.03 $0.05 $0.02
Cumulative effect of change in accounting principle........................... -- ($0.36) ($0.36)
Net income (loss)............................................................. $0.03 ($0.31) ($0.34)
Diluted common shares outstanding............................................. 10,077,488 10,077,488 --
</TABLE>
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 March
31, 2000, the results of operations for the three months ended March 31, 2000
and 1999 and the cash flows for the three months ended March 31, 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
5
<PAGE>
results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
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.
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
supply contracts, including one with Zimmer, Inc., a division of Bristol-Myers
Squibb (Zimmer), for Zimmer's distribution in Canada and Europe. On March 15,
2000, the Company had announced it had revised its revenue recognition policy
for sales of ORTHOVISC under its contract with Zimmer. 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 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 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 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 $2,033,240 at March 31, 2000.
The Company has 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, respectively, received from Zimmer in the
fourth quarter of 1997 and the second quarter of 1998. 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
6
<PAGE>
recognized as revenue ratably over the 10-year term of the distribution
agreement. The amount received and deferred to future periods is $3,125,000 at
March 31, 2000 of which $2,725,000 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, 1999 and 2000.
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:
<TABLE>
<S> <C>
Machinery and equipment............. 3-10 years
Furniture and fixtures.............. 3-5 years
Leasehold improvements.............. 4-10 years
</TABLE>
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 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.
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, potential common stock has been excluded as its effect would be
antidilutive.
7
<PAGE>
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 March 31, 2000 and 1999:
<TABLE>
<CAPTION>
MARCH 31,
2000 1999
---- ----
(AS RESTATED)
<S> <C> <C>
Net loss available to common shareholders............................ ($564,087) ($3,169,179)
========== ============
Basic weighted average common shares outstanding..................... 9,804,284 9,514,381
Dilutive effect of assumed exercise of stock options and warrants.... -- 563,107
--------- ------------
Diluted weighted average common and potential common shares outstanding.. 9,804,284 10,077,488
========= ============
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------- ------------
2000 1999
---- ----
<S> <C> <C>
Raw materials......................................................... $1,097,180 $ 681,936
Work in-process....................................................... 4,765,972 3,690,618
Finished goods........................................................ 929,842 1,121,147
---------- ---------
Total............................................................... $6,792,994 $5,493,701
========== =========
</TABLE>
6. PROPERTY & EQUIPMENT
Property and equipment is stated at cost and consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------- ------------
2000 1999
---- ----
<S> <C> <C>
Machinery and equipment............................................... $5,754,589 $5,704,663
Furniture and fixtures................................................ 1,787,115 1,773,390
Leasehold improvements................................................ 665,486 638,180
---------- ---------
Total............................................................... $8,207,190 $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 due at the earlier of the end of five
years from the date of the note or at the termination of the officers'
employment. Interest accrues at annual rates between 4.42% to 6.0% and is
payable monthly over the term of the loans.
8
<PAGE>
8. LICENSING AND DISTRIBUTION AGREEMENT
In November 1997, the Company entered into a long-term distribution
agreement with Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company, that
was subsequently amended in June 1998 and June 1999, (the "Zimmer Distribution
Contract"). The Zimmer Distribution Contract 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 Contract 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 or (b) 9.9% of the then outstanding
Common Stock (but not to exceed 19.9% of the then outstanding common stock).
There can be no assurance that any of such milestones will be met on a timely
basis or at all. The Zimmer Distribution Contract 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 Contract contains certain annual minimum purchase
requirements that Zimmer must order.
9
<PAGE>
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. For the three months ended March 31, 2000 and 1999, AMVISC sales
accounted for 71.7% and 68.3% of product revenue, respectively.
In November 1997, the Company entered into a long-term distribution
agreement with Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company, that
was subsequently amended in June 1998 and June 1999, (the "Zimmer Distribution
Contract"). The Zimmer Distribution Contract provides Zimmer with exclusive
marketing and distribution rights to ORTHOVISC-Registered Trademark- in the
United States, Canada, Latin America, Asia and most of Europe. As a result of 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 Contract 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 Contract. 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 $2,033,240 at March 31, 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, respectively,
received from Zimmer in the fourth quarter of 1997 and the second quarter of
1998. 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 $3,125,000 at March 31, 2000 of which $2,725,000 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, 1999 and
2000.
RESULTS OF OPERATIONS
PRODUCT REVENUE. Product revenue for the three months ended March 31, 2000
was $2,620,833 a decrease of $614,817 or 19.0%, over the $3,235,650 recorded in
the prior year corresponding quarter. Sales of ORTHOVISC decreased $409,612 or
40.3% primarily due to lower sales to the Company's Turkish distributor. Sales
of AMVISC products to Bausch & Lomb Surgical also decreased by $334,203.
LICENSING FEES. For the three months ended March 31, 2000 and 1999,
licensing fees of $100,000 represent the annual amortization of amounts received
in 1997 and 1998, in accordance with the Company's change in accounting for such
fees.
