-----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, Kfte6xy3Y6glJar792jOy4v2BS1FUJqtn6tvBGQbC2a7LiumfYdFqxDgIgSnlEyU Y4RXbOxWRnzROsRMli/H7A== 0000912057-01-528770.txt : 20010816 0000912057-01-528770.hdr.sgml : 20010816 ACCESSION NUMBER: 0000912057-01-528770 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 001-14027 FILM NUMBER: 1714282 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 a2057054z10-q.txt FORM 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 JUNE 30, 2001 / / 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 Identification No.) Incorporation or Organization) 236 WEST CUMMINGS PARK, 01801 WOBURN, MASSACHUSETTS (Zip Code) (Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 932-6616 Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. At August 6, 2001 there were issued and outstanding 9,934,280 shares of Common Stock, par value $.01 per share. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 8,263,944 $ 8,265,936 Marketable securities..................................... 7,421,823 10,039,849 Accounts receivable, net of allowance for doubtful accounts of $124,000.................................... 1,206,148 1,692,457 Inventories............................................... 4,624,673 4,737,645 Prepaid expenses and other current assets................. 475,067 612,890 ------------ ----------- Total current assets.................................... 21,991,655 25,348,777 Property and equipment, at cost........................... 9,247,934 8,621,579 Less: accumulated depreciation............................ (5,969,815) (5,498,455) ------------ ----------- 3,278,119 3,123,124 Long term deposits........................................ 118,660 124,600 Notes receivable from officers............................ 253,000 382,000 ------------ ----------- Total assets.............................................. $ 25,641,434 $28,978,501 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,651,609 $ 870,502 Accrued expenses.......................................... 1,881,041 1,395,677 Deferred revenue.......................................... 237,657 -- ------------ ----------- Total current liabilities............................... 3,770,307 2,266,179 ------------ ----------- Commitments and contingencies (Note 9) Stockholders' equity: Redeemable convertible preferred stock, $.01 par value authorized 750,000 shares, no shares issued and outstanding............................................. -- -- Undesignated preferred stock, $.01 par value authorized 1,250,000 shares, no shares issued and outstanding...... -- -- Common stock, $.01 par value: authorized 30,000,000 shares; Issued 9,991,943 shares in 2001 and 2000........ 99,919 99,919 Additional paid-in capital................................ 31,640,232 31,735,660 Treasury stock (at cost, 57,663 shares)................... (279,756) (279,756) Deferred compensation..................................... (21,477) (244,549) Accumulated deficit....................................... (9,567,791) (4,598,952) ------------ ----------- Total stockholders' equity.............................. 21,871,127 26,712,322 ------------ ----------- Total liabilities and stockholder's equity.................. $ 25,641,434 $28,978,501 ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 2 ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 ----------- ---------- ----------- ---------- Product revenue.............................. $ 2,919,034 $3,668,765 $ 5,097,652 $6,289,598 Licensing revenue............................ -- 100,000 -- 200,000 ----------- ---------- ----------- ---------- Total revenue.............................. 2,919,034 3,768,765 5,097,652 6,489,598 Cost of product revenue...................... 2,109,049 2,422,617 4,077,997 3,655,585 ----------- ---------- ----------- ---------- Gross profit............................. 809,985 1,346,148 1,019,655 2,834,013 Operating expenses: Research & development..................... 921,325 907,227 2,269,195 2,220,964 Selling, general & administrative.......... 1,858,790 987,151 3,247,364 1,986,613 Litigation settlement costs................ 886,480 -- 950,716 -- ----------- ---------- ----------- ---------- Total operating expenses..................... 3,666,595 1,894,378 6,467,275 4,207,577 Loss from operations......................... (2,856,610) (548,230) (5,447,620) (1,373,564) Interest income............................ 206,202 329,741 478,781 590,989 ----------- ---------- ----------- ---------- Net loss................................... $(2,650,408) $ (218,489) $(4,968,839) $ (782,575) =========== ========== =========== ========== Basic and diluted net loss per common share...................................... $ (0.27) $ (0.02) $ (0.50) $ (0.08) =========== ========== =========== ========== Shares used for computing basic and diluted net loss per common share.................. 9,934,280 9,918,842 9,934,280 9,847,476 =========== ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 3 ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED)
2001 2000 ----------- ----------- Cash flows from operating activities: Net loss.................................................... $(4,968,839) $ (782,575) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization............................. 471,360 444,945 Amortization of deferred compensation..................... 127,645 193,039 Forgiveness of debt on officer loans...................... 129,000 -- Changes in operating assets and liabilities: Accounts receivable..................................... 486,309 (9,177) Inventories............................................. 112,972 (1,740,712) Prepaid expenses and other current assets............... 137,823 235,312 Accounts payable........................................ 781,107 680,302 Accrued expenses........................................ 485,363 (136,048) Deferred revenue........................................ 237,657 (32,537) ----------- ----------- Net cash used for operating activities...................... (1,999,603) (1,147,451) ----------- ----------- Cash flows from investing activities: Proceeds from sale of held-to-maturity marketable securities.............................................. 12,001,865 -- Purchase of held-to-maturity marketable securities........ (9,383,839) 61,070 Purchase of property and equipment........................ (626,355) (380,296) Decrease in long term deposits............................ 5,940 -- ----------- ----------- Net cash provided by (used for) investing activities........ 1,997,611 (319,226) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock options and warrants...... -- 495,402 ----------- ----------- Net cash provided by financing activities................... -- 495,402 ----------- ----------- Decrease in cash and cash equivalents....................... (1,992) (971,275) Cash and cash equivalents at beginning of period............ 8,265,936 6,440,705 ----------- ----------- Cash and cash equivalents at end of period.................. $ 8,263,944 $ 5,469,430 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. NATURE OF BUSINESS Anika Therapeutics, Inc. ("Anika" or the "Company") develops, manufactures and commercializes therapeutic products and devices intended to promote the protection and healing of bone, cartilage and soft tissue. These products are based on hyaluronic acid ("HA"), a naturally occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the structural integrity of tissues, and the transport of molecules to and within cells. The Company's currently marketed products consist of ORTHOVISC(R), which is an HA product used in the treatment of some forms of osteoarthritis in humans, and HYVISC(R), which is an HA product used in the treatment of equine osteoarthritis. ORTHOVISC(R) is currently approved for sale and is being marketed in Canada, parts of Europe, Turkey, and Israel. In the U.S., ORTHOVISC(R) is currently limited to investigational use. The Company manufactures AMVISC(R) and AMVISC(R) Plus for Bausch & Lomb Surgical, which are HA products used as viscoelastic supplements in ophthalmic surgery. STAARVISC(R)II, an injectable ophthalmic viscoelastic, is produced for STAAR Surgical Company. 2. BASIS OF PRESENTATION The accompanying consolidated 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 consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2001, the results of operations for the three and six months ended June 30, 2001 and 2000 and the cash flows for the six months ended June 30, 2001 and 2000. The accompanying consolidated 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, 2000, as the same will be amended to reflect the restatement referred to in Note 10 herein. The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. (See "Risk Factors and Certain Factors Affecting Future Operating Results".) 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. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika Securities Corporation and Anika Therapeutics UK, Ltd. All intercompany transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consists of cash and investments with original maturities of 90 days or less. 5 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MARKETABLE SECURITIES The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Marketable securities consist of commercial paper with maturities within twelve months of the balance sheet date. The Company classifies these marketable securities as held to maturity, and accordingly they are carried at amortized costs. Aggregate fair value, amortized cost and average maturity for marketable securities held at June 30, 2001 and December 31, 2000 are as follows:
JUNE 30, 2001 ---------------------------------------- GROSS AMORTIZED UNREALIZED COST HOLDING GAIN FAIR VALUE ----------- ------------ ----------- Commercial Paper (weighted average maturity of 2.1 months).............. $ 7,421,823 $114,099 $ 7,535,922 =========== ======== ===========
DECEMBER 31, 2000 ---------------------------------------- GROSS AMORTIZED UNREALIZED COST HOLDING GAIN FAIR VALUE ----------- ------------ ----------- Commercial Paper (weighted average maturity of 3.4 months).............. $10,039,849 $ 82,384 $10,122,233 =========== ======== ===========
During the six months ending June 30, 2001, securities classified as held to maturity with an amortized cost aggregating $12,001,865, including interest and realized gains of $310,020 matured. 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, marketable securities, accounts receivable, notes receivable from officers and accounts payable. The estimated fair values of the Company's other financial instruments approximate their carrying values. REVENUE RECOGNITION Product revenue is derived from the sales of AMVISC(R) products, HYVISC(R) and ORTHOVISC(R). ORTHOVISC(R) is sold through several distribution arrangements as well as two outsource order processing arrangements ("logistic agents"). Product revenue is recognized upon shipment to the customer as long as there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collection of the related receivable is probable. Amounts billed or collected prior to recognition of revenue is classified as deferred revenue. Sales of product through third party logistics agents in certain markets are recognized in revenue upon shipment by the logistics agent to the customer. 6 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 Shorter of estimated useful life or life Leasehold improvements.................. of lease
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF The Company follows the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. During the six months ended June 30, 2001, the Company did not identify any impairments. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. 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. REPORTING COMPREHENSIVE INCOME SFAS No. 130, REPORTING COMPREHENSIVE INCOME establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity including such items as unrealized holding gains/losses on securities, foreign currency translation adjustments and minimum pension liability adjustments. The Company had no other items of comprehensive income for the three and six months ended June 30, 2001 and 2000 except for its reported net loss. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-makers, in making decisions regarding how to allocate resources and assess performance. The Company's chief decision-making group consists of two individuals: the chief executive officer and chief financial officer, and the president and chief operating officer. Based on the criteria established by SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, the Company has one reportable operating segment, the results of which are disclosed in the accompanying financial 7 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) statements. Substantially all of the operations and assets of the Company have been derived from and are located in the United States. Revenues by geographic location in total and as a percentage of total revenues are as follows for the three and six months ended June 30, 2001 and 2000, respectively:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------------------- ------------------------------------------------- 2001 2000 2001 2000 ----------------------- ----------------------- ----------------------- ----------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF GEOGRAPHIC LOCATION: REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE - -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- United States........ $1,955,793 67.00% $2,531,665 67.17% $3,396,275 66.62% $4,732,998 72.93% Middle East.......... -- 0.00% 995,000 26.40% 11,950 0.23% 1,512,500 23.31% Other/Europe......... 963,241 33.00% 242,100 6.42% 1,689,427 33.14% 244,100 3.76% ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total.............. $2,919,034 100.00% $3,768,765 100.00% $5,097,652 100.00% $6,489,598 100.00% ========== ====== ========== ====== ========== ====== ========== ======
Since early 2001, sales of product for the Turkish market have been made to a European-based entity and have accordingly been classified in the "Other/Europe" category since that time.
