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 September 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to
Commission File Number 000-21326
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Anika Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-3145961
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
236 West Cummings Park, Woburn, Massachusetts 01801
(Address of Principal Executive Offices) (Zip Code)
-----------
Registrant's Telephone Number, Including Area Code: (781) 932-6616
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
At November 10, 2000 there were issued and outstanding 9,934,280 shares of
Common Stock, par value $.01 per share.
1
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ANIKA THERAPEUTICS, INC.
BALANCE SHEETS
Unaudited
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 5,678,470 $ 6,440,705
Short-term investments .............................................................. 12,291,843 8,184,870
Accounts receivable, net ............................................................ 1,849,674 2,106,452
Inventories ......................................................................... 6,566,161 5,493,701
Prepaid expenses .................................................................... 459,911 721,206
------------ ------------
Total current assets ............................................................ 26,846,059 22,946,934
------------ ------------
Property and equipment ................................................................ 8,530,217 8,116,233
Less: accumulated depreciation ........................................................ (5,263,943) (4,587,692)
------------ ------------
Net property and equipment ...................................................... 3,266,274 3,528,541
------------ ------------
Long-term investments ................................................................. -- 5,558,029
Notes receivable from officers ........................................................ 382,000 353,000
Deposits .............................................................................. 124,600 124,600
------------ ------------
Total assets .................................................................... $ 30,618,933 $ 32,511,104
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 478,217 $ 629,080
Accrued expenses .................................................................... 1,522,648 1,552,661
Deferred revenue .................................................................... 4,315,173 1,792,505
------------ ------------
Total current liabilities ....................................................... 6,316,038 3,974,246
------------ ------------
Long-term deferred revenue ............................................................ -- 2,825,000
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Redeemable convertible preferred stock; $.01 par value: authorized 750,000 shares; no
shares issued and outstanding ....................................................... -- --
Undesignated preferred stock; $.01 par value: authorized 1,250,000 shares; no shares
issued and outstanding .............................................................. -- --
Common stock; $.01 par value: authorized 30,000,000 shares; issued 9,991,943 shares
in 2000 and 1999, respectively ...................................................... 99,919 99,919
Additional paid-in capital .......................................................... 31,735,660 31,959,316
Deferred compensation ............................................................... (315,022) (615,001)
Treasury stock (at cost, 57,663 and 204,207 shares in 2000 and 1999, respectively) .. (279,756) (959,870)
Accumulated deficit ................................................................. (6,937,906) (4,772,506)
------------ ------------
Total stockholders' equity ...................................................... 24,302,895 25,711,858
------------ ------------
Total liabilities and stockholders' equity ...................................... $ 30,618,933 $ 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>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(As restated) (As restated)
------------- -------------
<S> <C> <C> <C> <C>
Product revenue .............................................. $ 2,629,807 $ 2,895,350 $ 8,919,405 $ 9,564,346
License revenue .............................................. 100,000 100,000 300,000 300,000
------------ ------------ ------------ ------------
Total revenue ............................................. 2,729,807 2,995,350 9,219,405 9,864,346
Cost of product revenue ...................................... 2,804,285 1,429,587 6,459,870 4,826,472
------------ ------------ ------------ ------------
Gross profit (loss) ........................................ (74,478) 1,565,763 2,759,535 5,037,874
Operating expenses:
Research and development ................................... 516,171 1,193,240 2,737,136 2,825,916
Selling, general and administrative ........................ 1,093,841 714,173 3,070,513 2,265,365
------------ ------------ ------------ ------------
Total operating expenses ................................... 1,610,012 1,907,413 5,807,649 5,091,281
------------ ------------ ------------ ------------
Loss from operations ......................................... (1,684,490) (341,650) (3,048,114) (53,407)
Interest income, net ....................................... 301,666 237,897 892,665 837,926
------------ ------------ ------------ ------------
Loss before provision for income taxes ....................... (1,382,824) (103,753) (2,155,459) 784,519
Provision for income taxes ................................. -- 10,872 9,941 23,691
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting
principle .................................................. (1,382,824) (92,881) (2,165,400) 760,828
Cumulative effect of change in accounting principle .......... -- -- -- (3,625,000)
------------ ------------ ------------ ------------
Net loss ..................................................... $ (1,382,824) $ (92,881) $ (2,165,400) $ (2,864,172)
============ ============ ============ ============
Basic income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle ...................................... $ (0.14) $ (0.01) $ (0.22) $ 0.08
Cumulative effect of change in accounting principle ........ -- -- -- (0.37)
------------ ------------ ------------ ------------
Net loss ..................................................... $ (0.14) $ (0.01) $ (0.22) $ (0.29)
============ ============ ============ ============
Basic weighted average common shares outstanding ............. 9,934,280 9,940,228 9,870,323 9,900,317
============ ============ ============ ============
Diluted income (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle ....................................... $ (0.14) $ (0.01) $ (0.22) $ 0.08
Cumulative effect of change in accounting principle ........ -- -- -- (0.36)
------------ ------------ ------------ ------------
Net loss ..................................................... $ (0.14) $ (0.01) $ (0.22) $ (0.28)
============ ============ ============ ============
Diluted weighted average common shares outstanding ........... 9,934,280 9,940,228 9,870,323 10,191,300
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ANIKA THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
---- ----
(As restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... ($ 2,165,400) ($ 2,864,172)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization ...................................... 676,251 539,481
Amortization of unearned stock compensation ........................ 216,503 263,325
Other long-term liabilities ........................................ -- (41,395)
Deferred revenue ................................................... (302,332) 4,217,144
Changes in operating assets and liabilities:
Accounts receivable ...................................... 256,778 676,722
Inventories .............................................. (1,072,460) (1,261,480)
Prepaid expenses ......................................... 261,295 (390,719)
Accounts payable ......................................... (150,863) (256,747)
Accrued expenses ......................................... (30,013) --
------------ ------------
Net cash (used for) provided by operating activities ............... (2,310,241) 882,159
------------ ------------
Cash flows from investing activities:
(Purchase) maturities of short-term investments, net ............. (4,106,973) (1,571,323)
Maturity (purchase) of long-term investments, net ................ 5,558,029 --
Purchase of property and equipment ............................... (413,984) (395,176)
Notes receivable from officers ................................... (29,000) (59,000)
------------ ------------
Net cash provided by (used for) investing activities ............... 1,008,072 (2,025,499)
------------ ------------
Cash flows from financing activities:
Purchase of 394,800 shares of treasury stock ..................... -- (1,910,596)
Proceeds from exercise of stock options and warrants ............. 539,934 --
------------ ------------
Net cash provided by (used for) financing activities ............... 539,934 (1,910,596)
------------ ------------
Decrease in cash and cash equivalents .............................. (762,235) (3,053,936)
Cash and cash equivalents at beginning of period ................... 6,440,705 10,712,520
------------ ------------
Cash and cash equivalents at end of period ......................... $ 5,678,470 $ 7,658,584
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ANIKA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business
Anika Therapeutics, Inc. ("Anika" or the "Company") develops, manufactures
and commercializes therapeutic products and devices intended to promote the
protection and healing of bone, cartilage and soft tissue. These products are
based on hyaluronic acid ("HA"), a naturally occurring, biocompatible polymer
found throughout the body. Due to its unique biophysical and biochemical
properties, HA plays an important role in a number of physiological functions
such as the protection and lubrication of soft tissues and joints, the
maintenance of the structural integrity of tissues, and the transport of
molecules to and within cells. The Company's currently marketed products consist
of ORTHOVISC(R), which is an HA product used in the treatment of some forms of
osteoarthritis in humans and HYVISC(R), which is an HA product used in the
treatment of equine osteoarthritis. ORTHOVISC(R) is currently approved for sale
in Canada, parts of Europe, Turkey, Israel and Iceland. In the U.S.,
ORTHOVISC(R) is currently limited to investigational use. The Company
manufactures AMVISC(R) and AMVISC(R) Plus for Bausch & Lomb Surgical, which are
HA products used as viscoelastic supplements in ophthalmic surgery. The Company
is currently developing INCERT-S(R), 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(R); an injectable
formulation of basic fibroblast growth factor combined with HA designed to
accelerate the healing of bone fractures.