GROSS PROFIT. Gross profit for the three months ended March 31, 2000 was
$1,487,865 a decrease of $139,614 or 8.6% from $1,627,479 recorded in the prior
year corresponding quarter. Gross profit as a percentage of product sales for
the three months ended March 31, 2000 was 53.0% compared to 47.2% in the prior
quarter, previously reflecting improved manufacturing cost performance.
10
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
months ended March 31, 2000 increased by $605,881 to $1,313,738 from $707,857
recorded in the prior year corresponding quarter. The increase in research and
development during 2000 was primarily due to the costs associated with the
completion of ORTHOVISC-Registered Trademark- Phase III clinical trials.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended March 31, 2000 increased by $255,490 or
34.3% to $999,462 from $743,972 in the prior year corresponding quarter. The
increase was primarily attributable to higher non-recurring fees associated with
year end 1999 corporate matters.
NET INTEREST INCOME. The Company's net interest income decreased by $40,902
to $261,248 for the three months ended March 31, 2000 from $302,150 in the prior
year corresponding quarter. The decrease is attributable to lower average cash
balances on hand in 2000 versus 1999 and lower average interest rates.
INCOME TAXES. The Company recorded no income tax expense for the three
months ended March 31, 2000 due to the net loss.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash, cash equivalents and short and
long-term investments of $19.8 million and working capital of $18.6 million
versus cash, cash equivalents and short-term investments of $20.2 million and
working capital of $19.0 million at December 31, 1999. At March 31, 2000 and
December 31, 1999 the Company had investments of approximately $5.6 million in
long-term marketable securities, consisting of commercial paper.
During the first quarter of 2000, the Company utilized $1,299,293 in
connection with a planned increase in inventories. Deferred revenue increased by
$640,735 in connection with the receipt of cash for certain ORTHOVISC units
manufactured for Zimmer but held in the Company's refrigerators pending final
delivery instructions. Also, during the first quarter of 2000, the Company
utilized $91,000 for capital expenditures.
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 month period ended March 31, 2000, the Company has not repurchased any
Anika common stock. During the three months ended March 31, 2000 the Company
received $96,000 from the exercise of stock options and warrants.
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" 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, POSSIBLE
REGULATORY APPROVAL OF ORTHOVISC-Registered Trademark- AND NEW OR POTENTIAL
PRODUCTS, CAPACITY OF MANUFACTURING FACILITIES AND PERFORMANCE UNDER SUPPLY
AGREEMENTS, INCLUDING THOSE WITH ZIMMER, INC. AND BAUSCH AND LOMB SURGICAL. 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 IN THE "MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" BEGINNING ON PAGE 10 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 and/or 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 if 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 anticipates that once FDA approval for their
ORTHOVISC-Registered Trademark- product is obtained, ORTHOVISC-Registered
Trademark- 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 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 ORTHOVISC-Registered
Trademark- clinical trial commenced in late April 1999 and completed patient
enrollment for the trial in August 1999. The final patient completed the six
month follow-up period in late February 2000. There can be no assurance that
Anika will file a PMA. In addition, there can be no guarantee that the FDA will
approve a PMA application for ORTHOVISC-Registered Trademark- on a timely basis,
if at all, or that the FDA review will not involve delays that will affect the
Company's ability to commercialize additional products or expand permitted uses
of existing products. Furthermore, even if granted, 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. Before undertaking clinical trials in the U.S. to support a PMA, the
Company must apply for and obtain FDA and/or institutional review board ("IRB")
approval of an IDE. There can be no assurance that the Company will be permitted
to undertake clinical trials of these 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 pre-market approval 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
Orquest will be permitted to undertake clinical trials of OSSIGEL-Registered
Trademark- or, if clinical trials are permitted, that such clinical trials 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 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
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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 March 31, 2000, the Company had an accumulated deficit
of approximately $5,337,000. 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. 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 of any of these products. In addition, there can be no 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 currently manufactures AMVISC-Registered Trademark- and
AMVISC-Registered Trademark-PLUS for Bausch & Lomb Surgical under an exclusive
fixed price, five-year supply agreement which contains stated minimum annual
purchase obligations and terminates on December 31, 2001. Since January 1, 1997,
Bausch & Lomb Surgical has purchased AMVISC-Registered Trademark- and
AMVISC-Registered Trademark-PLUS in amounts substantially in excess of the
minimum purchase obligations set forth in the AMVISC Supply Contract. There can
be no assurance that Bausch & Lomb, Surgical will continue to purchase
AMVISC-Registered Trademark- and AMVISC-Registered Trademark-Plus at levels
beyond the stated minimum annual purchase obligations or that future unit sale
prices will not be subject to negotiated reductions. Any such decrease in orders
or prices under the AMVISC Supply Contract could have a material adverse effect
on the Company's business, financial condition and results of operations. For
the three months ended March 31, 2000 and 1999, sales of AMVISC-Registered
Trademark- products to Bausch & Lomb Surgical accounted for 71.7% and 68.3% of
product revenues.