PERCENT OF PRODUCT REVENUE PERCENT OF PRODUCT REVENUE THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ AMVISC(R): Bausch & Lomb............................ 50.9% 50.8% 56.9% 59.5% ORTHOVISC(R): Pharmaren AG (Biomeks in Year 2000)...... 23.7% 27.1% 22.1% 21.6% Zimmer................................... 0.0% 12.1% 0.0% 8.5% Other.................................... 9.0% 0.0% 11.5% 0.0% ---- ---- ---- ---- 83.6% 90.0% 90.5% 89.6% ==== ==== ==== ====
4. EARNINGS PER SHARE The Company reports earnings per share in accordance with SFAS No. 128, EARNINGS PER SHARE, which 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, dilutive net loss per share is equal to basic net loss per share. Accordingly, the dilutive effect of outstanding options totaling 416,500 and 1,255,809, respectively at June 30, 2001 and 2000, are excluded from the calculation of diluted weighted average shares outstanding because to include them would have been antidilutive for the periods presented. 8 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. INVENTORIES Inventories consist of the following:
JUNE 30, DECEMBER 31, 2001 2000 ---------- ------------ Raw materials....................................... $1,322,072 $1,386,504 Work in-process 2,822,997 3,169,358 Finished goods...................................... 479,604 181,783 ---------- ---------- Total............................................... $4,624,673 $4,737,645 ========== ==========
Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead. 6. PROPERTY & EQUIPMENT Property and equipment is stated at cost and consists of the following:
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ Machinery and equipment............................ $ 5,723,630 $ 6,071,812 Furniture and fixtures............................. 695,300 670,923 Leasehold improvements............................. 2,829,004 1,878,844 ----------- ----------- 9,247,934 8,621,579 ----------- ----------- Less accumulated depreciation...................... (5,969,815) (5,498,455) ----------- ----------- Total.............................................. $ 3,278,119 $ 3,123,124 =========== ===========
Costs of $835,000 for a clean room under construction had previously been included in machinery and equipment. This amount was reclassified to leasehold improvements upon its completion in the first quarter of Q1 2001. 7. NOTES RECEIVABLE FROM OFFICERS Notes receivable from officers of $253,000 consists of loans made to one officer and two former officers. The loan amounts are generally due at the earlier of the end of five years from the date of the note or at the termination of the officers' employment. The notes receivable from the former officers are secured by mortgages on their primary residences. Interest accrues at annual rates between 5.54% to 6.22% and is payable monthly over the term of the loans. In connection with the departure of two former officers in June 2001, notes totaling $129,000 were forgiven. In addition, the maturity of a note in the amount of $75,000 to the Company's former chief executive officer, which is secured by a mortgage on his primary residence, was extended to the earlier of the sale of such residence or March 31, 2002. 9 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 8. LICENSING AND DISTRIBUTION AGREEMENT In July 2000, the Company entered into a seven-year supply agreement (the "BLS Agreement") with Bausch & Lomb Surgical, a unit of Bausch & Lomb. Under the terms of the BLS Agreement, effective January 1, 2001, the Company became Bausch & Lomb's exclusive provider of AMVISC(R) and AMVISC(R) Plus, ophthalmic viscoelastic products, in the U.S. and international markets. The BLS Agreement expires December 31, 2007, superceding an existing supply contract with Bausch & Lomb Surgical that was set to expire December 31, 2001. The BLS Agreement is subject to early termination and/or reversion to a non-exclusive basis under certain circumstances. The BLS Agreement lifts contractual restrictions on the Company's sales of certain ophthalmic products to other companies, subject to payment of royalties to Bausch & Lomb by the Company. In exchange, the Company agreed to a reduction in unit selling prices effective April 1, 2000, and the elimination of minimum unit purchase obligations by BLS. Under the terms of the agreement, the price for units sold in a calendar year is dependent on total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in the six months ended June 30, 2001 are subject to possible retroactive price adjustments when the annual unit volume becomes known. In accordance with the Company's revenue recognition policy, any amounts received in excess of revenue recognized is recorded as deferred revenue. At June 30, 2001, the deferred revenue amounted to $237,657. 9. LEGAL MATTERS SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. The SEC has issued a formal order of investigation and has required the Company to provide information in connection with certain revenue recognition matters. The Company has been cooperating fully. These matters, relating to the Company's historical accounting for and disclosures concerning sales of ORTHOVISC(R) under a long-term supply and distribution agreement with Zimmer, were also the subject of the Company's March 15, 2000 disclosure concerning an informal SEC inquiry and the restatement of results for 1998 and the first three quarters of 1999. On August 14, 2001, as a result of the SEC's on-going investigation, the Company, in conjunction with its independent auditors, determined to again restate its financial results for the fourth quarter of 1998 and the first quarter of 1999 (as discussed in Note 10 herein). The Company is not in a position to predict the probable outcome of this matter or its potential impact on the Company's business or operations. PUTATIVE CLASS ACTION COMPLAINTS. Three putative class action complaints have been filed against the Company, J. Melville Engle, the Company's former chief executive officer, and Sean Moran, the Company's former chief financial officer, in the United States District Court for the District of Massachusetts (the "Court") on behalf of all purchasers of the Company's shares between April 15, 1998 and May 30, 2000 (the "Class"). The first, filed on or about June 8, 2000, is captioned CASAZZA, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN, Civil Action No. 00-11127-WGY. The second, filed on or about June 26, 2000, is captioned NEMETH-COSLETT, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN, Civil Action No. 00-11257-WGY. The third, filed on or about August 2, 2000, is captioned ROCKEFELLER, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN, Civil Action No. 00-11540-WGY. Each of these putative class action complaints encompasses the same class period and covers almost identical allegations. On or about August 7, 2000, David and Vivian West, alleged members of the Class, filed a motion to appoint themselves lead plaintiffs, and their law firm, lead counsel; as well as a motion for consolidation of the above cases. On or about September 13, 2000, the Court granted David and Vivian West's motions, consolidated the cases and recaptioned the 10 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. LEGAL MATTERS (CONTINUED) case IN RE ANIKA THERAPEUTICS, INC. SECURITIES LITIGATION, Civil Action No. 00-11127-WGY. On or about October 30, 2000, lead plaintiffs filed a consolidated amended complaint. The complaint alleges that the Company and the individual defendants violated the federal securities laws by, INTER ALIA, making material misrepresentations and omissions in certain public disclosures during the period between April 15, 1998 and May 30, 2000. The alleged misrepresentations and omissions relate to the Company's historical revenue recognition policies and its restatement of revenues for 1998 and the first three quarters of 1999. The complaint seeks an unspecified amount of monetary damages, costs and expenses, and equitable and/or injunctive relief to restrict the defendants from disposing of various assets in order to assure adequate funds are available for the claimed damages. On December 14, 2000, the Company, Mr. Engle and Mr. Moran each filed motions to dismiss the consolidated amended complaint. On January 29, 2001, plaintiffs' counsel filed oppositions to defendants' motions to dismiss. The Defendants filed reply briefs on February 12, 2001. Before the Court decided the motions to dismiss, the parties reached agreement on the terms of a potential settlement of the action. Accordingly, the parties negotiated and entered into a Memorandum of Understanding dated March 8, 2001 and the parties negotiated and entered into a Stipulation and Agreement of Settlement, Compromise and Release ("Stipulation") dated May 25, 2001, which contains the terms of a settlement of the action, subject to approval by the Court. The Stipulation was submitted to the Court and, on May 31, 2001, the Court entered an Order of Preliminary Approval in connection with the settlement proceedings. After preliminary approval, plaintiff's counsel sent notice of the proposed settlement to the Class, and the Company paid $1.25 million into a settlement fund that may, among other things, be used to pay authorized members of the Class. The Company entered into an agreement with its directors and officers liability insurer, under which the insurer paid the Company $400,000 in exchange for a release of the insurer's obligations under the policy, which policy's term was from December 1, 1999 to November 30, 2000 and which time period covers the allegations made in the securities class action litigation as well as the SEC investigation. The Company applied the $400,000 to the settlement amount in the shareholder class action lawsuit. In the Stipulation, the parties requested that the Court have a Final Settlement Hearing at which, among other things, (i) the Court would certify, for purposes of settlement, the Class, and certify, for purposes of settlement, the Action as a class action; (ii) the Court would finally approve the settlement as provided for in the Stipulation, including the release of all claims by Class members against the Defendants; and (iii) the Court would enter final judgment dismissing with prejudice all claims of the plaintiffs and the Class against the Defendants. The Court originally scheduled the Final Settlement Hearing for August 8, 2001. Pursuant to the joint request of counsel for the plaintiffs and counsel for the Company, the hearing was extended because of the restatement of financial results for certain prior periods as discussed in Note 10 herein. The Final Settlement Hearing has not yet been rescheduled. The Court has not yet finally approved the Settlement. The Company is not able to provide any assurances that: (i) the proposed settlement will be finally approved by the Court; or (ii) the terms of any final settlement approved by the Court will not differ from the terms of the Stipulation. 11 ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 10. RESTATEMENT On August 14, 2001, as a result of the SEC's ongoing investigation, the Company announced the restatement of its financial results for the fourth quarter of 1998 and the first quarter of 1999. This restatement involves the timing of recognition of revenues for the sale of ORTHOVISC(R) to Zimmer, formerly an ORTHOVISC(R) distributor. The Company and its independent auditors determined that certain revenue previously recognized in the fourth quarter of 1998 should have been recognized in the first quarter of 1999. Accordingly, revenue for the fourth quarter of 1998 is reduced by $343,000 to $3,060,000 and revenue for the first quarter of 1999 is increased by the same amount to $3,679,000. The impact on earnings in the fourth quarter of 1998 is a reduction of $119,000, or $.01 per share, to income of $489,000. The impact on earnings in the first quarter of 1999 is an increase of $119,000, or $.01 per share, to a loss of $3,050,000. The restated revenue for the years ended December 31, 1998 and 1999 is $12,930,000 and $13,826,000, respectively. The restated results for the years ended December 31, 1998 and 1999 include, respectively, net income of $3,633,000, or $.33 per share, and a net loss of $2,377,000, or $.23 per share. The Company expects to file an amended Form 10-K for the year ended December 31, 2000. 12 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 AS WELL AS THE "RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS" HEREIN. The Company derives a substantial portion of its revenue from the sale of AMVISC(R) and AMVISC(R)Plus to Bausch & Lomb Surgical. For the three months ended June 30, 2001 and 2000, AMVISC sales accounted for 50.9% and 50.8% of product revenue, respectively. For the six months ended June 30, 2001 and 2000, AMVISC sales accounted for 56.9% and 59.5% of product revenue, respectively. RESULTS OF OPERATIONS PRODUCT REVENUE. Product revenue for the three months ended June 30, 2001 was $2,919,034, a decrease of $749,731, or 20%, from $3,668,765 recorded in the corresponding quarter of 2000. Product revenue associated with ORTHOVISC(R) decreased by $716,317 in the second quarter of 2001 compared to the second quarter of 2000. Product revenue for the six months ended June 30, 2001 was $5,097,652, a decrease of $1,191,946, or 19%, over the $6,289,598 recorded in the comparable period of the prior year. The decrease was primarily attributable to lower ORTHOVISC(R) sales of $589,006 and lower AMVISC(R) product sales of $749,443. The Company believes that lower ORTHOVISC(R) sales are attributable to reduced sales in Europe and Canada as a result of the termination of the ORTHOVISC(R) distribution agreement with Zimmer, as well as reduced selling prices to another customer. The reduced selling price was negotiated to meet competitive market conditions and is not expected to result in increased volume to offset the price reduction in future periods. AMVISC(R) product sales were lower compared with 2000 as a result of lower unit prices under the BLS Agreement, effective April 1, 2000, partially offset by higher unit volumes. LICENSING REVENUE. There was no licensing revenue for the three and six months ended June 30, 2001 due to the termination of the ORTHOVISC distribution agreement on November 10, 2000. For the three and six months ended June 30, 2000, licensing revenues of $100,000 and $200,000, respectively, represented the annual amortization of certain milestone payments received in 1997 and 1998 in connection with terminated ORTHOVISC(R) agreement with Zimmer. GROSS PROFIT. Gross profit for the three months ended June 30, 2001 was $809,985, a decrease of $536,163, or 40%, from $1,346,148 recorded in the prior year corresponding quarter. Gross profit for the six months ended June 30, 2001 was $1,019,655 compared with $2,834,013 for the first six months of 2000, a decrease of 36%. These decreases reflect lower sales, as well as lower prices for ORTHOVISC(R) sales to the Company's distributor for the Turkish market, as well as the absence of amortized license fee revenue included in the prior year period. In addition, the first quarter of 2001 reflects lower unit prices for the Company's sales to Bausch and Lomb. Further, costs of sales for the three and six months ending June 30, 2001 includes approximately $500,000 and $1,200,000, respectively, attributable to underutilization of manufacturing capacity resulting from the Company's efforts to reduce work-in-process and other inventory. The Company expects to continue to experience the impacts of this underutilization through 2001. RESEARCH & DEVELOPMENT. Research and development expenses for the three months ended June 30, 2001 increased by $14,098 to $921,325 from $907,227 recorded in the corresponding quarter of the prior year. Research and development expenses for the six months ended June 30, 2001 increased $48,231, or 2%, compared to the same period in 2000. Research and development was $426,545 lower in the second quarter of 2001 compared with the first quarter of 2001. The first quarter included approximately $700,000 in startup costs associated with the new ORTHOVISC(R) Phase III clinical 13 trial and development costs for INCERT(R). Enrollment of patients in the ORTHOVISC(R) clinical trial has been slower than the Company had anticipated and this will delay completion of the trial. Costs for INCERT(R) in the second quarter were substantially lower than in the first quarter as the Company is evaluating various development options for this product and its underlying technology, including reconsideration of the Company's previous plans to launch a clinical trial in 2001. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the three months ended June 30, 2001 increased by $871,639, or 88%, to $1,858,790 from $987,151 in the corresponding quarter of the prior year. For the six months ended June 30, 2001, selling, general and administrative expenses increased $1,260,751 or 63% compared to the same period in the prior year. The increase was largely attributable to accrued separation costs of $515,000 related to management changes implemented in June 2001. Costs of the management separation include the forgiveness of officer loans totaling $129,000. For the six-month period, professional fees represent approximately $138,000 of the increase in 2001 as compared with 2000. LITIGATION SETTLEMENT COSTS. Litigation settlement costs for the three and six months ended June 30, 2001 includes a charge of $850,000, which is the amount of the $1.25 million settlement amount contributed by the Company, in settlement fees, and $36,480 in professional fees related to the putative class action suit. For the six months ended June 30, 2001, professional fees related to the putative class action suit were $100,716. The settlement is subject to final court approval. See Note 9. NET INTEREST INCOME. The Company's net interest income decreased by $123,539 to $206,202 for the three months ended June 2001 from $329,741 in the corresponding quarter of the prior year. Net interest income for the six months ended June 30, 2001 was $478,781 compared with $590,989 for the same period in 2000. The decrease is attributable to reduced average cash balances and lower interest rates during the first six months of 2001. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, the Company had cash, cash equivalents and short term investments of $15.7 million and working capital of $18.2 million versus cash, cash equivalents and short term investments of $18.3 million and working capital of $23.1 million at December 31, 2000. Investments at June 30, 2001 consist of commercial paper of various maturities of less than one year. During the first half of 2001, the Company utilized $1,999,603 of cash in operations, primarily related to the net loss, including the payment of $850,000 to the settlement fund in connection with the pending shareholder litigation settlement, and partially offset by the decrease in accounts receivable, and an increase in accounts payable and accrued expenses. Capital expenditures were $626,355 during the six month period ended June 30, 2001. Approximately $340,000 of these expenditures was used for the construction of certain pilot laboratory projects, as previously disclosed. Aggregate capital investments for 2001 are expected to be approximately $1 million. As described in financial statement Note 10--"Legal Matters", three putative class action lawsuits have been filed against the Company and former officers of the Company. These lawsuits have been consolidated. The parties negotiated and entered into a Memorandum of Understanding dated March 8, 2001, and the parties negotiated and entered into a Stipulation and Agreement of Settlement, Compromise and Release ("Stipulation") dated May 25, 2001, which contains the terms of a settlement of the action, subject to approval by the Court. The Stipulation was submitted to the Court and, on May 31, 2001, the Court entered an Order of Preliminary Approval in connection with the settlement proceedings. After preliminary approval, plaintiff's counsel sent notice of the proposed settlement to the Class, and the Company paid 14 $1.25 million into a settlement fund that may, among other things, be used to pay authorized members of the Class. The Company entered into an agreement with its directors and officers liability insurer, under which the insurer paid the Company $400,000 in exchange for a release of the insurer's obligations under the policy, which policy's term was from December 1, 1999 to November 30, 2000 and which time period covers the allegations made in the securities class action litigation as well as the SEC investigation. The Company applied the $400,000 to the settlement amount in the shareholder class action lawsuit. In the Stipulation, the parties requested that the Court have a Final Settlement Hearing at which, among other things, (i) the Court would certify, for purposes of settlement, the Class, and certify, for purposes of settlement, the Action as a class action; (ii) the Court would finally approve the settlement as provided for in the Stipulation, including the release of all claims by Class members against the Defendants; and (iii) the Court would enter final judgment dismissing with prejudice all claims of the plaintiffs and the Class against the Defendants. The Court originally scheduled the Final Settlement Hearing for August 8, 2001. Pursuant to the joint request of counsel for the plaintiffs and counsel for the Company, the hearing was extended because of the restatement of financial results for certain prior periods as discussed in Note 10 herein. The Final Settlement Hearing has not yet been rescheduled. The Court has not yet finally approved the Settlement. The Company is not able to provide any assurances that: (i) the proposed settlement will be finally approved by the Court; or (ii) the terms of any final settlement approved by the Court will not differ from the terms of the Stipulation. The Company's future capital requirements and the adequacy of available funds will depend 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 requirements of its efforts to expand its manufacturing capabilities; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; defending, negotiating, and settling legal matters; competing technological and market developments; and the development of strategic alliances for the marketing of certain of its products. There can be no assurance that the Company will record profits in future periods. See "Risk Factors and Certain Other Factors Affecting Future Operating Results--History of Losses; Uncertainty of Future Profitability" for other factors which could affect the Company's future capital requirements and the adequacy of available funds. 15 RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS THIS QUARTERLY REPORT ON 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," "WILL", "DEVELOP", "WOULD", FUTURE", "CAN", "MAY", "COULD" 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 AND PRODUCT REVENUES, NEGOTIATIONS WITH POTENTIAL AND EXISTING CUSTOMERS, POSSIBLE DEVELOPMENT OF NEW PRODUCTS, POSSIBLE STRATEGIC INVESTMENTS, POSSIBLE REGULATORY APPROVAL OF NEW OR POTENTIAL PRODUCTS, THE IMPACT OF THE TERMINATION OF THE ORTHOVISC(R) DISTRIBUTION AGREEMENT WITH ZIMMER, ACQUISITION OF NEW DISTRIBUTION AND COLLABORATION PARTNERS, PERFORMANCE UNDER THE BLS AGREEMENT AND THE OUTCOME, AND IMPACT OF THE SEC INVESTIGATION AND PAYMENT OF EXPENSES CONCERNING THE PUTATIVE CLASS ACTION COMPLAINT. 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. IN PARTICULAR, THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL: (I) BEGIN CLINICAL TRIALS OF INCERT(R)-S; (II) SUCCESSFULLY COMPLETE CLINICAL TRIALS OF ORTHOVISC(R) OR INCERT(R)-S; (III) OBTAIN CLINICAL DATA TO SUPPORT A PRE-MARKET APPROVAL APPLICATION AND/OR FDA APPROVAL OF ORTHOVISC(R) OR INCERT(R)-S; (IV) RECEIVE FDA OR OTHER REGULATORY APPROVALS OF ORTHOVISC(R) OR INCERT(R)-S OR THAT SUCH APPROVALS WILL BE OBTAINED IN A TIMELY MANNER OR WITHOUT THE NEED FOR ADDITIONAL CLINICAL TRIALS. THERE CAN BE NO ASSURANCE THAT THE TERMINATION OF THE DISTRIBUTION AGREEMENT WITH ZIMMER WILL NOT CONTINUE TO HAVE A MATERIAL ADVERSE IMPACT ON SALES OR DISTRIBUTION OF ORTHOVISC(R) OR THAT THE COMPANY WILL BE ABLE TO IDENTIFY OR ENGAGE APPROPRIATE DISTRIBUTION OR COLLABORATION PARTNERS FOR SALES OF ORTHOVISC(R) OR INCERT(R)-S OR EFFECTIVELY TRANSITION THE DISTRIBUTION OF ORTHOVISC(R) OR INCERT(R)-S TO SUCH DISTRIBUTORS, IF ENGAGED. IN ADDITION, THERE CAN BE NO ASSURANCE THAT ANY DELAY IN RECEIVING ANY SUCH APPROVALS WILL NOT ADVERSELY EFFECT THE COMPANY'S COMPETITIVE POSITION OR, IF COMPLETED, MEANINGFUL SALES OF THE PRODUCTS WILL BE ACHIEVED. THERE CAN BE NO ASSURANCE THAT THE COMPANY'S INVENTORY REDUCTION OR OTHER EFFORTS WILL RESULT IN IMPROVED GROSS MARGINS DURING 2001 OR EVER. THERE CAN BE NO ASSURANCES THAT: (I) THE COMPANY WILL ACHIEVE INCREMENTAL SALES OF ITS OPHTHALMIC PRODUCTS TO BAUSCH & LOMB SURGICAL AND/OR OTHER COMPANIES SUFFICIENT TO OFFSET THE EFFECTS OF THE PRICE REDUCTION AND ROYALTIES TO BE PAID TO BAUSCH & LOMB SURGICAL OR (II) BAUSCH & LOMB SURGICAL WILL MAKE PURCHASES IN ACCORDANCE WITH ITS FORECASTS. FURTHERMORE, THE COMPANY CANNOT MAKE ANY ASSURANCE THAT THE CURRENT LEVELS OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES WILL NOT CONTINUE. ADDITIONAL FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE SET FORTH HEREIN AND IN THE "MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" BEGINNING ON PAGE 11 OF THIS QUARTERLY REPORT ON FORM 10-Q AS WELL AS THOSE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS IT WILL BE AMENDED, ITS QUARTERLY REPORT ON FORM 10-Q, AND THE COMPANY'S PRESS RELEASES AND OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OF 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 Food & Drug Administration (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, safety, effectiveness, clearance, approval, manufacturing, labeling, packing, storage, 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 16 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 of such products typically would be substantially longer and more expensive than the review process to which they are currently subject as devices. The Company's ORTHOVISC(R) product will have to meet regulatory requirements for a Class III device as determined by the FDA. Class III devices are those that generally must receive pre-market approval (PMA) by the FDA (e.g. life-sustaining, life-supporting and implantable or new devices which have not been found to be substantially equivalent to legally marketed devices) and require clinical testing to ensure safety and effectiveness and FDA approval prior to marketing and distribution. In order for the Company to commercially distribute ORTHOVISC(R) in the U.S., it must obtain a PMA. The PMA process can be expensive, uncertain and lengthy. A number of devices for which PMAs have been sought have never been approved for marketing. The review of an application often occurs over a protracted time period, potentially taking two years or more from the filing date to complete. The Company submitted a PMA application for ORTHOVISC(R) in December 1997. In October 1998, the Company was notified by the FDA that the Company's PMA application for ORTHOVISC(R) was not approvable and that additional clinical data would be required to demonstrate the effectiveness of ORTHOVISC(R). The Company submitted an Investigational Device Exemption (IDE) to the FDA in February 1999 and received approval in late March 1999 to commence a second Phase III clinical study. The Company received initial results from the Phase III clinical trial in late May 2000 that the Company determined did not show sufficient efficacy to support the filing of a PMA application. The Company has evaluated available information and announced its intention to pursue further clinical trials. In February 2001, the Company commenced another Phase III clinical trial of ORTHOVISC(R). The trial is being conducted in up to 20 centers in the U.S. and Canada, with 360 patients expected to be enrolled, and with evaluation over a six-month period following treatment. To date, enrollment of patients in the clinical trial has been slower than the Company had anticipated which will delay completion of the trial. There can be no assurance that: (i) any additional clinical data will support the efficacy of ORTHOVISC(R); (ii) the Company will complete any additional clinical trials of ORTHOVISC(R); (iii) the Company will be able to successfully complete the FDA approval process; or (iv) additional clinical trials will support a PMA application and/or FDA approval in a timely manner or at all. There also can be no assurance that any delay in receiving FDA approvals will not continue to adversely affect the Company's competitive position. (See "Competition") Furthermore, even if the Company were to receive a PMA approval: (i) the approval may include significant limitations on the indications and other claims sought for use for which the product may be marketed; (ii) the approval may include other significant conditions to approval such as post-market testing, tracking, or surveillance requirements; and (iii) the Company may not be able to achieve meaningful sales of ORTHOVISC(R) in the U.S. The Company's HA product under development, INCERT(R)-S, has not obtained regulatory approval in the U.S. for commercial marketing and sale. The Company believes that INCERT(R)-S will be regulated as a Class III medical device and will require a PMA prior to marketing. The Company has received IDE approval from the FDA and is evaluating product development activities, including the prospects for conducting clinical trials for INCERT(R)-S. There can be no assurance that: (i) the Company will begin or successfully complete clinical trials of INCERT(R)-S; (ii) the clinical data will support the efficacy of INCERT(R)-S; (iii) it will be able to successfully complete the FDA approval process; or (iv) additional clinical trials will support a PMA application and/or FDA approval in a timely manner or at all. There also can be no assurance that any delay in receiving FDA approvals will not adversely affect the Company's competitive position. Furthermore, even if the Company does receive FDA approval: (i) the approval may include significant limitations on the indications and other 17 claims sought for use for which the product may be marketed; (ii) the approval may include other significant conditions of approval such as post-market testing, tracking, or surveillance requirements; and /or (iii) meaningful sales of INCERT(R)-S may never be achieved. Orquest has not received regulatory approval in the U.S. for the commercial marketing and sale of OSSIGEL(R). The Company believes that OSSIGEL(R) will be regulated as a Class III medical device with the FDA's Center of Biologics Research and Review as the lead review center and will require a PMA prior to marketing. There can be no assurance that clinical trials of OSSIGEL(R) will demonstrate that OSSIGEL(R) is safe and effective or otherwise satisfies FDA requirements. Once obtained, marketing approval can be withdrawn by the FDA for a number of reasons, including, among other things, the failure to comply with regulatory standards, or the occurrence of unforeseen problems following initial approval. The Company may be required to make further filings with the FDA under certain circumstances. The FDA's regulations require 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, and changes in performance or design specifications. Changes in manufacturing that effect safety and effectiveness may be deemed approved after a 30-day notice unless the FDA requests a supplement. 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, may 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 approval to market products, any FDA limitations on the use of the Company's products, or any withdrawal or suspension of approval or rescission of approval 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 or cleared products manufactured by the Company must be manufactured in compliance with FDA's Good Manufacturing Practices (GMP) regulations and, for medical devices, FDA's Good Manufacturing Practices/Quality System Regulations (GMP/QSR). Ongoing compliance with GMP/QSR and other applicable regulatory requirements is enforced 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 18 ORTHOVISC(R) in Europe, the Company was required to receive a "CE" marking certification, an international symbol of quality and compliance with the applicable European medical device directive. In October 1996, the Company received an EC Design Examination and an EC Quality System Certificate from a European Notified Body, which entitled the Company to affix a CE marking for ORTHOVISC(R) as a viscoelastic supplement or a replacement for synovial fluid in human joints. There can be no assurance that the Company will be able to achieve and/or maintain compliance required for CE marking or other foreign regulatory approvals for any or all of its products or that it will be able to produce its products in a timely and profitable manner while complying with applicable requirements. Federal, state, local and foreign regulations regarding the manufacture and sale of medical products are subject to change. The Company cannot predict what impact, if any, such changes might have on its business. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement also vary widely from country to country. The process of obtaining approvals from the FDA and other regulatory authorities can be costly, time consuming, and subject to unanticipated delays. There can be no assurance that approvals or clearances of the Company's products will be granted or that the Company will have the necessary funds to develop certain of its products. Any failure to obtain, or delay in obtaining such approvals or clearances, 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 and 2000, the Company had incurred annual operating losses. As of June 30, 2001, the Company had an accumulated deficit of approximately $9,568,000. The continued development of the Company's products will require the commitment of substantial resources to conduct research and preclinical and clinical development programs, and to establish sales and marketing capabilities or distribution arrangements. The ability of the Company to reach profitability is highly uncertain. To achieve profitability, the Company must, among other things, successfully complete development of certain of its products, obtain regulatory approvals and establish sales and marketing capabilities or distribution arrangements for certain of its products. COMPETITION. The Company competes with many companies, including, among others, large pharmaceutical companies and specialized medical products companies. Many of these companies have substantially greater financial and other resources, larger research and development staffs, more extensive marketing and manufacturing organizations and more experience in the regulatory process than the Company. The Company also competes with academic institutions, governmental agencies and other research organizations that 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, or, if regulatory approval is not obtained prior to competitors, the markets for these products will be sufficient to permit meaningful sales of the Company's products. There can be no assurance that the Company will be able to compete against current or future competitors or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently experiencing pricing pressures in the Turkish market from increased competition which may or may continue to hinder its ability to effectively compete in that market. As a result, prices to our Turkish distributor have decreased. UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of the Company's products, including ORTHOVISC(R), as well as the potential product of the Company's collaborative partner such as OSSIGEL(R), will require clinical trials to determine their safety and efficacy for U.S. and international marketing approval by regulatory bodies, including the FDA. In late May 2000, the Company's initial analysis of the results of its second Phase III clinical trial of ORTHOVISC(R) did not show sufficient efficacy to support the filing of a PMA application