-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KNhUfqEd38ZCWCfhOZwUGPb++0QcADm0p317rlIBs5OCwGwVya4R1K1BQi4bjMlf 8tgG6UNvrfO5f31oss/WqA== 0000912057-00-024833.txt : 20000516 0000912057-00-024833.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024833 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANIKA THERAPEUTICS INC CENTRAL INDEX KEY: 0000898437 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 043145961 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14027 FILM NUMBER: 635486 BUSINESS ADDRESS: STREET 1: 236 WEST CUMMINGS PARK CITY: WOBURN STATE: MA ZIP: 01801 BUSINESS PHONE: 6179326616 MAIL ADDRESS: STREET 1: 236 WEST CUMMINGS PARK CITY: WOBURN STATE: MA ZIP: 01801 FORMER COMPANY: FORMER CONFORMED NAME: ANIKA RESEARCH INC DATE OF NAME CHANGE: 19930309 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------- COMMISSION FILE NUMBER 000-21326 ----------- Anika Therapeutics, Inc. (Exact Name of Registrant as Specified in Its Charter) MASSACHUSETTS 04-3145961 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 236 WEST CUMMINGS PARK, WOBURN, MASSACHUSETTS 01801 (Address of Principal Executive Offices) (Zip Code) ----------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 932-6616 Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. At May 9, 2000 there were issued and outstanding 9,934,280 shares of Common Stock, par value $.01 per share. 1 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS ANIKA THERAPEUTICS, INC. BALANCE SHEETS (Unaudited)
MARCH 31, DECEMBER 31, 2000 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents............. $8,946,312 $6,440,705 Short-term investments................ 5,159,546 8,184,870 Accounts receivable, net.............. 1,811,927 2,106,452 Inventories........................... 6,792,994 5,493,701 Prepaid expenses...................... 475,183 721,206 ------- ---------- Total current assets.............. 23,185,962 22,946,934 ---------- ---------- Property and equipment.................. 8,207,190 8,116,233 Less: accumulated depreciation.......... 4,802,221 4,587,692 --------- --------- Net property and equipment........ 3,404,969 3,528,541 ---------- ---------- Long-term investments................... 5,646,465 5,558,029 Notes receivable from officers.......... 294,000 353,000 Deposits................................ 124,600 124,600 ---------- ---------- Total assets...................... $32,655,996 $32,511,104 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................... $421,412 $629,080 Accrued expenses...................... 1,755,079 1,552,661 Deferred revenue...................... 2,433,240 1,792,505 ---------- ---------- Total current liabilities......... 4,609,731 3,974,246 ---------- ---------- Long-term deferred revenue.............. 2,725,000 2,825,000 Stockholders' equity: Redeemable convertible preferred stock; $.01 par value: authorized 750,000 shares; no shares issued and outstanding................ -- -- Undesignated preferred stock; $.01 par value: authorized 1,250,000 shares; no shares issued and outstanding......... -- -- Common stock; $.01 par value: authorized 30,000,000 shares; issued 9,991,943 shares in 2000 and 1999, respectively.......................... 99,919 99,919 Additional paid-in capital............ 31,829,531 31,959,316 Deferred compensation................. (474,982) (615,001) Treasury stock (at cost, 166,913 and 200,863 shares in 2000 and 1999, respectively).......... (796,610) (959,870) Accumulated deficit................... (5,336,593) (4,772,506) ---------- ---------- Total stockholders' equity........ 25,321,265 25,711,858 ---------- ---------- Total liabilities and stockholders' equity.............. $32,655,996 $32,511,104 =========== ===========
The accompanying notes are an integral part of these financial statements. 2 ANIKA THERAPEUTICS, INC. STATEMENTS OF OPERATIONS (Unaudited)
MARCH 31, 2000 1999 ---- ---- (AS RESTATED) Product revenue................................................. $2,620,833 $3,235,650 Licensing fees.................................................. 100,000 100,000 ------- ------- Total revenue................................................. 2,720,833 3,335,650 Cost of product revenue......................................... 1,232,968 1,708,171 --------- --------- Gross profit.................................................. 1,487,865 1,627,479 Operating expenses: Research and development...................................... 1,313,738 707,857 Selling, general and administrative........................... 999,462 743,972 ------- ------- Total operating expenses........................................ 2,313,200 1,451,829 --------- --------- Income (loss) from operations................................... (825,335) 175,650 Interest income, net.......................................... 261,248 302,150 ------- ------- Income (loss) before provision for income taxes................. (564,087) 477,800 Provision for income taxes.................................... -- 21,979 --------- --------- Income (loss) before cumulative effect of change in accounting principle..................................................... (564,087) 455,821 Cumulative effective of change in accounting principle.......... -- (3,625,000) --------- --------- Net loss........................................................ ($564,087) ($3,169,179) ========= ========== Basic income (loss) per share: Income (loss) before cumulative effect of change in accounting ($0.06) $0.05 principle..................................................... Cumulative effect of change in accounting principle........... -- (0.38) --------- --------- Net loss...................................................... ($0.06) ($0.33) --------- --------- Basic weighted average common shares outstanding................ 9,804,284 9,514,381 ========= ========= Diluted income (loss) per share: Income (loss) before cumulative effect of change in accounting ($0.06) $0.05 principle..................................................... Cumulative effect of change in accounting principle........... -- (0.36) ------- ---------- Net loss...................................................... ($0.06) ($0.31) ======= ========== Diluted weighted average common shares outstanding.............. 9,804,284 10,077,488 ========= ==========
The accompanying notes are an integral part of these financial statements. 3 ANIKA THERAPEUTICS, INC. STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, 2000 1999 ---- ---- Cash flows from operating activities: Net loss ($564,087) ($3,169,179) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ........................ 214,529 179,656 Amortization of unearned stock compensation............ 77,842 92,974 Other long-term liabilities............................ -- (13,621) Deferred revenue....................................... 540,735 3,513,928 Changes in operating assets and liabilities: Accounts receivable............................ 294,525 684,729 Inventories.................................... (1,299,293) 13,264 Prepaid expenses............................... 246,024 (205,937) Accounts payable and accrued expenses.......... (5,250) 242,958 --------- ---------- Net cash (used for) provided by operating activities..... (494,975) 1,338,772 --------- ---------- Cash flows from investing activities: Decrease in short-term investments, net................ 3,025,324 (4,078,066) Increase in long-term investments, net................. (88,436) -- Purchase of property and equipment..................... (90,957) (395,176) Notes receivable from officers......................... 59,000 (59,000) --------- ----------- Net cash provided by (used for) investing activities..... 2,904,931 (4,532,242) --------- ----------- Cash flows from financing activities: Purchase of 394,800 shares of treasury stock........... -- (1,910,596) Proceeds from exercise of stock options and warrants. 95,650 -- ------ ----------- Net cash provided by (used for) financing activities..... 95,650 (1,910,596) ------ ----------- Increase (decrease) in cash and cash equivalents......... 2,505,607 (5,104,067) Cash and cash equivalents at beginning of period......... 6,440,705 10,712,520 --------- ---------- Cash and cash equivalents at end of period............... $8,946,312 $5,608,453 ========== ==========
The accompanying notes are an integral part of these financial statements. 4 ANIKA THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Anika Therapeutics, Inc. ("Anika" or the "Company") develops, manufactures and commercializes therapeutic products and devices intended to promote the protection and healing of bone, cartilage and soft tissue. These products are based on hyaluronic acid ("HA"), a naturally-occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the structural integrity of tissues, and the transport of molecules to and within cells. The Company's currently marketed products consist of ORTHOVISC, which is an HA product used in the treatment of some forms of osteoarthritis in humans and HYVISC-Registered Trademark-, which is an HA product used in the treatment of equine osteoarthritis. ORTHOVISC is currently approved for sale and marketed in Canada, Europe, Turkey, Israel and Iceland. In the U.S., ORTHOVISC is currently limited to investigational use and the Company commenced a Phase III clinical trial in the U.S. and Canada in late April 1999 and the final patient completed the six month follow-up period in late February 2000. The Company manufactures AMVISC-Registered Trademark- and AMVISC-Registered Trademark-Plus, which are HA products used as viscoelastic supplements in ophthalmic surgery, for Bausch & Lomb Surgical, a subsidiary of Bausch & Lomb, Incorporated. The Company is currently developing INCERT-Registered Trademark-, which is an HA based product designed for use in the prevention of post-surgical adhesions. In collaboration with Orquest, Inc., Anika also has exclusive rights to produce OSSIGEL-Registered Trademark-; an injectable formulation of basic fibroblast growth factor combined with HA designed to accelerate the healing of bone fractures. In the fourth quarter of 1999, the Company performed a review of its revenue recognition policy for revenue received from Zimmer, Inc., a division of Bristol-Myers Squibb Co., under a distribution agreement for ORTHOVISC, Anika's osteoarthritis product. As a result of this review and after consultation with the Securities and Exchange Commission, Anika revised its revenue recognition policy for ORTHOVISC sales to Zimmer and restated its operating results for 1998 and the first three quarters of 1999. (See REVENUE RECOGNITION below.) The following table summarizes the impact of the restatement on the quarter ended March 31, 1999:
MARCH 31, 1999 AS REPORTED AS RESTATED CHANGE Total revenue................................................................. $3,224,578 $3,335,650 $111,072 Cost of sales................................................................. 1,708,171 1,708,171 -- Gross profit.................................................................. 1,516,407 1,627,479 111,072 Income before cumulative effect of change in accounting principle............. 344,749 455,821 111,072 Cumulative effect of change in accounting principle........................... -- (3,625,000) (3,625,000) Net income (loss)............................................................. $344,749 ($3,169,179) ($3,513,928) Diluted income(loss) per common share: Income before cumulative effect of change in accounting principle............. $0.03 $0.05 $0.02 Cumulative effect of change in accounting principle........................... -- ($0.36) ($0.36) Net income (loss)............................................................. $0.03 ($0.31) ($0.34) Diluted common shares outstanding............................................. 10,077,488 10,077,488 --