The Zimmer Distribution Contract provides Zimmer with exclusive marketing
and distribution rights to ORTHOVISC-Registered Trademark- in the United States,
Canada, Latin America, Asia and most of Europe. To date the Company has received
up-front non-refundable licensing payments totaling $4.0 million. In addition,
under the Zimmer Distribution Contract the Company has the potential to receive
payments aggregating up to an additional $19.5 million upon the achievement of
certain regulatory approvals and enumerated sales milestones. As an alternative
to a $2.5 million milestone payment due upon receipt of FDA approval for the
U.S. market, Zimmer has the right to elect to acquire shares of the Company's
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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 or (b) 9.9% of the then outstanding Common Stock (but not to
exceed 19.9% of the then outstanding Common Stock) at a 25% premium to the
market price for the 60 days prior to the milestone. There can be no assurance
that any of such milestones will be met on a timely basis or at all. In
addition, Zimmer has the right to terminate the Zimmer Distribution Contract
within sixty (60) days of the occurrence of any of the following events: (i)
ORTHOVISC-Registered Trademark- is not approved by the FDA by January 1, 2001,
(ii) there is a material recall of ORTHOVISC-Registered Trademark-, (iii)
Zimmer's net sales of ORTHOVISC-Registered Trademark- failed to meet the
minimums specified in the Zimmer Distribution Contract for two consecutive years
beginning with the calendar year of 1998 or (iv) a court of competent
jurisdiction rules that ORTHOVISC-Registered Trademark- or any of its related
patents is infringing the patents or proprietary rights of a third party. There
can be no assurance that any of these events will not occur, or, even if any
such event does not occur, that Zimmer will not elect to terminate the
agreement. In fact, Zimmer's sales of ORTHOVISC-Registered Trademark- for 1999
and 1998, are less than the minimums for this consecutive two-year period.
Despite the fact that Zimmer has not given notice within the requisite sixty
(60) day period, there can be no assurances that Zimmer will not terminate the
Zimmer Distribution Contract or seek to renegotiate the agreement 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
4.5% and 3.4% of product revenue for the three months ended March 31, 2000 and
1999, respectively.
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 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.
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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 AMVISC Supply Contract, 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, 2001, the termination date of the
AMVISC supply contract (which became effective on January 1, 1997). Upon
expiration of the AMVISC Supply Contract, 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.
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
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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- and long-term investments of $19.8 million as of March
31, 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 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,
17
<PAGE>
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. 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 three months ended
March 31, 2000 and 1999, approximately, 19.7% and 26.8% 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-. To the extent the Company experiences any other
adverse developments in the process of seeking FDA approval for
ORTHOVISC-Registered Trademark-, the price of the Common Stock will likely be
subject to further, and perhaps substantial, declines. 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 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-
18
<PAGE>
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.
POTENTIAL SECURITIES CLASS ACTION LITIGATION. As a result of an informal
inquiry from the Securities and Exchange Commission, the Company has revised its
revenue recognition policies and has restated its operating results for 1998 and
the first three quarters of 1999. In the past, companies that have restated
their financial information have been subject to securities class action
litigation. The Company may be involved in a securities class action litigation
in the future. Such litigation often results in significant costs and a
diversion of management's attention and resources and could harm the Company's
business, financial condition and results of 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. Our failure to generate as much revenue as expected from these
customers or the failure of these customers to purchase our products would
seriously harm our business. For the three months ended March 31, 2000, Bausch &
Lomb Surgical accounted for 71.7% of our product revenues and 73.4% of our
account receivables balance and Biomeks accounted for 14.0% of our product
revenues and 17.0% of our accounts receivable balance. Accordingly, present and
future customers may terminate their purchasing arrangements with us,
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 our
business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will
significantly depend upon the timing and size of future purchases by our largest
customers and the financial and operational success of these customers.
The loss of any one of our major customers or the delay of significant
orders from such customers, even if only temporary, could reduce or delay our
recognition of revenues, harm our reputation in the industry and reduce our
ability to accurately predict cash flow, and, as a consequence, could seriously
harm our business, financial condition and results of operations.
19
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
(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 on Form 8-A12B
(File no. 001-14027), filed with the Securities and
Exchange Commission on April 7, 1998.
(10) Material Contracts
10.1 Settlement Agreement dated January 11, 1991 among
MedChem Products, Inc., Kabi Pharmacia AB, Pharmacia,
Inc., Dr. Endre Balazs and IOLAB Corporation,
incorporated herein by reference to Exhibit 10.3 to
the Company's Registration Statement of Form 10 (file
no. 000-21326), filed with the Securities and
Exchange Commission on March 5, 1993.
10.2 1993 Stock Option Plan, incorporated herein by
reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-QSB for the period ended June 30,
1998 (file no. 001-14027), filed with the Securities
and Exchange Commission on August 14, 1998.
