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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                  FORM 10-KSB
 
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
                                     1934
 
                     FOR FISCAL YEAR ENDED AUGUST 31, 1996
                                           ---------------

                                      OR
 
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
                            OF 1934 (NO FEE REQUIRED)
 
                FOR THE TRANSITION PERIOD FROM        TO
                                               ------    ------
                                             
                       COMMISSION FILE NUMBER 000-21326
                                              ---------

                             ANIKA RESEARCH, INC.
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          (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
 
                 MASSACHUSETTS                               04-3145961
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        (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NO.)
 
 236 WEST CUMMINGS PARK, WOBURN, MASSACHUSETTS                  01801
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   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)
                                                   
           ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 932-6616
                                                          --------------

        SECURITIES REGISTERED UNDER SECTION 12 (B) OF THE EXCHANGE ACT:
                                     None
 
        SECURITIES REGISTERED UNDER SECTION 12 (G) OF THE EXCHANGE ACT:
                    Common Stock, par value $.01 per share
 
  Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 and 15 (d) of the Securities Exchange Act of 1934
during the past 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 [_]
 
  Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB [X]
 
  Anika's revenues for fiscal year ended August 31, 1996 are $4,612,918.
 
  The aggregate market value of voting stock held by non-affiliates of the
Registrant as of November 15, 1996 was $20,844,989 based on the last sale
price of Common Stock of $4.375 as reported by the NASDAQ Small-Cap Market. At
November 15, 1996 there were issued and outstanding 4,917,023 shares of Common
Stock, par value $.01 per share, and 126,259 shares of redeemable preferred
stock convertible November 15, 1996 into 1,262,590 shares of Common Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
 
  Certain information required in response to Items 9, 10, 11, and 12 of Part
III are hereby incorporated by reference from the Company's Proxy Statement
for the Annual Meeting to be held on January 8, 1997. Such Proxy Statement
shall not be deemed to be "filed" as part of this Report on Form 10-KSB except
for the parts therein which have been specifically incorporated by reference
herein.
 
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                                  FORM 10-KSB
 
                             ANIKA RESEARCH, INC.
 
                     FOR FISCAL YEAR ENDED AUGUST 31, 1996
 
  This Form 10-KSB 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 Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed throughout this form 10-KSB and
are discussed in the section entitled "Certain Factors Affecting Future
Operating Results" on page 10 of this Form 10-KSB.
 
PART I
 
ITEM 1. BUSINESS
 
  Anika Research, Inc. ("Anika" or the "Company") develops and manufactures
hyaluronic acid ("HA") products for use in surgical and therapeutic medical
applications. Hyaluronic acid is a naturally occurring polysaccharide that
coats, protects, and lubricates soft tissues. HA is present in all of the
connective tissues of the body and is found in significant concentrations in
the synovial fluid of the joints, the skin and the vitreous of the eye. In
synovial fluid, HA is present as a viscoelastic solution, while in cartilage
and dermis it is present as a component of a complex, organized extracellular
matrix.
 
  Anika currently manufactures AMVISC(R)/1/, an HA-based viscoelastic used in
ophthalmic surgery for Chiron Vision, a subsidiary of Chiron Corporation.
Anika also manufactures HYVISC(R), an HA product used to treat equine
osteoarthritis which is distributed by Boehringer Ingelheim Animal Health,
Inc. in the United States.
 
  Anika became an independent company in May 1993 when MedChem Products, Inc.
("MedChem") distributed all of the outstanding shares of Anika Common Stock to
MedChem stockholders as a dividend.
 
 AMVISC
 
  AMVISC is a high molecular weight HA product that is used as a viscoelastic
agent in ophthalmic surgical procedures such as cataract extraction and
intraocular lens implantation. AMVISC coats, lubricates and protects sensitive
tissues and maintains the space between them, thereby facilitating ophthalmic
surgical procedures.
 
  Anika currently manufactures AMVISC for Chiron Vision at selling prices
which approximate cost under a supply contract that expires at the end of
1996. Commencing on January 1, 1997, Anika will continue to manufacture AMVISC
for Chiron Vision under a new five year supply agreement. The new contract
allows for significantly higher selling prices and gross margins. In addition,
under the new contract Chiron Vision is required to purchase certain annual
minimums.
 
 
 HYVISC
 
  HYVISC is a high molecular weight injectable HA product for the treatment of
joint dysfunction in horses due to non-infectious synovitis associated with
equine osteoarthritis. HYVISC has viscoelastic properties that lubricate and
protect the tissues in horse joints. HYVISC is distributed for Anika by
Boehringer Ingelheim Animal Health, Inc. for distribution in the United States
under a three year exclusive agreement.
 
 ORTHOVISC(R)
 
  ORTHOVISC is a high molecular weight injectable HA product for the treatment
of osteoarthritis in humans. Osteoarthritis causes pain, inflammation and
restricted movement in joints.
 
  Osteoarthritis occurs when the cartilage in a joint gradually deteriorates
due to the effects of mechanical stress which can be caused by a variety of
factors including the normal aging process. In an osteoarthritic joint,
- --------
(1) AMVISC is a registered trademark of Chiron Vision.
 
                                       2

 
particular regions of articulating surfaces are exposed to irregular forces,
which result in the remodeling of tissue surfaces that disrupt the normal
equilibrium or mechanical function. As osteoarthritis advances, the joint
gradually loses its ability to regenerate cartilage tissue and the cartilage
layer attached to the bone deteriorates to the point where eventually the bone
becomes exposed. Advanced osteoarthritis often requires surgery such as the
implantation of artificial joints.
 
  The current treatment options for osteoarthritis include anti-
inflammatories, pain medication, and as a last resort, steroid injections
which can lead to joint replacement surgery. By supplementing the body's own
production of hyaluronic acid which is secreted by the synovial membrane and
is responsible for lubricating and cushioning within joints, an injection of
ORTHOVISC can help relieve pain and improve joint function.
 
  Anika has demonstrated the efficacy of its ultrapure high molecular weight
hyaluronic acid in treating equine osteoarthritis through the clinical use of
HYVISC and has accumulated years of safety data from the clinical use of
AMVISC and HYVISC.
 
  In October 1996, Anika received Commumautee European (CE) mark approval for
ORTHOVISC. The CE mark, a certification required under European Community (EC)
medical device regulation, will allow ORTHOVISC to be sold as a medical device
without further approvals in most of the EC nations as well as European
countries that recognize EC device legislation. In addition, Anika will be
pursuing approvals to market ORTHOVISC in other countries.
 
  In January 1996, the Company received an Investigational Device Exemption
(IDE) approval from the FDA to commence clinical testing of the efficacy of
ORTHOVISC in the treatment of osteoarthritis of the knee. In May 1996, the
Company commenced the ORTHOVISC clinical trial. This trial has been designed
as a double blind, placebo controlled study and will include 220 patients. The
Company currently expects to complete the ORTHOVISC clinical trial during
1997. Anika is seeking to license ORTHOVISC to various companies in Europe who
will be responsible for the marketing, sales and distribution of ORTHOVISC.
 