2. BASIS OF PRESENTATION The accompanying financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2000, the results of operations for the three months ended March 31, 2000 and 1999 and the cash flows for the three months ended March 31, 2000 and 1999. The accompanying financial statements and related notes should be read in conjunction with the Company's annual financial statements filed with the Annual Report on Form 10-K for the year ended December 31, 1999. The 5 results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consists of cash and investments with original maturities of 90 days or less. FINANCIAL INSTRUMENTS SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure about fair value of financial instruments. Financial instruments consist of cash equivalents, short-term and long-term investments, accounts receivable, notes receivable from officers and accounts payable. The estimated fair value of these financial instruments approximates their carrying value, and in the case of cash equivalents, short-term and long-term investments, is based on market quotes. The Company's cash equivalents, short-term and long-term investments are generally obligations of the federal government or investment-grade corporate issuers. The Company, by policy, limits the amount of credit exposure to any one financial institution. INVENTORIES Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. REVENUE RECOGNITION Product revenue is recognized upon shipment of commercial product and represents sales of AMVISC-Registered Trademark- products, HYVISC-Registered Trademark- and ORTHOVISC-Registered Trademark-. ORTHOVISC is sold under several supply contracts, including one with Zimmer, Inc., a division of Bristol-Myers Squibb (Zimmer), for Zimmer's distribution in Canada and Europe. On March 15, 2000, the Company had announced it had revised its revenue recognition policy for sales of ORTHOVISC under its contract with Zimmer. Under the revised revenue recognition policy, revenue will be recognized at the time of shipment to Zimmer based upon the minimum per unit price under the Distribution Agreement at the time of sale to Zimmer. Anika had previously recognized revenue for ORTHOVISC sales to Zimmer based upon an estimate of the average selling price which would be obtained by Zimmer upon sale of the ORTHOVISC to its customers, as specified under the Distribution Agreement. Any additional amounts earned by Anika above the contractual minimum per unit price will be recognized when Zimmer sells the ORTHOVISC to its customers and Anika is able to determine its share of the actual per unit sales price. Anika had also previously recognized revenue in 1998 and the first three quarters of 1999 for ORTHOVISC which was held in its refrigerators at Zimmer's request. Under the Company's revised revenue recognition policy, this revenue will be recorded when the ORTHOVISC is shipped to Zimmer. Amounts paid by Zimmer in excess of the amount recognized under the revised revenue recognition policy is recorded by Anika as current deferred revenue and amounted to $2,033,240 at March 31, 2000. The Company has also adopted the provisions of SEC Staff Accounting Bulletin 101 (SAB 101) in its 1999 operating results. The issuance of SAB 101 changes revenue recognition practices for non-refundable up-front payments received as part of broad supply, distribution and marketing agreements, including $2,500,000 and $1,500,000, respectively, received from Zimmer in the fourth quarter of 1997 and the second quarter of 1998. These amounts were previously recognized in the period received. In accordance with SAB 101, the company has retroactively recorded the cumulative effect of the change in accounting principle of $3,625,000 as a charge in the first quarter of 1999. These payments will be 6 recognized as revenue ratably over the 10-year term of the distribution agreement. The amount received and deferred to future periods is $3,125,000 at March 31, 2000 of which $2,725,000 is included in long-term deferred revenue. The Company has recognized as revenue $100,000 of the payments in each of the quarters ended March 31, 1999 and 2000. Advanced payments received for products are recorded as deferred revenue and are recognized when the product is shipped. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets, as follows: Machinery and equipment............. 3-10 years Furniture and fixtures.............. 3-5 years Leasehold improvements.............. 4-10 years
Amortization on leasehold improvements is calculated using the straight-line method over the shorter of the lease term or estimated life of the asset. INCOME TAXES The Company provides for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters beginning with the quarter ending September 30, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company will adopt SFAS No. 133 in its quarter ending September 30, 2000 and does not expect that such adoption to have a material impact on the Company's results of operations, financial position or cash flows. As noted above the Company adopted the provisions of SEC Staff Accounting Bulletin 101 (SAB 101) in its restated 1999 operating results. The issuance of SAB 101 changes revenue recognition practices for non-refundable up-front payments received as part of broad supply, distribution and marketing agreements. Such amounts were previously recognized in the period received. In accordance with SAB 101, such payments will be recognized as revenue ratably over the term of the distribution agreement. 4. EARNINGS PER SHARE SFAS No. 128, EARNINGS PER SHARE, establishes standards for computing and presenting earnings (loss) per share. Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Under the treasury stock method, the dilutive unexercised options are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common shares at the average market price during the period. For periods where the company has incurred a loss, potential common stock has been excluded as its effect would be antidilutive. 7 The following illustrates a reconciliation of the number of shares used in the calculation of basic and diluted net income (loss) per share for the periods ended March 31, 2000 and 1999:
MARCH 31, 2000 1999 ---- ---- (AS RESTATED) Net loss available to common shareholders............................ ($564,087) ($3,169,179) ========== ============ Basic weighted average common shares outstanding..................... 9,804,284 9,514,381 Dilutive effect of assumed exercise of stock options and warrants.... -- 563,107 --------- ------------ Diluted weighted average common and potential common shares outstanding.. 9,804,284 10,077,488 ========= ============
5. INVENTORIES Inventories consist of the following:
MARCH 31, DECEMBER 31, --------- ------------ 2000 1999 ---- ---- Raw materials......................................................... $1,097,180 $ 681,936 Work in-process....................................................... 4,765,972 3,690,618 Finished goods........................................................ 929,842 1,121,147 ---------- --------- Total............................................................... $6,792,994 $5,493,701 ========== =========
6. PROPERTY & EQUIPMENT Property and equipment is stated at cost and consists of the following:
MARCH 31, DECEMBER 31, --------- ------------ 2000 1999 ---- ---- Machinery and equipment............................................... $5,754,589 $5,704,663 Furniture and fixtures................................................ 1,787,115 1,773,390 Leasehold improvements................................................ 665,486 638,180 ---------- --------- Total............................................................... $8,207,190 $8,116,233 ========== =========
7. NOTES RECEIVABLE FROM OFFICERS Notes receivable from officers consists of loans made to one officer and one former officer. The loan amounts are due at the earlier of the end of five years from the date of the note or at the termination of the officers' employment. Interest accrues at annual rates between 4.42% to 6.0% and is payable monthly over the term of the loans. 8 8. LICENSING AND DISTRIBUTION AGREEMENT In November 1997, the Company entered into a long-term distribution agreement with Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company, that was subsequently amended in June 1998 and June 1999, (the "Zimmer Distribution Contract"). The Zimmer Distribution Contract provides Zimmer with exclusive marketing and distribution rights to ORTHOVISC-Registered Trademark- in the United States, Canada, Asia and most of Europe. To date, the Company has received up-front non-refundable licensing payments from Zimmer totaling $4.0 million. In addition, under the Zimmer Distribution Contract the Company has the potential to receive payments aggregating up to $19.5 million upon the achievement of certain regulatory approvals, reimbursement approvals and enumerated sales milestones. As an alternative to a $2.5 million milestone payment due upon FDA approval for the U.S. market, Zimmer has the right to elect to acquire shares of the Company's Common Stock equal to the greater of: (a) $2,500,000 divided by 125% of the average daily closing price of the Common Stock for the prior sixty (60) calendar days or (b) 9.9% of the then outstanding Common Stock (but not to exceed 19.9% of the then outstanding common stock). There can be no assurance that any of such milestones will be met on a timely basis or at all. The Zimmer Distribution Contract provides that the amount Zimmer will pay to the Company for ORTHOVISC will be based on a fixed percentage of Zimmer's actual average selling price, subject to a floor. Additionally, the Zimmer Distribution Contract contains certain annual minimum purchase requirements that Zimmer must order. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF ANIKA THERAPEUTICS, INC. AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. The Company receives a substantial portion of its revenue from the sale of AMVISC-Registered Trademark- and AMVISC-Registered Trademark-Plus to Bausch & Lomb Surgical. For the three months ended March 31, 2000 and 1999, AMVISC sales accounted for 71.7% and 68.3% of product revenue, respectively. In November 1997, the Company entered into a long-term distribution agreement with Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company, that was subsequently amended in June 1998 and June 1999, (the "Zimmer Distribution Contract"). The Zimmer Distribution Contract provides Zimmer with exclusive marketing and distribution rights to ORTHOVISC-Registered Trademark- in the United States, Canada, Latin America, Asia and most of Europe. As a result of an informal inquiry from the Securities and Exchange Commission, the Company and its independent auditors conducted a review of its revenue recognition policy for revenue received from the Zimmer Distribution Contract. As a result of this review, and after consultation with the SEC, Anika revised its revenue recognition policy for ORTHOVISC sales to Zimmer and restated its operating results for 1998 and the first three quarters of 1999. Under the revised revenue recognition policy, revenue will be recognized at the time of shipment to Zimmer based upon the minimum per unit price under the Zimmer Distribution Contract at the time of sale to Zimmer. Anika had previously recognized revenue for ORTHOVISC sales to Zimmer based upon an estimate of the average selling price which would be obtained by Zimmer upon sale of the ORTHOVISC to its customers, as specified under the Zimmer Distribution Contract. Any additional amounts earned by Anika above the contractual minimum per unit price will be recognized when Zimmer sells the ORTHOVISC to its customers and Anika is able to determine its share of the actual per unit sales price. Anika had also recognized revenue in 1998 and the first three quarters of 1999 for ORTHOVISC which was held in its refrigerators at Zimmer's request. Under the Company's revised revenue recognition policy, this revenue will be recorded when the ORTHOVISC is shipped to Zimmer. Amounts paid by Zimmer in excess of the amount recognized under the revised revenue recognition policy is recorded by Anika as current deferred revenue and amounted to $2,033,240 at March 31, 2000. The Company also adopted the provisions of SEC Staff Accounting Bulletin 101 (SAB 101) in its restated 1999 operating results. The issuance of SAB 101 in December 1999 changed revenue recognition practices for non-refundable up-front payments received as part of broad supply, distribution and marketing agreements, and is applicable to $2,500,000 and $1,500,000, respectively, received from Zimmer in the fourth quarter of 1997 and the second quarter of 1998. These amounts were previously recognized in the period received. In accordance with SAB 101, the company has retroactively recorded the cumulative effect of the change in accounting principle of $3,625,000 as a charge in the first quarter of 1999. These payments will be recognized as revenue ratably over the 10-year term of the distribution agreement. The amount received and deferred to future periods is $3,125,000 at March 31, 2000 of which $2,725,000 is included in long-term deferred revenue. The Company has recognized as revenue $100,000 of these payments in each of the quarters ended March 31, 1999 and 2000. RESULTS OF OPERATIONS PRODUCT REVENUE. Product revenue for the three months ended March 31, 2000 was $2,620,833 a decrease of $614,817 or 19.0%, over the $3,235,650 recorded in the prior year corresponding quarter. Sales of ORTHOVISC decreased $409,612 or 40.3% primarily due to lower sales to the Company's Turkish distributor. Sales of AMVISC products to Bausch & Lomb Surgical also decreased by $334,203. LICENSING FEES. For the three months ended March 31, 2000 and 1999, licensing fees of $100,000 represent the annual amortization of amounts received in 1997 and 1998, in accordance with the Company's change in accounting for such fees. GROSS PROFIT. Gross profit for the three months ended March 31, 2000 was $1,487,865 a decrease of $139,614 or 8.6% from $1,627,479 recorded in the prior year corresponding quarter. Gross profit as a percentage of product sales for the three months ended March 31, 2000 was 53.0% compared to 47.2% in the prior quarter, previously reflecting improved manufacturing cost performance. 