10.3 1993 Directors Stock Option Plan, incorporated herein
by reference to Exhibit 10.15 to the Company's
Registration Statement on Form 10/A (file no.
000-21326), filed with the Securities and Exchange
Commission on April 28, 1993.
10.4 License Agreement dated as of July 22, 1992 between
the Company and Tufts University, incorporated herein
by reference to Exhibit 10.4 to the Company's
Registration Statement on Form 10 (file no.
000-21326), filed with the Securities and Exchange
Commission on March 5, 1993.
10.5 Lease dated March 10, 1995 between the Company and
Cummings Properties, incorporated herein by reference
to Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1995
(file no. 000-21326), filed with the Securities and
Exchange Commission on November 29, 1995.
10.6 Employment Agreement dated September 24, 1996 between
the Company and J. Melville Engle, incorporated
herein by reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
KSB for the fiscal year ended August 31, 1996 (file
no. 000-21326), filed with the Securities and
Exchange Commission on November 27, 1996.
10.7 Change of Control Agreement dated as of June 3, 1999
between the Company and J. Melville Engle
incorporated herein by reference to Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (file no.
001-14027), filed with the Securities and Exchange
Commission on March 31, 2000.
10.8 Promissory Note for $75,000 dated as of March 17,
1996 between the Company and J. Melville Engle,
incorporated herein by reference to Exhibit 10.25 to
the Company's Registration Statement on Form SB-2
(file no. 333-38993), filed with the Securities and
Exchange Commission on October 29, 1997.
10.9 Exclusive Distribution Agreement dated as of November
7, 1997 between the Company and Zimmer, Inc.,
incorporated herein by reference to Exhibit 10.26 to
the Company's Registration Statement on Form SB-2/A
(file no. 333-38993), filed with the Securities and
Exchange Commission on November 10, 1997.
Confidential treatment was granted to certain
portions of this Exhibit.
10.10 First Amendment to Exclusive Distribution Agreement
dated as of June 1, 1998 between the Company and
Zimmer, Inc., incorporated herein by reference to
Exhibit 10.1 to the Company's quarterly report on
Form 10-QSB for the quarterly period ended June 30,
1998 (file no. 001-14027), filed with the Securities
and Exchange Commission on August 14, 1998.
10.11 Second Amendment to Exclusive Distribution Agreement
dated as of June 3, 1999 between the Company and
Zimmer, Inc., is filed herewith as Exhibit 10.11.
</TABLE>
(27) Financial Data Schedule.
(b) Reports on Form 8-K: None
21
<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 May 15, 2000.
ANIKA THERAPEUTICS, INC.
May 15, 2000 By: /S/ DOUGLAS R. POTTER
----------------------
Douglas R. Potter
PRINCIPAL FINANCIAL & ACCOUNTING OFFICER
22
<PAGE>
EXHIBIT INDEX
(3) Articles of Incorporation and Bylaws:
<TABLE>
<S> <C> <C>
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 on Form 8-A12B (File no. 001-14027), filed with the
Securities and Exchange Commission on April 7, 1998.
(10) Material Contracts
10.1 Settlement Agreement dated January 11, 1991 among MedChem
Products, Inc., Kabi Pharmacia AB, Pharmacia, Inc., Dr. Endre
Balazs and IOLAB Corporation, incorporated herein by reference
to Exhibit 10.3 to the Company's Registration Statement on
Form 10 (file no. 000-21326), filed with the Securities and
Exchange Commission on March 5, 1993.
10.2 1993 Stock Option Plan, incorporated herein by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-QSB
for the period ended June 30, 1998 (file no. 001-14027), filed
with the Securities and Exchange Commission on August 14,
1998.
10.3 1993 Directors Stock Option Plan, incorporated herein by
reference to Exhibit 10.15 to the Company's Registration
Statement on Form 10/A (file no. 000-21326), filed with the
Securities and Exchange Commission on April 28, 1993.
10.4 License Agreement dated as of July 22, 1992 between the
Company and Tufts University, incorporated herein by reference
to Exhibit 10.4 to the Company's Registration Statement on
Form 10 (file no. 000-21326), filed with the Securities and
Exchange Commission on March 5, 1993.
10.5 Lease dated March 10, 1995 between the Company and Cummings
Properties, incorporated herein by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1995 (file no. 000-21326), filed with
the Securities and Exchange Commission on November 29, 1995.
10.6 Employment Agreement dated September 24, 1996 between the
Company and J. Melville Engle, incorporated herein by
reference to Exhibit 10.31 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1996
(file no. 000-21326), filed with the Securities and Exchange
Commission on November 27, 1996.
10.7 Change of Control Agreement dated as of June 3, 1999 between
the Company and J. Melville Engle incorporated herein by
reference to Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
fiscal year ended December 31, 1999 (file no. 001-14027),
filed with the Securities and Exchange Commission on
March 31, 2000.