to obtain FDA approval. The 19 Company has evaluated available information and announced the commencement of further clinical trials. The Company has received Investigational Device Exemption (IDE) approval from the FDA. There can be no assurance that (i) any additional clinical data will support the efficacy of ORTHOVISC(R), (ii) the Company will begin clinical trials of INCERT(R)-S or complete any additional clinical trials of ORTHOVISC(R) or INCERT(R)-S, (iii) it will be able to successfully complete the FDA approval process for either ORTHOVISC(R) or INCERT(R)-S, or (iv) additional ORTHOVISC(R) or INCERT(R)-S clinical trials will support a PMA application and/or FDA approval in a timely manner or at all. There can be no assurance that the Company or its collaborative partner will not encounter additional problems that will cause it to delay, suspend or terminate clinical trials. In addition, the Company cannot provide any assurance that such clinical trials, if completed, will ultimately demonstrate these products to be safe and efficacious. DEPENDENCE UPON MARKETING AND DISTRIBUTION PARTNERS. The Company's success will be dependent, in part, 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. Under the terms of the BLS Agreement, effective January 1, 2001, the Company became Bausch & Lomb Surgical's exclusive provider of AMVISC(R) and AMVISC(R) Plus, ophthalmic viscoelastic products, in the U.S. and international markets. The BLS Agreement expires December 31, 2007, superseding an existing supply contract with Bausch & Lomb Surgical that was set to expire December 31, 2001. The BLS Agreement is subject to early termination and/or reversion to a non-exclusive basis under certain circumstances. The BLS Agreement lifts contractual restrictions on the Company's sales of certain ophthalmic products to other companies, subject to payment of royalties by the Company. In exchange, the Company agreed to a reduction in unit selling prices retroactively effective to April 1, 2000 and the elimination of minimum unit purchase obligations by BLS. The Company has not achieved incremental sales of its ophthalmic products to Bausch & Lomb Surgical and/or other companies sufficient to offset the effects of the price reduction and royalties to Bausch & Lomb Surgical and there can be no assurances that the Company will be able to do so in the future. The Company expects that, at least through 2001, the reduction in unit prices will result in a decrease in the Company's revenue and gross margin from Bausch & Lomb Surgical. In addition, under certain circumstances, (i) Bausch & Lomb Surgical has the right to terminate the agreement and/or (ii) the agreement may revert to a non-exclusive basis; in each case, the Company cannot make any assurances that such circumstances will not occur. For the three months ended June 30, 2001 and 2000, sales of AMVISC(R) products to Bausch & Lomb Surgical accounted for 50.9% and 50.8% of product revenues, respectively. For the six months ended June 30, 2001 and 2000, sales of AMVISC(R) products to Bausch & Lomb Surgical accounted for 56.9% and 59.5% of product revenues, respectively. Although the Company intends to continue to seek new opthalmic product customers, there can be no assurances that the Company will be successful in obtaining new customers or to achieve meaningful sales to such new customers. The ORTHOVISC(R) Distribution Agreement with Zimmer provided Zimmer with exclusive marketing and distribution rights to ORTHOVISC(R) in the United States, Canada, Latin America, Asia and most of Europe. On November 10, 2000, the Company reached an agreement with Zimmer for an early termination of its marketing and distribution agreement for ORTHOVISC(R). The termination may continue to have a material adverse effect on the Company's ability to market ORTHOVISC(R), which is likely to have a material adverse effect on the Company's future operating results. The Company has relationships with logistics agents (outsource order processing providers) to distribute ORTHOVISC(R) to customers in Canada and European countries previously served by Zimmer. The Company is seeking to establish long-term relationships with new distribution partners in those countries where Zimmer previously sold the product. There can be no assurance that the 20 Company will be able to identify or engage appropriate distribution or collaboration partners or effectively transition to any such partners. There can be no assurance that the Company will obtain European or other reimbursement approvals or, if such approvals are obtained, they will be obtained on a timely basis or at a satisfactory level of reimbursement. The Company will need to obtain the assistance of additional marketing partners to bring new and existing products to market and to replace certain marketing partners, such as Zimmer. 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 will 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 on the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms, including the Company, can be uncertain and involve complex legal and factual questions. There can be no assurance that any patent applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or will not be circumvented by others. In the event a third party has also filed one or more patent applications for any of its inventions, the Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office ("PTO") to determine priority of invention (see below), which could result in failure to obtain or the loss of patent protection for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to the Company, such interference proceedings could result in substantial cost to the Company. Filing and prosecution of patent applications, litigation to establish the validity and scope of patents, assertion of patent infringement claims against others and the defense of patent infringement claims by others can be expensive and time consuming. There can be no assurance that in the event that any claims with respect to any of the Company's patents, if issued, are challenged by one or more third parties, that any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause the Company to lose exclusivity covered by the disputed rights. If a third party is found to have rights covering products or processes used by the Company, the Company could be forced to cease using the technologies or marketing the products covered by such rights, could be subject to significant liabilities to such third party, and could be required to license technologies from such third party. Furthermore, even if the Company's patents are determined to be valid, enforceable, and broad in scope, there can be no assurance that competitors will not be able to design around such patents and compete with the Company using the resulting alternative technology. The Company has a policy of seeking patent protection for patentable aspects of its proprietary technology. It filed five (5) patent applications in the first quarter of 2001. The Company co-owns certain United States patents with claims relating to the chemical modification of HA and certain adhesion prevention and drug delivery uses of HA. Two patents in this portfolio were issued in the year 21 2000. The Company also solely owns patents directed to certain manufacturing processes. The Company 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 appropriate. 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 licensed patents 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 on the patent rights of others in the future. Any such infringement may have a material adverse effect on the Company's business, financial condition, and results of operations. In particular, the Company received notice from the PTO in 1995 that a third party was attempting to provoke a patent interference with respect to one of the Company's co-owned patents covering the use of INCERT(R) for post-surgical adhesion prevention. It is unclear whether an interference will be declared. If an interference is declared, it is not possible at this time to determine the merits of the interference or the effect, if any, the interference will have on the Company's marketing of INCERT(R) for this use. The existence of the interference proceeding may have a negative impact on the marketing of the INCERT(R) 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(R) product may be materially and adversely affected and the third party may enforce patent rights against the Company which could prohibit the sale and use of INCERT(R) 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 non-patented 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 BLS Agreement, the Company has agreed to transfer to Bausch & Lomb Surgical, upon expiration of the term of the agreement on December 31, 2007, or in connection with earlier termination in certain circumstances, the Company's manufacturing process, know-how and technical information which relate to AMVISC(R) products. Upon expiration of the BLS Agreement, there can be no assurance that Bausch & Lomb Surgical will continue to use the Company to manufacture AMVISC(R) and AMVISC(R) Plus. If Bausch & Lomb Surgical discontinues the use of the Company as a manufacturer after such time, the Company's business, financial condition, and results of operations would likely be materially and adversely affected. 22 RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations are dependent upon the continued operation of its manufacturing facility in Woburn, Massachusetts. The operation of biomedical manufacturing plants involves many risks, including the breakdown, failure or substandard performance of equipment, natural and other disasters, and the need to comply with the requirements of directives of government agencies, including the FDA. In addition, the Company relies on a single supplier for syringes and a small number of suppliers for a number of other materials required for the manufacturing and delivery of its HA products. Furthermore, manufacturing processes and research and development efforts of the Company involve animals and products derived from animals. The utilization of animals in research and development and product commercialization is subject to increasing focus by animal rights activists. The activities of animal rights groups and other organizations that have protested animal based research and development programs or boycotted the products resulting from such programs could cause an interruption in the Company's manufacturing processes and research and development efforts. The occurrence of material operational problems, including but not limited to the events described above, could have a material adverse effect on the Company's business, financial condition and results of operations during the period of such operational difficulties. NO ASSURANCE OF GROWTH OR ABILITY TO MANAGE GROWTH. The Company's future success depends on substantial growth in product sales. There can be no assurance that such growth can be achieved or, if achieved, can be sustained. There can be no assurance that even if substantial growth in product sales and the demand for the Company's products is achieved, the Company will be able to (i) develop the necessary manufacturing capabilities; (ii) obtain the assistance of additional marketing partners; (iii) attract, retain and integrate the required key personnel; or (iv) implement the financial, accounting and management systems needed to manage growing demand for its products, should it occur. Failure of the Company to successfully manage future growth could have a material adverse effect on the Company's business, financial condition and results of operations. THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES. In the U.S. and other markets, health care providers, such as hospitals and physicians, that purchase health care products, such as the Company's products, generally rely on third party payors, including Medicare, Medicaid and other health insurance and managed care plans, to reimburse all or part of the cost of the health care product. The Company depends upon the distributors for its products to secure reimbursement. Reimbursement by a third party payor may depend on a number of factors, including the payor's determination that the use of the Company's products are clinically useful and cost-effective, medically necessary and not experimental or investigational. Since reimbursement approval is required from each payor individually, seeking such approvals can be a time consuming and costly process which, in the future, could require the Company or its marketing partners to provide supporting scientific, clinical and cost-effectiveness data for the use of the Company's products to each payor separately. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third party payors are increasingly attempting to contain the costs of health care products and services by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing in some cases to provide coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. In addition, Congress and certain state legislatures have considered reforms that may affect current reimbursement practices, including controls on health care spending through limitations on the growth of Medicare and Medicaid spending. There can be no assurance that third party reimbursement coverage will be available or adequate for any products or services developed by the Company. Outside the U.S., the success of the Company's products is also dependent in part upon the availability of reimbursement and health care payment systems. Lack of adequate coverage and reimbursement provided by governments and other third party payors for the Company' products and services could have a material adverse effect on the Company's business, financial condition and results of operations. 23 NEED FOR ADDITIONAL FUNDS; LIQUIDITY. The Company had cash, cash equivalents and short-term marketable securities of $15.7 million as of June 30, 2001. The Company's future capital requirements and the adequacy of available funds will depend, however, on numerous factors, including: market acceptance of its existing and future products; the successful commercialization of products in development; progress in its product development efforts; the magnitude and scope of such efforts, progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies; the cost 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 $5,000,000 per occurrence and $5,000,000 in the aggregate to cover such claims should they arise, there can be no assurance that material claims will not arise in the future or that the Company's insurance will be adequate to cover all situations. Moreover, there can be no assurance that such insurance, or additional insurance, if required, will be available in the future or, if available, will be available on commercially reasonable terms. Any product liability claim, if successful, could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent on the members of its management and scientific staff, the loss of one or more of whom could have a material adverse effect on the Company. In June 2001, Mr. Engle, the former Chief Executive Officer and Chairman of the Board of Directors, and Mr. Slater, the former Vice President of Operations, ceased to be employees of the Company. There can be no assurances that such departures will not adversely affect the Company's business. 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. 24 RISKS RELATING TO INTERNATIONAL SALES. During the three months ended June 30, 2001 and 2000, approximately, 33% and 32.8%, respectively, of the Company's product sales were sold to international markets. During the six months ended June 30, 2001 and 2000, approximately, 33.3% and 27%, respectively, of the Company's product sales were sold to international markets. The Company's representatives, agents and distributors who 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 and/or economic instability, trade restrictions, changes in tariffs, difficulties in managing international operations, import restrictions and fluctuations in foreign currency exchange rates. The Company sells its ORTHOVISC(R) product to a European sales and marketing company for supply of the Turkish market. The Turkish economic situation has been volatile and the impacts of this volatility on future sales of ORTHOVISC(R) are uncertain. 