10 RESEARCH AND DEVELOPMENT. Research and development expenses for the three months ended March 31, 2000 increased by $605,881 to $1,313,738 from $707,857 recorded in the prior year corresponding quarter. The increase in research and development during 2000 was primarily due to the costs associated with the completion of ORTHOVISC-Registered Trademark- Phase III clinical trials. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the three months ended March 31, 2000 increased by $255,490 or 34.3% to $999,462 from $743,972 in the prior year corresponding quarter. The increase was primarily attributable to higher non-recurring fees associated with year end 1999 corporate matters. NET INTEREST INCOME. The Company's net interest income decreased by $40,902 to $261,248 for the three months ended March 31, 2000 from $302,150 in the prior year corresponding quarter. The decrease is attributable to lower average cash balances on hand in 2000 versus 1999 and lower average interest rates. INCOME TAXES. The Company recorded no income tax expense for the three months ended March 31, 2000 due to the net loss. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had cash, cash equivalents and short and long-term investments of $19.8 million and working capital of $18.6 million versus cash, cash equivalents and short-term investments of $20.2 million and working capital of $19.0 million at December 31, 1999. At March 31, 2000 and December 31, 1999 the Company had investments of approximately $5.6 million in long-term marketable securities, consisting of commercial paper. During the first quarter of 2000, the Company utilized $1,299,293 in connection with a planned increase in inventories. Deferred revenue increased by $640,735 in connection with the receipt of cash for certain ORTHOVISC units manufactured for Zimmer but held in the Company's refrigerators pending final delivery instructions. Also, during the first quarter of 2000, the Company utilized $91,000 for capital expenditures. In October 1998, the Board of Directors approved a stock repurchase program under which the Company was authorized to repurchase up to $4 million of Anika common stock with the total number of shares repurchased under the plan not to exceed 9.9% of the total issued and outstanding shares. Through December 31, 1999, the Company had repurchased 762,100 shares at an average cost per share of $5.08 for an aggregate cash purchase price of approximately $3,873,000. During the three month period ended March 31, 2000, the Company has not repurchased any Anika common stock. During the three months ended March 31, 2000 the Company received $96,000 from the exercise of stock options and warrants. The Company's future capital requirements and the adequacy of available funds will depend, however, on numerous factors, including market acceptance of its existing and future products, the successful commercialization of products in development, progress in its product development efforts, the magnitude and scope of such efforts, progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies, the cost, timing requirements of its efforts to expand its manufacturing capabilities, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, and the development of strategic alliances for the marketing of certain of its products. 11 RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE" AND OTHER EXPRESSIONS WHICH ARE PREDICTIONS OF OR INDICATE FUTURE EVENTS AND TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING BUT NOT LIMITED TO STATEMENTS REGARDING: FUTURE SALES, POSSIBLE DEVELOPMENT OF NEW PRODUCTS, POSSIBLE REGULATORY APPROVAL OF ORTHOVISC-Registered Trademark- AND NEW OR POTENTIAL PRODUCTS, CAPACITY OF MANUFACTURING FACILITIES AND PERFORMANCE UNDER SUPPLY AGREEMENTS, INCLUDING THOSE WITH ZIMMER, INC. AND BAUSCH AND LOMB SURGICAL. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENT COULD DIFFER MATERIALLY FROM ANTICIPATED RESULTS, PERFORMANCE OR ACHIEVEMENT, EXPRESSED OR IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS. ADDITIONAL FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE SET FORTH IN THE "MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" BEGINNING ON PAGE 10 OF THIS REPORT ON FORM 10-Q. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. COMPREHENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. The Company's products, product development activities, manufacturing processes, and current and future sales and marketing are subject to extensive and rigorous regulation by the FDA and comparable agencies in foreign countries. In the United States, the FDA regulates the marketing, advertising, promotion, and distribution of medical devices, drugs, and biologics, as well as testing, manufacturing, labeling, record keeping, and reporting activities for such products. Medical products regulated by the FDA are generally classified as medical devices and/or drugs and/or biologics. Product development and approval within the FDA framework takes a number of years and involves the expenditure of substantial resources. There can be no assurance that the FDA will grant approval for the Company's new products on a timely basis if at all, or that FDA review will not involve delays that will adversely affect the Company's ability to commercialize additional products or expand permitted uses of existing products, or that the regulatory framework will not change, or that additional regulation will not arise at any stage of the Company's product development process which may adversely affect approval of or delay an application or require additional expenditures by the Company. In the event the Company's future products are regulated as human drugs or biologics, the FDA's review process typically would be substantially longer and more expensive than the review process to which they are currently subject as devices. The Company anticipates that once FDA approval for their ORTHOVISC-Registered Trademark- product is obtained, ORTHOVISC-Registered Trademark- will have to meet regulatory requirements of a Class III device by THE FDA. Class III devices are those that generally must receive pre-market approval by the FDA to ensure their safety and effectiveness (e.g. life-sustaining, life-supporting and implantable or new devices which have not been found to be substantially equivalent to legally marketed devices) and require clinical testing to ensure safety and effectiveness and FDA approval prior to marketing and distribution. In order for the Company to commercially distribute ORTHOVISC-Registered Trademark- in the U.S., it must obtain FDA approval of a PMA. The PMA approval process can be expensive, uncertain and lengthy. A number of devices for which pre-market approval has been sought have never been approved for marketing. The review of an application often occurs over a protracted time period and may take two years or more from the filing date to complete. The Company submitted a PMA for ORTHOVISC-Registered Trademark- in December 1997. IN October 1998, the Company was notified by the FDA that the Company's PMA application for ORTHOVISC-Registered Trademark- was not approvable and that additional clinical data would be required to demonstrate the effectiveness of ORTHOVISC-Registered Trademark-. The Company submitted an IDE to the FDA IN February 1999 and received approval in late March 1999 to commence a second Phase III clinical study. The ORTHOVISC-Registered Trademark- clinical trial commenced in late April 1999 and completed patient enrollment for the trial in August 1999. The final patient completed the six month follow-up period in late February 2000. There can be no assurance that Anika will file a PMA. In addition, there can be no guarantee that the FDA will approve a PMA application for ORTHOVISC-Registered Trademark- on a timely basis, if at all, or that the FDA review will not involve delays that will affect the Company's ability to commercialize additional products or expand permitted uses of existing products. Furthermore, even if granted, the approval may include significant limitations on the indications and other claims sought for use for which the product may be marketed. 12 The Company's developmental HA products, including INCERT-Registered Trademark-, have not obtained regulatory approval in the U.S. for investigational use and/or commercial marketing and sale. The Company believes that INCERT-Registered Trademark- will be regulated as a Class III medical device. Before undertaking clinical trials in the U.S. to support a PMA, the Company must apply for and obtain FDA and/or institutional review board ("IRB") approval of an IDE. There can be no assurance that the Company will be permitted to undertake clinical trials of these or other future products in the U.S. or that clinical trials will demonstrate that the products are safe and effective or otherwise satisfy the FDA's pre-market approval requirements. Orquest has not received regulatory approval in the U.S. for the commercial marketing and sale of OSSIGEL-Registered Trademark-. OSSIGEL-Registered Trademark- will be regulated as a Class III medical device with the FDA's Center of Biologics Research and Review as the lead review center. There can be no assurance that Orquest will be permitted to undertake clinical trials of OSSIGEL-Registered Trademark- or, if clinical trials are permitted, that such clinical trials will demonstrate that OSSIGEL-Registered Trademark- is safe and effective or otherwise satisfy FDA requirements. Once obtained, marketing clearance can be withdrawn by the FDA due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance. The Company may be required to make further filings with the FDA under certain circumstances. The FDA's regulations require agency approval of a PMA supplement for certain changes if they affect the safety and effectiveness of an approved device, including, but not limited to, new indications for use, labeling changes, the use of a different facility to manufacture, process or package the device, changes in manufacturing methods or quality control systems and changes in performance or design specifications. Failure by the Company to receive approval of a PMA supplement regarding the use of a different manufacturing facility or any other change affecting the safety or effectiveness of an approved device on a timely basis, or at all, would have a material adverse effect on the Company's business, financial condition and results of operations. The FDA could