In the fourth quarter of 1999, the Company performed a review of its
revenue recognition policy for revenue received from Zimmer, Inc., a division of
Bristol-Myers Squibb Co. (Zimmer), under a distribution agreement (the "Zimmer
Distribution Agreement") for ORTHOVISC(R), 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(R) sales
to Zimmer and restated its operating results for 1998 and the first three
quarters of 1999. The restatement also reflects the application of Securities
and Exchange Commission Staff Accounting Bulletin 101 on revenue recognition.
(See Note 3, Summary of Significant Accounting Policies-Revenue Recognition, to
the Company's financial statements hereof). The following table summarizes the
impact of the restatement on the quarter and nine months ended September 30,
1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
As Reported As Restated Change As Reported As Restated Change
-------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 3,481,637 $2,995,350 $(486,287) $10,456,490 9,864,346 $ (592,144)
Cost of sales 1,818,807 1,429,587 (389,220) 5,432,611 4,826,472 (597,139)
Gross profit 1,662,830 1,565,763 (97,067) 5,032,879 5,037,874 4,995
Income before cumulative 4,186 (92,881) (97,067) 755,833 760,828 4,995
effect of change in accounting
principle
Cumulative effect of change
in accounting principle -- -- -- -- (3,625,000) (3,625,000)
Net income (loss) $ 4,186 $ (92,881) $ (97,067) $ 755,833 $(2,864,172) $(3,620,005)
Diluted income (loss) per common share:
Income before cumulative effect of
change in accounting principle 0.01 (0.01) (0.02) 0.08 0.08 --
Cumulative effect of change in
accounting principle -- -- -- -- (0.36) (0.36)
Net income (loss) 0.01 (0.01) (0.02) 0.08 (0.28) (0.36)
Diluted common shares outstanding 10,374,349 9,940,228 (434,121) 10,191,300 10,191,300 --
</TABLE>
5
<PAGE>
2. Basis of Presentation
The accompanying financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of
September 30, 2000, the results of operations for the three- and nine-month
periods ended September 30, 2000 and 1999 and the cash flows for the nine months
ended September 30, 2000 and 1999, respectively.
The accompanying financial statements and related notes should be read in
conjunction with the Company's annual financial statements filed with the Annual
Report on Form 10-K for the year ended December 31, 1999. The results of
operations for the three and nine month periods ended September 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. (See "Risk Factors and Certain Factors Affecting Future
Operating Results" below).
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash and investments with original
maturities of 90 days or less.
Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, short-term and long-term investments,
accounts receivable, notes receivable from officers and accounts payable. The
estimated fair value of these financial instruments approximates their carrying
value, and in the case of cash equivalents, short-term and long-term
investments, is based on market quotes. The Company's cash equivalents,
short-term and long-term investments are generally obligations of the federal
government or investment-grade corporate issuers. The Company, by policy, limits
the amount of credit exposure to any one financial institution.
Investments in Marketable Securities
The Company follows the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Short-term investments consist of
debt securities with original maturities between three and twelve months, which
are classified as held to maturity. Long-term investments consist of debt
securities with original maturities greater than twelve months, which are
classified as held to maturity. The held-to-maturity securities are carried at
amortized cost ,which approximates fair market value at September 30, 2000 and
December 31, 1999, respectively.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.
6
<PAGE>
Revenue Recognition
Product revenue is recognized upon shipment of commercial product and
represents sales of AMVISC(R) products, HYVISC(R) and ORTHOVISC(R). ORTHOVISC(R)
is sold under several distribution contracts. On March 15, 2000, the Company
announced that it had revised its revenue recognition policy for sales of
ORTHOVISC(R) under its distribution agreement with Zimmer. Under the revised
revenue recognition policy, revenue was recognized at the time of shipment to
Zimmer, based upon the minimum per unit price under the terms of the Zimmer
Distribution Agreement at the time of sale to Zimmer. Anika had previously
recognized revenue for ORTHOVISC(R) sales to Zimmer based upon an estimate of
the average selling price, which would be obtained by Zimmer upon sale of the
ORTHOVISC(R) to its customers. Anika had also previously recognized revenue in
1998 and the first three quarters of 1999 for ORTHOVISC(R), which had previously
been purchased and paid for by Zimmer but was being held in Anika's
refrigerators at Zimmer's request. Under the Company's revised revenue
recognition policy, this revenue would be recorded when the ORTHOVISC(R) being
held was shipped to Zimmer. Amounts paid by Zimmer in excess of the amount
recognized under the revised revenue recognition policy were recorded by Anika
as deferred revenue and amounted to $1,390,000 at September 30, 2000. On
November 10, 2000, Anika and Zimmer agreed to an early termination of the Zimmer
Distribution Agreement. In accordance with the termination agreement, no further
unit price adjustment will be made, units held in Anika's refrigerators will
either be shipped prior to December 31, 2000 or will be destroyed by January 31,
2001, and Anika will not be required to make any payments to Zimmer.
Accordingly, amounts included as deferred revenue at September 30, 2000 will be
included in revenue in the fourth quarter of 2000 (See Note 10.)
The Company also adopted the provisions of SEC Staff Accounting Bulletin
101 (SAB 101) in its 1999 operating results. The issuance of SAB 101 changes
revenue recognition practices for non-refundable up-front payments received as
part of broad supply, distribution and marketing agreements, including
$2,500,000 and $1,500,000 received from Zimmer in the fourth quarter of 1997 and
the second quarter of 1998, respectively. These amounts were previously
recognized in the period received. In accordance with SAB 101, issued in
December 1999, the Company, retroactively recorded the cumulative effect of the
change in accounting principle of $3,625,000 as a charge in the first quarter of
1999. Under the revised revenue recognition policy, these payments would be
recognized as revenue ratably over the term of the Zimmer Distribution
Agreement. The amount received and deferred to future periods is $2,925,000 at
September 30, 2000. The Company has recognized as revenue $100,000 of the
payments in each of the quarters ended March 31, June 30, and September 30, 1999
and March 31, and June 30, 2000. As a result of the early termination of the
Zimmer distribution agreement, all amounts remaining of the non-refundable
up-front payments in deferred revenue at September 30, 2000, will be recorded as
revenue in the fourth quarter of 2000 (See Note 10.)
During the second quarter of 2000, the Company was informed that the
Securities and Exchange Commission issued a formal order of investigation and
required the Company to provide further information in connection with certain
revenue recognition matters relating to the Company's historical accounting for
the Zimmer distribution agreement. The Company has been cooperating fully with
the SEC. However, the Company is not in a position to predict the probable
outcome of this matter or its potential impact on the Company's business or
operations.
Advanced payments received for products are recorded as deferred revenue
and are recognized when the product is shipped.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
as follows:
Machinery and equipment .............................. 3-10 years
Furniture and fixtures ............................... 3-5 years
Leasehold improvements ............................... 4-10 years
7
<PAGE>
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
adopted SFAS No. 133 in its quarter ending September 30, 2000. The adoption did
not 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 are recognized as revenue ratably over
the term of the related agreement.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No.25. The interpretation clarifies the application of Opinion 25 in
certain situations, as defined. The interpretation is effective July 1, 2000,
but covers certain events that occur after December 15, 1998. The effects of
applying this interpretation should be applied on a prospective basis from the
effective date. The adoption of the interpretation during the third quarter of
2000 did not have a material effect on the results of the Company.
Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments With Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet risks such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements. Sales of AMVISC(R) products to Bausch & Lomb Surgical accounted
for 57% and 79% of product revenue for the three-month periods ended September
30, 2000 and 1999, respectively, and 58% and 68% of product revenue for the nine
month periods ended September 30, 2000 and 1999, respectively. See Note 8 for
discussion of the Bausch & Lomb Surgical Supply Agreement. ORTHOVISC(R) sales
accounted for 37% and 21% of product sales for the third quarters of 2000 and
1999, respectively and 37% and 30% for the nine months ended September 30, 2000
and 1999, respectively. Additionally, as of September 30, 2000, three customers,
two of whom are international customers, accounted for 45%, 37% and 16% of the
Company's accounts receivable balance. As of December 31, 1999, two customers,
one of whom is an international customer, represented 49% and 42%, respectively,
of the Company's accounts receivable balance.
Disclosures About Segments of an Enterprise and Related Information
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision-maker or decision-making group, in making decisions how
to allocate resources and assess performance. The company's chief
8
<PAGE>
decision-making group consists of the Chief Executive Officer and the Chief
Financial Officer. Based on the criteria established by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, the Company
has one reportable operating segment, the results of which are disclosed in the
accompanying financial statements. Substantially all of the operations and
assets of the Company have been derived from and are located in the United
States.
Revenues by country of the customer in total and as a percentage of total
revenues are as follows for the three- and nine-month periods ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
Percent Percent of Percent Percent of
Country: Revenue of Revenue Revenue Revenue Revenue of revenue Revenue Revenue
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $1,917,457 70% $2,462,002 82% $6,650,455 72% $7,269,572 74%
Middle East 655,000 24% 533,348 18% 2,167,500 24% 2,592,024 26%
Other/Europe 157,350 6% -- -- 401,450 4% 2,750 --
---------- --- ---------- --- ---------- --- ---------- ---
Total $2,729,807 100% $2,995,350 100% $9,219,405 100% $9,864,346 100%
========== === ========== === ========== === ========== ===
</TABLE>
4. Earnings Per Share
SFAS No. 128, Earning per Share, establishes standards for computing and
presenting earnings (loss) per share.
A basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period. A
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, dilutive
unexercised options are assumed to be exercised at the beginning of the period
or at issuance, if later. The assumed proceeds are then used to purchase common
shares at the average market price during the period. For periods where the
company has incurred a loss, potentially dilutive shares of common stock have
been excluded, as their effect would be anti-dilutive.
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 September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(As restated) (As restated)
<S> <C> <C> <C> <C>
Net income (loss) available to common shareholders .. $ (1,382,824) $ (92,881) $ (2,165,400) $ (2,864,172)
============ ============ ============ ============
Basic weighted average common shares outstanding .... 9,934,280 9,940,228 9,870,323 9,900,317
Dilutive effect of assumed exercise of stock options
and warrants ...................................... -- -- -- 290,983
------------ ------------ ------------ ------------
Diluted weighted average common and potential common
shares outstanding ................................ 9,934,280 9,940,228 9,870,323 10,191,300
============ ============ ============ ============
</TABLE>
5. Inventories
Inventories consist of the following:
September 30, December 31,
------------- ------------
2000 1999
---- ----
Raw materials ...................... $1,856,156 $ 681,936
Work in-process .................... 3,676,568 3,690,618
Finished goods ..................... 1,033,437 1,121,147
---------- ----------
Total ............................ $6,566,161 $5,493,701
========== ==========
9
<PAGE>
6. Property & Equipment
Property and equipment is stated at cost and consists of the following:
September 30, December 31,
------------- ------------
2000 1999
---- ----
Machinery and equipment ................ $ 6,014,370 $ 5,704,663
Furniture and fixtures ................. 670,716 1,773,390
Leasehold improvements ................. 1,845,131 638,180
----------- -----------
Total ................................ 8,530,217 8,116,233
Less Accumulated Depreciation .......... (5,263,943) (4,587,692)
----------- -----------
$ 3,266,274 $ 3,528,541
=========== ===========
7. Notes Receivable from Officers
Notes receivable from officers consists of loans made to three officers
and one former officer. The loan amounts are generally due at the earlier of the
end of five years from the date of the note or at the termination of the
officers' employment. The loan outstanding to a former officer is secured by a
mortgage on certain real estate. Interest accrues at annual rates between 4.4%
and 6.0% and is payable monthly over the term of the loans.
8. Licensing and Distribution Agreements
See Note 10, Subsequent Events, regarding early termination of the
distribution agreement with Zimmer for ORTHOVISC(R) .
In July 2000, the Company entered into a new seven-year supply agreement
(the "New BLS Agreement") with Bausch & Lomb Surgical, a unit of Bausch & Lomb
Incorporated in July 2000. Under the terms of the New BLS Agreement, the Company
becomes Bausch & Lomb's exclusive provider of AMVISC(R) and AMVISC(R) Plus,
ophthalmic viscoelastic products, in the U.S. and international markets where
approved, effective January 1, 2001. The New BLS Agreement expires December 31,
2007 and supersedes an existing supply contract with Bausch & Lomb that was set
to expire December 31, 2001. The New BLS Agreement is subject to early
termination and/or reversion to a non-exclusive basis under certain
circumstances. The agreement lifts contractual restrictions on the Company's
sales of certain ophthalmic products to other companies, subject to payment of
royalties by Anika. In exchange, the Company agreed to a reduction in unit
selling prices effective retroactively to April 1, 2000 and the elimination of
any minimum purchase obligations. The Company expects that, at least for the
remainder of the fiscal year, the reduction in unit prices will result in a
decrease in the Company's revenue and gross margin from Bausch & Lomb. The
Company is not able to predict when, if at all, higher unit volumes from BLS or
other potential customers would offset these decreases. (See "Risk Factors and
Certain Factors Affecting Future Operating Results--Dependence Upon Marketing
Partners" below).
9. Shareholder Litigation
Three putative class action complaints have been filed against the
Company, J. Melville Engle and Sean Moran, the Company's former chief financial
officer, in the United States District Court for the District of Massachusetts
(the "Court") on behalf of all purchasers of the Company's shares between April
15, 1998 and May 30, 2000 (the "Class"). The first, filed on or about June 8,
2000, is captioned Casazza, et al. v. Anika Therapeutics, Inc., J. Melville
Engle and Sean Moran, Civil Action No. 00-11127-WGY. The second, filed on or
about June 26, 2000, is captioned Nemeth-Coslett, et al. v. Anika Therapeutics,
Inc., J. Melville Engle and Sean Moran, Civil Action No. 00-11257-WGY. The
third, filed on or about August 2, 2000, is captioned Rockefeller, et al. v.
Anika Therapeutics, Inc., J. Melville Engle and Sean Moran, Civil Action No.
00-11540-WGY. Each of these putative class action complaints encompasses the
same class period and covers almost identical allegations.
On or about August 7, 2000, David and Vivian West, alleged members of the
Class, filed a motion to appoint themselves lead plaintiffs and their law firm
lead counsel, as well as a motion for
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consolidation of the above cases. On or about September 13, 2000, the Court
granted David and Vivian West's motions, consolidating the cases and
recaptioning the case In re Anika Therapeutics, Inc. Securities Litigation,
Civil Action No. 00-11127-WGY. On or about October 30, 2000, lead plaintiffs
filed a consolidated amended complaint. The complaint alleges that the Company
and the individual defendants violated the federal securities laws by, inter
alia, making material misrepresentations and omissions in certain public
disclosures during the period between April 15, 1998 and May 30, 2000. The
alleged misrepresentations and omissions relate to the Company's historical
revenue recognition policies and its restatement of revenues for 1998 and the
first three quarters of 1999. The complaint seeks an unspecified amount of
monetary damages, costs and expenses, and equitable and/or injunctive relief to
restrict the defendants from disposing of various assets in order to assure
adequate funds are available for the claimed damages. The Company plans to
defend vigorously the lawsuit. Because the lawsuit is in its preliminary stages,
the Company is not able to predict the probable outcome of this matter or its
potential impact on the Company's business or operations.