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(R) was not approvable and that additional clinical data would be required to demonstrate the effectiveness of ORTHOVISC(R). The stock price declined again in May 2000 following the Company's announcements that initial analysis of results from the Phase III clinical trial of ORTHOVISC(R) did not show sufficient efficacy to support the filing of a PMA application to obtain FDA approval, and that the SEC had issued a formal order of investigation and required the Company to provide information in connection with certain revenue recognition matters. The trading price of the Company's common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in the Company's operating results, material announcements by the Company or its competitors, governmental regulatory action, conditions in the health care industry generally or in the medical products industry specifically, or other events or factors, many of which are beyond the Company's control. In addition, the stock market has experienced extreme price and volume fluctuations which have particularly affected the market prices of many medical products companies and which often have been unrelated to the operating performance of such companies. The Company's operating results in future quarters may be below the expectations of equity research analysts and investors. In such event, the price of the common stock would likely decline, perhaps substantially. No person is under any obligation to make a market in the common stock or to publish research reports on the Company, and any person making a market in the common stock or publishing research reports on the Company may discontinue market making or publishing such reports at any time without notice. There can be no assurance that an active public market in the common stock will be sustained. POSSIBLE ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Restated Articles of Organization and Amended and Restated By-laws could have the effect of discouraging a third party from pursuing a non-negotiated takeover of the Company and preventing certain changes in control. These provisions include a classified Board of Directors, advance notice to the Board of Directors of stockholder proposals, limitations on the ability of stockholders to remove directors and to call stockholder meetings, the provision that vacancies on the Board of Directors be 25 filled by a majority of the remaining directors. In addition, the Board of Directors adopted a Shareholders Rights Plan in April 1998. The Company also is subject to Chapter 110F of the Massachusetts General Laws which, subject to certain exceptions, prohibits a Massachusetts corporation from engaging in any of a broad range of business combinations with any "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder. These provisions could discourage a third party from pursuing a takeover of the Company at a price considered attractive by many stockholders, since such provisions could have the effect of preventing or delaying a potential acquirer from acquiring control of the Company and its Board of Directors. SEC INVESTIGATION AND SECURITIES CLASS ACTION LITIGATION. The SEC has issued a formal order of investigation and has required the Company to provide information in connection with certain revenue recognition matters. The Company has been cooperating fully. These matters, relating to the Company's historical accounting for and disclosures concerning sales of ORTHOVISC(R) under a long-term supply and distribution agreement with Zimmer were also the subject of the Company's March 15, 2000 disclosure concerning an informal SEC inquiry and the restatement of results for 1998 and the first three quarters of 1999. On August 14, 2001, as a result of the SEC's ongoing investigation, the Company, in conjunction with its independent auditors, determined to again restate its financial results for the fourth quarter of 1998 and the first quarter of 1999 as discussed in Note 10 in the consolidated financial statements. The Company is not in a position to predict the probable outcome of this matter or its potential impact on the Company's business or operations. Three putative class action lawsuits were filed against the Company and former officers of the Company. These lawsuits have been consolidated. The parties negotiated and entered into a Memorandum of Understanding dated March 8, 2001, and the parties negotiated and entered into a Stipulation and Agreement of Settlement, Compromise and Release ("Stipulation") dated May 25, 2001, which contains the terms of a settlement of the action, subject to approval by the Court. The Stipulation was submitted to the Court and, on May 31, 2001, the Court entered an Order of Preliminary Approval in connection with the settlement proceedings. After preliminary approval, plaintiff's counsel sent notice of the proposed settlement to the Class, and the Company paid $1.25 million into a settlement fund that may, among other things, be used to pay authorized members of the Class. The Company entered into an agreement with its directors and officers liability insurer, under which the insurer paid the Company $400,000 in exchange for a release of the insurer's obligations under the policy, which policy's term was from December 1, 1999 to November 30, 2000 and which time period covers the allegations made in the securities class action litigation as well as the SEC investigation. The Company applied the $400,000 to the settlement amount in the shareholder class action lawsuit. In the Stipulation, the parties requested that the Court have a Final Settlement Hearing at which, among other things, (i) the Court would certify, for purposes of settlement, the Class, and certify, for purposes of settlement, the Action as a class action; (ii) the Court would finally approve the settlement as provided for in the Stipulation, including the release of all claims by Class members against the Defendants; and (iii) the Court would enter final judgment dismissing with prejudice all claims of the plaintiffs and the Class against the Defendants. The Court originally scheduled the Final Settlement Hearing for August 8, 2001. Pursuant to the joint request of counsel for the plaintiffs and counsel for the Company, the hearing was extended because of the restatement of financial results for certain prior periods as discussed in Note 10 herein. The Final Settlement Hearing has not yet been rescheduled. The Court has not yet finally approved the Settlement. The Company is not able to provide any assurances that: (i) the proposed settlement will be finally approved by the Court; or (ii) the terms of any final settlement approved by the Court will not differ from the terms of the Stipulation. RELIANCE ON A SMALL NUMBER OF CUSTOMERS. The Company has historically derived the majority of its revenues from a small number of customers, most of whom resell its products to end users and most 26 of whom are significantly larger companies. The Company's failure to generate as much revenue as expected from these customers or the failure of these customers to purchase the Company's products would seriously harm the Company's business. For the three months ended June 30, 2001, Bausch & Lomb Surgical accounted for 50.9% of product revenues and 69.6% of the accounts receivable balance and Pharmaren (an affiliate of Biomeks), the Company's distributor in Turkey, accounted for 23.7% of product revenues and none of the accounts receivable balance. Accordingly, if present and future customers terminate their purchasing arrangements with the Company, significantly reduce or delay their orders or seek to renegotiate their agreements on terms less favorable to the Company, the Company's business, financial condition, and results of operations will be adversely affected. If the Company accepts terms less favorable than the terms of the current agreement, such renegotiations may have a material adverse affect on the Company's business, financial condition, and/or results of operations. Furthermore, the Company may be subject to the perceived or actual leverage the customers may have given their relative size and importance to the Company in any future negotiations. Any termination, change, reduction or delay in orders could seriously harm the Company's business, financial condition, and results of operations. Accordingly, unless and until the Company diversifies and expands its customer base, the Company's future success will significantly depend upon the timing and size of future purchases by its largest customers and the financial and operational success of these customers. Product revenue in the future may continue to be impacted by economic uncertainties associated with the Turkish market. Furthermore, sales in 2001 to our Turkish distributor are at lowered prices and negotiations are ongoing to establish a new long-term distribution agreement for this territory. The loss of any one of the Company's major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay the Company's recognition of revenues, harm its reputation in the industry, and reduce its ability to accurately predict cash flow, and, as a consequence, could seriously harm the Company's business, financial condition, and results of operations. The Company, through its distributors, distributes ORTHOVISC(R) in territories such as Spain, Portugal, Turkey, and Israel. Due to the result of the unfavorable results of the U.S. ORTHOVISC(R) Phase III clinical trial announced on May 31, 2000, marketing efforts in these countries have been and may continue to be negatively affected. There can be no assurance that past ORTHOVISC(R) sales levels will be maintained or that sales will occur at all in these countries. 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 2001, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of the Company's investments consist of money market funds and commercial paper that are carried on the Company's books at amortized cost, which approximates fair market value. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. PRIMARY MARKET RISK EXPOSURES The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalent and short-term investments is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company's exposure to currency exchange rate fluctuations is specific to certain sales to a foreign customer and is expected to continue to be modest. The impact of currency exchange rate movements on sales to this foreign customer was immaterial for the quarter ended June 30, 2001. Currently, the Company does not engage in foreign currency hedging activities. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 9, "Legal Matters" of the consolidated financial statements. The description of such matters is incorporated herein by reference to such financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 6, 2001, the Company held its 2001 Annual Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, Stockholders of the Company were asked to consider a proposal to elect two Class II Directors of the Company to serve until the 2004 annual meeting of stockholders and until their successors are duly elected and qualified (the "Election Proposal"). With respect to the Election Proposal, Samuel F. McKay and Harvey S. Sadow, Ph.D. were nominated as Class II Directors of the Company. Mr. McKay received 8,162,415 shares voted in favor of his election and 125,883 votes were withheld. Dr. Sadow received 8,155,970 shares voted in favor of his election and 132,328 votes were withheld. Mr. McKay and Dr. Sadow were therefore elected as Class II Directors. Joseph L. Bower and Eugene A. Davidson, Ph.D. (Class I Directors), and J. Melville Engle and Steven E. Wheeler (Class III Directors) continued to serve their respective terms after the Annual Meeting. Subsequently, as announced on June 13, 2001, in conjunction with J. Melville Engle's departure from the Company on that date, Mr. Engle also left the Board of Directors. 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.
28
(A) EXHIBIT NO. DESCRIPTION - --------------- ----------- 3.2 Certificate of Vote of Directors Establishing a Series of Convertible Preferred Stock, incorporated herein by reference to Exhibits to the Company's Registration Statement on Form 10 (File no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993. 3.3 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. 3.4 Certificate of Vote of Directors Establishing a Series of a Class of Stock, incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form 8-AB12 (File no. 001-14027), filed with the Securities and Exchange Commission on April 7, 1998. 3.5 Amendment to the Amended and Restated Articles of Organization of the Company, incorporated herein by reference to the Company's quarterly report on Form 10-QSB for the quarterly period ending June 30, 1998 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 1998. 3.6 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. (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 to 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 Separation Agreement between J. Melville Engle and the Company dated June 13, 2001. *10.2 Stipulation and Agreement of Compromise, Settlement and Release dated May 25, 2001 in connection with In Re Anika Therapeutics, Inc. Securities Litigation. (11) Statement Regarding the Computation of Per Share Earnings 11.1 See Note 4 to the Financial Statements included herewith.
* Filed herewith (b) Reports on Form 8-K: None 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Woburn, Massachusetts on August 14, 2001. ANIKA THERAPEUTICS, INC. By: /s/ DOUGLAS R. POTTER ----------------------------------------- Douglas R. Potter CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL August 14, 2001 OFFICER AND AUTHORIZED OFFICER)
30 EX-10.1 3 a2057054zex-10_1.txt EXHIBIT 10.1 Exhibit 10.1 June 15, 2001 PERSONAL & CONFIDENTIAL Mr. J. Melville Engle 12 Deergrass Lane Acton, MA 01720 Dear Mel: This letter agreement (the "Agreement") confirms the agreement that we have reached regarding your resignation from your regular, full-time employment and all offices you hold with Anika Therapeutics, Inc. (the "Company"). The purpose of this Agreement is to establish an amicable arrangement for ending your employment relationship with the Company, to release the Company and related persons or entities from any claims and to permit you to receive fair and reasonable separation pay and related benefits. Nothing in this Agreement is intended to condition your entitlement to pay or benefits earned based on your employment to and including the date of termination of your employment on your agreement to this Agreement. Specifically, the Company has provided or shall provide the pay referred to in Section 1 below and the right to elect COBRA coverage, regardless of whether you agree to this Agreement. If you agree to the terms of this Agreement, you acknowledge that you are entering into this Agreement voluntarily. It is customary in employment separation agreements that provide for severance pay for the departing employee to release the employer from any possible claims, even if the employer believes, as is the case here, that no such claims exist. You understand that you are giving up your right to bring any and all possible legal claims against the Company. Neither the Company nor you want your employment relationship to end with a legal dispute. By entering into this Agreement, you understand that the Company is not admitting in any way that it violated any legal obligation that it owed to you. To the contrary, the Company's willingness to enter into this Agreement, which provides for compensation beyond what you are contractually entitled to, demonstrates that it is continuing to deal with you fairly and in good faith. Mr. J. Melville Engle June 15, 2001 Page 2 With those understandings, you and the Company agree as follows: 1. RESIGNATION Effective June 12, 2001 (the "Resignation Date"), you resigned from your offices as Chairman of the Board, President and Chief Executive Officer, and Director on the Company's Board of Directors, trustee of the Company's Employee Savings and Retirement Plan and from any and all employment or offices you hold with the Company, its subsidiaries and/or its affiliates. The Company shall pay you your current base salary through June 12, 2001. In addition, the Company will pay you for all accrued but unused vacation time through the Resignation Date, which will be based on 173.85 hours of accrued but unused vacation time. All payments to be made are subject to the provisions of Section 5 hereof. 2. SEVERANCE PAY Beginning no later than the Company's second regular payroll date after the Effective Date, as it is defined in Section 14, the Company shall provide severance pay ("Severance Pay") to you consisting of the continuation of your current base salary rate of $251,472.00 per year for a forty-one and one-half (41 1/2) week period beginning June 13, 2001 (the "Salary Continuation Period") such that you shall receive total Severance Pay of $200,736.00, payable on the Company's regular bi-weekly payroll dates. The Company will suspend the payment of Severance Pay until such time as the Agreement becomes effective in accordance with Section 14. If the Agreement becomes effective, the Company will reinstate you to the payroll and shall provide any suspended payroll payments to you no later than the second payroll date after this Agreement becomes effective. All payments to be made are subject to the provisions of Section 5 hereof. 