10.8 Promissory Note for $75,000 dated as of March 17, 1996 between
the Company and J. Melville Engle, incorporated herein by
reference to Exhibit 10.25 to the Company's Registration
Statement on Form SB-2 (file no. 333-38993), filed with the
Securities and Exchange Commission on October 29, 1997.
10.9 Exclusive Distribution Agreement dated as of November 7, 1997
between the Company and Zimmer, Inc., incorporated herein by
reference to Exhibit 10.26 to the Company's Registration
Statement on Form SB-2/A (file no. 333-38993), filed with the
Securities and Exchange Commission on November 10, 1997.
Confidential treatment was granted to certain portions of this
Exhibit.
10.10 First Amendment to Exclusive Distribution Agreement dated as
of June 1, 1998 between the Company and Zimmer, Inc.,
incorporated herein by reference to Exhibit 10.1 to the
Company's quarterly report on Form 10-QSB for the quarterly
period ended June 30, 1998 (file no. 001-14027), filed with
the Securities and Exchange Commission on August 14, 1998.
10.11 Second Amendment to Exclusive Distribution Agreement dated as
of June 3, 1999 between the Company and Zimmer, Inc., is filed
herewith as Exhibit 10.11.
</TABLE>
(27) Financial Data Schedule.
24
<PAGE>
EXHIBIT 10.11
SECOND AMENDMENT TO
EXCLUSIVE DISTRIBUTION AGREEMENT
THIS SECOND AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT (the "Amendment")
is effective as of this June 3, 1999 by and between ZIMMER, INC., a Delaware
corporation ("Distributor"), and ANIKA THERAPEUTICS, INC., a Massachusetts
corporation ("Company"). Reference is hereby made to that certain Exclusive
Distribution Agreement effective as of November 7, 1997, as amended by First
Amendment to Exclusive Distribution Agreement effective as of June 1, 1998,
together with all Annexes and Exhibits thereto (as so amended, the "Agreement"),
by and between Distributor and Company. All capitalized terms used herein and
not defined shall have the meanings given to them in the Agreement.
WHEREAS, Distributor and Company have previously entered into the Agreement
providing for the exclusive right of Distributor to distribute and sell the
Product in accordance with the terms set forth therein, and the Parties desire
to amend the terms of the Agreement as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
the Parties contained herein and in the Agreement, the Parties hereby agree as
follows:
SECTION 1. AMENDMENTS. The Agreement is hereby amended as follows:
1.1 Section 2 of the Agreement shall be amended as follows: (i) the heading
of Section 2(c) shall be changed to "(c) CERTAIN REGULATORY APPROVALS"; and (ii)
there shall be added the following additional paragraph at the end of such
Section:
"(c) (iv) DISTRIBUTOR RESPONSIBLE COUNTRIES. Notwithstanding anything
contained in this Agreement to the contrary, Distributor shall use commercially
reasonable efforts to obtain all regulatory approvals required to market, sell
and distribute the Product in the countries set forth on Annex C-1 attached
hereto marked with a + (the "Distributor Responsible Countries").
1.2 Sections 2(d.2), 2(d.3) and 2(d.4) shall be deleted in their entirety
and replaced with the following:
(d.2) Upon receipt of a Reimbursement Approval(s) for use of the
Product in the Field of Use by the appropriate governmental body
and/or private insurers representing in aggregate more than fifty
percent (50%) of the population in Germany, Distributor shall pay
Company the one-time nonrefundable sum of $500,000.
(d.3) Upon receipt of the first Reimbursement Approval(s) for use of
the Product in the Field of Use by the appropriate governmental body
and/or private insurers representing in aggregate more than fifty
percent
<PAGE>
(50%) of the population in either of the United Kingdom or France,
Distributor shall pay Company the one-time nonrefundable sum of
$250,000, and thereafter upon receipt of such Reimbursement
Approval(s) in such other country, Distributor shall pay Company the
one-time nonrefundable sum of $125,000.
(d.4) Upon receipt of the first Reimbursement Approval(s) for use of
the Product in the Field of Use by the appropriate governmental body
and/or private insurers representing in aggregate more than fifty
percent (50%) of the population in any one of the following countries
(Italy, Sweden or the Netherlands), Distributor shall pay Company the
one-time nonrefundable sum of $125,000.
