Anika Therapeutics, Inc., J. Melville Engle and Sean F. Moran

SECURITIES EXCHANGE ACT OF 1934
RELEASE NO. 47167 / January 13, 2003

ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE NO. 1699 / January 13, 2003

ADMINISTRATIVE PROCEEDING
File No. 3-11006

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Anika Therapeutics, Inc. ("Anika"), J. Melville Engle ("Engle") and Sean F. Moran ("Moran").

II.

In anticipation of the institution of these proceedings, Respondents Anika, Engle and Moran have submitted Offers of Settlement ("Offers") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and over the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Proceedings, Making Findings, and Imposing Cease-and-Desist Orders Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.

III.

On the basis of this Order and the Respondents' Offers, the Commission finds¹ that:

A. RESPONDENTS AND RELATED PARTY

1. Respondents

a. Anika is a Massachusetts corporation with its headquarters in Woburn, Massachusetts. It manufactures and sells therapeutic products and devices intended to treat bone, cartilage and soft tissue. During all relevant times, Anika's common stock was traded on the NASDAQ national market system and was registered with the Commission pursuant to Section 12(g) of the Exchange Act.

b. Engle, age 52, resides in Napa, California. He was the president and chief executive officer of Anika from September 1996 to June 2001. Engle also served as chairman of Anika from February 1999 to June 2001. He is no longer employed by Anika.

c. Moran, age 44, resides in Norfolk, Massachusetts. He was employed as Anika's chief financial officer from February 1993 until January 2000. In that capacity, he was responsible for, among other things, performing financial and accounting functions relating to both public reporting and internal financial recording. Prior to that, he served as controller of MedChem Products, Inc., Anika's former parent. Moran is a certified public accountant. He is no longer employed by Anika.

2. Related Party

In November 1997, Anika entered into a ten-year exclusive agreement with a distributor (the "Distributor") pursuant to which it received exclusive rights to distribute one of Anika's products, Orthovisc, to end customers in Canada, most of Europe and the United States (the "Agreement"). Pursuant to the Agreement, which was filed with the Commission as an exhibit to Anika's Form SB-2/A on November 10, 1997, the Distributor made up-front payments to Anika of $4 million, was required to purchase at least 30,000 units of Orthovisc annually, and would make future payments of up to $20.5 million provided that Orthovisc received certain regulatory approvals and met enumerated sales milestones ("milestone payments").

B. FACTS

1. Summary

This matter involves Anika's improper recognition of approximately $1.5 million in revenue from sales of its product, Orthovisc, to the Distributor in 1998 and 1999.² J. Melville Engle, Anika's CEO, and Sean Moran, Anika's CFO, caused Anika to prematurely record on its books and records and report in periodic filings with the Commission revenue from three "bill-and-hold" transactions with the Distributor at the time of invoicing and prior to actual shipment and delivery of the product to the Distributor.³ Anika also failed to adequately disclose in its filings with the Commission that approximately $1 million in bill-and-hold sales to the Distributor in 1999 were expressly predicated on Anika's agreement with the Distributor, under which the Distributor would purchase $1 million in Orthovisc in exchange for a $1 million reduction in previously disclosed future potential milestone payments from the Distributor. Further, in press releases issued in July and October 1999, Anika improperly characterized the bill-and-hold sales of Orthovisc to the Distributor as "international sales," when in fact they were not being resold by the Distributor internationally, but were being held in storage by Anika. In March 2000 and again in September 2001, Anika restated its financial statements for the affected periods.

As a result, Anika violated the periodic reporting, books and records, and internal accounting control provisions of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, and Engle and Moran violated Rule 13b2-1 of the Exchange Act and caused Anika's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.