PRODUCTS UNDER DEVELOPMENT
 
 INCERT
 
  INCERT is a chemically modified, cross-linked form of HA designed to prevent
surgical adhesions. Surgical adhesions occur when fibrous bands of tissues
form between adjacent tissue layers during the wound healing process. Although
surgeons attempt to minimize the formation of adhesions, nevertheless they
occur quite frequently after surgery. Adhesions in the abdominal and thoracic
cavity can cause particularly serious problems such as intestinal blockage
following abdominal surgery and infertility following pelvic surgery.
 
  INCERT adheres to a wound site and serves as a barrier between adjacent
tissues. Anika was awarded a patent in October 1994 by the U.S. Patent and
Trademark office covering Anika's method of manufacturing INCERT for use in
adhesion prevention and drug delivery. The Company has tested INCERT in animal
studies at Duke University, has performed toxicology studies and has
successfully conducted preclinical tests of INCERT. Anika currently plans to
submit an IDE to the FDA in 1997. Upon approval of the IDE by the FDA, Anika
plans to commence the testing of INCERT in humans. In addition, Anika is
currently seeking a strategic partner to assist in the funding of human
clinical testing and eventual marketing of INCERT.
 
 HA Oligosaccharides
 
  HA oligosaccharides are discrete pieces of the HA polysaccharide chain.
Because many different types of normal cells and cells in disease processes
contain HA receptors on the cell surface that interact with HA
oligosaccharides, the material has the ability to influence cell behavior.
 
  HA oligosaccharides have demonstrated the ability to bind to and block HA
receptors and can modify the behavior of cells bearing the receptors. Anika
has licensed this technology from Dr. Bryan Toole of Tufts
 
                                       3

 
University and has filed for patent protection. Experimental studies performed
at Dana Farber Cancer Institute and Massachusetts General Hospital have
demonstrated that Anika's HA oligosaccharides inhibited the metastasis of
ovarian cancer cells and melanoma cells in mice. During 1997, the Company
currently intends to further its preclinical testing of HA oligosaccharides
and will seek a strategic partner to assist in the funding of further product
development and eventual human clinical testing of HA oligosaccharides.
 
MANUFACTURING OF HYALURONIC ACID
 
  Anika has been manufacturing HA since 1983 in an FDA approved facility
through a proprietary manufacturing process that extracts and purifies high
molecular weight HA from rooster combs. A substantial supply of rooster combs
is available and Anika believes that all other materials required for the
extraction and purification of HA and the manufacture of HA, AMVISC and future
HA-based products are readily available.
 
  Anika's manufacturing facility in Woburn, Massachusetts has received all FDA
and state regulatory approvals to operate as a sterile device and drug
manufacturer with respect to the manufacture of HA. Anika believes that this
facility has sufficient capacity to accommodate demand through 1999.
 
  In fiscal year 1996, Anika received an International Standards Organization
(ISO) 9001 certification of its manufacturing facility and HA manufacturing
process. ISO 9001 designation is an internationally recognized certification
for quality standards governed by the International Organization for Standards
based in Geneva, Switzerland. The certifications for ISO 9001 and EN 46001
were awarded to the Company after a rigorous assessment and audit of Anika's
quality system by a private, third party European accredited notified body.
ISO 9001 is the highest level of achievement possible in the ISO certification
system.
 
PATENTS AND PROPRIETARY RIGHTS
 
  Anika has a policy of seeking patent protection for patentable aspects of
its proprietary technology. Anika owns three United States patents and owns or
has exclusive license rights to one pending United States patent application
relating to HA and related technologies. Anika 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.
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 Anika 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 patented products.
 
  Anika also relies upon trade secrets and proprietary know-how. To protect
such information, Anika generally requires all employees, consultants and
licensees to enter into confidentiality agreements limiting the disclosure and
use of such information. However, there can be no assurance that
confidentiality agreements will be effective in protecting trade secrets or
that third parties will not independently develop substantially equivalent or
better technology.
 
  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 Anika will not
infringe the patent rights of others in the future.
 
  Anika has granted Chiron Vision an exclusive license in the ophthalmic field
to use Anika's HA-related technology existing as of January 11, 1991. In
addition, Anika has granted Chiron Vision a second exclusive license in the
ophthalmic field to use any new HA technology employed by Anika to manufacture
AMVISC. This second license becomes effective on December 31, 2001, upon the
termination date of the new AMVISC supply contract.
 
GOVERNMENT REGULATION
 
  Anika's research, development, manufacturing activities and the future
marketing of products by Anika are subject to regulation for safety and
efficacy by numerous governmental authorities in the United States and
 
                                       4

 
other countries. In the United States, devices and drugs are subject to
rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act governs the
testing, manufacture, safety, efficacy, labelling, storage, record keeping,
approval, advertising and promotion of Anika's products.
 
  Product development and approval within the FDA regulatory framework takes a
number of years and involves the expenditure of substantial resources. There
can be no assurance that this regulatory framework will not change or that
additional regulation will not arise at any stage of Anika's product
development process which may affect approval of or delay an application or
require additional expenditures by Anika.
 
  Medical products regulated by the FDA are generally classified as drugs
and/or medical devices. AMVISC is approved as a Class III device in the United
States for ophthalmic surgical procedures in intraocular use in humans. HYVISC
is approved as an animal drug for intra-articular injection in horse joints to
treat degenerative joint disease associated with synovitis. ORTHOVISC is
currently considered a Class III device by the FDA. In the past, most HA
products have been regulated as medical devices. Anika believes that its
ORTHOVISC for osteoarthritis and INCERT products will be regulated as Class
III devices. However, no assurance can be given that such products will not be
classified as drugs or as both devices and drugs. It is also not known whether
the regulatory status of HA oligosaccharides for use in the treatment of
certain proliferative diseases and in drug delivery will be regulated as
drugs.
 
 Devices
 
  The steps required to qualify a medical device for marketing in the United
States are complex. Medical devices are classified as Class I, II, or III
devices. In general, Class I devices require compliance with labelling and
record keeping regulations and are subject to other general controls. Class II
devices may be subject to special controls, such as market surveillance and
are subject to general controls. Class II devices also may be subject to
clinical testing for purposes of premarket notification to the FDA. Class III
devices require clinical testing to assure safety and effectiveness prior to
marketing and distribution.
 