10. Subsequent Events
On November 10, 2000 the Company entered into an agreement with Zimmer,
Inc. to terminate the Zimmer Distribution Agreement for ORTHOVISC(R) . Under the
terms of the termination agreement, Zimmer has rights to continue to distribute
ORTHOVISC through the end of the year in the countries where it is currently
sold. As a result of the early termination of the distribution agreement, Anika
expects to recognize approximately $4.3 million of revenue in the fourth quarter
of 2000 for amounts previously received from Zimmer, which had been included in
deferred revenue in the accompanying balance sheets, under the company's revenue
recognition policies. The termination eliminates all obligations under the
distribution agreement with respect to milestone payments, minimum purchases,
unit pricing adjustments based on market prices and provides for the disposal of
Zimmer units held on Anika premises.
See Note 9, Shareholder Litigation, regarding the consolidated amended
complaint.
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ITEM 2. Management Discussions 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 as well as the "Risk Factors and Certain Factors Affecting Future
Operating Results" herein.
The Company receives a substantial portion of its revenue from the sale of
AMVISC(R) and AMVISC(R) Plus to Bausch & Lomb Surgical, a unit of Bausch & Lomb
Incorporated ("BLS"). For the three months ended September 30, 2000 and 1999,
AMVISC(R) product sales accounted for 57% and 79% of product revenue,
respectively. For the nine months ended September 30, 2000 and 1999, AMVISC(R)
product sales represented 58% and 68% of product revenue, respectively.
The Company entered into a new agreement with Bausch & Lomb Surgical,
("the New BLS Agreement"), in July 2000. Under the terms of the New BLS
Agreement, the Company becomes Bausch & Lomb's exclusive provider of AMVISC(R)
and AMVISC(R) Plus ophthalmic viscoelastic products in the U.S. and
international markets where approved, effective January 1, 2001. The New BLS
Agreement expires December 31, 2007 and supersedes an existing supply contract
with Bausch & Lomb that was set to expire December 31, 2001. The New BLS
Agreement is subject to early termination and/or reversion to a non-exclusive
basis under certain circumstances. The New BLS Agreement lifts contractual
restrictions on the Company's sales of certain ophthalmic products to other
companies, subject to payment of royalties by Anika. In exchange, the Company
agreed to a reduction in unit selling prices effective retroactively to April 1,
2000, and the elimination of any minimum purchase obligations by Bausch & Lomb.
The Company expects that, at least until mid 2001, the reduction in unit prices
will result in a decrease in the Company's revenue and gross margin from Bausch
& Lomb from levels experienced in 1999. The Company is not able to predict when,
if at all, higher unit volumes from BLS or other potential customers would
offset these decreases. (See "Risk Factors and Certain Factors Affecting Future
Operating Results--Dependence Upon Marketing Partners" below). Although the
Company intends to seek new ophthalmic product customers, it does not expect
sales to any such new customers until after 2000. (See "Risk Factors and Certain
Factors Affecting Future Operating Results--Dependence Upon Marketing Partners"
below).
In November 1997, the Company entered into the Zimmer Distribution
Agreement, which was subsequently amended in June 1998 and June 1999. The Zimmer
Distribution Agreement provides Zimmer with exclusive marketing and distribution
rights to ORTHOVISC(R) in the United States, Canada, Latin America, Asia and
most of Europe. Following an informal inquiry from the Securities and Exchange
Commission, the Company and its independent auditors conducted a review of its
revenue recognition policy for revenue received from the Zimmer Distribution
Contract. As a result of this review, and after consultation with the SEC, Anika
revised its revenue recognition policy for ORTHOVISC(R) sales to Zimmer and
restated its operating results for 1998 and the first three quarters of 1999.
Under the revised revenue recognition policy, revenue would be recognized at the
time of shipment to Zimmer based upon the minimum per unit price under the
Zimmer Distribution Agreement at the time of sale to Zimmer. Anika had
previously recognized revenue for ORTHOVISC(R) sales to Zimmer based upon an
estimate of the average selling price, which would be obtained by Zimmer upon
sale of ORTHOVISC(R) to its customers, as specified under the Zimmer
Distribution Agreement. Anika had also recognized revenue in 1998 and the first
three quarters of 1999 for ORTHOVISC(R), which had previously been purchased and
paid for by Zimmer, but was being held in Anika's refrigerators at Zimmer's
request. Under the Company's revised revenue recognition policy, this revenue
would be recorded when the ORTHOVISC(R) being held was shipped to Zimmer from
Anika's refrigerators. Amounts paid by Zimmer in excess of the amount recognized
under the revised revenue recognition policy was recorded by Anika as deferred
revenue and amounted to $1,390,000 at September 30, 2000. On November 10, 2000,
Anika and Zimmer agreed to an early termination of the Zimmer Distribution
Agreement. In accordance with the termination agreement, no further unit price
adjustment will be made, units held in Anika's refrigerators will either be
shipped prior to December 31, 2000 or will be destroyed by January 31, 2001,
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and Anika will not be required to make any payments to Zimmer. Accordingly,
amounts included as deferred revenue at September 30, 2000 will be included in
revenue in the fourth quarter of 2000.
The Company also adopted the provisions of SEC Staff Accounting Bulletin
101 (SAB 101) in its restated 1999 operating results. The issuance of SAB 101 in
December 1999 changed revenue recognition practices for non-refundable up-front
payments received as part of broad supply, distribution and marketing
agreements, and is applicable to $2,500,000 and $1,500,000 received from Zimmer
in the fourth quarter of 1997 and the second quarter of 1998, respectively.
These amounts were previously recognized in the period received. In accordance
with SAB 101, the Company retroactively recorded the cumulative effect of the
change in accounting principle of $3,625,000 as a charge in the first quarter of
1999. Under the new revenue recognition policy, these payments would be
recognized as revenue ratably over the 10-year term of the Zimmer Distribution
Agreement. The amount received and deferred to future periods is $2,925,000 at
September 30, 2000. The Company has recognized as revenue $100,000 of these
payments in each of the quarters ended March 31, June 30, and September 30, 2000
and March 31, June 30, and September 30, 1999. As a result of the early
termination of the Zimmer Distribution Agreement, all amounts remaining of the
non-refundable up-front payments in deferred revenue at September 30, 2000, will
be recorded as revenue in the fourth quarter of 2000.
Results of Operations
Product Revenue. Product revenue for the three months ended September 30,
2000 was $2,629,807, a decrease of $265,543 or 9%, from $2,895,350 recorded in
the prior year's corresponding quarter. Product revenue associated with
ORTHOVISC(R) increased by $385,486 in the third quarter of 2000 compared to the
third quarter of 1999, and includes $169,797 and $63,313, respectively, of
previously deferred revenue. Sales of AMVISC(R) products to Bausch & Lomb
Surgical decreased by $806,908 compared with the third quarter of 1999,
reflecting lower prices effective April 1, 2000 under the New BLS Agreement, but
was partially offset by higher unit volumes. Product revenue for the nine months
ended September 30, 2000 was $8,919,405 a decrease of $644,941 or 7%, over the
$9,564,346 recorded in the comparable prior period as a result of lower prices
associated with sales of AMVISC(R) products to Bausch & Lomb Surgical, but was
partially offset by increased sales of ORTHOVISC.
On November 10, 2000, the Company entered into an agreement to terminate
its distribution arrangement for ORTHOVISC with Zimmer. See the Notes to the
Financial Statements contained elsewhere in this Form 10-Q for information with
respect to the expected recognition of the previously deferred revenue in the
fourth quarter of 2000. Revenue from the Zimmer agreement amounted to 15% of
product revenue in the nine months ended September 30, 2000. Results of future
periods beyond 2000 may be adversely affected as a result of the termination.