1.3 Section 3 of the Agreement shall be amended to include the following
additional paragraph at the end of such Section:
"(c) The Company grants to Distributor a right of first offer to
acquire the rights to market, distribute and sell the Product in Israel,
Turkey, Spain, Portugal and Egypt (the "Additional Territory") on the
following terms: If the Company seeks to change its current distributor in
any of the countries in the Additional Territory, the Company will notify
Distributor in writing (the date of such notification the "Notification
Date") before commencing any negotiations with any third party regarding
such rights. Distributor will have sixty (60) days from the Notification
Date to indicate its interest in acquiring the right to market, distribute
and sell the Product in any of such countries. If Distributor does not wish
to pursue negotiations for the right to market, distribute and sell the
Product in any such country, or if such sixty (60) day period expires
without Distributor notifying Company as to its interest, then Company
shall be free to enter into an agreement with another Person with respect
to such rights. If prior to the expiration of the sixty (60) day period,
Distributor expresses in writing its interest in obtaining the right to
market, distribute and sell the Product in any such country, the parties
shall enter in to good faith negotiations regarding such rights within the
ninety (90) day period immediately following the Notification Date. In any
proposal to acquire the rights to market, distribute and sell the Product
in any Additional Territory, Distributor shall produce a supplement to the
Marketing Plan with respect to such country which shall include a
reasonable incremental increase to the Territory-wide Purchase Requirement
(up to a maximum of five percent (5%) of Distributor's marketing forecast
for actual Product sales for such countries). If at the end of such ninety
(90) day period the parties are unable to reach an agreement and Company
does not wish to continue the negotiations, as Company shall determine in
its sole discretion, Company shall be free to enter into an agreement with
any other Person with respect to such rights. Notwithstanding anything
contained in this Agreement to the contrary, the Company shall have no
obligation to seek to change its current distributor in any of the
countries in the Additional Territory."
2
<PAGE>
1.4 The table comprising part of Section 4(a) of the Agreement shall be
amended by deleting such table in its entirety and replacing it with the
following:
<TABLE>
<CAPTION>
CALENDAR TERRITORY-WIDE INCREMENTAL
YEAR UNITS REQUIREMENT* MINIMUM*
-------- ------------------ --------
<S> <C> <C>
1998 (Year 1) 30,000 Units 30,000 Units
1999 (Year 2) 90,000 Units 30,000 Units
2000 (Year 3) 150,000 Units 30,000 Units
2001 (Year 4) 290,000 Units 40,000 Units
2002 (Year 5) 520,000 Units 45,000 Units
2003 (Year 6) 550,000 Units 50,000 Units
2004 (Year 7) 570,000 Units 70,000 Units
2005 (Year 8) and 580,000 Units 80,000 Units
thereafter annually
</TABLE>
* Exclusive of Samples and Demonstration Units
1.5 Section 4(b) of the Agreement shall be deleted in its entirety and
replaced with the following:
"(b) Notwithstanding the provisions of Section 4(a), Distributor shall not
be obligated to purchase more than the number of Units per year listed in the
table in Section 4(a) under the column titled "Incremental Minimum" for each
such year until the year in which the U.S. FDA approves the Product for
marketing and sale for use in the treatment of osteoarthritis by injection in
the human knee joint in the Field of Use in the United States. Upon receipt of
such FDA approval, Distributor shall be obligated to purchase in that calendar
year the prorated Year 2 annual Territory-wide Units Requirement which shall be
determined by multiplying the Year 2 annual Territory-wide Units Requirement
(90,000 Units) by a fraction, the numerator of which is the number of days
remaining in the calendar year after the date on which FDA approval is received
and the denominator of which is 365. The Year 3, Year 4, Year 5, Year 6 and Year
7 annual Territory-wide Units Requirement shall apply to the first, second,
third, fourth and fifth calendar years, respectively, immediately succeeding the
calendar year during which the FDA approval is received, and the Year 8 annual
Territory- wide Units Requirement shall apply to each calendar year thereafter
during the Term. For example: if FDA approval is received 6 months into Year 3
then for Year 3, the annual Territory-wide Units Requirement pursuant to the
calculation specified above shall be 45,000 Units (90,000 multiplied by .50);
and for Year 4, the annual Territory-wide Units Requirement shall be 150,000
Units (the Year 3 Territory-wide Units Requirement as applicable to the first
year succeeding the calendar year during which the FDA approval is received).
All purchases of Product shall have a documented delivery date assigned to
them. For purposes of determining whether or not Distributor has met the annual
Territory-wide Units Requirement for any given year, the documented delivery
date shall be determinative, not the date of actual delivery, if different."
3
<PAGE>
1.6 Annex C-1 of the Agreement shall be deleted in its entirety and
replaced by Annex C-1 attached hereto.
1.7 Table 3, (referred to therein as the "Proposed Majority Activities
Budget Summary"), comprising part of the Marketing Plan attached as Annex B to
the Agreement, and Appendix A also comprising part of the Marketing Plan shall
both be amended in the form of Exhibit 1 attached hereto.