2. Anika Improperly Recognized Revenue From Bill-And-Hold Sales In 1998

Pursuant to the Agreement, the Distributor placed orders with Anika for a total of approximately 15,000 units of Orthovisc in April and July 1998.⁴ In early September 1998, in light of the different labeling and packaging requirements for Orthovisc in various regulatory jurisdictions, Anika recommended to the Distributor that Anika invoice for the approximately 15,000 unit order under Anika's normal payment terms, but that it hold the Distributor's order atAnika's refrigerated facility. Under this arrangement, the Distributor would pay for the invoice within 45 days of invoicing, and Anika would hold the units as unlabeled, unpackaged, filled syringes, until the Distributor desired shipment.

On September 24, 1998, Anika invoiced the Distributor $545,650 for the 15,590 units ordered in April and July 1998. The Distributor paid for the units in November 1998, within the 45 day payment period established by the parties under the Agreement. The 15,590 unit order was not shipped to the Distributor until March 1999, as per the Distributor's request. Anika, however, recorded revenue for this sale on its books and records for the quarter ended September 30, 1998. In its quarterly report for the quarter ended September 30, 1998, filed with the Commission on Form 10-Q, Anika recognized $545,650 from this bill-and-hold sale as revenue for that quarter.⁵ Anika also recognized this revenue in its annual report for the year ended December 31, 1998, filed with the Commission on Form 10-K. Moran made, and Engle approved, the decision to recognize revenue from the transaction during the quarter ended September 30, 1998. Engle and Moran both signed the third quarter 1998 Form 10-Q and 1998 Form 10-K.

a. Anika's Accounting Treatment of the 1998 Bill-and-Hold Sale Failed to Comply with GAAP

As the Commission stated in Sunbeam Corporation, Exchange Act Rel. No. 44305, Accounting and Auditing Enforcement Rel. No. 1393 (May 15, 2001), 2001 SEC LEXIS 931, "[b]ill and hold sales are unusual transactions subject to stringent accounting criteria." The Commission has previously articulated these criteria in Stewart Parness, Exchange Act Rel. No. 23507, Accounting and Auditing Enforcement Rel. No. 108 (August 5, 1986), 1986 SEC LEXIS 1051. Anika's September 1998 bill-and-hold transaction with the Distributor did not satisfy all of the Parness criteria. As a result, the transaction failed to comply with GAAP and should not have been recorded or recognized as revenue in the quarter ended September 30, 1998.⁶ Anika's transaction with the Distributor failed to meet the following criteria necessary for revenue recognition:

• The risks of ownership had not yet passed to the buyer. Although the Distributor took title to the inventory at the time of invoicing and had no right of return except for defective product, the full risk of ownership had not yet passed to the buyer because Anika agreed that it would bear responsibility for any loss of product during packaging, a process that the Distributor inventory had yet to undergo;

• At the time of the revenue recognition, Anika and the Distributor had not agreed to a fixed schedule for delivery of the goods;

• Anika retained specific performance obligations such that the earnings process was not complete. The labeling, packaging and sterilization process that the Orthovisc still needed to undergo consisted of approximately 20% of the total manufacturing cost of the product;

• Anika failed to properly segregate the Distributor's Orthovisc units from other stored units of Orthovisc. Tubs labeled with the Distributor's name, holding the Distributor's 15,590 units, were not consolidated, but rather were located throughout Anika's refrigerated storage facility and commingled with other tubs. In addition, the Orthovisc units that made up the transaction were not used to fill that particular order, but rather were either shipped to another Anika customer or were used to fill other separate orders from the Distributor; and

• The product was not complete and ready for shipment at the time Anika recognized the revenue. Anika had not yet labeled, packaged and sterilized the product in its packaging.