also limit or prevent the manufacture or distribution of the Company's products and has the power to require the recall of such products. Significant delay or cost in obtaining, or failure to obtain FDA clearance to market products, any FDA limitations on the use of the Company's products, or any withdrawal or suspension of clearance by the FDA could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, all FDA-approved products manufactured by the Company must be manufactured in compliance with FDA's Good Manufacturing Practices ("GMP") regulations or, for medical devices, FDA's Quality System Regulations ("QSR"). Ongoing compliance with GMP, QSR and other applicable regulatory requirements is monitored through periodic inspection by state and federal agencies, including the FDA. The FDA may inspect the Company and its facilities from time to time to determine whether the Company is in compliance with regulations relating to medical device and manufacturing companies, including regulations concerning manufacturing, testing, quality control and product labeling practices. There can be no assurance that the Company will be able to comply with current or future FDA requirements applicable to the manufacture of products. FDA regulations depend heavily on administrative interpretation and there can be no assurance that the future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company. In addition, changes in the existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of the Company's products. Failure to comply with applicable regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the FDA to grant pre-market clearance or pre-market approval for devices, withdrawal of approvals and criminal prosecution. In addition to regulations enforced by the FDA, the Company is subject to other existing and potential future federal, state, local and foreign regulations. International regulatory bodies often establish regulations governing product standards, packing requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. To enable the Company to market ORTHOVISC-Registered Trademark- in Europe, the Company was required to receive a "CE" marking certification, an international symbol of quality and compliance with the applicable European medical device directive. In October 1996, the Company received an EC Design Examination and an EC Quality System Certificate from a European Notified Body, which entitles the Company to affix a CE marking on ORTHOVISC-Registered Trademark- for the treatment OF osteoarthritis in synovial joints. There can be no assurance that the Company will be able to achieve and/or maintain compliance required for CE marking or other foreign regulatory approvals for any or all of its products or that it will be able to produce its products in a timely and profitable manner while complying with applicable requirements. Federal, state, local and foreign regulations regarding the manufacture and sale of medical products are subject to change. The Company cannot predict what impact, if any, such 13 changes might have on its business. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement also vary widely from country to country. The process of obtaining approvals from the FDA and other regulatory authorities can be costly, time consuming, and subject to unanticipated delays. There can be no assurance that approvals of the Company's products will be granted or that the Company will have the necessary funds to develop certain of such products. Any failure to obtain, or delay in obtaining, such approvals could adversely affect the ability of the Company to market its products. HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. From its inception up until December 31, 1996 and in 1999, the Company had incurred annual operating losses. As of March 31, 2000, the Company had an accumulated deficit of approximately $5,337,000. The continued development of the Company's products will require the commitment of substantial resources to conduct research and preclinical and clinical development programs, and to establish sales and marketing capabilities. The ability of the Company to reach sustained profitability is highly uncertain. To achieve sustained profitability the Company must, among other things, successfully complete development of certain of its products, obtain regulatory approvals and establish sales and marketing capabilities for certain of its products. There can be no assurance that the Company will be able to achieve sustained profitability. COMPETITION. The Company competes with many companies, including, among others, large pharmaceutical companies and specialized medical products companies. Many of these companies have substantially greater financial and other resources, larger research and development staffs, more extensive marketing and manufacturing organizations and more experience in the regulatory process than the Company. The Company also competes with academic institutions, governmental agencies and other research organizations which may be involved in research, development and commercialization of products. Because a number of companies are developing HA products for similar applications, the successful commercialization of a particular product will depend in part upon the ability of the Company to complete clinical studies and obtain FDA marketing and foreign regulatory approvals prior to its competitors. There can be no assurance that the Company will be able to compete against current or future competitors or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of the Company's products, including ORTHOVISC-Registered Trademark- and INCERT-Registered Trademark-, as well as the products of the Company's collaborative partners, including OSSIGEL-Registered Trademark-, will require clinical trials to determine their safety and efficacy in humans for various conditions. There can be no assurance that the Company or its collaborative partners will not encounter problems that will cause it to delay, suspend or terminate clinical trials of any of these products. In addition, there can be no assurance that such clinical trials, if completed, will ultimately demonstrate these products to be safe and efficacious. DEPENDENCE UPON MARKETING PARTNERS. The Company does not plan to directly market and sell its current products to end-users. Therefore, the Company's success will be dependent upon the efforts of its marketing partners and the terms and conditions of the Company's relationships with such marketing partners. In addition, there can be no assurances that such marketing partners will not seek to renegotiate their current agreements on terms less favorable to the Company. The Company currently manufactures AMVISC-Registered Trademark- and AMVISC-Registered Trademark-PLUS for Bausch & Lomb Surgical under an exclusive fixed price, five-year supply agreement which contains stated minimum annual purchase obligations and terminates on December 31, 2001. Since January 1, 1997, Bausch & Lomb Surgical has purchased AMVISC-Registered Trademark- and AMVISC-Registered Trademark-PLUS in amounts substantially in excess of the minimum purchase obligations set forth in the AMVISC Supply Contract. There can be no assurance that Bausch & Lomb, Surgical will continue to purchase AMVISC-Registered Trademark- and AMVISC-Registered Trademark-Plus at levels beyond the stated minimum annual purchase obligations or that future unit sale prices will not be subject to negotiated reductions. Any such decrease in orders or prices under the AMVISC Supply Contract could have a material adverse effect on the Company's business, financial condition and results of operations. For the three months ended March 31, 2000 and 1999, sales of AMVISC-Registered Trademark- products to Bausch & Lomb Surgical accounted for 71.7% and 68.3% of product revenues. The Zimmer Distribution Contract provides Zimmer with exclusive marketing and distribution rights to ORTHOVISC-Registered Trademark- in the United States, Canada, Latin America, Asia and most of Europe. To date the Company has received up-front non-refundable licensing payments totaling $4.0 million. In addition, under the Zimmer Distribution Contract the Company has the potential to receive payments aggregating up to an additional $19.5 million upon the achievement of certain regulatory approvals and enumerated sales milestones. As an alternative to a $2.5 million milestone payment due upon receipt of FDA approval for the U.S. market, Zimmer has the right to elect to acquire shares of the Company's 14 Common Stock equal to the greater of: (a) $2,500,000 divided by 125% of the average daily closing price of the Common Stock for the prior sixty (60) calendar days or (b) 9.9% of the then outstanding Common Stock (but not to exceed 19.9% of the then outstanding Common Stock) at a 25% premium to the market price for the 60 days prior to the milestone. There can be no assurance that any of such milestones will be met on a timely basis or at all. In addition, Zimmer has the right to terminate the Zimmer Distribution Contract within sixty (60) days of the occurrence of any of the following events: (i) ORTHOVISC-Registered Trademark- is not approved by the FDA by January 1, 2001, (ii) there is a material recall of ORTHOVISC-Registered Trademark-, (iii) Zimmer's net sales of ORTHOVISC-Registered Trademark- failed to meet the minimums specified in the Zimmer Distribution Contract for two consecutive years beginning with the calendar year of 1998 or (iv) a court of competent jurisdiction rules that ORTHOVISC-Registered Trademark- or any of its related patents is infringing the patents or proprietary rights of a third party. There can be no assurance that any of these events will not occur, or, even if any such event does not occur, that Zimmer will not elect to terminate the agreement. In fact, Zimmer's sales of ORTHOVISC-Registered Trademark- for 1999 and 1998, are less than the minimums for this consecutive two-year period. Despite the fact that Zimmer has not given notice within the requisite sixty (60) day period, there can be no assurances that Zimmer will not terminate the Zimmer Distribution Contract or seek to renegotiate the agreement on terms less favorable to the Company. Any such termination is likely to have a material adverse effect on the Company's ability to market ORTHOVISC-Registered Trademark-, which may have a material adverse effect on the Company's future operating results. ORTHOVISC-Registered Trademark- sales to Zimmer accounted for 4.5% and 3.4% of product revenue for the three months ended March 31, 2000 and 1999, respectively. The Company will need to obtain the assistance of additional marketing partners for new products which are brought to market and existing products brought to new markets. There can be no assurance that such additional partners will be available or that such partners will agree to market the Company's products on acceptable terms. The failure to establish strategic partnerships for the marketing and distribution of the Company's products on acceptable terms would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY OF MARKET ACCEPTANCE OF FUTURE PRODUCTS. The Company's success will depend in part upon the acceptance of the Company's future products by the medical community, hospitals and physicians and other health care providers, and third-party payors. Such acceptance may depend upon the extent to which the medical community perceives the Company's products as safer, more effective or cost-competitive than other similar products. Ultimately, for the Company's new products to gain general market acceptance, it will also be necessary for the Company to develop marketing partners for the distribution of its products. There can be no assurance that the Company's new products will achieve significant market acceptance on a timely basis, or at all. Failure of some or all of the Company's future products to achieve significant market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success will depend, in part, on its ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary, and conduct its business without infringing the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms, including the Company, can be uncertain and involve complex legal and factual questions. There can be no assurance that any patent applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or will not be circumvented by others. In the event a third party has also filed one or more patent applications for any of its inventions, the Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office ("PTO") to determine priority of invention (see below), which could result in failure to obtain or the loss of patent protection for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to the Company, such interference proceedings could result in substantial cost to the Company. Filing and prosecution of patent applications, litigation to establish the validity and scope of patents, assertion of patent infringement claims against others and the defense of patent infringement claims by others can be expensive and time consuming. There can be no assurance that in the event that any claims with respect to any of the Company's patents, if issued, are challenged by one or more third parties, that any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause the Company to lose exclusivity covered by the disputed rights. If a third party is found to have rights covering products or processes used by the Company, the Company could be forced to cease using the technologies or marketing the products covered by such rights, could be subject to significant liabilities to such third party, and could be required to license technologies from such third party. Furthermore, even if the Company's patents are determined to be valid, enforceable, and broad in scope, there can be no assurance that competitors will not be able to design around such patents and compete with the Company using the resulting alternative technology. 