  At least 90 days prior to marketing, devices must be subject to a premarket
notification to the FDA to determine the product's classification and
regulatory status. If a product is found to be "substantially equivalent" to a
Class I or Class II device, or a Class III device not subject to a Pre Market
Approval ("PMA") requirement, it may be marketed without further FDA review.
The FDA may require the submission of clinical data as a basis for determining
whether a device is "substantially equivalent." If a device is found to be
"not substantially equivalent," the device manufacturer must file a PMA
application with the FDA based on testing intended to demonstrate that the
product is both safe and effective. HA-based products may require the issuance
of a PMA from the FDA prior to commercial sale.
 
  The PMA process requires the performance of human clinical studies under an
IDE. Upon completion of required clinical studies, results are presented to
the FDA in a PMA application. In addition to the results of clinical
investigations, the PMA applicant must submit other information relevant to
the safety and effectiveness of the device, including the results of non-
clinical tests; a full description of the device and its components; a full
description of the methods, facilities and controls used for manufacturing;
and proposed labelling. The FDA staff then determines whether to accept the
application for filing. If accepted for filing, the application is further
reviewed by the FDA and then usually reviewed by an FDA scientific advisory
panel of physicians and others with expertise in the relevant field. The FDA
will also conduct an inspection to determine whether an applicant conforms
with the FDA's current Good Manufacturing Practices. If the FDA's evaluation
is favorable, the FDA will subsequently publish an order granting the PMA for
the device. Although the initial PMA review process is required to be
completed within 180 days from the date the PMA application is accepted for
filing, the FDA routinely raises additional issues which must be addressed
prior to the approval of a PMA, which significantly extends the review
process.
 
 Drugs
 
  Medical devices may meet both the definition of a medical device and a drug.
In these instances, the FDA may regulate these products as drugs or as both
medical devices and drugs. The steps required before a drug
 
                                       5

 
may be marketed in the United States include (i) preclinical laboratory and
animal tests, (ii) submission to the FDA of an Investigational New Drug
application ("IND"), which must become effective before human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug, (iv) submission of a New Drug
Application ("NDA") to the FDA and (v) FDA approval of the NDA prior to any
commercial sales or shipment of the drug. A clinical study program designed to
demonstrate the safety and effectiveness of a drug usually proceeds in three
phases:
 
  . Phase I involves testing the drug for safety and tolerance in a small
    group of healthy volunteers.
 
  . Phase II involves testing for efficacy and identifying possible side
    effects in a target patient group.
 
  . Phase III involves additional testing for efficacy, optimal dosage and
    safety with an expanded patient group, preferably using a comparative
    control agent.
 
  The results of the clinical testing, together with manufacturing
information, are then submitted to the FDA in the form of an NDA. In the event
Anika's products are classified as drugs, it may take five to ten years to
complete this process, which typically would be substantially longer than the
review process for devices. The extended review process is also substantially
more expensive.
 
  Furthermore, Anika or the FDA may suspend clinical trials at any time upon a
determination that the subjects or patients are being exposed to an
unacceptable adverse health risk ascribable to Anika's products. If clinical
studies are suspended, Anika may be unable to continue the development of the
investigational products affected.
 
  In addition to the FDA approval processes for products, manufacturing
facilities are subject to approval by the FDA. Among the conditions for such
approval is the requirement that quality control and manufacturing procedures
conform to the FDA's Good Manufacturing Practices regulations, which must be
followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical
compliance. Manufacturing establishments also are subject to inspections by or
under the authority of the FDA and by other federal, state or local agencies.
 
  In addition to regulations enforced by the FDA, Anika is subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation
and Recovery Act and other existing and potential future federal, state and
local regulations of foreign governments. Federal, state and foreign
regulations regarding the manufacture and sale of medical products are subject
to change. Anika cannot predict what impact, if any, such changes might have
on its business.
 
  For marketing outside the United States, Anika will be subject to FDA
regulations regarding the export of products within its jurisdiction and to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements relating to the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. The process of obtaining approvals from the FDA and other
regulatory authorities can be costly, time consuming, and subject to
unanticipated delays. There can be no assurance that approvals of Anika's
products, processes or facilities will be granted or that Anika will obtain
the financing needed to develop certain of such products. Any failure to
obtain, or delay in obtaining, such approvals could adversely affect the
ability of Anika to market its products.
 
COMPETITION
 
  Anika competes with many companies, including 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 Anika. Anika also competes
with academic institutions, governmental agencies and other research
organizations which may be involved in research, development and
commercialization of products. Because a number of companies are developing HA
products for similar
 
                                       6

 
applications, the successful commercialization of a particular product will
depend in large part upon the ability of Anika to complete clinical studies
and obtain FDA marketing and foreign regulatory approvals prior to its
competitors.
 
  Anika is aware of several companies, including Genzyme Corp., Biomatrix,
Inc., Hyal Pharmaceutical Corp., Fidia S.P.A. and LifeCore Biomedical, Inc.
("LifeCore"), that are developing products utilizing HA for a variety of
health applications. In some cases, competitors have obtained product
approvals, submitted for approval or have commenced human clinical studies,
either in the United States or in certain foreign countries. Genzyme Corp. has
received marketing approvals in Europe and the U.S. for a chemically modified
HA for the prevention of surgical adhesions. Biomatrix, Inc. has completed
human clinical studies testing the efficacy of a chemically-modified HA
product for the treatment of osteoarthritis of the knee and has submitted a
PMA that has been recommended for approval by an expert advisory panel. In
addition, Biomatrix, Inc. is marketing this product in Canada, Italy and
Sweden. LifeCore Biomedical, Inc. is conducting a Phase II human clinical
trial testing HA to prevent surgical adhesions. Fidia S.P.A. has filed a PMA
application for an HA product to treat osteoarthritis of the knee that has
been recommended for approval by an expert advisory panel. Fidia is selling
this product in France, Italy and Germany.
 
EMPLOYEES
 
  As of November 15, 1996, Anika employs approximately 40 full time employees.
Anika considers relations with employees to be good. No employees are
represented by labor unions.
 
ENVIRONMENT
 
  The Company believes that it is in compliance with all federal, state and
local environmental regulations with respect to its manufacturing facilities
and that compliance with such regulations does not have a material effect on
the Company's operations. The Company's manufacturing facility is located
within the Wells G&H Superfund site in Woburn, MA. The Company has not been
named and is not a party to any such legal proceedings regarding the Wells G&H
Superfund site.
 
PRODUCT LIABILITY
 
  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 incurred any material
product liability to date and has coverage under its insurance policy of
$1,000,000, as of November 15, 1996, there can be no assurance if material
claims arise in the future, that the Company's insurance will be adequate to
cover all situations.
 