Another Parness factor weighing against Anika's recognition of the revenue from this transaction was under the Agreement, that Anika bore the risk of loss in the event of a decline in the market value of the goods. Under the Agreement, Anika was required to refund money to the Distributor if the parties' "estimated selling price" to end customers was higher than the actual selling price. Anika was ultimately required to refund the Distributor nearly $30,000 for the sales initially recorded in 1998.

b. Anika Deviated from its Written Revenue Recognition Policy

When it recognized revenue from the above bill-and-hold transaction in the third quarter of 1998, Anika contradicted the revenue recognition policy set forth in both its 1997 and 1998 Forms 10-K. In the 1997 Form 10-K, the policy stated in relevant part that: "[t]he Company recognizes revenue on product sales when the products are shipped and the customer takes ownership." In the 1998 Form 10-K, the policy stated in relevant part: "Product revenue is recognized upon shipment of commercial product and represents sales of products, Hyvisc and Orthovisc." Anika did not ship the product from the third quarter of 1998 bill-and-holdtransaction to the Distributor's facility until March 1999, almost six months after it had recognized revenue from the sale. Nonetheless, the company neither qualified the revenue recognition policy in its 1998 Form 10-K nor included information in its Commission filings about its deviation from its stated revenue recognition policy. Both Engle and Moran were aware of the written revenue recognition policy at the time of Anika's recognition of revenue from the bill-and-hold transaction.

3. Anika Improperly Recognized Revenue from Bill-and-Hold Sales in 1999

Due to delays in launching Orthovisc in Europe in 1998, the Distributor was, in early 1999, still storing approximately 58,000 of the 60,000 units of Orthovisc it had already purchased from Anika.⁷ Despite this level of inventory, in late April 1999, the Distributor proposed to Engle that it buy 41,100 additional units of Orthovisc from Anika in the second and third quarters of 1999, or approximately $1 million in inventory, in exchange for a $1 million reduction in potential future milestone payments by the Distributor to Anika. The additional units were above and beyond the contractually required annual minimum purchase of 30,000 units. Engle, after consulting with Moran and other Anika officials, agreed to this proposal. The additional units ordered were divided into two invoices, one on June 30, 1999, which the Distributor paid in August 1999, and the other on September 30, 1999, which the Distributor paid in November 1999. In a May 20, 1999 letter, the Distributor requested that the 41,100 additional units be treated as bill-and-hold transactions.

In its quarterly report for the period ended June 30, 1999, filed with the Commission on Form 10-Q, Anika prematurely recognized $365,250 from the June 30, 1999 bill-and-hold transaction of 15,000 units as revenue for that quarter. In its quarterly report for the period ended September 30, 1999, filed with the Commission on Form 10-Q, Anika prematurely recognized $633,100 from the September 30, 1999 bill-and-hold transaction of 26,000 units as revenue for that quarter. Anika also recorded revenue from those transactions on its books and records for the quarters ended June 30, 1999 and September 30, 1999. Once again, Moran made, and Engle approved, the decision to recognize the revenue from the bill-and-hold transactions before the product was shipped to the Distributor. Both Engle and Moran signed the second and third quarter 1999 Forms 10-Q.

Like the third quarter of 1998 bill-and-hold transaction, these 1999 bill-and-hold transactions did not satisfy all of the Parness criteria and therefore failed to comply with GAAP. As with the prior transaction, the risk of loss for the product had not yet passed to the customer. In addition, Anika and the Distributor had not agreed to a fixed schedule for delivery of the goods to the Distributor. Indeed, few of the units ordered were ever delivered to the Distributor. Of the approximately 71,000 units that the Distributor purchased from Anika in 1999, only about 1,100 were ever shipped to the Distributor. Further, Anika had not completed the "earnings process" for these units. The remaining manufacturing process constituted approximately 20% of the total cost of the product. Anika also failed to properly segregate the inventory. Finally, as with the 1998 transaction, the product sold on a bill-and-hold basis in 1999 was not complete and ready for shipment at the time of revenue recognition because Anika had not yet labeled, packaged and sterilized it in its packaging.

By recognizing revenue from the June 1999 bill-and-hold transaction in the second quarter of 1999, Anika again contradicted the revenue recognition policy set forth in its 1998 Form 10-K. The company again failed to include any information in its Commission filing in the second quarter of 1999 about its deviation from this stated revenue recognition policy.