15 The Company has a policy of seeking patent protection for patentable aspects of its proprietary technology. The Company co-owns certain United States patents and a patent application which claim certain adhesion prevention uses and certain drug delivery uses of HA, and solely owns patents directed to certain manufacturing processes. The Company also holds an exclusive license from Tufts University to use technologies claimed in a United States patent application which has been granted a Notice of Allowance from the U.S. Patent Office for the anti-metastasis applications of HA oligosaccharides. The Company's patents expire between 2007 and 2015 and the license expires upon expiration of all related patents. The Company intends to seek patent protection with respect to products and processes developed in the course of its activities when it believes such protection is in its best interest and when the cost of seeking such protection is not inordinate. However, no assurance can be given that any patent application will be filed, that any filed applications will result in issued patents or that any issued patents will provide the Company with a competitive advantage or will not be successfully challenged by third parties. The protections afforded by patents will depend upon their scope and validity, and others may be able to design around the Company's patents. The Company's issued patents and any patents which arise from the Company's licensed application would provide competitive protection, if at all, only in the United States. The Company has not, to date, pursued foreign patents equivalent to those issued or applied for in the United States. Other entities have filed patent applications for or have been issued patents concerning various aspects of HA-related products or processes. There can be no assurance that the products or processes developed by the Company will not infringe the patent rights of others in the future. Any such infringement may have a material adverse effect on the Company's business, financial condition and results of operations. In particular, the Company has received notice from the PTO that a third party is attempting to provoke a patent interference with respect to one of the Company's co-owned patents covering the use of INCERT-Registered Trademark- for post-surgical adhesion prevention. Although the Company believes that an interference may be declared by the PTO, it is too early to determine the merits of the interference or the effect, if any, the interference will have on the Company's marketing of INCERT-Registered Trademark- for this use. The existence of the interference proceeding may have a negative impact on the marketing of the INCERT-Registered Trademark- product, and no assurance can be given that the Company would be successful in any such interference proceeding. If the third-party interference were to be decided adversely to the Company, involved claims of the Company's patent would be cancelled, the Company's marketing of the INCERT-Registered Trademark- product may be materially and adversely affected and the third party may enforce patent rights against the Company which could prohibit the sale and use of the INCERT-Registered Trademark- products, which could have a material adverse effect on the Company's future operating results. The Company also relies upon trade secrets and proprietary know-how for certain unpatented aspects of its technology. To protect such information, the Company requires all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. There can be no assurance that these agreements provide meaningful protection or that they will not be breached, that the Company would have adequate remedies for any such breach, or that the Company's trade secrets, proprietary know-how, and technological advances will not otherwise become known to others. In addition, there can be no assurance that, despite precautions taken by the Company, others have not and will not obtain access to the Company's proprietary technology. Further, there can be no assurance that third parties will not independently develop substantially equivalent or better technology. Pursuant to the AMVISC Supply Contract, the Company has agreed to grant Bausch & Lomb Surgical a royalty-free, worldwide, exclusive license to the Company's manufacturing and product inventions which relate to AMVISC-Registered Trademark- products, effective on December 31, 2001, the termination date of the AMVISC supply contract (which became effective on January 1, 1997). Upon expiration of the AMVISC Supply Contract, there can be no assurance that Bausch & Lomb Surgical will continue to use the Company to manufacture AMVISC-Registered Trademark- and AMVISC-Registered Trademark-Plus. If Bausch & Lomb Surgical discontinues the use of the Company as a manufacturer after such time, the Company's business, financial condition and results of operations would be materially and adversely affected. RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations are dependent upon the continued operation of its manufacturing facility in Woburn, Massachusetts. The operation of biomedical manufacturing plants involves many risks, including the breakdown, failure or substandard performance of equipment, natural and other disasters, and the need to comply with the requirements of directives of government agencies, including the FDA. In addition, the Company relies on a single supplier for syringes and a small number of suppliers for a number of other materials required for the manufacturing and delivery of its HA products. Furthermore, manufacturing processes and research and development efforts of the Company involve animals and products derived from animals. The utilization of animals in research and development and product commercialization is subject to increasing focus by animal rights activists. The activities of animal rights groups and other organizations that have protested animal based research and development programs or boycotted the 16 products resulting from such programs could cause an interruption in the Company's manufacturing processes and research and development efforts. The occurrence of material operational problems, including but not limited to the events described above, could have a material adverse effect on the Company's business, financial condition and results of operations during the period of such operational difficulties. NO ASSURANCE OF GROWTH OR ABILITY TO MANAGE GROWTH. The Company's future success depends on substantial growth in product sales. There can be no assurance that such growth can be achieved or, if achieved, can be sustained. There can be no assurance that even if substantial growth in product sales and the demand for the Company's products is achieved, the Company will be able to (i) develop the necessary manufacturing capabilities; (ii) obtain the assistance of additional marketing partners; (iii) attract, retain and integrate the required key personnel; or (iv) implement the financial, accounting and management systems needed to manage growing demand for its products, should it occur. Failure of the Company to successfully manage future growth could have a material adverse effect on the Company's business, financial condition and results of operations. THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES. In the U.S. and other markets, health care providers, such as hospitals and physicians, that purchase health care products, such as the Company's products, generally rely on third party payors, including Medicare, Medicaid and other health insurance and managed care plans, to reimburse all or part of the cost of the health care product. The Company depends upon the distributors for its products to secure reimbursement. Reimbursement by a third party payor may depend on a number of factors, including the payor's determination that the use of the Company's products are clinically useful and cost-effective, medically necessary and not experimental or investigational. Since reimbursement approval is required from each payor individually, seeking such approvals can be a time consuming and costly process which, in the future, could require the Company or its marketing partners to provide supporting scientific, clinical and cost-effectiveness data for the use of the Company's products to each payor separately. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third party payors are increasingly attempting to contain the costs of health care products and services by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing in some cases to provide coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. In addition, Congress and certain state legislatures have considered reforms that may affect current reimbursement practices, including controls on health care spending through limitations on the growth of Medicare and Medicaid spending. There can be no assurance that third party reimbursement coverage will be available or adequate for any products or services developed by the Company. Outside the U.S., the success of the Company's products is also dependent in part upon the availability of reimbursement and health care payment systems. Lack of adequate coverage and reimbursement provided by governments and other third party payors for the Company' products and services could have a material adverse effect on the Company's business, financial condition and results of operations. NEED FOR ADDITIONAL FUNDS; LIQUIDITY. The Company had cash, cash equivalents and short- and long-term investments of $19.8 million as of March 31, 2000. The Company's future capital requirements and the adequacy of available funds will depend, however, on numerous factors, including market acceptance of its existing and future products, the successful commercialization of products in development, progress in its product development efforts, the magnitude and scope of such efforts, progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies, the cost and timing of its efforts to expand its manufacturing capabilities, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments, and the development of strategic alliances for the marketing of certain of its products. To the extent that funds generated from the Company's operations, together with the Company's existing capital resources and are insufficient to meet future requirements, the Company will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. The