3. BENEFITS a. MEDICAL AND DENTAL BENEFITS By agreeing to this Agreement, you elect to continue your medical and dental insurance coverage under COBRA. Your COBRA period commenced on June 13, 2001. Provided that you remain eligible for COBRA continuation coverage, the Company shall continue to pay the premiums for your group medical and dental insurance coverage on the same basis as if you continued to be employed through December 12, 2001. Thereafter, you may continue coverage at your own expense for the remainder of the COBRA period to the extent you remain eligible. b. SPOT/STAY BONUS The Company also will provide you with the payment of $37,500, constituting your 2001 "Spot/Stay Bonus" payment, which will be sent to you by mail on the date on which the Mr. J. Melville Engle June 15, 2001 Page 3 Company regularly distributes the "Spot/Stay Bonus" to its eligible employees. All payments to be made are subject to the provisions of Section 5 hereof. c. STOCK AND STOCK OPTION PLANS You currently hold stock options to purchase common stock under the Company's Stock Option Plan dated March 3, 1993, as amended (the "Plan"), as set forth below: o 250,000 shares at $5.25 per share on October 4, 1996 (the "October 4, 1996 Stock Grant"); o 100,000 shares at $7.625 per share on October 28, 1997 (the "October 28, 1997 Stock Grant"); o 85,000 shares at $4.75 per share on December 21, 1998 (the "December 21, 1998 Stock Grant"); o 40,000 shares at $6.938 per share on January 11, 2000 (the "January 11, 2000 Stock Grant") ; and o 60,000 shares at $1.75 per share on September 11, 2000 (the "September 11, 2000 Stock Grant"). All of your vested and unvested stock options under each of the October 4, 1996 Stock Grant, October 28, 1997 Stock Grant, December 21, 1998 Stock Grant and January 11, 2000 Stock Grant are hereby terminated as of the Resignation Date. With respect to those shares subject to the terms of the September 11, 2000 Stock Grant, the terms of the September 11, 2000 Stock Grant are hereby amended such that all 60,000 shares will vest as of the Resignation Date at the option exercise price specified in the September 11, 2000 Stock Grant and shall remain fully exercisable under the terms of the Plan until December 12, 2001. Thereafter, the September 11, 2000 Stock Grant, or portion thereof that is unexercised, shall terminate. d. OUTPLACEMENT The Company shall pay up to a maximum of $20,000 to a mutually agreeable outplacement advisor to assist you in your efforts to obtain new employment, provided that such outplacement services are provided on or prior to June 12, 2002. e. OTHER BENEFITS Your eligibility to participate in any other employee benefit plans and programs sponsored by or made available to employees of the Company or its affiliated or related entities ceases effective on or after your Resignation Date in accordance with applicable benefit plan terms and benefit practices. Your rights to benefits, if any, are governed by the terms of those benefit plans and programs. Mr. J. Melville Engle June 15, 2001 Page 4 4. TREATMENT OF EXISTING PROMISSORY NOTES TO THE COMPANY a. $75, 000 PROMISSORY NOTE DATED MARCH 17, 1997 You acknowledge that on or about March 17, 1997, you entered into a Promissory Note (the "March 17, 1997 Promissory Note") with the Company pursuant to which you borrowed the principal sum of seventy-five thousand dollars ($75,000.00), together with interest, which is payable upon the end of the severance continuation period which is 41 1/2 weeks after the employee's termination date or when the primary residence is paid, whichever is sooner. The March 17, 1997 Promissory Note is secured, in part, by a second mortgage on your primary residence located at 12 Deergrass Lane, Acton, Massachusetts (the "Primary Residence"). You and the Company hereby agree that the terms of the Promissory Note are hereby amended such that the Note, together with interest, shall be payable upon the end of the severance continuation period which is 41 1/2 weeks after the employee's termination date or when the primary residence is paid, whichever is sooner. You further covenant to give prior notice to the Company of any impending sale of your Primary Residence. b. $59,000 PROMISSORY NOTE DATED JULY 10, 1998 You acknowledge that on or about July 10, 1998, you entered into a Demand Promissory Note (the "July 10, 1998 Note") with the Company pursuant to which you borrowed the principal sum of fifty-nine thousand dollars ($59,000.00), together with interest, which is payable upon the Resignation Date. The Company hereby forgives any repayment obligations owed by you as of the Resignation Date under the terms of the July 10, 1998 Note. You acknowledge and agree that you are solely responsible for any tax consequences resulting from the Company's forgiveness of the July 10, 1998 Note. c. $41,000 PROMISSORY NOTE DATED DECEMBER 20, 1999 You acknowledge that on or about December 20, 1999, you entered into a Demand Promissory Note (the "December 20, 1999 Note") with the Company pursuant to which you borrowed the principal sum of forty-one thousand dollars ($41,000.00), together with interest, which is payable upon the Resignation Date. The Company hereby forgives any repayment obligations owed by you as of the Resignation Date under the terms of the December 20, 1999 Note. You acknowledge and agree that you are solely responsible for any tax consequences resulting from the Company's forgiveness of the December 20, 1999 Note. d. $20,000 PROMISSORY NOTE DATED AUGUST 26, 1999 You acknowledge that on or about August 26, 1999, you entered into a Promissory Note (the "August 26, 1999 Promissory Note") with the Anika Therapeutics, Inc. 401(k) Profit Mr. J. Melville Engle June 15, 2001 Page 5 Sharing Plan (the "401(k) Plan"). The Terms of the August 26, 1999 Promissory Note are unaffected by this Agreement and continue to be governed by the terms of the 401(k) Plan. e. PAYMENT TO OFFSET TAX LIABILITY To offset tax liability you may incur as a result of the Company's forgiveness of your payment obligations pursuant to the July 10, 1998 Note and the December 20, 1999 Note, on or before December 31, 2001, the Company will make a payment to you of $72,414.00. All payments to be made are subject to the provisions of Section 5 hereof. 5. TAX TREATMENT The Company shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Except as expressly provided in Section 4, nothing in this Agreement shall be construed to require the Company to make any payments to compensate you for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 6. RELEASE OF CLAIMS In consideration for, among other terms, the payments and benefits described in Sections 2, 3 and 4, to which you otherwise would not be entitled, you voluntarily release and forever discharge the Company, its affiliated and related entities, its and their respective predecessors, successors and assigns, and each of their current and former officers, directors, shareholders, employees, attorneys, accountants and agents in their official and personal capacities (collectively referred to as the "Releasees") generally from all claims, demands, debts, damages and liabilities of every name and nature, known or unknown, that, as of the date that you sign this Agreement, you now have, ever had, now claim to have or ever claimed to have had against any or all of the Releasees ("Claims"). This release includes, without limitation, all Claims relating to your employment by and termination of employment with the Company; all Claims of wrongful discharge; all Claims of breach of contract; all Claims of retaliation or discrimination under federal, state or local law (including, without limitation, Claims of age discrimination under the Age Discrimination in Employment Act); all Claims of defamation or other torts; all Claims of violation of public policy; all Claims for wages, bonuses, incentive compensation, vacation pay or any other compensation or benefits; and all Claims for damages of any sort, including, without limitation, compensatory damages, punitive damages and attorneys fees; provided, however, that this release shall not affect your right to enforce this Agreement. Mr. J. Melville Engle June 15, 2001 Page 6 You agree that you shall not seek or accept reinstatement with any Releasees. You also agree that you shall not seek damages of any nature, equitable or legal remedies, attorney's fees, or costs from any of the Releasees with respect to any Claim. As a material inducement to the Company to enter into this Agreement, you hereby represent that you have not heretofore assigned to any third party and you have not heretofore filed with any agency or court any Claim released by this Agreement. 7. RETURN OF PROPERTY You will return all Company property that is in your possession, custody or control, including, without limitation, computer equipment, software, cellular telephones, keys and access cards, credit cards, files and any other documents (including computerized data and any copies made of any computerized data or software) containing information concerning the Company, its business or customer relationships (in the latter two cases, actual or prospective), no later than the date when this Agreement becomes effective. 8. COOPERATION You agree that, at any time in the future, you shall cooperate fully with the Company as reasonably requested in all regulatory matters and in the defense or prosecution of any legal claims or actions that already have been brought or that may be brought in the future against or on behalf of the Company that relate to events or occurrences that transpired during your employment with the Company. Your full cooperation in connection with such regulatory matters, claims, actions or disputes shall include, without limitation, being available to meet with representatives of the Company to prepare for regulatory processes and counsel to prepare for discovery or trial and to testify truthfully as a witness when reasonably requested by the Company. The Company will reimburse you for any reasonable out-of-pocket expenses [(which shall not be construed to include your personal attorney's fees)] that you incur in connection with such cooperation, provided that you provide the Company reasonable documentation of such out-of-pocket expenses, and receive advanced written approval of any such expenditure or group of related expenditures in excess of $250. 9. CONFIDENTIALITY OF AGREEMENT You agree to keep the existence and terms of this Agreement and all matters leading up to your resignation, including the rationale or reasons therefor, in the strictest confidence and to not reveal, unless legally compelled to do so, the existence or terms of this Agreement to any persons except your attorney and your financial advisors, provided that they also agree to keep such information confidential. You shall be considered to have breached this Agreement if any of those individuals fails to keep such information completely confidential. Nothing in this Section 9 shall be construed to prevent you from disclosing such matters to the extent required by a lawfully issued subpoena or duly issued court order; PROVIDED that you provide the Company Mr. J. Melville Engle June 15, 2001 Page 7 with advance written notice as soon as is practicable and a reasonable opportunity to contest such subpoena or court order. Nothing contained herein shall be deemed to limit your rights under applicable law, including 29 U.S.C. ss. 626(f)(4). 10. VALIDITY OF NON-DISCLOSURE AND NON-COMPETITION AGREEMENT You acknowledge and agree that you remain bound by the terms of the Company's Non-Disclosure and Non-Competition Agreement that was executed by you on or about August 20, 1998, in accordance with its terms after the date hereof. 11. NON-DISPARAGEMENT You will refrain from making any disparaging statements, taking any actions, or conducting yourself in any way that adversely affects the reputation or goodwill of the Company and/or its affiliated entities and the current and former officers, directors, shareholders, employees and agents of any of them. These non-disparagement obligations shall not in any way affect your obligation to testify truthfully in any legal proceeding. You further agree to refrain from communicating with any third parties, including, without limitation, shareholders of the Company, regarding the Company, its business, prospects or strategies. 12. CONSIDERATION OF THE AGREEMENT This Agreement is a legally binding document. Provided that you do not revoke this Agreement in accordance with Section 14 below, your signature will commit you to the terms of this Agreement. You acknowledge that you have been advised to discuss all aspects of this Agreement with your attorney, that you have carefully read and fully understand all of the provisions of this Agreement and that you are voluntarily entering into this Agreement. 13. CONSENT TO JURISDICTION You and the Company hereby consent to the jurisdiction of the Superior Court of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts with respect to any claim of violation of this Agreement. With respect to any such court action you (a) submit to the jurisdiction of such courts, (b) consent to service of process, and (c) waive any other requirement (whether imposed by statute, rule of court or otherwise) with respect to personal jurisdiction or venue. 14. OTHER PROVISIONS You acknowledge that you have been given the opportunity to consider this Agreement for twenty-one (21) days before signing it. If you sign this Agreement within less than twenty- Mr. J. Melville Engle June 15, 2001 Page 8 one (21) days of the date of its delivery to you, you acknowledge that such decision was entirely voluntary and that you had the opportunity to consider this Agreement for the entire twenty-one (21) day period. To accept this Agreement, you must provide the fully signed Agreement to the undersigned by the end of the twenty-one (21) day period. For a period of seven (7) days from the date you sign this Agreement, you have the right to revoke this Agreement by written notice to the undersigned. If you do not revoke this Agreement, it shall become effective on the eighth (8th) day after you sign it. This Agreement shall not become effective or enforceable until the expiration of the seven (7) day revocation period (the "Effective Date"). You acknowledge that you are aware that under Federal and state securities laws, certain restrictions may apply to actions and communications by you, as well as to trading in the Company's securities. This Agreement constitutes the entire agreement regarding the termination of your employment with the Company. This Agreement supersedes any previous agreements or understandings between us (including, without limitation, that certain letter dated September 24, 1996), except as described in Sections 3, 4 and 10. In signing this Agreement, you are not relying upon any oral promises or representations made by anyone at or on behalf of the Company. This Agreement will be interpreted and enforced under the laws of the Commonwealth of Massachusetts, without regard to conflict of law principles. In the event of any dispute, this Agreement will be construed as a whole, will be interpreted in accordance with its fair meaning, and will not be construed strictly for or against either you or the Company. This Agreement is executed under seal. Mr. J. Melville Engle June 15, 2001 Page 9 Please indicate your agreement to the terms of this Agreement by signing and returning to me a copy of this letter. You are advised to consult with an attorney before signing this Agreement. Sincerely, ANIKA THERAPEUTICS, INC. By: /s/ DOUGLAS R. POTTER ---------------------------- Accepted and agreed to: Douglas R. Potter Chief Executive Officer and Chief Financial Officer /s/ J. MELVILLE ENGLE - --------------------- J. Melville Engle Date: June 15, 2001 EX-10.2 4 a2057054zex-10_2.txt EXHIBIT 10.2 Exhibit 10.2 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS - ------------------------------------------------------------------------------- IN RE ANIKA THERAPEUTICS, INC. CIVIL ACTION NO. 00-11127-WGY SECURITIES LITIGATION (All Actions) - ------------------------------------------------------------------------------- STIPULATION AND AGREEMENT OF COMPROMISE, SETTLEMENT AND RELEASE Plaintiffs in the above-captioned matters, on behalf of themselves, the Class and all Class Members (as defined below); and defendant Anika Therapeutics, Inc. ("Anika") and individual defendants J. Melville Engle and Sean Moran ("Individual Defendants"), by and through their attorneys, hereby enter into this Stipulation and Agreement of Compromise, Settlement and Release (the "Stipulation"), as of May 25, 2001, subject to the approval of the Court pursuant to Rule 23 of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995. For purposes of this Stipulation, Anika and the Individual Defendants shall be collectively referred to as "Defendants." WHEREAS: 1. Wherever used in this Stipulation, the following terms have the meanings set forth below: a. "Action" means the above-captioned consolidated action pending in the United States District Court for the District of Massachusetts. b. "Authorized Claimant" means a Claimant who submits a Proof of Claim in accordance with the criteria in paragraph 12, and whose Proof of Claim is not rejected. c. "Claimant" means a Class Member who submits a Proof of Claim to the Claims Administrator. d. "Claims Administrator" means the firm of Strategic Claims Services, Inc., the claims administrator selected by Plaintiffs' Lead Counsel to assist in the administration of the Settlement. e. "Class" means, for purposes of this Settlement only, a plaintiff class pursuant to Rule 23 of the Federal Rules of Civil Procedure, comprising all Persons who purchased or otherwise acquired Anika common stock during the period beginning and including April 15, 1998 through and including May 30, 2000, together with the successors in interest and transferees, immediate and remote, of each of them. Excluded from the Class are the Defendants, the officers and directors of Anika during the Class Period, members of their immediate families (i.e., spouses, parents, siblings and children), any Person in which any Defendant has a controlling interest, and the legal representatives, heirs, successors in interest, and/or assigns of any such excluded party. Also excluded from the Class are any Persons who exclude themselves by filing a request for exclusion in accordance with the requirements set forth in the Notice. f. "Class Member" means any Person included in the Class. g. "Class Period" means the period beginning and including April 15, 1998 through and including May 30, 2000. h. "Complaint" means the Consolidated Amended Class Action Complaint filed in this Court on or about October 30, 2000. i. "Court" means the United States District Court for the District of Massachusetts. j. "Defendants' Counsel" means the law firm of Goodwin Procter LLP. 2 k. "Effective Date of Settlement" or "Effective Date" means the date upon which the Settlement contemplated by this Stipulation shall become effective, as set forth in paragraph 21 below. l. "Final Judgment" means an Order And Final Judgment to be entered by the Court substantially in the form attached hereto as Exhibit B. m. "Lead Plaintiffs" means David West and Vivian West. n. "Notice" means the Notice of Pendency of Class Action, Proposed Settlement Thereof, Settlement Hearing and Right to Share in the Settlement Fund, which is to be sent to Class Members substantially in the form attached hereto as Exhibit 1 to Exhibit A. o. "Notice and Administration Costs" means the notice and administrative costs described in paragraph 6 below. p. "Person" means an individual, corporation, general or limited partnership, joint stock company, joint venture, limited liability company, estate, legal representative, trust, unincorporated association, and any other business or legal entity and its heirs, successors, or assigns. q. "Plaintiffs' Lead Counsel" means the law firm of Berman, DeValerio & Pease LLP. r. "Plan of Allocation" means the Plan of Allocation prepared by Plaintiffs' Lead Counsel or such other Plan of Allocation as may be approved by the Court. s. "Preliminary Approval Order" means an Order of Preliminary Approval in Connection with Settlement Procedures to be entered by the Court substantially in the form attached hereto as Exhibit A. 3 t. "Proof of Claim" means the Proof of Claim and Release in the form attached hereto as Exhibit 3 to Exhibit A. u. "Publication Notice" means the Publication Notice of Pendency of Class Action, Proposed Settlement and Settlement Hearing in the form