4. Anika Failed to Adequately Disclose Its Arrangementwith the Distributor For Additional 1999 Sales

In various filings with the Commission through at least 1999, Anika had disclosed that, under the Agreement with the Distributor, Anika "has the potential to receive additional payments aggregating up to $20.5 million upon the achievement of certain regulatory approvals and enumerated sales milestones." As explained above, in early 1999, Anika and the Distributor entered into an arrangement pursuant to which the Distributor would purchase $1 million in Orthovisc above the minimum amount stipulated in the Agreement in 1999, and in exchange, Anika would provide a $1 million reduction in potential future milestone payments from the Distributor to Anika. In its Form 10-Q for the second quarter of 1999, Anika disclosed that the amount of the milestone payments it could potentially receive from the Distributor was reduced to $19.5 million. Nevertheless, Anika failed to adequately disclose in any of its filings with the Commission or in its press releases announcing financial results that the $1 million in additional sales to the Distributor in the second and third quarters of 1999 resulted from giving up the rights to $1 million in potential revenues in the form of future milestone payments. Both Engle and Moran were aware that this was a key component of the Distributor's agreement to purchase additional Orthovisc during 1999.

The 1999 bill and hold sale of an additional 41,000 units of Orthovisc to the Distributor in exchange for giving up a future milestone payment was also material to Anika's financial results. The sale of 15,000 units recognized in the second quarter of 1999 totaled $365,250, or approximately 10% of Anika's reported quarterly revenues. The sale of the 26,000 units recognized in the third quarter of 1999 totaled $633,100, or approximately 18% of Anika's reported quarterly revenues.

5. Anika Inaccurately Stated that the 1999 Bill-and-Hold Transactions Were International Sales

In Anika's announcement of its second and third quarter 1999 financial results in press releases dated July 22, 1999 and October 21, 1999, the company characterized Orthovisc sales to the Distributor in those quarters as "international sales." Anika characterized these sales as international despite knowing that the Distributor's sales of Orthovisc in the international market were poor, and that most of the units of Orthovisc that Anika sold to the Distributor during this time were being held in storage at Anika's facilities. Few of the units were ever sold in the international market.

6. Anika's Restatements on March 31, 2000 and September 5, 2001⁸

On March 31, 2000, Anika restated its earnings figures for 1998 and the first three quarters of 1999 in its 1999 Form 10-K.⁹ Specifically, Anika restated results by reducing revenues from (1) the $545,650 bill-and-hold transaction Anika entered into with the Distributor during the third quarter of 1998, the $365,250 bill-and-hold transaction in the second quarter of 1999, and the $633,100 bill-and-hold transaction in the third quarter of 1999, and (2) its recognition of the full per unit sale price of Orthovisc to the Distributor, without taking into account the possibility of Anika having to refund some of the sales price to the Distributor.¹⁰ The restatement indicated that Anika would recognize revenue for sales of Orthovisc at the time of shipment to the Distributor and based on the minimum per unit price under the Agreement. According to the restatement, Anika overstated revenues for the three quarters in which it recognized revenue from the bill-and-hold transactions by $587,230, or 22.6% (third quarter of 1998), $216,929, or 6.1% (second quarter of 1999), and $486,287, or 16.2% (third quarter of 1999). Over 90% of the overstated revenues in those quarters were attributable to the bill-and-hold transactions. Anika also overstated net income for those quarters by $363,233, or 96.1% (third quarter of 1998), $9,010, or 2.3% (second quarter of 1999), and $97,067, which resulted in a change from net income of $4,186 to a net loss of $92,881 (third quarter of 1999).