During the nine months ended September 30, 2000, 23% of the Company's revenue
was attributable to sales of ORTHOVISC in Turkey. The Company's Turkish
distributor has informed the Company that it wishes to renegotiate its
distribution agreement, citing increasing pricing pressures. If the Company
accepts terms less favorable than the terms of the current agreement, product
revenues may be materially adversely affected. See "Risk Factors and Certain
Factors Affecting Future Operating Results - Dependence Upon Marketing Partners"
and "Reliance on a Small Number of Customers".
Licensing Fees. For the first three quarters of 2000 and 1999, licensing
fees of $100,000 per quarter represent the amortization of non-refundable
up-front payments received in 1997 and 1998 as per adoption of SAB 101 in 1999
related to the Zimmer Distribution Agreement.
Gross Profit. For the three months ended September 30, 2000, Anika
experienced a loss of ($74,478) at the gross profit line, a decrease of
$1,640,241 or 105% from $1,565,763 recorded in the prior year corresponding
quarter. Gross profit as a percentage of product sales for the three months
ended September 30, 2000 decreased to negative (7)% from 51% in the prior year
corresponding quarter. Gross profit for the nine months ended September 30, 2000
was $2,759,535 compared with $5,037,874 for the first nine months of 1999. Gross
profit as a percentage of product sales for the nine months ended September 30,
2000 decreased to 28% from 50% for the first nine months of 1999. These
decreases are primarily attributable to: (i) lower unit prices of AMVISC(R)
products under the Company's New BLS
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Agreement with Bausch & Lomb Surgical, and (ii) lower manufacturing cost
absorption into inventory as the Company scaled down certain manufacturing
operations after it became known that the U.S. launch of ORTHVISC would not
occur as planned due to unfavorable results of a clinical trial. Cost of goods
sold includes approximately $1.1 million for manufacturing costs expensed in the
third quarter of 2000 due to the lower production of bulk stage work-in-process.
The Company expects that the reduction in unit prices from Bausch & Lomb
Surgical and continued scaled down manufacturing operations will adversely
effect gross profits through mid 2001. (See "Risk Factors and Certain Factors
Affecting Future Operating Results--Dependence Upon Marketing Partners"). These
steps, however, may not be sufficient to reduce manufacturing costs.
Research and Development. Research and development expenses for the three
months ended September 30, 2000 decreased by $677,069 to $516,171 from
$1,193,240 recorded in the prior year corresponding quarter, reflecting lower
ORTHOVISC(R) clinical trial costs. Research and development expenses for the
nine months ended September 30, 2000 decreased $88,780, or 3%, compared to the
same period in 1999. The Company anticipates that research and development
spending will increase in future quarters to reflect planned spending on
clinical trials for ORTHOVISC(R) and INCERT-S(R).
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended September 30, 2000 increased by $379,668 or
53% to $1,093,841 from $714,173 in the prior year corresponding quarter. For the
nine months ended September 30, 2000, selling, general and administrative
expenses increased $805,148 or 36% compared to the same period in the prior
year. The increase was primarily attributable to higher professional fees.
Net Interest Income. The Company's net interest income increased by
$63,769 to $301,666 for the three months ended September 30, 2000 from $237,897
in the prior year corresponding quarter. The increase is attributable to higher
interest rates on cash deposits and investments. Net interest income for the
nine months ended September 30, 2000 was $892,665 compared with $837,926 for the
same period in 1999. The increase is attributable to higher interest rates on
cash deposits and investments during the first nine months of 2000.
Income Taxes. The Company recorded minimal income tax expense for the
three and nine-month periods ended September 30, 2000 due to the net loss from
operations. Income tax expense for the quarter ended September 30, 1999 was
minimized due to the cumulative net loss from operations for the year.
Liquidity and Capital Resources
At September 30, 2000, the Company had cash, cash equivalents and
investments of $18.0 million and working capital of $23.0 million versus $20.2
million and $19.0 million, respectively, at December 31, 1999. Investments at
September 30, 2000 consist of commercial paper of various maturities of less
than one year.
Cash and investments decreased by $2.2 million during the first nine
months of 2000. During this period, the Company's net loss, adjusted for
depreciation, amortization and the change on deferred revenue, used $1.6 million
in cash; inventory growth used $1.1 million; capital spending used $0.4 million;
and other items generated $0.9 million. The Company's inventory levels grew
during the first two quarters of 2000 in connection with a planned increase of
bulk stage work-in-process inventory to support higher anticipated product
demand in connection with the since cancelled U.S. launch of ORTHOVISC(R). In
June 2000, the Company commenced actions to reduce inventory levels by utilizing
bulk stage work-in-process to meet product delivery requirements. The Company
expects to continue to utilize bulk stage work-in-process at least through June
30, 2001.
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
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for an aggregate cash purchase price of approximately $3,873,000. During the
nine month period ended September 30, 2000, the Company has not repurchased any
Anika common stock. During the nine months ended September 2000 the Company
received $539,934 from the exercise of stock options.
In view of the Company's operating performance during year 2000, ongoing
efforts to manage costs of manufacturing and inventory levels (as described
above), the Company's plans to conduct further clinical trials for ORTHOVISC and
other products, and intentions to commit resources to research and development
efforts, the Company expects that it will continue to draw upon its cash and
investments to finance operations at least through much of year 2001.
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 Quarterly Report Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The words "believe," "expect," "anticipate,"
"intend," "estimate," "plan", "seek", "hope", "will" 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 sale
and product revenues, negotiations with potential and existing customers,
possible development of new products, possible strategic investments, possible
regulatory approval of new or potential products, the impact of the termination
of the Zimmer Distribution Agreement, acquisition of new distribution and
collaboration partners, performance under the New BLS Agreement and the outcome
and impact of the SEC investigation and putative class action complaints. The
Company's actual results, performance or achievement could differ materially
from anticipated results, performance or achievement, expressed or implied in
such forward-looking statements. Additional factors that might cause such a
difference are set forth herein and in the "Business" and "Management's
Discussions and Analysis of Financial Condition and Results of Operations"
beginning on page 12 of this Quarterly Report on Form 10-Q. The Company
undertakes no obligation to publicly update or revise any forward-looking
statement whether as a result of new information, future events or otherwise.
Comprehensive Government Regulation; No Assurance of FDA Approval. The
Company's products, product development activities, manufacturing processes, and
current and future sales and marketing are subject to extensive and rigorous
regulation by the FDA and comparable agencies in foreign countries. In the
United States, the FDA regulates the marketing, advertising, promotion, and
distribution of medical devices, drugs, and biologics, as well as testing,
manufacturing, labeling, record keeping, and reporting activities for such
products.
Medical products regulated by the FDA are generally classified as medical
devices, drugs and/or biologics. Product development and approval within the FDA
framework takes a number of years and involves the expenditure of substantial
resources. There can be no assurance that the FDA will grant approval for the
Company's new products on a timely basis or at all, or that FDA review will not
involve delays that will adversely affect the Company's ability to commercialize
additional products or expand permitted uses of existing products, or that the
regulatory framework will not change, or that additional regulation will not
arise at any stage of the Company's product development process which may
adversely affect approval of or delay an application or require additional
expenditures by the Company. In the event the Company's future products are
regulated as human drugs or biologics, the FDA review process typically would be
substantially longer and more expensive than the review process to which they
are currently subject as devices.
The Company's ORTHOVISC(R) product will have to meet regulatory
requirements of a Class III device by the FDA. Class III devices are those that
generally must receive pre-market approval (PMA) by the FDA (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(R) 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(R) in December 1997. In October 1998, the
Company was notified by the FDA that the Company's PMA application for
ORTHOVISC(R) was not approvable and that additional clinical data would be
required to demonstrate the effectiveness of ORTHOVISC(R). The Company submitted
an IDE to the FDA in February 1999 and received approval in late March 1999 to
commence a second Phase III clinical study. The Company received initial results
from the Phase III clinical trial in late May 2000 that did not show sufficient
efficacy to support the filing of a PMA application. The Company has evaluated
available information and announced its intention to pursue further clinical
trials. There can be no assurance that (i) any additional clinical data will
support the efficacy of ORTHOVISC(R), (ii) the Company will begin or complete
any additional clinical trials of ORTHOVISC(R), (iii) it will be able to
successfully complete the FDA approval process, or (iv) additional
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clinical trials will support a PMA application and/or FDA approval in a timely
manner or at all. There also can be no assurance that any delay in receiving FDA
approvals will not adversely affect the Company's competitive position.