terms of any future equity financings may be dilutive to the Company's stockholders and the terms of any debt financings may contain restrictive covenants which limit the Company's ability to pursue certain courses of action. The ability of the Company to obtain financing is dependent on the status of the Company's future business prospects as well as conditions prevailing in the relevant capital markets. No assurance can be given that any additional financing will be made available to the Company or will be available on acceptable terms should such a need arise. EXPOSURE TO PRODUCT LIABILITY CLAIMS. The testing, marketing and sale of human health care products entail an inherent risk of allegations of product liability, and there can be no assurance that substantial product liability claims will not be asserted against the Company. Although the Company has not received any material product liability claims to date and has an insurance policy of $1,000,000 per occurrence and $5,000,000 in the aggregate to cover such claims should they arise, 17 there can be no assurance that material claims will not arise in the future or that the Company's insurance will be adequate to cover all situations. Moreover, there can be no assurance that such insurance, or additional insurance, if required, will be available in the future or, if available, will be available on commercially reasonable terms. Any product liability claim, if successful, could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent on the members of its management and scientific staff, the loss of one or more of whom could have a material adverse effect on the Company. In addition, the Company believes that its future success will depend in large part upon its ability to attract and retain highly skilled, scientific, managerial and manufacturing personnel. The Company faces significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. There can be no assurance that the Company will be successful in hiring or retaining the personnel it requires. The failure to hire and retain such personnel could have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL REGULATION. The Company is subject to a variety of local, state and federal government regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic, or other hazardous substances used in the manufacture of the Company's products. Any failure by the Company to control the use, disposal, removal or storage of hazardous chemicals or toxic substances could subject the Company to significant liabilities, which could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS RELATING TO INTERNATIONAL OPERATIONS. During the three months ended March 31, 2000 and 1999, approximately, 19.7% and 26.8% of the Company's product sales were generated in international markets through marketing partners. The Company's representatives, agents and distributors which sell products in international markets are subject to the laws and regulations of the foreign jurisdictions in which they operate and in which the Company's products are sold. A number of risks are inherent in international sales and operations. For example, the volume of international sales may be limited by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs, difficulties in managing international operations, import restrictions and fluctuations in foreign currency exchange rates. Such changes in the volume of sales may have an adverse effect on the Company's business, financial condition and results of operations. POTENTIAL VOLATILITY OF STOCK PRICE; NO CONTROL OVER MARKET MAKING. The market price of shares of the Company's Common Stock may be highly volatile. Factors such as announcements of new commercial products or technological innovations by the Company or its competitors, disclosure of results of clinical testing or regulatory proceedings, governmental regulation and approvals, developments in patent or other proprietary rights, public concern as to the safety of products developed by the Company and general market conditions may have a significant effect on the market price of the Company's Common Stock. In particular, the Company's stock price declined significantly in October 1998 following the Company's announcement that the FDA had notified the Company that its PMA for ORTHOVISC-Registered Trademark- was not approvable and that additional clinical data would be required to demonstrate the effectiveness of ORTHOVISC-Registered Trademark-. To the extent the Company experiences any other adverse developments in the process of seeking FDA approval for ORTHOVISC-Registered Trademark-, the price of the Common Stock will likely be subject to further, and perhaps substantial, declines. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in the Company's operating results, material announcements by the Company or its competitors, governmental regulatory action, conditions in the health care industry generally or in the medical products industry specifically, or other events or factors, many of which are beyond the Company's control. In addition, the stock market has experienced extreme price and volume fluctuations which have particularly affected the market prices of many medical products companies and which often have been unrelated to the operating performance of such companies. The Company's operating results in future quarters may be below the expectations of equity research analysts and investors. In such event, the price of the Common Stock would likely decline, perhaps substantially. No person is under any obligation to make a market in the Common Stock or publish research reports on the Company, and any person making a market in the Common Stock or publishing research reports on the Company may discontinue market making or publishing such reports at any time without notice. There can be no assurance that an active public market in the Common Stock will be sustained. POSSIBLE ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Restated Articles of Organization and Amended and Restated By-laws could have the effect of discouraging a third party from pursuing a non- 18 negotiated takeover of the Company and preventing certain changes in control. These provisions include a classified Board of Directors, advance notice to the Board of Directors of stockholder proposals, limitations on the ability of stockholders to remove directors and to call stockholder meetings, the provision that vacancies on the Board of Directors be filled by a majority of the remaining directors. In addition, the Board of Directors adopted a Shareholders Rights Plan in April 1998. The Company also is subject to Chapter 110F of the Massachusetts General Laws which, subject to certain exceptions, prohibits a Massachusetts corporation from engaging in any of a broad range of business combinations with any "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder. These provisions could discourage a third party from pursuing a takeover of the Company at a price considered attractive by many stockholders, since such provisions could have the effect of preventing or delaying a potential acquiror from acquiring control of the Company and its Board of Directors. POTENTIAL SECURITIES CLASS ACTION LITIGATION. As a result of an informal inquiry from the Securities and Exchange Commission, the Company has revised its revenue recognition policies and has restated its operating results for 1998 and the first three quarters of 1999. In the past, companies that have restated their financial information have been subject to securities class action litigation. The Company may be involved in a securities class action litigation in the future. Such litigation often results in significant costs and a diversion of management's attention and resources and could harm the Company's business, financial condition and results of operations. RELIANCE ON A SMALL NUMBER OF CUSTOMERS. The Company has historically derived the majority of our revenues from a small number of customers, most of whom resell our products to end users and most of whom are significantly larger companies. Our failure to generate as much revenue as expected from these customers or the failure of these customers to purchase our products would seriously harm our business. For the three months ended March 31, 2000, Bausch & Lomb Surgical accounted for 71.7% of our product revenues and 73.4% of our account receivables balance and Biomeks accounted for 14.0% of our product revenues and 17.0% of our accounts receivable balance. Accordingly, present and future customers may terminate their purchasing arrangements with us, significantly reduce or delay their orders or seek to renegotiate their agreements on terms less favorable to the Company. Furthermore, in any future negotiations the Company may be subject to the perceived or actual leverage the customers may have given their relative size and importance to the Company. Any termination, change, reduction or delay in orders could seriously harm our business, financial condition and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry and reduce our ability to accurately predict cash flow, and, as a consequence, could seriously harm our business, financial condition and results of operations. 19 PART II: OTHER INFORMATION 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 on Form 8-A12B (File no. 001-14027), filed with the Securities and Exchange Commission on April 7, 1998. (10) Material Contracts 10.1 Settlement Agreement dated January 11, 1991 among MedChem Products, Inc., Kabi Pharmacia AB, Pharmacia, Inc., Dr. Endre Balazs and IOLAB Corporation, incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement of Form 10 (file no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993. 10.2 1993 Stock Option Plan, incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-QSB for the period ended June 30, 1998 (file no. 001-14027), filed with the Securities and Exchange Commission on August 14, 1998. 10.3 1993 Directors Stock Option Plan, incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form 10/A (file no. 000-21326), filed with the Securities and Exchange Commission on April 28, 1993. 10.4 License Agreement dated as of July 22, 1992 between the Company and Tufts University, incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form 10 (file no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993. 10.5 Lease dated March 10, 1995 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1995 (file no. 000-21326), filed with the Securities and Exchange Commission on November 29, 1995. 10.6 Employment Agreement dated September 24, 1996 between the Company and J. Melville Engle, incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-
20 KSB for the fiscal year ended August 31, 1996 (file no. 000-21326), filed with the Securities and Exchange Commission on November 27, 1996. 10.7 Change of Control Agreement dated as of June 3, 1999 between the Company and J. Melville Engle incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (file no. 001-14027), filed with the Securities and Exchange Commission on March 31, 2000. 10.8 Promissory Note for $75,000 dated as of March 17, 1996 between the Company and J. Melville Engle, incorporated herein by reference to Exhibit 10.25 to the Company's Registration Statement on Form SB-2 (file no. 333-38993), filed with the Securities and Exchange Commission on October 29, 1997. 10.9 Exclusive Distribution Agreement dated as of November 7, 1997 between the Company and Zimmer, Inc., incorporated herein by reference to Exhibit 10.26 to the Company's Registration Statement on Form SB-2/A (file no. 333-38993), filed with the Securities and Exchange Commission on November 10, 1997. Confidential treatment was granted to certain portions of this Exhibit. 10.10 First Amendment to Exclusive Distribution Agreement dated as of June 1, 1998 between the Company and Zimmer, Inc., incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-QSB for the quarterly period ended June 30, 1998 (file no. 001-14027), filed with the Securities and Exchange Commission on August 14, 1998. 10.11 Second Amendment to Exclusive Distribution Agreement dated as of June 3, 1999 between the Company and Zimmer, Inc., is filed herewith as Exhibit 10.11.