ITEM 2. PROPERTIES
 
  Anika leases its corporate headquarters located at 236 West Cummings Park,
Woburn, Massachusetts. Anika leases approximately 22,000 square feet of
manufacturing space at this location for the manufacture of HA products. This
facility has received all FDA and state regulatory approvals to operate as a
sterile device and drug manufacturer. This lease terminates in February 2001.
The total amount payable under the lease is approximately $315,000 per year.
Anika also leases another facility in Woburn, Massachusetts that approximates
15,000 square feet of administrative and research and development space. The
total amount payable under the lease is approximately $88,000 per year. The
lease terminates in October 2001. Anika believes that its existing facilities
are adequate to meet its requirements through 1999.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company has no material pending litigation.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
 
                                       7

 
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
 
 
COMMON STOCK INFORMATION
 
  The Company's Common Stock is traded on the NASDAQ Small Cap Market under
the symbol "ANIK." The following table sets forth the quarterly high and low
bid quotations as reported by NASDAQ:
 
YEARS ENDED AUGUST 31, ---------------------------- 1996 1995 -------------- ------------- QUARTER HIGH LOW HIGH LOW - ------- ------ ------- ------ ------ First.............................................. $3 $2 5/8 $2 7/8 $1 3/4 Second............................................. 4 5/8 2 7/8 2 1/8 1 1/2 Third.............................................. 7 7/8 3 3/16 2 3/4 1 7/8 Fourth............................................. 6 5/8 4 3/8 2 7/8 2 1/4
As of August 31, 1996, there were 333 holders of record of the Company's Common Stock. The Company may not without first obtaining the affirmative vote or written consent of a majority-in-interest of outstanding shares of Series A Redeemable Convertible Preferred Stock, pay, set aside for payment or declare any dividends on any share of Common Stock unless all dividends accrued and payable on the Series A Redeemable Convertible Preferred Stock have either been paid in full or funds have been set aside for such payment and certain other financial covenants have been satisfied. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS Anika Research, Inc. ("Anika" or the "Company") develops and manufactures hyaluronic acid ("HA") products for use in surgical and therapeutic medical applications. Hyaluronic acid is a naturally occurring biopolymer found in the body that coats, protects, cushions and lubricates soft tissues. Anika currently manufactures AMVISC, an HA-based viscoelastic used in ophthalmic surgery for Chiron Vision, a subsidiary of Chiron Corporation. Anika also manufactures HYVISC, an HA-based product used to treat equine osteoarthritis for Boehringer Ingelheim Animal Health, Inc. Anika is developing ORTHOVISC (intra-articular injection of HA) for the treatment of osteoarthritis. In October 1996, the Company received a Commumautee European (CE) mark approval for ORTHOVISC. The CE mark, a certification required under European Community (EC) medical device regulation, will allow ORTHOVISC to be sold as a medical device without further approvals in most of the EC nations as well as European countries that recognize EC device legislation. In addition, Anika will be pursuing approvals to market ORTHOVISC in other countries. In the United States, the Company has commenced a pivotal ORTHOVISC clinical trial under an Investigational Device Exemption. This trial has been designed as a double blind, placebo controlled study and will include 220 patients. The Company expects to complete the ORTHOVISC clinical trial during 1997. The following discussion and analysis of the financial condition and results of operations of Anika should be read in conjunction with the accompanying financial statements and footnotes. RESULTS OF OPERATIONS 1996 vs. 1995 Net sales of hyaluronic acid products totaled $4,613,000 in fiscal 1996 an increase of $1,257,000 from the $3,356,000 in sales for 1995. The increase in sales was primarily attributable to an increase in AMVISC sales. Anika's gross profit as a percentage of net sales declined to 3% in fiscal 1996, from 7% in fiscal 1995. During 1996 the balance in the AMVISC manufacturing reserve of $520,757 was written off to cost of goods sold since the AMVISC supply contract was marginally profitable and it expires on December 31, 1996. The Company determined that the reserve was no longer required as the supply contract is expected to remain marginally profitable through the end of the contract period. The decrease in gross profit as a percentage of net sales is attributable to higher manufacturing costs per unit in fiscal 1996 versus 1995 and an unfavorable mix of product sales in fiscal 1996 versus 1995. 8 Research and development expenses increased by $317,000 to $1,635,000 in fiscal 1996 from $1,318,000 in 1995. The increase is primarily attributable to the commencement of the ORTHOVISC clinical trial in the United States. Selling, general and administrative expenses for fiscal 1996 increased by $565,000 to $1,469,000 from $904,000 in fiscal 1995. The increase of $565,000 is primarily attributable to additions to administration staffing for fiscal 1996, increased selling and marketing costs associated with the international commercialization of ORTHOVISC and severance payments to the former President. The Company's net interest income increased to $114,000 in fiscal 1996 from $30,000 in 1995. The increase is attributable to the Company having more cash to invest on average in fiscal 1996 as compared to 1995. The Company has not recorded income tax benefits for fiscal years 1996 and 1995. Anika will not be able to record income tax benefits from the operating losses incurred after May 1, 1993 until the Company has operating profits, since the realization of these benefits cannot be reasonably assured. 1995 vs. 1994 Net sales of hyaluronic acid products totaled $3,356,000 in fiscal 1995 a decrease of $1,307,000 from the $4,663,000 in sales for 1994. The decrease in sales was attributable to a decrease in AMVISC sales. In fiscal 1994 the Company achieved higher AMVISC sales because Chiron substantially increased their AMVISC inventories. Anika's gross profit as a percentage of net sales declined to 7% in fiscal 1995, from 15.6% in fiscal 1994. The decrease in gross profit as a percentage of net sales is attributable to higher manufacturing costs per unit in fiscal 1995 due to a decrease in production volume. Research and development expenses decreased by $178,000 to $1,318,000 in fiscal 1995 from $1,496,000 in 1994. The decrease is attributable to a reduction in spending on basic research for hyaluronic acid. Selling, general and administrative expenses for fiscal 1995 increased by $170,000 to $904,000 from $734,000 in fiscal 1994. The increase of $170,000 is primarily attributable to increased selling and marketing costs associated with the international commercialization of ORTHOVISC. The Company's net interest income decreased to $30,000 in fiscal 1995 from $62,000 in 1994. The decrease is attributable to the Company having less cash to invest on average in fiscal 1995 as compared to 1994. The Company has not recorded income tax benefits for fiscal years 1995 and 1994. Anika will not be able to record income tax benefits from the operating losses incurred after May 1, 1993 until the Company has operating profits, since the realization of these benefits cannot be reasonably assured. LIQUIDITY AND CAPITAL RESOURCES In March 1996, the Company completed a financing involving the private placement of 1,455,000 shares of newly issued Common Stock to institutional and private accredited investors. Total gross proceeds were approximately $4 million and net proceeds to the Company after fees and expenses were approximately $3,542,000. In connection with the private placement, the Company issued to the private placement agent 57,036 warrants to purchase Common Stock exercisable at $3.00 per share and 146,664 warrants to purchase Common Stock exercisable at $4.00 per share. In addition, the Company granted certain registration rights and filed a registration statement with the Securities and Exchange