attached as Exhibit 2 to Exhibit A. v. "Released Parties" means any and all of the Defendants and their past or present subsidiaries, parents, predecessors, officers, directors, shareholders, agents, employees, attorneys, advisers, investment advisers, financial advisers, underwriters, auditors, accountants, insurers, lenders, investment bankers, affiliates, associates, general and limited partners and partnerships, family members, legal representatives, heirs, executors, administrators, successors in interest or assigns, and any person, firm, trust, corporation, officer, director or other individual or entity in which any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants. w. "Settled Claims" means any and all actions, suits, claims, demands, rights, liabilities and causes of action, of every nature and description whatsoever, whether known or unknown, accrued or unaccrued, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including without limitation Unknown Claims as herein defined, whether or not concealed or hidden, that were asserted or that could have been asserted or could be asserted in any forum, whether brought directly, indirectly or derivatively (including but not limited to claims for negligence, gross negligence, breach of duty of care and/or breach of duty of loyalty, fraud, breach of fiduciary duty, or violations of any statutes, rules, duties or regulations), that the Lead Plaintiffs, the Class, the Class Members or any of them, or any of their heirs, executors, administrators, representatives, attorneys, successors, assigns, agents, 4 affiliates and partners, and any Persons they represent, in the past had, now have, or might in the future have against the Released Parties or any of them, which regard, concern, relate to, refer to, arise out of, or are based upon, in any way: (a) the allegations, transactions, facts, matters, occurrences, representations, omissions, disclosures, statements, failure to disclose or failure to act involved, set forth, referred to or that were, could be, or could have been asserted in the Action, whether known or unknown, including without limitation Unknown Claims as herein defined, and whether or not concealed or hidden; (b) the purchase or acquisition of shares of Anika stock during the Class Period; (c) the Defendants' defense of or settlement of the Action; and (d) the administration of the settlement or the distribution of funds from the Settlement Fund. Provided, however, that the definition of Settled Claims shall not in any way impair or restrict the rights of the settling parties to enforce the settlement set forth in this Stipulation. As used herein, "Unknown Claims" shall mean any and all actions, suits, claims, demands, rights, liabilities and causes of action that the Lead Plaintiffs, the Class, or any of the Class Members do not know of or suspect to exist in their favor at the time of the release of the Released Parties, including but not limited to those that, if known by them, might have affected their agreement to the Settlement. With respect to Unknown Claims, the Lead Plaintiffs, the Class, and each of the Class Members hereby expressly waive and relinquish, to the fullest extent permitted by law, the benefits of Section 1542 of the California Civil Code, which states: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor; and any and all provisions, rights, and benefits of any similar state or federal or other law. x. "Settlement" means the settlement contemplated by this Stipulation. 5 y. "Settlement Fund" means the $1,250,000 payment to be made by Defendants within ten (10) business days after the Court executes the Preliminary Approval Order, together with all interest accrued and paid therein. z. "Settlement Hearing" means the final settlement hearing, required by the Court, to determine, among other things, the fairness, reasonableness, and adequacy of the Settlement. aa. "Stipulation" means this Stipulation and Agreement of Compromise, Settlement and Release. 2. The first of the putative class action complaints filed against the Defendants and consolidated in this Action was filed in this Court on or about June 8, 2000, and captioned CASAZZA, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN, Civil Action No. 00-11127-WGY. 3. Thereafter, additional complaints were filed against the Defendants, also in this Court, and consolidated in this action. The second, filed on or about June 26, 2000, was captioned NEMETH-COSLETT, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN, Civil Action No. 00-11257-WGY. The third, filed on or about August 2, 2000, was captioned ROCKEFELLER, ET AL. V. ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN, Civil Action No. 00-11540-WGY. Each of these putative class action complaints encompassed the same class period and covered substantively identical allegations. 4. On or about August 7, 2000, David and Vivian West, alleged members of the Class, filed a motion to have the Court appoint them to be Lead Plaintiffs, to appoint Berman, DeValerio & Pease LLP as Plaintiffs' Lead Counsel, as well as a motion for consolidation of the above cases. On or about September 13, 2000, this Court granted David and Vivian West's 6 motions, consolidated the cases referred to in paragraphs 2 and 3, above, and recaptioned the consolidated Action IN RE ANIKA THERAPEUTICS, INC. SECURITIES LITIGATION, Civil Action No. 00-11127-WGY. 5. On or about October 30, 2000, Lead Plaintiffs filed a Consolidated Amended Class Action Complaint in the Action. The Complaint alleges that the Defendants violated the federal securities laws by, INTER ALIA, making material misrepresentations and omissions in certain public disclosures during the period between April 15, 1998 and May 30, 2000. The alleged misrepresentations and omissions relate to the Company's historical revenue recognition policies and its restatement of revenues for fiscal year 1998 and the first three quarters of 1999. 6. Following negotiations, the parties reached an agreement in principle on the terms of a settlement of the Action. Accordingly, the parties entered into a Memorandum of Understanding ("MOU") dated March 8, 2001. The MOU provides that the effectuation of the settlement contemplated thereunder is subject to, among other things, (i) the parties' execution of an appropriate Stipulation; (ii) certification of the Class for purposes of the Settlement; (iii) Court approval of the Settlement; (iv) confirmatory discovery and (v) dismissal of the Action with prejudice and with each party bearing his/its own costs except as otherwise provided for herein. 7. Solely for purposes of settlement and for carrying out the terms of this Stipulation, the parties have agreed to this Court's certification of the Class pursuant to Rule 23 of the Federal Rules of Civil Procedure. 8. Defendants deny all liability with respect to the Action, deny that they have engaged in any wrongdoing, deny the allegations in the Complaint filed in the Action, deny that they committed any violation of law, deny that they acted improperly in any way, and deny 7 liability of any kind to the plaintiffs named in the initial complaints, the Lead Plaintiffs, the Class, or the Class Members, but have agreed to the settlement and dismissal of the Action with prejudice in order to: (i) avoid the substantial expense, inconvenience and distraction of protracted litigation; and (ii) finally put to rest and terminate the Action and any and all Settled Claims. 9. Plaintiffs' Lead Counsel has conducted discussions and arms' length negotiations with Defendants' Counsel with respect to a compromise and settlement of the Action with a view to settling the issues in dispute and achieving the best relief possible consistent with the interests of the Lead Plaintiffs, the Class, and all Class Members. 10. Plaintiffs' Lead Counsel has concluded that the terms and conditions of this Stipulation are fair, reasonable, and in the best interests of the Lead Plaintiffs, the Class, and all Class Members; have agreed that the Released Parties should be released from the Settled Claims pursuant to the terms and provisions of this Stipulation; and have agreed to the dismissal of the Action with prejudice, after considering the substantial benefits that the Lead Plaintiffs, the Class, and all Class Members will receive from settlement of the Action, the risks of litigation, and the desirability of permitting the Settlement to be consummated as provided by the terms of this Stipulation. NOW, THEREFORE, it is hereby STIPULATED AND AGREED, by and among the parties to this Stipulation, through their respective attorneys, subject to the approval of the Court pursuant to Rule 23(e) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, in consideration of the benefits flowing to the parties hereto from the Settlement, that the Settled Claims as against the Released Parties shall be compromised, 8 settled, forever released, barred, and dismissed with prejudice, upon and subject to the following terms and conditions: RELEASE; SCOPE AND EFFECT OF RELEASE 1. The obligations incurred pursuant to this Stipulation shall be in full and final disposition of the Action with prejudice and of any and all Settled Claims as against all Released Parties. 2. On the Effective Date, the Lead Plaintiffs, the Class, and the Class Members, on behalf of themselves, their heirs, executors, administrators, representatives, attorneys, successors, assigns, agents, affiliates and partners, and any Persons they represent ("Releasing Parties"), shall be deemed to have, and by operation of the Final Judgment shall have, fully, finally and forever released, relinquished, and discharged the Released Parties of and from any and all of the Settled Claims, and the Releasing Parties shall forever be barred and enjoined from bringing or prosecuting any Settled Claim against any of the Released Parties. SETTLEMENT CONSIDERATION 3. Within ten (10) business days after the Court executes the Preliminary Approval Order, Defendants shall pay or cause to be paid $1,250,000.00 ("the Settlement Fund") into an interest bearing escrow account to be established by Plaintiffs' Lead Counsel. Plaintiffs' Lead Counsel shall administer the Settlement Fund. The Settlement Fund, less any amounts reasonably incurred for notice, administration, and/or taxes pursuant to the Stipulation, shall revert to the Defendant(s) making the payment of the settlement amount if the Settlement does not become effective. 4. (a) The Settlement Fund, net of any taxes on the income thereof, shall be used to pay (i) the reasonable Notice and Administration Costs referred to in paragraph 6 hereof, and 9 (ii) the award of attorneys' fees and reimbursement of expenses referred to in paragraph 7 hereof. The balance of the Settlement Fund after the above payments shall be distributed to the Authorized Claimants in this Action as provided in paragraphs 8-16 hereof. All funds held by Plaintiffs' Lead Counsel in the Settlement Fund shall be deemed to be IN CUSTODIA LEGIS and shall remain subject to the jurisdiction of the Court until such time as the funds shall be distributed or returned to Defendants pursuant to this Stipulation and/or further order of the Court. Plaintiffs' Lead Counsel shall invest any funds in excess of $50,000 in United States Government obligations with a maturity of 180 days or less, and shall collect and reinvest in the Settlement Fund all interest accrued thereon. Any funds held in escrow in an amount of less than $50,000 may be held in an interest bearing bank account insured by the Federal Deposit Insurance Corporation (FDIC). (b) The parties hereto agree that the Settlement Fund is intended to be a Qualified Settlement Fund within the meaning of Income Tax Regulation ss. 1.468B-1 and that the Claims Administrator, as administrator of the Settlement Fund within the meaning of Income Tax Regulation ss. l.468B-2(k)(3), shall be responsible for filing tax returns for the Settlement Fund and paying from the Settlement Fund any taxes owed with respect to the Settlement Fund. Defendants' Counsel agree to provide promptly to Plaintiffs' Lead Counsel the statement described in Income Tax Regulation ss. 1.468B-3(e). (i) ADMINISTRATION. 5. The Claims Administrator shall administer the Settlement under Plaintiffs' Lead Counsel's supervision and subject to the jurisdiction of this Court. The allocation of the Settlement Fund among the Class Members shall be subject to a plan of allocation to be proposed by Plaintiffs' Lead Counsel and approved by the Court. Except as stated in the last sentence of 10 this paragraph, Defendants shall have no responsibility for the administration of the Settlement, the maintenance or investments of the Settlement Fund, or distribution of the Settlement Fund, and shall have no liability to the Lead Plaintiffs, the Class, or any Class Member in connection with such administration or distribution or the maintenance or investment of the Settlement Fund. Defendants agree to provide Plaintiffs' Lead Counsel, within ten (10) business days after signing this Stipulation, such information from Defendants' stock transfer records concerning the identity of Class Members as made available by Defendants' stock transfer agent following request by Defendants as appropriate for providing Notice to the Class. 6. Prior to the Effective Date, Plaintiffs' Lead Counsel may expend from the Settlement Fund, without further approval from the Defendants or the Court, up to the sum of $50,000.00 to pay the reasonable costs and expenses actually incurred in the administration of the Settlement, including without limitation the costs of identifying members of the Class, mailing the Notice, and publishing the Publication Notice. Such amounts shall include, without limitation, the reasonable actual costs of publication, printing and mailing the Notice, reasonable reimbursements to nominee owners for forwarding notice to their beneficial owners, and the reasonable administrative expenses incurred and fees charged by the Claims Administrator in connection with providing notice and processing the claims filed. All such amounts are the "Notice and Administration Costs." All Notice and Administration Costs shall be paid solely from the Settlement Fund, and none of the Defendants shall be required to pay any portion of the Notice and Administration Costs. (ii) ATTORNEYS' FEES AND EXPENSES. 7. Plaintiffs' Lead Counsel will apply to the Court for an award from the Settlement Fund of attorneys' fees and reimbursement of out-of-pocket expenses on behalf of plaintiffs' 11 counsel. Defendants agree that they will take no position with regard to Plaintiffs' Lead Counsel's application for an award of attorneys' fees and reimbursement of expenses. Such attorneys' fees and reimbursement of expenses as are awarded by the Court shall be paid from the Settlement Fund to Plaintiffs' Lead Counsel immediately upon entry by the Court of an order awarding them, notwithstanding the existence of any timely-filed objections thereto or potential for appeal therefrom, or collateral attack on the Settlement, subject to the joint and several obligation of all Plaintiffs' counsel to make appropriate refunds or repayments to the Settlement Fund plus accrued interest at the rate paid on the Settlement Fund by the financial institution holding it, if and when, as a result of any appeal and/or further proceedings on remand, or a successful collateral attack, the award is reduced or reversed or does not become final. All such attorneys' fees and reimbursement of expenses shall be paid solely from the Settlement Fund, and none of the Defendants shall be required to pay any portion of such attorneys' fees and reimbursement of expenses. (iii) CLASS DISTRIBUTION. 8. The Claims Administrator shall determine for each Authorized Claimant the appropriate PRO RATA share of the Settlement Fund, based upon each Authorized Claimant's Recognized Loss (as defined in the Plan of Allocation). 9. Each Authorized Claimant shall be allocated a PRO RATA share of the Settlement Fund based on his or her Recognized Loss compared to the total Recognized Losses of all accepted claimants. In no case, however, shall an Authorized Claimant's PRO RATA share of the Settlement Fund be greater than such Authorized Claimant's Recognized Loss. The Claims Administrator shall pay each Authorized Claimant the appropriate distribution amount from the Settlement Fund, net of attorneys' fees, expenses, and other costs described above. If any funds remain in the Settlement Fund after all Authorized Claimants have been paid, then such funds shall be donated to charity. 12 ADMINISTRATION OF THE SETTLEMENT 10. Any Class Member who does not submit a Proof of Claim is not eligible to receive any portion of the Settlement Fund, but otherwise shall be bound by all of the terms of this Stipulation and the Settlement, including the terms of the Order and Final Judgment to be entered in the Action and the releases provided for herein, and will be barred and enjoined from bringing or prosecuting any action against the Released Parties concerning the Settled Claims. 11. Plaintiffs' Lead Counsel shall be responsible for supervising the administration of the Settlement and disbursement of the Settlement Fund by the Claims Administrator. Defendants shall have no responsibility for the administration of the Settlement or distribution of the Settlement Fund and shall have no liability to the Lead Plaintiffs, the Class, or any Class Member in connection with such administration or distribution. Plaintiffs' Lead Counsel shall have the right, but not the obligation, to waive what they deem to be formal or technical defects in any submitted Proof of Claim in the interests of achieving substantial justice. 