1.8 Section 7(b) of the Agreement shall be amended so that the last two
sentences of such section shall be deleted in their entirety and replaced by the
following:
"If for any calendar year during the first three (3) years following the
earlier of (i) the First Commercial Sale of the Product by Distribution in any
country in the Territory or (ii) January 1, 1998, the actual Average Selling
Price per Unit for such calendar year exceeds the Estimated Average Selling
Price used for such calendar year, Distributor shall pay to Company within
thirty (30) days of the date the calculation of the actual Average Selling Price
per Unit is deemed final by the Parties as provided in Section 7(c) of the
Agreement, an amount equal to (X) the number of Net Units Sold during such
calendar year multiplied by (Y) thirty-five percent (35%) of the difference
between the actual Average Selling Price per Unit and the Estimated Average
Selling Price used for such calendar year. Thereafter, if for any calendar year
the actual Average Selling Price per Unit for such calendar year exceeds the
Estimated Average Selling Price used for such calendar year, Distributor shall
pay to Company within thirty (30) days of the date the calculation of the actual
Average Selling Price per Unit is deemed final by the Parties as provided in
Section 7(c) of the Agreement, an amount equal to (X) the number of Net Units
Sold during such calendar year multiplied by (Y) forty percent (40%) of the
difference between the actual Average Selling Price per Unit and the Estimated
Average Selling Price used for such calendar year. If for any calendar year
during the first three (3) years following the earlier of (i) the First
Commercial Sale of the Product by Distributor in any country in the Territory or
(ii) January 1, 1998, the Estimated Average Selling Price exceeds the actual
Average Selling Price per Unit, Company shall pay to Distributor within thirty
(30) days of the date the calculation of the actual Average Selling Price per
Unit is deemed final by the Parties as provided in Section 7(c) of this
Agreement an amount equal to (X) the number of Net Units Sold during such
calendar year multiplied by (Y) thirty-five percent (35%) of the difference
between the Estimated Average Selling Price and the actual Average Selling Price
per Unit. Thereafter, if for any calendar year the Estimated Average Selling
Price exceeds the actual Average Selling Price per Unit, Company shall pay to
Distributor within thirty (30) days of the date the calculation of the actual
Average Selling Price per Unit is deemed final by the Parties as provided in
Section 7(c) of this Agreement an amount equal to (X) the number of Net Units
Sold during such calendar year multiplied by (Y) forty percent (40%) of the
difference between the Estimated Average Selling Price and the actual Average
Selling Price per Unit."
1.9 The first paragraph of Section 17(b) of the Agreement shall be deleted
in its entirety and replaced by the following:
4
<PAGE>
"(b) Upon the tenth anniversary of the Effective Date, Distributor may, at
Distributor's sole option, choose to extend this Agreement for an additional
period of ten (10) years, which such ten (10) years shall be added to the Term
for each country in the following regions:
1. "Americas" Region = Canada, U.S., and Puerto Rico
2. "Latin America" Region = Argentina, Bolivia, Brazil, Chile, Columbia,
Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala,
Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay,
Peru, Suriname, Trinidad and Tobago, Uruguay, Venezuela
3. "Asia" Region = Australia, China, Hong Kong, Indonesia, South Korea,
Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand
4. "Europe" Region = Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Italy, Luxembourg, The Netherlands, Norway, Sweden,
Switzerland, United Kingdom
5. "Eastern Europe" Region = Baltic Region (Estonia, Latvia and
Lithuania), Balkan Region (Romania, Bulgaria, Albania, Croatia,
Slovenia, Bosnia, Macedonia and Serbia), Czech Republic, Hungary,
Poland, Russia and other Commonwealth of Independent States
(specifically excluding Azerbaijan, Turkmenistan, Kazakhstan,
Kirghizistan, Tachcikistan)
6. "Middle East/Africa" Region = Syria, Lebanon, Jordan, Saudi Arabia,
UAE/Gulf, Africa, South Africa"
SECTION 2. MISCELLANEOUS.
2.1 Except as specifically amended by this Amendment, the Agreement shall
remain in full force and effect in accordance with its terms and all references
in the Agreement and in this Amendment to the Agreement shall mean the Agreement
as amended hereby.
2.2 This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
2.3 This Amendment shall be governed by and construed in all respects in
accordance with the laws of the State of New York, without giving effect to its
choice of law principles.
5
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Amendment to be
executed by their duly authorized representatives.
ANIKA THERAPEUTICS, INC.
By: /S/ J. MELVILLE ENGLE
----------------------------
Name: J. Melville Engle
Title: Chairman, President, CEO
ZIMMER, INC.