Commission registering the securities which was declared effective by the Securities and Exchange Commission in May 1996. The proceeds from the private placement were used to repay a $1,000,000 debt obligation and for general working capital purposes. On May 17, 1995, the Company raised through a private placement $2,235,642, net of offering costs, from the issuance of 120,970 shares of Series A Redeemable Convertible Preferred Stock ("Series A stock") at a 9 selling price of $20.00 per share. Each share of the Series A stock is entitled to receive an annual dividend on May 1 of each year, at a rate of $1.80 per share, payable in additional shares of Series A stock, with the number of dividend shares determined by the price of Anika's underlying Common Stock. The Company may elect to pay the dividend in cash if certain financial covenants are met. During each consecutive ninety day period in which the average quarterly price of Anika's Common Stock remains above $6.00 per share, no dividend will accrue. Anika currently expects that its cash on hand of $3,651,000 at August 31, 1996 will fund operating expenses throughout calendar 1997 including the cost of the ORTHOVISC clinical trial. However, there can be no assurance that the cash on hand will be sufficient for this period of time if actual costs and expenses are higher than anticipated. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS This Form 10-KSB 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 Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include, among other factors noted herein, the following: Need for Additional Funds; Liquidity. Anika currently expects that its cash on hand will fund operating expenses throughout calendar 1997 including the cost of the ORTHOVISC clinic trial. However, higher than anticipated costs and expenses may result in insufficient cash on hand which could create a need for additional financing. The ability of Anika to obtain financing is dependent on the status of Anika'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 Anika or will be available on acceptable terms should such a need arise. Competition. Anika competes with many companies, including large pharmaceutical companies, specialized medical products companies, academic institutions, governmental agencies and other research organizations which may be involved in research, development and commercialization of HA products. Successful commercialization of a particular HA product will depend in large part upon the ability of Anika to complete clinical studies and obtain FDA marketing and foreign regulatory approvals prior to its competitors. History of Losses; Uncertainty of Future Profitability. Anika has incurred operating losses since its inception in May 1993 and has accumulated net losses of approximately $7 million as of August 31, 1996. The continued development of Anika'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. Anika expects to incur substantial and increasing operating losses until at least 1997. The amount of net losses and the time required by Anika to reach sustained profitability are highly uncertain and to achieve profitability Anika must, among other things, successfully complete development of certain of its products, obtain regulatory approvals and establish sales and marketing capabilities for certain of its products. There can be no assurance that Anika will be able to achieve profitability at all or on a sustained basis. Comprehensive Government Regulation; No Assurance of FDA Approval. Anika's research, development, manufacturing activities and the future marketing of products by Anika are subject to regulation for safety and efficacy by numerous governmental authorities in the United States and other countries. These regulations can be costly, regulatory approvals may take many years, and they can be subject to change and unanticipated delays. Anika cannot predict what impact, if any, such changes might have on its business. There can be no assurance that approvals of Anika's products, processes or facilities will be granted or that Anika will obtain the financing needed to develop certain products. Any failure to obtain, or delay in obtaining, such approvals could adversely affect the ability of Anika to market its products. In addition, requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. Anika or the FDA may suspend clinical trials at any time 10 upon a determination that the subjects or patients are being exposed to an unacceptable adverse health risk ascribable to Anika's products. If clinical studies are suspended, Anika may be unable to continue the development of the investigational products affected. Dependence on Patents and Proprietary Technology. Anika has a policy of seeking patent protection for patentable aspects of its proprietary technology. However, no assurance can be given that any application filings or issued patents will provide Anika with a competitive advantage or will not be successfully challenged by third parties. 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 Anika will not infringe the patent rights of others in the future. Anika also relies upon trade secrets and proprietary know-how. However, there can be no assurance that confidentiality agreements, which Anika employees generally sign, will be effective in protecting trade secrets or that third parties will not independently develop substantially equivalent or better technology. Dependence Upon Marketing Partners. Anika does not plan to directly market and sell its products to customers. Therefore, Anika's success will be dependent upon the efforts of its marketing partners and the terms and conditions of Anika's relationships with such marketing partners. In addition, Anika will need to obtain the assistance of additional marketing partners for new products which are brought to market and existing products brought to new markets, and there can be no assurance that such additional partners will be available or that such partners will agree to market Anika's products on acceptable terms. 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 Anika. Although Anika has not incurred any material product liability to date and coverage under its $1,000,000 insurance policy may be adequate to cover such claims should they arise, there can be no assurance that material claims will not arise in the future or that Anika's insurance will be adequate to cover all situations. Dependence Upon Key Personnel. The future success of Anika 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 Anika. Anika faces significant competition for highly skilled scientific, management and marketing personnel from other companies, research and academic institutions, government entities and other organizations. There can be no assurance that Anika will be successful in hiring or retaining the personnel it requires and failure to do so could materially and adversely affect Anika's prospects. 11 ITEM 7. FINANCIAL STATEMENTS BALANCE SHEETS
AUGUST 31, ------------------------ 1996 1995 ----------- ----------- ASSETS Current assets: Cash and cash equivalents.......................... $ 3,651,023 $ 2,824,663 Accounts receivable................................ 631,916 190,976 Inventories........................................ 2,514,280 3,292,416 Prepaid expenses................................... 502,207 318,960 ----------- ----------- Total current assets............................. 7,299,426 6,627,015 ----------- ----------- Property and equipment............................... 4,745,923 4,332,171 Less accumulated depreciation and amortization....... 3,465,175 2,912,966 ----------- ----------- Net property and equipment....................... 1,280,748 1,419,205 ----------- ----------- $ 8,580,174 $ 8,046,220 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 645,484 $ 353,444 Accrued expenses................................... 795,832 301,507 Current portion of long-term debt.................. -- 1,000,000 ----------- ----------- Total current liabilities........................ 1,441,316 1,654,951 ----------- ----------- Other long-term liabilities.......................... 200,000 520,757 Redeemable convertible preferred stock; $.01 par value: authorized 750,000 shares; 126,259 and 120,970 shares issued and outstanding, respectively; liquidation and redemption value of $20.00 per share plus accrued dividends.............................. 2,523,483 2,326,171 Stockholders' equity: Undesignated preferred stock, $.01 par value: authorized 1,250,000 shares; no shares issued and outstanding....................................... -- -- Common stock, $.01 par value: authorized 15,000,000 shares; issued and outstanding 4,840,726 and 3,291,475 shares, respectively.................... 48,407 32,915 Additional paid-in capital......................... 11,551,685 7,378,514 Unearned stock option compensation................. (468,750) -- Accumulated deficit................................ (6,715,967) (3,867,088) ----------- ----------- Total stockholders' equity....................... 4,415,375 3,544,341 ----------- ----------- $ 8,580,174 $ 8,046,220 =========== ===========