Furthermore, even if the Company were to receive a PMA approval, the approval
may include significant limitations on the indications and other claims sought
for use for which the product may be marketed.
The Company's HA products under development, including INCERT-S(R) have
not obtained regulatory approval in the U.S. for commercial marketing and sale.
The Company believes that INCERT(R) will be regulated as a Class III medical
device. In order to undertake clinical trials in the U.S. to support a PMA, the
Company is currently evaluating various clinical trial design alternatives.
There can be no assurance that the Company will be permitted to undertake
clinical trials of this or other future products in the U.S. or that clinical
trials will demonstrate that the products are safe and effective or otherwise
satisfy the FDA's PMA requirements.
Orquest has not received regulatory approval in the U.S. for the
commercial marketing and sale of OSSIGEL(R). OSSIGEL(R) will be regulated as a
Class III medical device with the FDA's Center of Biologics Research and Review
as the lead review center. There can be no assurance that clinical trials of
OSSIGEL(R) will demonstrate that OSSIGEL(R) 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 and, 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.
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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(R) 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(R) 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 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 September 30, 2000, the Company had an accumulated
deficit of $6,937,000. 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 or distribution arrangements. 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 or distribution arrangements for
certain of its products.
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 successfully 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. The
Company is currently experiencing pricing pressures in the Turkish market, which
may hinder its ability to effectively compete in that market.
Uncertainty Regarding Success of Clinical Trials. Several of the Company's
products, including ORTHOVISC(R), as well as the products of the Company's
collaborative partners, including OSSIGEL(R), will require clinical trials to
determine their safety and efficacy for U.S. and international marketing
approval by regulatory bodies, including the FDA. In late May 2000, the
Company's initial analysis of the results of its Phase III clinical trial of
ORTHOVISC(R) did not show sufficient efficacy to support the filing of a PMA
application to obtain FDA approval. The Company has evaluated available
information and announced its intention to pursue further clinical trials. There
can be no assurance that (i) any additional clinical data will support the
efficacy of ORTHOVISC(R), (ii) the Company will begin or complete any additional
clinical trials of ORTHOVISC(R), (iii) it will be able to successfully complete
the
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FDA approval process, or (iv) additional ORTHOVISC(R) clinical trials will
support a PMA application and/or FDA approval in a timely manner or at all. In
order to undertake clinical trials in the U.S. to support a PMA of INCERT-S(R),
the Company is currently evaluating various clinical trial design alternatives.
There can be no assurance that the Company or its collaborative partners will
not encounter problems that will cause it to delay, suspend or terminate
clinical trials. In addition, the Company cannot provide any assurance that such
clinical trials, if completed, will ultimately demonstrate these products to be
safe and efficacious.
Dependence Upon Marketing Partners. The Company does not plan to directly
market and sell its current products to end-users. Therefore, the Company's
success will be dependent upon the efforts of its marketing partners and the
terms and conditions of the Company's relationships with such marketing
partners. In addition, there can be no assurances that such marketing partners
will not seek to renegotiate their current agreements on terms less favorable to
the Company. The Company entered into a new supply agreement (the "New BLS
Agreement") with Bausch & Lomb Surgical, a unit of Bausch & Lomb Incorporated in
July 2000. Under the terms of the New BLS Agreement, the Company becomes Bausch
& Lomb Surgical's exclusive provider of AMVISC(R) and AMVISC(R) Plus, ophthalmic
viscoelastic products, in the U.S. and international markets where approved,
effective January 1, 2001. The New BLS Agreement expires December 31, 2007,
superseding an existing supply contract with Bausch & Lomb Surgical that was set
to expire December 31, 2001. The New BLS Agreement is subject to early
termination and/or reversion to a non-exclusive basis under certain
circumstances. The New BLS Agreement lifts contractual restrictions on the
Company's sales of certain ophthalmic products to other companies, subject to
payment of royalties by Anika. In exchange, the Company agreed to a reduction in
unit selling prices retroactively effective to April 1, 2000 and the elimination
of minimum unit purchase obligations by BLS.
There can be no assurances that the Company will achieve incremental sales
of its ophthalmic products to Bausch & Lomb Surgical and/or other companies
sufficient to offset the effects of the price reduction to Bausch & Lomb
Surgical. The Company expects that, at least through mid 2001, the reduction in
unit prices will result in a decrease in the Company's revenue and gross margin
from Bausch & Lomb Surgical. In addition, under certain circumstances, (i)
Bausch & Lomb Surgical may have the right to terminate the agreement and/or (ii)
the agreement may revert to a non-exclusive basis; in each case, the Company
cannot make any assurances that such circumstances will not occur. For the nine
months ended September 30, 2000 and 1999, sales of AMVISC(R) products to Bausch
& Lomb Surgical accounted for 58% and 66% of product revenues, respectively.
Although the Company intends to seek new opthalmic product customers, there can
be no assurances that the Company will be successful obtaining new customers and
increased sales.
The Zimmer Distribution Agreement provided Zimmer with exclusive marketing
and distribution rights to ORTHOVISC(R) in the United States, Canada, Latin
America, Asia and most of Europe. On November 10, the Company and Zimmer reached
an agreement with Zimmer, Inc. for an early termination of its marketing and
distribution agreement for ORTHOVISC(R). Under the terms of the termination
agreement, Zimmer has the right to distribute ORTHOVISC from its existing
inventory through the end of the year in the countries where it is currently
sold. The early termination agreement also eliminates, among other things, all
obligations with respect to additional milestone payments, minimum purchases,
unit pricing adjustments and provides for the disposal of Zimmer units held on
Anika premises. The termination is likely to have a material adverse effect on
the Company's ability to market ORTHOVISC(R), which may have a material adverse
effect on the Company's future operating results. ORTHOVISC(R) sales to Zimmer
accounted for 15% of product revenue for the nine months ended September 30,
2000. The Company intends to establish relationships with new distribution
partners in regions where Zimmer previously sold the product so physicians and
their patients will be able to obtain the product, once Zimmer ceases to
distribute ORTHOVISC. There can be no assurance that the Company will be able to
identify or engage appropriate distribution or collaboration partners or
strategic investment opportunities.
As a result of the Zimmer Termination Agreement, the Company will not earn
any additional milestone payments under the Zimmer Distribution Agreement. In
addition, there can be no assurance that
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the Company will obtain European or other reimbursement approvals or, if such
approvals are obtained, they will be obtained on a timely basis or at a
satisfactory level of reimbursement. Furthermore, Anika may experience some
difficulties or delays in the transfer of existing reimbursement approvals from
Zimmer.
The Company will need to obtain the assistance of additional marketing
partners for new products which are brought to market, for the replacement of
certain marketing partners, such as Zimmer, and for 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.
The Company has a policy of seeking patent protection for patentable
aspects of its proprietary technology. The Company co-owns certain United States
patents with claims relating to the chemical modification of HA and certain
adhesion prevention and drug delivery uses of HA. Two patents in this portfolio
have issued in the year 2000. The Company also 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
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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 received notice
from the PTO in 1995 that a third party was attempting to provoke a patent
interference with respect to one of the Company's co-owned patents covering the
use of INCERT(R) for post-surgical adhesion prevention. It is unclear whether an
interference will be declared. If an interference is declared it is not possible
at this time to determine the merits of the interference or the effect, if any,
the interference will have on the Company's marketing of INCERT for this use.