By: /S/ J. RAYMOND ELLIOTT
---------------------------
Name: J. Raymond Elliott
Title: President
6
<PAGE>
ANNEX C-1
<TABLE>
<CAPTION>
COUNTRIES INCLUDED IN TERRITORY
<S> <C>
ASIA AMERICAS
- ---- --------
Australia Canada
China* United States of America
Hong Kong Puerto Rico
Indonesia
Korea, South LATIN AMERICA
Malaysia -------------
New Zealand Argentina
Philippines Bolivia
Singapore Brazil
Taiwan Chile
Thailand Columbia
Costa Rica
EUROPE Dominican Republic
- ------ Ecuador
Austria El Salvador
Belgium Guatemala
Denmark Guyana
Finland Haiti
France Honduras
Germany Jamaica
Greece Mexico
Italy Nicaragua
Luxembourg Panama
Netherlands, The Paraguay
Norway Peru
Sweden Suriname
Switzerland Trinidad and Tobago
United Kingdom Uruguay
Venezuela
</TABLE>
7
<PAGE>
EASTERN EUROPE+
- ---------------
Baltic Region (Estonia, Latvia and Lithuania)
Balkan Region (Romania, Bulgaria, Albania,
Croatia, Slovenia, Bosnia, Macedonia and
Serbia)
Czech Republic
Hungary
Poland
Russia and other Commonwealth of
Independent States countries (specifically
excluding Azerbaijan, Turkmenistan,
Kazakhstan, Kirghizistan and
Tachcikistan)
MIDDLE EAST/AFRICA+
- -------------------
Syria
Lebanon
Jordan
Saudi Arabia
UAE/Gulf
Africa
South Africa
* Subject to the terms and conditions in Section 2(c)(ii)
+ Distributor Responsible Countries
8
<PAGE>
EXHIBIT 1
TABLE #3
AMENDED BUDGET SUMMARY
ZIMMER, INC./ANIKA THERAPEUTICS, INC.
SECOND AMENDMENT PROPOSAL TO
EXCLUSIVE DISTRIBUTION AGREEMENT
3) Proposed Marketing Activities Budget Summary
- -----------------------------------------------
a) Table 3 comprising part of the Marketing Plan attached as Annex B to
the Agreement, and Appendix A also comprising part of the Marketing
Plan shall both be amended in the form of Exhibit 2 as follows:
<TABLE>
<CAPTION>
COUNTRY/ YEAR 1 YEAR 2 YEAR 3 YEAR 4
REGION 12 MO. 12 MO. 12 MO. 12 MO.
- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Canada/Australia $1,700,000 $ 700,000 $ 1,700,000 TBD
United States 10,000 4,900,000 3,880,000 TBD
Asia 5,000 10,000 1,000,000 TBD
Europe 1,170,000 4,540,000 4,300,000 TBD
Latin America 180,000 1,040,000 1,000,000 TBD
CE/ME/SA 680,000 700,000 760,000 TBD
---------- ----------- -----------
Total $3,685,000 $11,890,000 $12,640,000
Contract Contingency +/- 5% +/- 15% +/- 20% 0%
Adj. Annual Commitment $ 184,280 $ 1,785,500 $ 2,528,000 Proposed Budget
All/Shortfalls/Overspend: M $4,485.7
</TABLE>
TBD: Budget for Year 4 has not been determined. A proposed budget will be
presented to the Steering Committee. All Adjustments will be incorporated
into Year 4 Proposal. Budget is Contingent upon Regulatory Approval in All
Markets and Countries Identified in Annex C1.
<PAGE>
EXHIBIT 1
(CONTINUED)
AMENDED APPENDIX A
ZIMMER, INC./ANIKA THERAPEUTICS
SECOND AMENDMENT PROPOSAL TO EXCLUSIVE DISTRIBUTION AGREEMENT
b) Amended Appendix A: Field Specialist and Support Personnel
<TABLE>
<CAPTION>
YEAR ONE YEAR TWO
PERSONNEL 12 MONTHS 12 MONTHS
- --------- --------- ---------
<S> <C> <C>
(Field Sales Specialists)
- -------------------------
Canada 5 5
United States 0 26
Taiwan 1 2
Korea 1 2
Singapore 1 1
Hong Kong 1 1
Australia 1 2
New Zealand TBD
Latin America 2 5
Europe 5 24
CE/ME/SA 4 4
Total FSS 21 71
(Support Personnel)
- -------------------
Europe:
- -------
Product Mgr. 1 1
Sales Specialist 2 4
Sales Director 1 1
Total Europe 4 6
Latin America:
Product Mgr. 1 1
Total Support Personn 5 7
</TABLE>
Specific Additions are predicated upon receipt of Regulatory Approval in each
Country/Region to market ORTHOVISC.
Notes:
- ------
1. Budgeted Specialist for the following Markets: Russia, Czech Republic,
Poland, Hungary
2. Non-Budgeted: ME/Africa/SA: Local Market distributors to hire Specialists
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,946,312
<SECURITIES> 5,159,546
<RECEIVABLES> 1,870,927
<ALLOWANCES> (59,000)
<INVENTORY> 6,792,994
<CURRENT-ASSETS> 23,185,962
<PP&E> 8,207,190
<DEPRECIATION> (4,802,221)
<TOTAL-ASSETS> 32,655,996
<CURRENT-LIABILITIES> 4,609,731
<BONDS> 0
0
0
<COMMON> 99,919
<OTHER-SE> 25,221,346
<TOTAL-LIABILITY-AND-EQUITY> 25,321,265
<SALES> 2,620,833
<TOTAL-REVENUES> 2,720,833
<CGS> 1,232,968
<TOTAL-COSTS> 1,232,968
<OTHER-EXPENSES> 2,313,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (564,087)
<INCOME-TAX> 0
<INCOME-CONTINUING> (564,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (564,087)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