See accompanying notes to financial statements. 12 STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, -------------------------------------- 1996 1995 1994 ----------- ------------ ----------- Net sales............................. $ 4,612,918 $ 3,355,798 $ 4,662,681 Cost of sales......................... 4,472,214 3,118,163 3,934,382 ----------- ------------ ----------- Gross profit...................... 140,704 237,635 728,299 Operating expenses: Research and development............ 1,634,640 1,317,667 1,495,514 Selling, general and administrative..................... 1,469,257 904,223 734,336 ----------- ------------ ----------- Total operating expenses.......... 3,103,897 2,221,890 2,229,850 ----------- ------------ ----------- Loss from operations.................. (2,963,193) (1,984,255) (1,501,551) Interest income, net.................. (114,314) (29,749) (61,702) ----------- ------------ ----------- Loss before income tax benefit........ (2,848,879) (1,954,506) (1,439,849) Income tax benefit.................... -- -- -- ----------- ------------ ----------- Net loss............................ $(2,848,879) $(1,954,506) $(1,439,849) =========== ============ =========== Loss per share........................ $ (.70) $ (.61) $ (.45) =========== ============ =========== Primary and fully diluted shares outstanding.......................... 4,052,596 3,225,205 3,177,094 =========== ============ ===========
See accompanying notes to financial statements. 13 STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK $.01 PAR VALUE ADDITIONAL UNEARNED TOTAL ----------------- PAID-IN STOCK OPTION ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY --------- ------- ----------- ------------ ----------- ------------- Balance, August 31, 1993................... 3,164,155 $31,642 $ 7,176,509 -- $ (472,733) $ 6,735,418 Exercise of common stock options......... 11,248 112 14,731 -- -- 14,843 Issuance of common stock................. 23,889 239 67,696 -- -- 67,935 Net loss............... -- -- -- -- (1,439,849) (1,439,849) --------- ------- ----------- --------- ----------- ----------- Balance, August 31, 1994................... 3,199,292 31,993 7,258,936 -- (1,912,582) 5,378,347 Exercise of common stock options......... 30,605 306 44,738 -- -- 45,044 Issuance of common stock to 401(k) plan.. 61,578 616 138,076 -- -- 138,692 Dividend on redeemable preferred stock....... -- -- (63,236) -- -- (63,236) Net loss............... -- -- -- -- (1,954,506) (1,954,506) --------- ------- ----------- --------- ----------- ----------- Balance, August 31, 1995................... 3,291,475 32,915 7,378,514 -- (3,867,088) 3,544,341 Exercise of common stock options......... 74,804 748 158,752 -- -- 159,500 Issuance of common stock to 401(k) plan.. 19,447 194 79,176 -- -- 79,370 Dividend on redeemable preferred stock....... -- -- (224,605) -- -- (224,605) Issuance of common stock (net of expenses)............. 1,455,000 14,550 3,527,035 -- -- 3,541,585 Unearned stock option compensation.......... -- -- 632,813 (468,750) -- 164,063 Net loss............... -- -- -- -- (2,848,879) (2,848,879) --------- ------- ----------- --------- ----------- ----------- Balance, August 31, 1996................... 4,840,726 $48,407 $11,551,685 $(468,750) $(6,715,967) $ 4,415,375 ========= ======= =========== ========= =========== ===========
See accompanying notes to financial statements. 14 STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Cash flows from operating activities: Net loss.............................. $(2,848,879) $(1,954,506) $(1,439,849) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization....... 552,209 298,934 235,482 Amortization of unearned stock compensation....................... 164,063 -- -- Common stock issued to 401(k) plan.. 79,370 138,692 67,935 Changes in operating assets and liabilities: Accounts receivable............... (440,940) (2,492) 105,203 Inventories....................... 778,136 58,585 (792,363) Prepaid expenses.................. (183,247) (123,647) (16,396) Accounts payable and accrued expenses......................... 786,365 (143,712) (499,670) Other long-term liabilities....... (520,757) -- -- ----------- ----------- ----------- Net cash used for operating activities..................... (1,633,680) (1,728,146) (2,339,658) ----------- ----------- ----------- Cash flows used for investing activities: Additions to property and equipment... (413,752) (339,064) (155,342) ----------- ----------- ----------- Net cash used for investing activities..................... (413,752) (339,064) (155,342) ----------- ----------- ----------- Cash flows provided by financing activities: Proceeds from issuance of common stock................................ 3,541,585 -- -- Proceeds (costs) from issuance of preferred stock...................... (27,293) 2,262,935 -- Proceeds from exercise of stock options.............................. 159,500 45,044 14,843 Payments on long-term debt............ (800,000) -- -- ----------- ----------- ----------- Net cash provided by financing activities..................... 2,873,792 2,307,979 14,843 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents............... 826,360 240,769 (2,480,157) Cash and cash equivalents at beginning of year................................ 2,824,663 2,583,894 5,064,051 ----------- ----------- ----------- Cash and cash equivalents at end of year................................... $ 3,651,023 $ 2,824,663 $ 2,583,894 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest................ $ 42,222 $ 87,611 $ 64,541 =========== =========== =========== Supplemental disclosure of non cash items: Repayment of debt through future deferred sublease payments........... $ 200,000 -- -- Dividend on redeemable preferred stock................................ 224,605 63,236 -- =========== =========== ===========
See accompanying notes to financial statements. 15 NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Anika Research, Inc. ("Anika" or the "Company") develops and manufactures hyaluronic acid ("HA") products for use in surgical and therapeutic medical applications. Hyaluronic acid is a naturally occurring biopolymer found in the body that coats, protects, cushions and lubricates soft tissues. Anika currently manufactures the AMVISC line of HA based viscoelastic used in ophthalmic surgery for Chiron Vision, a subsidiary of Chiron Corporation. Anika also manufactures HYVISC, an HA based product used to treat equine osteoarthritis, for Boehringer Ingelheim Animal Health, Inc. Commencing on December 31, 1996, Anika Research, Inc. will be changing its fiscal year from an August 31st year end to a calendar year end. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Anika became an independent company in May 1993 when MedChem Products, Inc. ("MedChem"), distributed 3,154,812 shares outstanding of Anika Common Stock to MedChem stockholders as a dividend. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consists of cash and investments with original maturities of three months or less. Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short maturity of these items. Inventories Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. Revenue Recognition The Company recognizes revenue on product sales when the products are shipped and the customer takes ownership. The Company records advance payments for products as deferred revenue. 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.......................................... 5-10 years Furniture and fixtures..................... ..................... 5 years Leasehold improvements........................................... 5-10 years