The existence of the interference proceeding may have a negative impact on the
marketing of the INCERT 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
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
INCERT products, which could have a material adverse effect on the Company's
future operating results.
The Company also relies upon trade secrets and proprietary know-how for
certain unpatented aspects of its technology. To protect such information, the
Company requires all employees, consultants and licensees to enter into
confidentiality agreements limiting the disclosure and use of such information.
There can be no assurance that these agreements provide meaningful protection or
that they will not be breached, that the Company would have adequate remedies
for any such breach, or that the Company's trade secrets, proprietary know-how,
and technological advances will not otherwise become known to others. In
addition, there can be no assurance that, despite precautions taken by the
Company, others have not and will not obtain access to the Company's proprietary
technology. Further, there can be no assurance that third parties will not
independently develop substantially equivalent or better technology.
Pursuant to the new BLS Agreement, the Company has agreed to grant Bausch
& Lomb Surgical a royalty-free, worldwide, exclusive license to the Company's
manufacturing and product inventions, which relate to AMVISC(R) products,
effective on December 31, 2007, the termination date of the agreement. Upon
expiration of the New BLS Agreement, there can be no assurance that Bausch &
Lomb Surgical will continue to use the Company to manufacture AMVISC(R) and
AMVISC(R) 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
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development efforts of the Company involve animals and products derived from
animals. The utilization of animals in research and development and product
commercialization is subject to increasing focus by animal rights activists. The
activities of animal rights groups and other organizations that have protested
animal based research and development programs or boycotted the products
resulting from such programs could cause an interruption in the Company's
manufacturing processes and research and development efforts. The occurrence of
material operational problems, including but not limited to the events described
above, could have a material adverse effect on the Company's business, financial
condition and results of operations during the period of such operational
difficulties.
No Assurance of Growth or Ability to Manage Growth. The Company's future
success depends on substantial growth in product sales. There can be no
assurance that such growth can be achieved or, if achieved, can be sustained.
There can be no assurance that even if substantial growth in product sales and
the demand for the Company's products is achieved, the Company will be able to
(i) develop the necessary manufacturing capabilities; (ii) obtain the assistance
of additional marketing partners; (iii) attract, retain and integrate the
required key personnel; or (iv) implement the financial, accounting and
management systems needed to manage growing demand for its products, should it
occur. Failure of the Company to successfully manage future growth could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Third Party Reimbursement and Health Care Cost Containment Initiatives. In
the U.S. and other markets, health care providers, such as hospitals and
physicians, that purchase health care products, such as the Company's products,
generally rely on third party payors, including Medicare, Medicaid and other
health insurance and managed care plans, to reimburse all or part of the cost of
the health care product. The Company depends upon the distributors for its
products to secure reimbursement. Reimbursement by third party payors may depend
on a number of factors, including the payor's determination that the use of the
Company's products is 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.
Needs for Additional Funds; Liquidity. The Company had cash, cash
equivalents and short-term investments of $18.0 million as of September 30,
2000. The Company's future capital requirements and the adequacy of available
funds will depend, however, on numerous factors, including market acceptance of
its existing and future products, the successful commercialization of products
in development, progress in its product development efforts, the magnitude and
scope of such efforts, progress with preclinical studies, clinical trials and
product clearances by the FDA and other agencies, the cost and timing of its
efforts to improve its manufacturing capabilities and cost efficiency, 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
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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, there can be no assurance that material claims
will not arise in the future or that the Company's insurance will be adequate to
cover all situations. Moreover, there can be no assurance that such insurance,
or additional insurance, if required, will be available in the future or, if
available, will be available on commercially reasonable terms. Any product
liability claim, if successful, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence upon Key Personnel. The Company is highly dependent on the
members of its management and scientific staff, the loss of one or more of whom
could have a material adverse effect on the Company. In addition, the Company
believes that its future success will depend in large part upon its ability to
attract and retain highly skilled, scientific, managerial and manufacturing
personnel. The Company faces significant competition for such personnel from
other companies, research and academic institutions, government entities and
other organizations. There can be no assurance that the Company will be
successful in hiring or retaining the personnel it requires. In particular, the
Company can provide no assurances that the results from the recent Phase III
clinical trial of ORTHOVISC(R) will not impact its ability to attract and retain
the personnel it requires. The failure to hire and retain such personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Environmental Regulation. The Company is subject to a variety of local,
state and federal government regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic, or other
hazardous substances used in the manufacture of the Company's products. Any
failure by the Company to control the use, disposal, removal or storage of
hazardous chemicals or toxic substances could subject the Company to significant
liabilities, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Relating to International Operations. During the nine months ended
September 30, 2000 and 1999, approximately 28% and 26%, respectively, of the
Company's product sales were generated in international markets through
marketing partners. The Company's representatives, agents and distributors,
which sell products in international markets, are subject to the laws and
regulations of the foreign jurisdictions in which they operate and in which the
Company's products are sold. A number of risks are inherent in international
sales and operations. For example, the volume of international sales may be
limited by the imposition of government controls, export license requirements,
political instability, trade restrictions, changes in tariffs, difficulties in
managing international operations, import restrictions and fluctuations in
foreign currency exchange rates. Such changes in the volume of sales may have an
adverse effect on the Company's business, financial condition and results of
operations.
Potential Volatility of Stock Price; No Control Over Market Making. The
market price of shares of the Company's Common Stock may be highly volatile.
Factors such as announcements of new commercial products or technological
innovations by the Company or its competitors, disclosure of results of clinical
testing or regulatory proceedings, governmental regulation and approvals,
developments in patent or other proprietary rights, public concern as to the
safety of products developed by the Company and general market conditions may
have a significant effect on the market price of the Company's Common Stock. In
particular, the Company's stock price declined significantly in October 1998
following the Company's announcement that the FDA had notified the Company that
its PMA for
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ORTHOVISC(R) was not approvable and that additional clinical data would be
required to demonstrate the effectiveness of ORTHOVISC(R) and again in May 2000
following the Company's announcements that initial analysis of results from the
Phase III clinical trial of ORTHOVISC(R) did not show sufficient efficacy to
support the filing of a PMA application to obtain FDA approval and that the SEC
had issued a formal order of investigation and required the Company to provide
information in connection with certain revenue recognition matters. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
material announcements by the Company or its competitors, governmental
regulatory action, conditions in the health care industry generally or in the
medical products industry specifically, or other events or factors, many of
which are beyond the Company's control. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market prices of many medical products companies and which often
have been unrelated to the operating performance of such companies. The
Company's operating results in future quarters may be below the expectations of
equity research analysts and investors. In such event, the price of the Common
Stock would likely decline, perhaps substantially.
No person is under any obligation to make a market in the Common
Stock or publish research reports on the Company, and any person making a market
in the Common Stock or publishing research reports on the Company may
discontinue market making or publishing such reports at any time without notice.
There can be no assurance that an active public market in the Common Stock will
be sustained.
Possible Adverse Effect of Certain Anti-Takeover Provisions. Certain
provisions of the Company's Restated Articles of Organization and Amended and
Restated By-laws could have the effect of discouraging a third party from
pursuing a non-negotiated takeover of the Company and preventing certain changes
in control. These provisions include a classified Board of Directors, advance
notice to the Board of Directors of stockholder proposals, limitations on the
ability of stockholders to remove directors and to call stockholder meetings,
and 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 acquirer
from acquiring control of the Company and its Board of Directors.
SEC Investigation and Securities Class Action Litigation. The SEC
has issued a formal order of investigation and has required the Company to
provide information in connection with certain revenue recognition matters.
These matters, relating to the Company's historical accounting for sales of its
product under a long-term supply and distribution agreement, were also the
subject of the Company's March 15, 2000 disclosure concerning an informal SEC
inquiry and the restatement of results for 1998 and the first three quarters of
1999. The Company has been cooperating fully. However, the Company is not in a
position to predict the probable outcome of this matter or its potential impact
on the Company's business or operations. Three putative class action lawsuits
were filed against the Company. These lawsuits have been consolidated. The
consolidated lawsuit is described more fully in Part II under Legal Proceedings.