(27) Financial Data Schedule. (b) Reports on Form 8-K: None 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Woburn, Massachusetts on May 15, 2000. ANIKA THERAPEUTICS, INC. May 15, 2000 By: /S/ DOUGLAS R. POTTER ---------------------- Douglas R. Potter PRINCIPAL FINANCIAL & ACCOUNTING OFFICER 22 EXHIBIT INDEX (3) Articles of Incorporation and Bylaws: 3.1 The Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form 10 (file no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993. 3.2 The Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.4 to the Company's quarterly report on Form 10-QSB for the period ended November 30, 1996 (file no. 000-21326), filed with the Securities and Exchange Commission on January 14, 1997. 3.3 Amendment to the Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.1 to the Company's quarterly report on Form 10-QSB for the period ended November 30, 1996 (file no. 000-21326), filed with the Securities and Exchange Commission on January 14, 1997. (4) Instruments Defining the Rights of Security Holders 4.1 Shareholder Rights Agreement dated as of April 6, 1998 between the Company and Firstar Trust Company, incorporated herein by reference to Exhibit 4.1 of the Company's Registration Statement on Form 8-A12B (File no. 001-14027), filed with the Securities and Exchange Commission on April 7, 1998. (10) Material Contracts 10.1 Settlement Agreement dated January 11, 1991 among MedChem Products, Inc., Kabi Pharmacia AB, Pharmacia, Inc., Dr. Endre Balazs and IOLAB Corporation, incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form 10 (file no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993. 10.2 1993 Stock Option Plan, incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-QSB for the period ended June 30, 1998 (file no. 001-14027), filed with the Securities and Exchange Commission on August 14, 1998. 10.3 1993 Directors Stock Option Plan, incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form 10/A (file no. 000-21326), filed with the Securities and Exchange Commission on April 28, 1993. 10.4 License Agreement dated as of July 22, 1992 between the Company and Tufts University, incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form 10 (file no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993. 10.5 Lease dated March 10, 1995 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1995 (file no. 000-21326), filed with the Securities and Exchange Commission on November 29, 1995. 10.6 Employment Agreement dated September 24, 1996 between the Company and J. Melville Engle, incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-KSB for the fiscal year ended August 31, 1996 (file no. 000-21326), filed with the Securities and Exchange Commission on November 27, 1996. 10.7 Change of Control Agreement dated as of June 3, 1999 between the Company and J. Melville Engle incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
23 fiscal year ended December 31, 1999 (file no. 001-14027), filed with the Securities and Exchange Commission on March 31, 2000. 10.8 Promissory Note for $75,000 dated as of March 17, 1996 between the Company and J. Melville Engle, incorporated herein by reference to Exhibit 10.25 to the Company's Registration Statement on Form SB-2 (file no. 333-38993), filed with the Securities and Exchange Commission on October 29, 1997. 10.9 Exclusive Distribution Agreement dated as of November 7, 1997 between the Company and Zimmer, Inc., incorporated herein by reference to Exhibit 10.26 to the Company's Registration Statement on Form SB-2/A (file no. 333-38993), filed with the Securities and Exchange Commission on November 10, 1997. Confidential treatment was granted to certain portions of this Exhibit. 10.10 First Amendment to Exclusive Distribution Agreement dated as of June 1, 1998 between the Company and Zimmer, Inc., incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-QSB for the quarterly period ended June 30, 1998 (file no. 001-14027), filed with the Securities and Exchange Commission on August 14, 1998. 10.11 Second Amendment to Exclusive Distribution Agreement dated as of June 3, 1999 between the Company and Zimmer, Inc., is filed herewith as Exhibit 10.11.
(27) Financial Data Schedule. 24 EX-10.11 2 EX-10.11 EXHIBIT 10.11 SECOND AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT THIS SECOND AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT (the "Amendment") is effective as of this June 3, 1999 by and between ZIMMER, INC., a Delaware corporation ("Distributor"), and ANIKA THERAPEUTICS, INC., a Massachusetts corporation ("Company"). Reference is hereby made to that certain Exclusive Distribution Agreement effective as of November 7, 1997, as amended by First Amendment to Exclusive Distribution Agreement effective as of June 1, 1998, together with all Annexes and Exhibits thereto (as so amended, the "Agreement"), by and between Distributor and Company. All capitalized terms used herein and not defined shall have the meanings given to them in the Agreement. WHEREAS, Distributor and Company have previously entered into the Agreement providing for the exclusive right of Distributor to distribute and sell the Product in accordance with the terms set forth therein, and the Parties desire to amend the terms of the Agreement as provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements of the Parties contained herein and in the Agreement, the Parties hereby agree as follows: SECTION 1. AMENDMENTS. The Agreement is hereby amended as follows: 1.1 Section 2 of the Agreement shall be amended as follows: (i) the heading of Section 2(c) shall be changed to "(c) CERTAIN REGULATORY APPROVALS"; and (ii) there shall be added the following additional paragraph at the end of such Section: "(c) (iv) DISTRIBUTOR RESPONSIBLE COUNTRIES. Notwithstanding anything contained in this Agreement to the contrary, Distributor shall use commercially reasonable efforts to obtain all regulatory approvals required to market, sell and distribute the Product in the countries set forth on Annex C-1 attached hereto marked with a + (the "Distributor Responsible Countries"). 1.2 Sections 2(d.2), 2(d.3) and 2(d.4) shall be deleted in their entirety and replaced with the following: (d.2) Upon receipt of a Reimbursement Approval(s) for use of the Product in the Field of Use by the appropriate governmental body and/or private insurers representing in aggregate more than fifty percent (50%) of the population in Germany, Distributor shall pay Company the one-time nonrefundable sum of $500,000. (d.3) Upon receipt of the first Reimbursement Approval(s) for use of the Product in the Field of Use by the appropriate governmental body and/or private insurers representing in aggregate more than fifty percent (50%) of the population in either of the United Kingdom or France, Distributor shall pay Company the one-time nonrefundable sum of $250,000, and thereafter upon receipt of such Reimbursement Approval(s) in such other country, Distributor shall pay Company the one-time nonrefundable sum of $125,000. (d.4) Upon receipt of the first Reimbursement Approval(s) for use of the Product in the Field of Use by the appropriate governmental body and/or private insurers representing in aggregate more than fifty percent (50%) of the population in any one of the following countries (Italy, Sweden or the Netherlands), Distributor shall pay Company the one-time nonrefundable sum of $125,000. 1.3 Section 3 of the Agreement shall be amended to include the following additional paragraph at the end of such Section: "(c) The Company grants to Distributor a right of first offer to acquire the rights to market, distribute and sell the Product in Israel, Turkey, Spain, Portugal and Egypt (the "Additional Territory") on the following terms: If the Company seeks to change its current distributor in any of the countries in the Additional Territory, the Company will notify Distributor in writing (the date of such notification the "Notification Date") before commencing any negotiations with any third party regarding such rights. Distributor will have sixty (60) days from the Notification Date to indicate its interest in acquiring the right to market, distribute and sell the Product in any of such countries. If Distributor does not wish to pursue negotiations for the right to market, distribute and sell the Product in any such country, or if such sixty (60) day period expires without Distributor notifying Company as to its interest, then Company shall be free to enter into an agreement with another Person with respect to such rights. If prior to the expiration of the sixty (60) day period, Distributor expresses in writing its interest in obtaining the right to market, distribute and sell the Product in any such country, the parties shall enter in to good faith negotiations regarding such rights within the ninety (90) day period immediately following the Notification Date. In any proposal to acquire the rights to market, distribute and sell the Product in any Additional Territory, Distributor shall produce a supplement to the Marketing Plan with respect to such country which shall include a reasonable incremental increase to the Territory-wide Purchase Requirement (up to a maximum of five percent (5%) of Distributor's marketing forecast for actual Product sales for such countries). If at the end of such ninety (90) day period the parties are unable to reach an agreement and Company does not wish to continue the negotiations, as Company shall determine in its sole discretion, Company shall be free to enter into an agreement with any other Person with respect to such rights. Notwithstanding anything contained in this Agreement to the contrary, the Company shall have no obligation to seek to change its current distributor in any of the countries in the Additional Territory." 2 1.4 The table comprising part of Section 4(a) of the Agreement shall be amended by deleting such table in its entirety and replacing it with the following:
CALENDAR TERRITORY-WIDE INCREMENTAL YEAR UNITS REQUIREMENT* MINIMUM* -------- ------------------ -------- 1998 (Year 1) 30,000 Units 30,000 Units 1999 (Year 2) 90,000 Units 30,000 Units 2000 (Year 3) 150,000 Units 30,000 Units 2001 (Year 4) 290,000 Units 40,000 Units 2002 (Year 5) 520,000 Units 45,000 Units 2003 (Year 6) 550,000 Units 50,000 Units 2004 (Year 7) 570,000 Units 70,000 Units 2005 (Year 8) and 580,000 Units 80,000 Units thereafter annually