12. For purposes of determining the extent, if any, to which a Class Member shall be entitled to be treated as an "Authorized Claimant," the following conditions shall apply: (a) Each Class Member shall be required to submit a complete and executed Proof of Claim (see attached Exhibit 3 to Exhibit A), supported by such documents as are designated therein, including proof of the Class Member's loss, or such other documents or proof as Plaintiffs' Lead Counsel, in their discretion, may deem acceptable; (b) All Proofs of Claim must be submitted by the date specified in the Notice unless such period is extended by Order of the Court. Any Class Member who fails to submit a Proof 13 of Claim by such date shall be forever barred from receiving any payment pursuant to this Stipulation (unless, by Order of the Court, a later-submitted Proof of Claim by such Class Member is approved), but otherwise shall be bound by all of the terms of this Stipulation and Settlement, including the terms of the Final Judgment to be entered in the Action and the releases provided for herein, and will be barred and enjoined from bringing or prosecuting any action against the Released Parties concerning the Settled Claims. A Proof of Claim shall be deemed to have been submitted when postmarked, if received with a postmark indicated on the envelope and if mailed first class, and addressed in accordance with the instructions thereon. In all other cases, the Proof of Claim shall be deemed to have been submitted when actually received by the Claims Administrator; (c) Each Proof of Claim shall be submitted to the Claims Administrator and shall be reviewed by the Claims Administrator under the supervision of Plaintiffs' Lead Counsel, who shall determine in accordance with this Stipulation the extent, if any, to which each claim shall be allowed, subject to review by the Court pursuant to subparagraph (e) below; (d) Proofs of Claim that do not meet the submission requirements may be rejected. Prior to rejection of a Proof of Claim, the Claims Administrator shall communicate with the Class Member submitting the Proof of Claim ("the Claimant") in order to remedy any curable deficiencies in the Proof of Claim submitted. The Claims Administrator, under supervision of Plaintiffs' Lead Counsel, shall notify, in a timely fashion and in writing, all Claimants whose Proofs of Claim it proposes to reject in whole or in part, setting forth the reasons therefore, and shall indicate in such notice that the Claimant whose claim is to be rejected has the right to a review by the Court if the Claimant so desires and complies with the requirements of subparagraph (e) below; and 14 (e) If any Claimant whose claim has been rejected in whole or in part desires to contest such rejection, the Claimant must, within twenty (20) days after the date of mailing of the notice required in subparagraph (d) above, serve upon the Claims Administrator a notice and statement of reasons indicating the Claimant's grounds for contesting the rejection, along with any supporting documentation, and requesting a review thereof by the Court. If a dispute concerning a claim cannot be otherwise resolved, Plaintiffs' Lead Counsel shall thereafter present the notice and statement of reasons to the Court for its review. 13. Each Claimant shall be deemed to have submitted to the jurisdiction of the Court with respect to the Claimant's Proof of Claim, and the Proof of Claim will be subject to investigation and discovery under the Federal Rules of Civil Procedure, provided that such investigation and discovery shall be limited to that Claimant's status as a Class Member and the validity and amount of the Claimant's Proof of Claim. No discovery shall be allowed on the merits of the Action or the Settlement. 14. Payment pursuant to this Stipulation shall be deemed final and conclusive against all Class Members. Any Class Member whose claim is rejected shall be barred from participating in distributions from the Settlement Fund, but otherwise shall be bound by all of the terms of this Stipulation and the Settlement, including the terms of the Final Judgment to be entered in the Action and the releases provided for herein, and will be barred and enjoined from bringing or prosecuting any action against the Released Parties concerning the Settled Claims. 15. All proceedings with respect to the administration, processing, and determination of Claims described by paragraphs 8-16 of this Stipulation and the determination of all controversies relating thereto, including disputed questions of law and fact with respect to the validity of any Proof of Claim, shall be subject to the jurisdiction of the Court. 15 16. The Settlement Fund shall be distributed to Authorized Claimants by the Claims Administrator only after the Effective Date and after: (i) all Claims have been processed, and all Claimants whose Proofs of Claim have been rejected or disallowed, in whole or in part, have been notified and provided the opportunity to be heard, pursuant to this Stipulation and the Preliminary Approval Order, concerning such rejection or disallowance; (ii) all objections with respect to all rejected or disallowed Proofs of Claim have been resolved by the Court, and all appeals from such rulings by the Court have been resolved or the time for such appeal has expired; (iii) all matters with respect to attorneys' fees and reimbursement of expenses have been resolved by the Court, and all appeals from such rulings by the Court have been resolved or the time for such appeals has expired; and (iv) all costs of administration pursuant to the Stipulation have been paid. RIGHT TO REQUEST EXCLUSION FROM THE CLASS 17. Class Members shall have the right to request exclusion from the Class by submitting a written request for exclusion to Plaintiffs' Lead Counsel and Defendants' Counsel in accordance with procedures to be approved by the Court. Any Class Member who properly and timely requests exclusion from the Class shall not be bound by the Final Judgment and shall have no right to participate in any distribution from the Settlement Fund. In order to be effective, a request for exclusion ("Request for Exclusion") must be postmarked by the date set forth in the Preliminary Approval Order, must set forth the information required by the Preliminary Approval Order and must be signed by the Class Member seeking exclusion. 16 TERMS OF ORDER FOR NOTICE AND HEARING 18. Concurrently with their filing of this Stipulation, Plaintiffs' Lead Counsel and Defendants' Counsel shall jointly apply to the Court for preliminary Court approval of the Settlement contemplated by this Stipulation and entry of a Preliminary Approval Order, substantially in the form appended hereto as Exhibit A. TERMS OF ORDER AND FINAL JUDGMENT 19. If the Settlement contemplated by this Stipulation is approved by the Court, counsel for the parties shall request that the Court enter Final Judgment substantially in the form appended hereto as Exhibit B. OPTION TO WITHDRAW 20. Defendants shall have the option to withdraw from this Stipulation without prejudice if holders of a certain number of shares of Anika publicly-traded common stock as set forth in a letter agreement among counsel for the parties, purchased during the Class Period by members of the Class (which purchasers would otherwise be entitled to participate as members of the Class), timely and validly request exclusion from the Class pursuant to the Preliminary Approval Order. The procedure for making such an election is as follows: (a) Plaintiffs' Lead Counsel and/or the Claims Administrator will inform Defendants' Counsel no later than fourteen (14) days before the Settlement Hearing of the number of Class Members who requested exclusion from the Class and the number of shares purchased by each such Class Member during the Class Period. (b) Such option to withdraw shall be exercised by serving written notice, signed by Defendants' Counsel, upon Plaintiffs' Lead Counsel, but not fewer than four (4) business days before the Settlement Hearing. 17 (c) If Defendants exercise their option to withdraw from the Settlement as provided herein, this Stipulation will be null and void and of no further force and effect, except that the provisions of paragraphs 23 and 24 will survive and apply. EFFECTIVE DATE OF SETTLEMENT, WAIVER OR TERMINATION 21. The Effective Date of Settlement shall be the date when all the following shall have occurred: (a) entry of the Preliminary Approval Order in all material respects in the form appended hereto as Exhibit A; (b) approval by the Court of the Settlement, following notice to the Class and a hearing, as prescribed by Rule 23 of the Federal Rules of Civil Procedure; and (c) entry by the Court of Final Judgment, in all material respects in the form appended hereto as Exhibit B, and the expiration of any time for appeal or review of such Final Judgment, or, if any appeal is filed and not dismissed, after such Final Judgment is upheld on appeal in all material respects and is no longer subject to review upon appeal or review by writ of certiorari, or, in the event that the Court enters an order and final judgment in a form other than that provided above ("Alternative Judgment") and none of the parties hereto elects to terminate this Settlement, the date that such Alternative Judgment becomes final and no longer subject to appeal or review by writ of certiorari. 22. Defendants' Counsel or Plaintiffs' Lead Counsel shall have the right to terminate the Settlement and this Stipulation by providing written notice of their election to do so ("Termination Notice") to all other parties hereto within thirty days of (a) the Court's declining to enter the Preliminary Approval Order or modification of that Preliminary Approval Order in any material respect; (b) the Court's declining to approve the Settlement embodied in this 18 Stipulation, or any material part of it; (c) the Court's declining to enter the Final Judgment or modification of the Final Judgment in any material respect; (d) the date upon which the Final Judgment is modified, reversed, or vacated in any material respect by the Court, the Court of Appeals or the United States Supreme Court; or (e) the date upon which an Alternative Judgment is modified, reversed, or vacated in any material respect by the Court, the Court of Appeals or by the United States Supreme Court. 23. Except as otherwise provided herein, in the event the Settlement is terminated or modified in any material respect or fails to become effective for any reason, then the Settlement shall be without prejudice and none of its terms shall be effective or enforceable; the parties to this Stipulation shall be deemed to have reverted to their respective status in the Action as of the date and time immediately prior to the execution of this Stipulation; except as otherwise expressly provided, the parties shall proceed in all respects as if this Stipulation and any related orders had not been entered; and any portion of the Settlement Fund previously paid by Defendants, together with any interest earned thereon, less any taxes due with respect to such income and less Notice and Administration Costs actually incurred and paid or payable from the Settlement Fund pursuant to this Stipulation, shall be returned to such Defendant(s) as paid the settlement amount into the Settlement Fund. In the event the Settlement is terminated or modified in any material respect, the Defendants shall be deemed to have retained all rights to object to the maintenance of the Action as a class action or the appropriateness of the Lead Plaintiffs as class representatives pursuant to Rule 23 of the Federal Rules of Civil Procedure and shall further be deemed not to have waived, modified, or be estopped from asserting any additional defenses available to them. 19 NO ADMISSION OF WRONGDOING 24. This Stipulation, whether or not consummated, and any proceedings taken pursuant to it: (a) shall not be offered or received against the Defendants as evidence of, or construed as or deemed to be evidence of, any presumption, concession, or admission by any of the Defendants of the truth of any fact alleged by the Plaintiffs or the validity of any claim that had been or could have been asserted in the Action or in any litigation, whether directly or derivatively, or the deficiency of any defense that has been or could have been asserted in the Action, or of any liability, negligence, fault, or wrongdoing of the Defendants; (b) shall not be offered or received against the Defendants as evidence of a presumption, concession, or admission of any fault, misrepresentation, or omission with respect to any statement or written document approved or made by any Defendant, or against the Plaintiffs and the Class as evidence of any infirmity in the claims of the Plaintiffs and the Class; (c) shall not be offered or received against the Defendants as evidence of a presumption, concession, or admission of any liability, negligence, fault or wrongdoing, or in any way referred to for any other reason as against any of the parties to this Stipulation, in any other civil, criminal, or administrative action or proceeding, other than such proceedings as may be necessary to effectuate the provisions of this Stipulation; provided, however, that if this Stipulation is approved by the Court, Defendants may refer to it and rely upon it to effectuate the liability protection granted them hereunder; and (d) shall not be construed against the Defendants or the Plaintiffs and the Class as an admission or concession that the consideration to be given hereunder represents the amount that could be or would have been recovered after trial. 20 MISCELLANEOUS PROVISIONS 25. All of the exhibits attached hereto are hereby incorporated by reference as though fully set forth herein. 26. The parties to this Stipulation intend the Settlement to be a final and complete resolution of all disputes asserted or that could be or could have been asserted by the Lead Plaintiffs, the Class, and/or any of the Class Members against the Released Parties with respect to the Settled Claims. Accordingly, the Defendants agree not to assert that the litigation was brought in bad faith or without a reasonable basis. The parties agree that the amount paid and the other terms of the Settlement were negotiated at arms' length in good faith by the parties, and reflect a settlement that was reached voluntarily by the parties after consultation with their respective experienced legal counsel. The parties will propose to the Court an agreed upon Final Judgment, which will contain a finding that, at all times during the litigation, all parties hereto and their counsel complied with Fed. R. Civ. P. 11. 27. This Stipulation may not be modified or amended, nor may any of its provisions be waived except by a writing signed by all parties hereto or their successors-in-interest. 28. The headings herein are used for the purpose of convenience only and are not intended to have legal effect. 29. The administration and consummation of the Settlement as embodied in this Stipulation shall be under the authority of the Court, and the Court shall retain jurisdiction for the purpose of entering orders providing for awards of attorneys' fees and reimbursement of expenses to Plaintiffs' counsel and enforcing the terms of this Stipulation. 30. The waiver by one party of any breach of this Stipulation by any other party shall not be deemed a waiver of any other prior or subsequent breach of this Stipulation. 21 31. This Stipulation and its exhibits constitute the entire agreement among the parties hereto concerning the Settlement of the Action, and no representations, warranties, or inducements have been made by any party hereto other than those contained and memorialized in such documents. 32. This Stipulation may be executed in one or more counterparts. All executed counterparts and each of them shall be deemed to be one and the same instrument provided that counsel for the parties to this Stipulation shall exchange among themselves original signed counterparts. 33. This Stipulation shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto. 34. The construction, interpretation, operation, effect and validity of this Stipulation, and all documents necessary to effectuate it, shall be governed by the internal laws of the Commonwealth of Massachusetts without regard to conflicts of laws, except to the extent that preemption by federal law requires that federal law govern. 35. This Stipulation shall not be construed more strictly against one party than another merely by virtue of the fact that it, or any part of it, may have been prepared by counsel for one of the parties, it being recognized by the parties that this Stipulation is the result of arms' length negotiations between the parties and that all parties have contributed substantially and materially to the preparation of this Stipulation. 36. All counsel and any other person executing this Stipulation and any of the exhibits hereto, or any related settlement documents, warrant and represent that they have the full authority to do so and that they have the authority to take appropriate action required or permitted to be taken pursuant to the Stipulation to effectuate its terms. 22 37. Plaintiffs' Lead Counsel and Defendants' Counsel agree to cooperate fully with one another in seeking Court approval of the Preliminary Order in Connection with the Settlement Proceedings, the Stipulation and Agreement of Settlement, and to promptly agree upon and execute all such other documentation as may be reasonably required to obtain final approval by the Court of the Settlement. Dated: May 25, 2001 BERMAN, DEVALERIO & PEASE LLP By: /s/ KATHLEEN M. DONOVAN-MAHER ----------------------------- Glen DeValerio, BBO #122010 Kathleen M. Donovan-Maher, BBO #558947 One Liberty Square Boston, MA 02109 (617) 542-8300 PLAINTIFFS' LEAD COUNSEL LAW OFFICES OF CHARLES J. PIVEN Charles J. Piven The World Trade Center, Suite 2525 401 E. Pratt Street Baltimore, MD 21202 (410) 332-0030 LAW OFFICES OF LEO W. DESMOND Leo W. Desmond 2161 Palm Beach Lake Blvd., Suite 204 W. Palm Beach, FL 33409 (561) 712-8000 23 RABIN & PECKEL LLP Brian Murray 275 Madison Avenue New York, NY 10016 (212) 682-1818 WOLF HALDENSTEIN ADLER FREEMAN & HERZ Peter C. Harrar 270 Madison Avenue New York, NY 10016 (212) 545-4600 ADDITIONAL PLAINTIFFS' COUNSEL GOODWIN PROCTER LLP By: /s/ GUS P. COLDEBELLA --------------------- Stephen D. Poss, P.C. BBO #551760 Gus P. Coldebella BBO #566918 Exchange Place Boston, MA 02109 (617) 570-1000 COUNSEL FOR DEFENDANTS ANIKA THERAPEUTICS, INC., J. MELVILLE ENGLE AND SEAN MORAN 24 -----END PRIVACY-ENHANCED MESSAGE-----