Amortization on leasehold improvements is calculated using the straight-line method over the shorter of the lease term or estimated life of the asset. 16 Leasehold improvements are assessed for impairment when related operating profit indicates that the carrying amount of the asset may not be recoverable. During fiscal 1996, a loss of impairment has been recorded in the amount of $200,000 which is reflected in depreciation and amortization expense. Research and Development Research and Development costs are expensed as incurred. Earnings Per Share Earnings per share is computed based on the weighted average number of common shares outstanding, adjusted, when dilutive, for the number of shares issuable upon the conversion of Series A Redeemable Convertible Preferred Stock and the assumed exercise of stock options and warrants after the assumed repurchase of shares with the related proceeds. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. Stock Options When stock options are exercised, proceeds from the sale of Common Stock issued under those options are credited to Common Stock. No charges or credits are made to operations for stock options. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." The Company will continue to account for stock options described above. As such, the financial statement effect of this new standard will be limited to additional required footnote disclosures in 1997. Significant Customer Chiron Vision accounted for 86% and 89% of total net revenues for the years ended August 31, 1996 and 1995, respectively. 3. INVENTORIES Inventories consist of the following:
AUGUST 31, --------------------- 1996 1995 ---------- ---------- Raw materials.......................................... $ 684,094 $ 689,519 Work in process........................................ 1,745,733 2,440,468 Finished goods......................................... 84,453 162,429 ---------- ---------- Total................................................ $2,514,280 $3,292,416 ========== ==========
4. PROPERTY & EQUIPMENT Property and equipment consists of the following:
AUGUST 31, --------------------- 1996 1995 ---------- ---------- Machinery and equipment............................... $2,109,621 $1,765,520 Leasehold improvements................................ 2,514,499 2,470,845 Furniture and fixtures................................ 121,803 95,806 ---------- ---------- Total............................................... $4,745,923 $4,332,171 ========== ==========
17 5. LONG TERM DEBT Long term debt consists of the following:
AUGUST 31, ---------------- 1996 1995 ----- ---------- $1,000,000 revolving line of credit. Interest accrued at 9%. Amounts borrowed under the line were paid in full on March 1, 1996........................................... $ -- $1,000,000 Less current installments................................ -- 1,000,000 ----- ---------- Long term debt excluding current installments.......... $ -- $ -- ===== ==========
6. ACCRUED EXPENSES Accrued expenses consists of the following:
AUGUST 31, ----------------- 1996 1995 -------- -------- Accrued compensation....................................... $207,046 $ 89,979 Deferred revenue........................................... 200,000 -- Other accrued expenses..................................... 388,786 211,528 -------- -------- Total.................................................... $795,832 $301,507 ======== ========
7. OTHER LONG TERM LIABILITES Other long term liabilities consists of the following:
AUGUST 31, ----------------- 1996 1995 -------- -------- AMVISC manufacturing reserve.............................. $ -- $520,757 Advance rent payment...................................... 200,000 -- -------- -------- Total................................................... $200,000 $520,757 ======== ========
The balance in the AMVISC manufacturing reserve of $520,757 at August 31, 1995 was written off to cost of goods sold during 1996 since the AMVISC supply contract was marginally profitable and the contract expires on December 31, 1996. The Company determined that the reserve was no longer required as the supply contract is expected to remain maginally profitable through the end of the contract period. 8. LEASE OBLIGATIONS The company subleases two facilities with one lease expiring in February 2001 and the other in October 2001. These subleases are accounted for as operating leases. Rent expense, net of sublease payments, totaled $369,928, $310,332, and $289,996 respectively, for the years ended August 31, 1996, 1995 and 1994. Future minimum lease payments under the operating leases for the years ending August 31 are as follows:
LEASE SUBLEASE NET PAYMENTS INCOME PAYMENTS ---------- -------- ---------- 1997.......................................... $ 403,793 $ 42,280 $ 361,513 1998.......................................... 413,220 42,280 370,940 1999.......................................... 422,930 42,901 380,029 2000.......................................... 432,931 44,166 388,765 2001.......................................... 264,663 7,468 257,195 Thereafter.................................... 14,927 -- 14,927 ---------- -------- ---------- Total....................................... $1,952,464 $179,095 $1,773,369 ========== ======== ==========
18 9. STOCK OPTION PLAN The Company's 1993 Stock Option Plan (the "Plan") reserved 1,000,000 shares of Anika Common Stock for the grant of stock options to employees and directors. The 1993 Directors Stock Option Plan reserved 40,000 shares for the Board of Directors. On March 21, 1995 the Company's Board of Directors approved an increase in the number of shares reserved for grant under the Plan by 1,000,000 shares to 2,000,000 shares and the Company's stockholders approved such an increase at the Annual Meeting of Stockholders held on January 10, 1996. Option activity is summarized as follows:
YEARS ENDED AUGUST 31, ----------------------------- 1996 1995 1994 --------- --------- ------- Options outstanding at beginning of year..... 1,346,072 883,515 763,263 Options granted.............................. 302,750 568,000 146,500 Options canceled............................. (146,391) (74,838) (15,000) Options exercised............................ (74,804) (30,605) (11,248) --------- --------- ------- Options outstanding at the end of year..... 1,427,627 1,346,072 883,515 ========= ========= =======
Generally, options are exercisable and vest in varying installments up to four years after the date of grant. The average exercise price of options outstanding was $2.36 at August 31, 1996 and the price range of options exercised during fiscal 1996, 1995 and 1994 were from $1.383 to $4.781, $1.383 to $2.625 and $1.098 to $1.383, respectively. Options for 1,053,876 shares were exercisable at August 31, 1996. During 1996, options for 302,750 shares of its $.01 par value Common Stock were granted by the Company. The Company recorded deferred compensation of $632,813 on options for 168,750 shares to account for the difference between the market value of the stock at the time of grant and exercise price of the options. The Company is amortizing the deferred compensation over a 27 month period that began in February 1996. 