Because the first restatement improperly accounted for the September 1998 bill-and-hold transaction, Anika had to restate its earnings from that transaction for a second time, on September 5, 2001. In its 1999 Form 10-K, which contained the first restatement and was signed by Engle, Anika clarified its revenue recognition policy with respect to sales to the Distributor as follows: "Anika had also recognized revenue in 1998 and the first three quarters of 1999 for Orthovisc which was held in its refrigerators at [the Distributor's] request. Under the Company'srevised revenue recognition policy, this revenue will be recorded when the Orthovisc is shipped to [the Distributor]." However, the restatement improperly moved the revenue from the third quarter of 1998 bill-and-hold transaction into the fourth quarter of 1998. In fact, under GAAP and pursuant to Anika's clarified revenue recognition policy described in the first restatement, revenue from that bill-and-hold transaction should have been recognized in the first quarter of 1999, when the product was actually shipped and delivered to the Distributor. Thus, Anika's annual report for the period ended December 31, 1999, filed with the Commission on Form 10-K, contained inaccuracies concerning Anika's revenue for 1998 and 1999.

C. LEGAL ANALYSIS

1. Anika Violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 Thereunder

Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 require issuers of registered securities to file annual and quarterly reports with the Commission. It is implicit in this requirement that the information provided be accurate. See SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975) (filing misleading periodic 13(a) reports violates the federal securities laws); SEC v. IMC International, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974) (Exchange Act reporting provisions are satisfied only by filing complete, accurate reports). Similarly, Regulation S-X requires that financial statements filed with the Commission pursuant to Section 13(a) of the Exchange Act be prepared in accordance with GAAP. See Peritus Software Services, Inc., Exchange Act Rel. No. 42673 (April 13, 2000), 2000 SEC LEXIS 724. Otherwise, such statements will be presumed to be misleading or inaccurate. In addition, Exchange Act Rule 12b-20 requires that these periodic reports contain all information necessary to ensure that statements made in them are not materially misleading. Finally, pursuant to Regulation S-K, the MD&A section in quarterly reports filed with the Commission must disclose "any material changes in the registrant's results of operations . . . with respect to that fiscal quarter and the corresponding fiscal quarter in the preceding fiscal year." Regulation S-K, Item 303(b)(2).¹¹ No showing of scienter is necessary to establish a violation of Section 13(a) or Rule 12b-20. See SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979); SEC v. Wills, 472 F. Supp.1250, 1268 (D.D.C. 1978).

Anika's recognition of revenue from the three bill-and-hold transactions prior to shipment and delivery of the product violated GAAP and contradicted the plain language of its revenue recognition policy as disclosed in filings with the Commission. As a result of Anika's premature recognition of revenue, its Forms 10-K for the years ended December 31, 1998 and December 31, 1999 and its Forms 10-Q for the quarters ended September 30, 1998, July 31, 1999, andSeptember 30, 1999 materially overstated the company's revenues. Anika also failed to adequately disclose in its MD&A or elsewhere in its Commission filings that the additional sale of $1 million of Orthovisc it made to the Distributor in 1999 only resulted from its agreement to give up $1 million in potential future milestone revenues, and inaccurately stated that certain sales of Orthovisc to the Distributor in 1999 were international sales. Accordingly, the annual and quarterly reports discussed above were inaccurate, and Anika violated Section 13(a) of the Exchange Act and Rules12b-20, 13a-1, and 13a-13 thereunder.

2. Anika Violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act

Section 13(b)(2)(A) of the Exchange Act states in pertinent part that every reporting company must make and keep books, records and accounts that accurately and fairly reflect the issuer's transactions. Section 13(b)(2)(B) requires the issuer to establish and maintain a system of internal controls that provides reasonable assurances that its transactions are recorded and financial statements are prepared in conformity with GAAP. Sections 13(b)(2)(A) and 13(b)(2)(B) do not require a showing of scienter. SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 751 (N.D. Ga. 1983).

Anika violated Section 13(b)(2)(A) by failing to maintain accurate records of its revenues and net income. The company's books and records reflected Anika's premature recording of revenues from the bill-and-hold transactions that occurred in 1998 and 1999. In addition, Anika violated Section 13(b)(2)(B) by failing to implement procedures reasonably designed to prevent its premature recognition of revenue from the bill-and-hold transactions. Anika's internal controls failed to provide reasonable assurances that its transactions would be recorded and its financial statements prepared in conformity with GAAP. Its internal controls also failed to prevent Anika from recognizing revenue in contravention of its revenue recognition policy.