* Exclusive of Samples and Demonstration Units 1.5 Section 4(b) of the Agreement shall be deleted in its entirety and replaced with the following: "(b) Notwithstanding the provisions of Section 4(a), Distributor shall not be obligated to purchase more than the number of Units per year listed in the table in Section 4(a) under the column titled "Incremental Minimum" for each such year until the year in which the U.S. FDA approves the Product for marketing and sale for use in the treatment of osteoarthritis by injection in the human knee joint in the Field of Use in the United States. Upon receipt of such FDA approval, Distributor shall be obligated to purchase in that calendar year the prorated Year 2 annual Territory-wide Units Requirement which shall be determined by multiplying the Year 2 annual Territory-wide Units Requirement (90,000 Units) by a fraction, the numerator of which is the number of days remaining in the calendar year after the date on which FDA approval is received and the denominator of which is 365. The Year 3, Year 4, Year 5, Year 6 and Year 7 annual Territory-wide Units Requirement shall apply to the first, second, third, fourth and fifth calendar years, respectively, immediately succeeding the calendar year during which the FDA approval is received, and the Year 8 annual Territory- wide Units Requirement shall apply to each calendar year thereafter during the Term. For example: if FDA approval is received 6 months into Year 3 then for Year 3, the annual Territory-wide Units Requirement pursuant to the calculation specified above shall be 45,000 Units (90,000 multiplied by .50); and for Year 4, the annual Territory-wide Units Requirement shall be 150,000 Units (the Year 3 Territory-wide Units Requirement as applicable to the first year succeeding the calendar year during which the FDA approval is received). All purchases of Product shall have a documented delivery date assigned to them. For purposes of determining whether or not Distributor has met the annual Territory-wide Units Requirement for any given year, the documented delivery date shall be determinative, not the date of actual delivery, if different." 3 1.6 Annex C-1 of the Agreement shall be deleted in its entirety and replaced by Annex C-1 attached hereto. 1.7 Table 3, (referred to therein as the "Proposed Majority Activities Budget Summary"), comprising part of the Marketing Plan attached as Annex B to the Agreement, and Appendix A also comprising part of the Marketing Plan shall both be amended in the form of Exhibit 1 attached hereto. 1.8 Section 7(b) of the Agreement shall be amended so that the last two sentences of such section shall be deleted in their entirety and replaced by the following: "If for any calendar year during the first three (3) years following the earlier of (i) the First Commercial Sale of the Product by Distribution in any country in the Territory or (ii) January 1, 1998, the actual Average Selling Price per Unit for such calendar year exceeds the Estimated Average Selling Price used for such calendar year, Distributor shall pay to Company within thirty (30) days of the date the calculation of the actual Average Selling Price per Unit is deemed final by the Parties as provided in Section 7(c) of the Agreement, an amount equal to (X) the number of Net Units Sold during such calendar year multiplied by (Y) thirty-five percent (35%) of the difference between the actual Average Selling Price per Unit and the Estimated Average Selling Price used for such calendar year. Thereafter, if for any calendar year the actual Average Selling Price per Unit for such calendar year exceeds the Estimated Average Selling Price used for such calendar year, Distributor shall pay to Company within thirty (30) days of the date the calculation of the actual Average Selling Price per Unit is deemed final by the Parties as provided in Section 7(c) of the Agreement, an amount equal to (X) the number of Net Units Sold during such calendar year multiplied by (Y) forty percent (40%) of the difference between the actual Average Selling Price per Unit and the Estimated Average Selling Price used for such calendar year. If for any calendar year during the first three (3) years following the earlier of (i) the First Commercial Sale of the Product by Distributor in any country in the Territory or (ii) January 1, 1998, the Estimated Average Selling Price exceeds the actual Average Selling Price per Unit, Company shall pay to Distributor within thirty (30) days of the date the calculation of the actual Average Selling Price per Unit is deemed final by the Parties as provided in Section 7(c) of this Agreement an amount equal to (X) the number of Net Units Sold during such calendar year multiplied by (Y) thirty-five percent (35%) of the difference between the Estimated Average Selling Price and the actual Average Selling Price per Unit. Thereafter, if for any calendar year the Estimated Average Selling Price exceeds the actual Average Selling Price per Unit, Company shall pay to Distributor within thirty (30) days of the date the calculation of the actual Average Selling Price per Unit is deemed final by the Parties as provided in Section 7(c) of this Agreement an amount equal to (X) the number of Net Units Sold during such calendar year multiplied by (Y) forty percent (40%) of the difference between the Estimated Average Selling Price and the actual Average Selling Price per Unit." 1.9 The first paragraph of Section 17(b) of the Agreement shall be deleted in its entirety and replaced by the following: 4 "(b) Upon the tenth anniversary of the Effective Date, Distributor may, at Distributor's sole option, choose to extend this Agreement for an additional period of ten (10) years, which such ten (10) years shall be added to the Term for each country in the following regions: 1. "Americas" Region = Canada, U.S., and Puerto Rico 2. "Latin America" Region = Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, Venezuela 3. "Asia" Region = Australia, China, Hong Kong, Indonesia, South Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand 4. "Europe" Region = Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, The Netherlands, Norway, Sweden, Switzerland, United Kingdom 5. "Eastern Europe" Region = Baltic Region (Estonia, Latvia and Lithuania), Balkan Region (Romania, Bulgaria, Albania, Croatia, Slovenia, Bosnia, Macedonia and Serbia), Czech Republic, Hungary, Poland, Russia and other Commonwealth of Independent States (specifically excluding Azerbaijan, Turkmenistan, Kazakhstan, Kirghizistan, Tachcikistan) 6. "Middle East/Africa" Region = Syria, Lebanon, Jordan, Saudi Arabia, UAE/Gulf, Africa, South Africa" SECTION 2. MISCELLANEOUS. 2.1 Except as specifically amended by this Amendment, the Agreement shall remain in full force and effect in accordance with its terms and all references in the Agreement and in this Amendment to the Agreement shall mean the Agreement as amended hereby. 2.2 This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2.3 This Amendment shall be governed by and construed in all respects in accordance with the laws of the State of New York, without giving effect to its choice of law principles. 5 IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly authorized representatives. ANIKA THERAPEUTICS, INC. By: /S/ J. MELVILLE ENGLE ---------------------------- Name: J. Melville Engle Title: Chairman, President, CEO ZIMMER, INC. By: /S/ J. RAYMOND ELLIOTT --------------------------- Name: J. Raymond Elliott Title: President 6 ANNEX C-1
COUNTRIES INCLUDED IN TERRITORY ASIA AMERICAS - ---- -------- Australia Canada China* United States of America Hong Kong Puerto Rico Indonesia Korea, South LATIN AMERICA Malaysia ------------- New Zealand Argentina Philippines Bolivia Singapore Brazil Taiwan Chile Thailand Columbia Costa Rica EUROPE Dominican Republic - ------ Ecuador Austria El Salvador Belgium Guatemala Denmark Guyana Finland Haiti France Honduras Germany Jamaica Greece Mexico Italy Nicaragua Luxembourg Panama Netherlands, The Paraguay Norway Peru Sweden Suriname Switzerland Trinidad and Tobago United Kingdom Uruguay Venezuela
7 EASTERN EUROPE+ - --------------- Baltic Region (Estonia, Latvia and Lithuania) Balkan Region (Romania, Bulgaria, Albania, Croatia, Slovenia, Bosnia, Macedonia and Serbia) Czech Republic Hungary Poland Russia and other Commonwealth of Independent States countries (specifically excluding Azerbaijan, Turkmenistan, Kazakhstan, Kirghizistan and Tachcikistan) MIDDLE EAST/AFRICA+ - ------------------- Syria Lebanon Jordan Saudi Arabia UAE/Gulf Africa South Africa * Subject to the terms and conditions in Section 2(c)(ii) + Distributor Responsible Countries 8 EXHIBIT 1 TABLE #3 AMENDED BUDGET SUMMARY ZIMMER, INC./ANIKA THERAPEUTICS, INC. SECOND AMENDMENT PROPOSAL TO EXCLUSIVE DISTRIBUTION AGREEMENT 3) Proposed Marketing Activities Budget Summary - ----------------------------------------------- a) Table 3 comprising part of the Marketing Plan attached as Annex B to the Agreement, and Appendix A also comprising part of the Marketing Plan shall both be amended in the form of Exhibit 2 as follows:
COUNTRY/ YEAR 1 YEAR 2 YEAR 3 YEAR 4 REGION 12 MO. 12 MO. 12 MO. 12 MO. - -------- ------ ------ ------ ------ Canada/Australia $1,700,000 $ 700,000 $ 1,700,000 TBD United States 10,000 4,900,000 3,880,000 TBD Asia 5,000 10,000 1,000,000 TBD Europe 1,170,000 4,540,000 4,300,000 TBD Latin America 180,000 1,040,000 1,000,000 TBD CE/ME/SA 680,000 700,000 760,000 TBD ---------- ----------- ----------- Total $3,685,000 $11,890,000 $12,640,000 Contract Contingency +/- 5% +/- 15% +/- 20% 0% Adj. Annual Commitment $ 184,280 $ 1,785,500 $ 2,528,000 Proposed Budget All/Shortfalls/Overspend: M $4,485.7
TBD: Budget for Year 4 has not been determined. A proposed budget will be presented to the Steering Committee. All Adjustments will be incorporated into Year 4 Proposal. Budget is Contingent upon Regulatory Approval in All Markets and Countries Identified in Annex C1. EXHIBIT 1 (CONTINUED) AMENDED APPENDIX A ZIMMER, INC./ANIKA THERAPEUTICS SECOND AMENDMENT PROPOSAL TO EXCLUSIVE DISTRIBUTION AGREEMENT b) Amended Appendix A: Field Specialist and Support Personnel
YEAR ONE YEAR TWO PERSONNEL 12 MONTHS 12 MONTHS - --------- --------- --------- (Field Sales Specialists) - ------------------------- Canada 5 5 United States 0 26 Taiwan 1 2 Korea 1 2 Singapore 1 1 Hong Kong 1 1 Australia 1 2 New Zealand TBD Latin America 2 5 Europe 5 24 CE/ME/SA 4 4 Total FSS 21 71 (Support Personnel) - ------------------- Europe: - ------- Product Mgr. 1 1 Sales Specialist 2 4 Sales Director 1 1 Total Europe 4 6 Latin America: Product Mgr. 1 1 Total Support Personn 5 7
Specific Additions are predicated upon receipt of Regulatory Approval in each Country/Region to market ORTHOVISC. Notes: - ------ 1. Budgeted Specialist for the following Markets: Russia, Czech Republic, Poland, Hungary 2. Non-Budgeted: ME/Africa/SA: Local Market distributors to hire Specialists EX-27 3 EX-27
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 8,946,312 5,159,546 1,870,927 (59,000) 6,792,994 23,185,962 8,207,190 (4,802,221) 32,655,996 4,609,731 0 0 0 99,919 25,221,346 25,321,265 2,620,833 2,720,833 1,232,968 1,232,968 2,313,200 0 0 (564,087) 0 (564,087) 0 0 0 (564,087) (.06) (.06)
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