Because this lawsuit is in its preliminary stages, the Company is not able to
predict the probable outcome of this matter or its potential impact on the
Company's business or operations.
Reliance On A Small Number of Customers. The Company has
historically derived the majority of its revenues from a small number of
customers, most of who resell its products to end users and most of who are
significantly larger companies. The Company's failure to generate as much
revenue as expected from these customers or the failure of these customers to
purchase Anika's products would seriously harm Anika's business. For the nine
months ended September 30, 2000, Bausch & Lomb Surgical accounted for 58% of
product revenues and 45% of the accounts receivable balance and Biomeks, Anika's
distributor in Turkey, accounted for 23% of product revenues and 37% of the
accounts receivable balance. Accordingly, if present and future customers
terminate their purchasing arrangements
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with the Company, significantly reduce or delay their orders or seek to
renegotiate their agreements on terms less favorable to the Company, the Company
will be adversely affected. For example, Anika's Turkish distributor has
informed the Company that it wishes to renegotiate its distribution agreement,
citing increasing pricing pressures. If the Company accepts terms less favorable
than the terms of the current agreement, such renegotiations may have a material
adverse affect on Anika's business, financial condition, and/or results of
operations. Furthermore, the Company may be subject to the perceived or actual
leverage the customers may have given their relative size and importance to the
Company in any future negotiations. Any termination, change, reduction or delay
in orders could seriously harm the Company's business, financial condition and
results of operations. Accordingly, unless and until the Company diversifies and
expands its customer base, Anika's future success will significantly depend upon
the timing and size of future purchases by its largest customers and the
financial and operational success of these customers.
The loss of any one of the Company's major customers or the delay of
significant orders from such customers, even if only temporary, could reduce or
delay the Company's recognition of revenues, harm its reputation in the industry
and reduce its ability to accurately predict cash flow, and, as a consequence,
could seriously harm the Company's business, financial condition and results of
operations.
The Company distributes ORTHOVISC(R) through distributors other than
Zimmer in territories such as Spain, Portugal, Turkey, Israel and Iceland. Due
to the result of the recent U.S. ORTHOVISC(R) Phase III clinical trial,
marketing efforts in these countries may be negatively affected. There can be no
assurance that past ORTHOVISC(R) sales levels will be maintained or that sales
will occur at all in these countries.
PART II: Other Information
ITEM 1. Legal Proceedings
1. Securities and Exchange Commission Investigation. The SEC has issued a
formal order of investigation and has required the Company to provide
information in connection with certain revenue recognition matters. These
matters, relating to the Company's historical accounting for sales of its
product under a long-term supply and distribution agreement, were also the
subject of the Company's March 15, 2000 disclosure concerning an informal SEC
inquiry and the restatement of results for 1998 and the first three quarters of
1999. The Company has been cooperating fully. However, the Company is not in a
position to predict the probable outcome of this matter or its potential impact
on the Company's business or operations.
2. Putative Class Action Complaints. Three putative class action
complaints have been filed against the Company, J. Melville Engle and Sean
Moran, the Company's former chief financial officer, in the United States
District Court for the District of Massachusetts (the "Court") on behalf of all
purchasers of the Company's shares between April 15, 1998 and May 30, 2000 (the
"Class"). The first, filed on or about June 8, 2000, is captioned Casazza, et
al. v. Anika Therapeutics, Inc., J. Melville Engle and Sean Moran, Civil Action
No. 00-11127-WGY. The second, filed on or about June 26, 2000, is captioned
Nemeth-Coslett, et al. v. Anika Therapeutics, Inc., J. Melville Engle and Sean
Moran, Civil Action No. 00-11257-WGY. The third, filed on or about August 2,
2000, is captioned Rockefeller, et al. v. Anika Therapeutics, Inc., J. Melville
Engle and Sean Moran, Civil Action No. 00-11540-WGY. Each of these putative
class action complaints encompasses the same class period and covers almost
identical allegations.
On or about August 7, 2000, David and Vivian West, alleged members
of the Class, filed a motion to appoint themselves lead plaintiffs and their law
firm lead counsel, as well as a motion for consolidation of the above cases. On
or about September 13, 2000, the Court granted David and Vivian West's motions,
consolidating the cases and recaptioning the case In re Anika Therapeutics, Inc.
Securities Litigation, Civil Action No. 00-11127-WGY. On or about October 30,
2000, lead plaintiffs filed a consolidated amended complaint. The complaint
alleges that the Company and the individual defendants violated the federal
securities laws by, inter alia, making material misrepresentations and omissions
in certain public disclosures during the period between April 15, 1998 and May
30, 2000. The
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alleged misrepresentations and omissions relate to the Company's historical
revenue recognition policies and its restatement of revenues for 1998 and the
first three quarters of 1999. The complaint seeks an unspecified amount of
monetary damages, costs and expenses, and equitable and/or injunctive relief to
restrict the defendants from disposing of various assets in order to assure
adequate funds are available for the claimed damages. The Company plans to
defend vigorously the lawsuit. Because the lawsuit is in its preliminary stages,
the Company is not able to predict the probable outcome of this matter or its
potential impact on the Company's business or operations.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
(3) Articles of Incorporation and Bylaws:
3.1 The Amended and Restated Articles of Organization of the
Company, incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form 10 (file no.
000-21326), filed with the Securities and Exchange
Commission on March 5, 1993.
3.2 The Amended and Restated Bylaws of the Company, incorporated
herein by reference to Exhibit 3.4 to the Company's
quarterly report on Form 10-QSB for the period ended
November 30, 1996 (file no. 000-21326), filed with the
Securities and Exchange Commission on January 14, 1997.
3.3 Amendment to the Amended and Restated Articles of
Organization of the Company, incorporated herein by
reference to Exhibit 3.1 to the Company's quarterly report
on Form 10-QSB for the period ended November 30, 1996 (file
no. 000-21326), filed with the Securities and Exchange
Commission on January 14, 1997.
(4) Instruments Defining the Rights of Security Holders
4.1 Shareholder Rights Agreement dated as of April 6, 1998
between the Company and Firstar Trust Company, incorporated
herein by reference to Exhibit 4.1 of the Company's
Registration Statement of Form 8-A12B (File no. 001-14027),
filed with the Securities and Exchange Commission on April
7, 1998.
(10) Material Contracts
*10.1 Supply Agreement dated as of July 25, 2000 by and between
the Company and Bausch & Lomb Surgical, Inc. [Portions of
this exhibit have been omitted pursuant to a request for
confidential treatment.]
*10.2 Termination Agreement and Mutual Release dated as of
November 10, 2000 by and between the Company and Zimmer,
Inc. [Portions of this exhibit have been omitted pursuant to
a request for confidential treatment.]
(27) Financial Data Schedule.
*Filed herewith.
(b) Reports on Form 8-K: None
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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 November 14, 2000.
ANIKA THERAPEUTICS, INC.
November 14, 2000 By: /s/ Douglas R. Potter
---------------------------
Douglas R. Potter
Vice President, Finance
Chief Financial Officer
Treasurer
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<PAGE>
EXHIBIT INDEX
(10) Material Contracts
*10.1 Supply Agreement dated as of July 25, 2000 by and between
the Company and Bausch & Lomb Surgical, Inc. [Portions of
this exhibit have been omitted pursuant to a request for
confidential treatment.]
*10.2 Termination Agreement and Mutual Release dated as of
November 10, 2000 by and between the Company and Zimmer,
Inc. [Portions of this exhibit have been omitted pursuant to
a request for confidential treatment.]
*(27) Financial Data Schedule
*Filed herewith.
(b) Reports on Form 8-K: None
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