3. Moran Violated Rule 13b2-1 of the Exchange Act and Caused Anika's Violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 Thereunder

Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or causing the falsification of any books, records, or accounts subject to Section 13(b)(2)(A). This provision permits the Commission to address conduct that undermines the integrity of the books, records and internal controls of an issuer that are integral to the issuer's ability to state accurately its financial results in public filings. See SEC v. Larry Biggs, Jr., et al., Litigation Rel. No. 17084 (August 1, 2001), 2001 SEC LEXIS 1535(officers of company who knew that revenue reported in filings did not conform with GAAP violated, inter alia, Rule 13b2-1). Moran violated Rule 13b2-1 by causing Anika to prematurely recognize revenue with respect to the bill-and-hold transactions in the quarters ended September 30, 1998, June 30, 1999, and September 30, 1999, and the year ended December 31, 1998, when he knew or should have known that the recognition of revenue from the transactions failed to satisfy GAAP. He also knew or should have known that Anika's recognition of revenue in the third quarter of 1998 and the secondquarter of 1999 was contrary to Anika's revenue recognition policy.

Moran also caused Anika's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Moran made the decision to record and recognize revenue from the bill-and-hold transactions in the third quarter of 1998 and the second and third quarters of 1999 on Anika's books and records and in Anika's periodic reports filed with the Commission. Because recording and recognizing revenue from those transactions did not comply with GAAP, Moran caused Anika to keep inaccurate books and records and file misleading periodic reports with the Commission. Moran also approved the recognition and recording of the bill-and-hold revenue despite the plain language of Anika's revenue recognition policy, which stated that such revenue would not be recognized until shipment of the product. As CFO, Moran was responsible for ensuring that Anika's internal controls were reasonably designed to prevent improper recognition of revenue. Moran failed to ensure that proper internal controls were in place to prevent Anika from prematurely recognizing revenue from the bill-and-hold transactions. Moran also failed to ensure that Anika adequately disclosed in its Commission filings that the additional $1 million sale of Orthovisc to the Distributor in 1999 was a direct result of Anika's agreement to give up $1 million in potential future revenues.

4. Engle Violated Rule 13b2-1 of the Exchange Act and Caused Anika's Violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 Thereunder

As discussed above, Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or causing the falsification of any books, records, or accounts subject to Section 13(b)(2)(A). Engle violated Rule 13b2-1 by causing Anika to prematurely recognize revenue with respect to the bill-and-hold transactions in the quarters ended September 30, 1998, June 30, 1999, and September 30, 1999, and the year ended December 31, 1998, when he knew or should have known that the recognition of revenue from the transactions failed to satisfy GAAP. He also knew or should have known that Anika's recognition of revenue in the third quarter of 1998, the second quarter of 1999 and in its restatement was contrary to Anika's revenue recognition policy.

Engle also caused Anika's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Engle approved Moran's decision to record and recognize revenue from the bill-and-hold transactions in the third quarter of 1998 and the second and third quarters of 1999 on Anika's books and records and in Anika's periodic Commission filings. Engle also approved Anika's subsequent improper recognition of revenue from the September 1998 bill-and-hold transaction in its March 2000 restatement and in its books and records. Recording and recognizing revenue from those transactions did not comply with GAAP, and with respect to the third quarter of 1998, second quarter of 1999 and the March 2000 restatement, directly contradicted Anika's revenue recognition policy. Engle's involvement in approving Anika's improper accounting treatment demonstrates that he retainedresponsibility for Anika's accounting and financial functions. Engle's failure to ensure that proper internal controls were in place to prevent the improper recognition of revenue from bill-and-hold transactions resulted in Anika's premature recognition of revenue and its failure to comply with its own revenue recognition policy. Moreover, despite his personal involvement in the negotiation of the agreement that led to the additional $1 million sale of Orthovisc to the Distributor in 1999, Engle failed to ensure that Anika adequately disclosed in its Commission filings that the $1 million sale was a direct result of Anika's agreement to give up $1 million in potential revenues in the form of future milestone payments.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in the Respondents' Offers.

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that:

A. Respondent Anika shall cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.

B. Respondent Engle shall cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder and from committing or causing any Exchange Act violations and any future violations of Rule 13b2-1 thereunder.

C. Respondent Moran shall cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder and from committing or causing any Exchange Act violations and any future violations of Rule 13b2-1 thereunder.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

¹ The findings herein are not binding on anyone other than Respondents Anika, Engle and Moran.

² Orthovisc is a treatment for osteoarthritis that is manufactured in a liquid form and placed into syringes for injection into the knee. The product must be refrigerated during and after the manufacturing process.

³ Generally, a bill-and-hold transaction is a practice whereby a customer agrees to purchase goods and the seller invoices the customer, but the seller retains physical possession until a later delivery date. There are very limited circumstances under generally accepted accounting principles ("GAAP") that permit a seller to recognize revenue from a bill-and-hold transaction prior to shipping the goods, as discussed in Section 2(a), and Anika did not satisfy all of the necessary criteria for revenue recognition for its bill-and-hold transactions.

⁴ The Distributor began selling Orthovisc in Canada in February 1998 and in parts of western Europe in February 1999. Orthovisc has yet to receive Food and Drug Administration approval for sale in the United States. As a result, the Distributor never sold Orthovisc in the United States. In November 2000, the Distributor terminated the Agreement.

⁵ In addition, this $545,650 revenue figure for the bill-and-hold transaction in the third quarter of 1998 inappropriately assumed a purchase price of $35.00 per unit of Orthovisc, which did not reflect the possibility that Anika might have had to refund a portion of the purchase price if the actual selling price to end customers was lower than expected. The Agreement called for the Distributor to pay Anika 35% of Orthovisc's "estimated selling price" to end customers. Anika and the Distributor agreed that the initial "estimated selling price" to end customers would be $100 per unit, which required the Distributor to pay Anika $35 per unit in 1998. The Agreement also stated that the minimum per unit price that the Distributor would pay Anika was $22.00 or, if both parties agreed, as low as $18.00 per unit. If the Distributor sold Orthovisc to end customers at a price lower than the parties' "estimated selling price," Anika was required to refund the difference to the Distributor at the end of the year. Indeed, Anika was later required to refund nearly $30,000 to the Distributor based on a purchase price of $24.35 per unit.

⁶See Statement of Financial Accounting Concepts No. 5, paragraphs 83 and 84.

⁷ The Distributor's sales to end customers in 1998 and 1999 were extremely low. Of the approximately 130,000 units of Orthovisc it purchased from Anika during this period, the Distributor sold only approximately 17,000 units to end customers. The remaining units were destroyed, and Anika retained the purchase price paid by the Distributor for such units.

⁸ Moran left Anika in early 2000 to take other employment and was not involved in the two restatements.

⁹ Along with the restatement, Anika changed its method for recognizing nonrefundable up-front payments to conform with the guidance issued in December 1999 in SEC Staff Accounting Bulletin 101. Anika had previously recognized $4 million in such payments upon receipt. When the company filed its restated numbers in its 1999 Form 10-K, Anika began recording the revenue on a pro-rata basis over the life of the Agreement and recorded a $3.6 million charge in the first quarter of 1999 to reflect the cumulative effect of the change.

¹⁰ The revenue that was restated was subsequently recognized as revenue by Anika after the Distributor terminated the Agreement.

¹¹ Regulation S-K also provides that the discussion of material changes in results of operations during the quarter "shall identify any significant elements of the registrant's income or loss from continuing operations which do not arise from or are not necessarily representative of the registrant's ongoing business." Regulation S-K, Instruction No. 4 to Paragraph 303(b).