10. REDEEMABLE CONVERTIBLE PREFERRED STOCK On May 17, 1995, the Company issued 120,970 shares of Series A Redeemable Convertible Preferred Stock ("Series A stock") at a selling price of $20.00 per share for a total consideration of $2,235,642, net of offering costs. Each share of the Series A stock is convertible into 10 shares of Common Stock at any time at the option of the holder. The Series A stock may be converted into Common Stock, at the Company's option, upon closing of a public offering if the proceeds to the Company are at least $20,000,000 and the sale price per common share is at least $6.00. The stock contains provisions to adjust the conversion ratio in the event of certain dilutive and other transactions. In addition, each share of the Series A stock is entitled to receive an annual dividend on May 1 of each year, at a rate of $1.80 per share, payable in additional shares of Series A stock, with the number of dividend shares determined by the price of Anika's underlying Common Stock. The Company may elect to pay the dividend in cash if certain financial convenants are met. During each consecutive ninety day period in which the average quarterly price of Anika's Common Stock remains above $6.00 per share, no dividend will accrue. For the period May 17, 1995 through May 1, 1996, Anika issued 5,289 additional shares of Series A stock to the preferred shareholders as a dividend payment. The total recorded value of the dividend payment was $208,227. At August 31, 1996 and 1995, accrued dividends payable were $79,693 and $63,236, respectively. The outstanding balance of Series A stock will be redeemed at $20.00 per share plus accrued dividends at the option of the holder in three equal installments beginning on May 17, 2000. The Company has the option to redeem the Series A stock on or after May 17, 2000 if the Common Stock price is in excess of $10.00 and a certain trading volume requirement is met. The holders of the Series A stock are entitled to liquidation preference over the common shareholders at $20.00 per share plus accrued dividends. Each share of the Series A stock has voting rights equal to the number 19 of common shares into which each share of preferred is convertible at the time as such vote. In addition, the holders of the Series A stock are entitled to certain representation on the Company's Board of Directors based upon the number of shares outstanding. 11. COMMON STOCK In March, 1996 the Company completed a financing involving the private placement of 1,455,000 shares of newly issued Common Stock to institutional and private accredited investors. Total gross proceeds were $3,986,700 and net proceeds to the Company after fees and expenses were $3,541,585. In addition, the Company granted certain registration rights and filed a registration statement with the Securities and Exchange Commission that was declared effective by the Securities and Exchange Commission on May 1, 1996. The proceeds from the private placement were used to repay a $1,000,000 debt obligation (See note 5) and for general working capital purposes. 12. WARRANTS In connection with the sale of Series A Redeemable Convertible Preferred Stock ("Series A stock"), the Company issued warrants to the holders of Series A stock to purchase 60,485 shares of Series A stock, exercisable at $20.00 per share. The warrants expire on May 17, 2000. If the price of the Company's Common Stock is in excess of $6.00 per share for a consecutive ninety day period, the Company can force the exercise of the warrants. In connection with the private placement of newly issued Common Stock in March, 1996, the Company issued warrants to the placement agent for 57,036 shares of Common Stock exercisable at $3.00 per share and warrants for 146,664 shares of Common Stock exercisable at $4.00 per share. 13. EMPLOYEE BENEFIT PLAN Full-time employees are eligible to participate in the Company's 401(k) savings plan. Employees may elect to contribute a percentage of their compensation to the plan, and the Company will make matching contributions up to a limit of 5% of an employee's compensation. In addition, the Company can make annual discretionary contributions. In fiscal 1996 and 1995, the Company's matching contributions and any discretionary contributions to the plan were in the form of Anika Common Stock. The Company's total 401(k) savings plan expense in fiscal years 1996, 1995, and 1994 was $79,370, $138,692, and $67,935, respectively. 20 14. INCOME TAXES The components of the net deferred tax asset are as follows:
YEARS ENDED AUGUST 31, ------------------------ 1996 1995 ----------- ----------- Gross deferred tax assets: Depreciation..................................... $ 461,151 $ 338,328 Accrued expenses................................. 149,368 35,458 Inventory loss reserve........................... 158,969 -- Non-qualified stock option amortization.......... 66,069 -- Uniform capitalization........................... 50,754 51,673 Net operating loss carryforward.................. 2,267,960 1,523,750 Credit carryforward.............................. 18,388 9,187 ----------- ----------- Gross deferred tax assets.......................... 3,172,659 1,958,396 Less: valuation allowance........................ (3,172,659) (1,958,396) ----------- ----------- Net deferred tax asset............................. $ -- $ -- =========== ===========
Income tax benefit was zero for the years ended August 31, 1996 and August 31, 1995, respectively, and differs from the amounts computed by applying the U.S. Federal income tax rate of thirty-four percent to pretax income as a result of the following:
YEARS ENDED AUGUST 31, -------------------------------- 1996 1995 1994 ---------- --------- --------- Computed expected tax benefit............ $ (968,619) $(664,532) $(489,549) State tax benefit (net of federal benefit)................................ (178,323) (123,455) (90,216) Nondeductible expenses................... 1,638 1,108 374 Other.................................... (9,051) 15,670 (12,694) Increase in valuation allowance related to income tax benefit................... 1,154,355 771,209 592,085 ---------- --------- --------- Tax benefit............................ $ -- $ -- $ -- ========== ========= =========
The valuation allowance for deferred tax assets was $3,172,659 at August 31, 1996, an increase of $1,214,263 over the balance of $1,958,396 at September 1, 1995. Subsequently, recognized tax benefits relating to the valuation allowance for deferred tax assets as of August 31, 1996 will be allocated as follows: Income tax benefit............................................... $3,112,751 Additional paid in capital....................................... 59,908 ---------- $3,172,659 ==========
The Company has total Federal and Massachusetts net operating losses of $5,631,886 and $5,722,895 as of August 31, 1996, respectively. The Federal net operating losses will begin to expire beginning 2008. The Massachusetts net operating losses will begin to expire in 1997. 21 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Anika Research, Inc.: We have audited the accompanying balance sheets of Anika Research, Inc. as of August 31, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended August 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Anika Research, Inc. at August 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts October 18, 1996 22 PART II ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information required by Item 9 is hereby incorporated by reference to the Registrant's Proxy Statement (the "Proxy Statement") for the Annual Meeting of Stockholders to be held on January 8, 1997 under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 10. EXECUTIVE COMPENSATION The information required by Item 10 is hereby incorporated by reference to the Proxy Statement under the heading "Election of Directors--Executive Compensation." ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 11 is hereby incorporated by reference to the Proxy Statement under the heading "Beneficial Ownership of Voting Stock." ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 12 is hereby incorporated by reference to the Proxy Statement under the headings "Employment Arrangements with Senior Executives" and "Certain Relationships." 23 ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K (a) Documents filed as part of Form 10-KSB. (1) Financial Statements The financial statements of the Company have been included in Item 7 of this report. Balance Sheets-- August 31, 1996 and 1995 Statements of Operations-- years ended August 31, 1996, 1995 and 1994 Statements of Stockholders' Equity-- years ended August 31, 1996, 1995 and 1994 Statements of Cash Flows-- years ended August 31, 1996, 1995 and 1994 Notes to Financial Statements (2) Schedules Schedule II--Valuation and Qualifying Accounts (Exhibit 28.4) Schedules other than those listed above have been omitted since they are either not required or the information required is included in the financial statements or the notes thereto. KPMG Peat Marwick LLP's reports with respect to the above listed financial statements and financial statements schedules are included herein at Item 7 and Exhibit 23.1. (3) Exhibits required to be filed by Item 601 of Regulation S-B and by Item 13 (a) The list of Exhibits filed as a part of this Annual Report on Form 10- KSB are set forth on the Exhibit Index immediately preceding such Exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K The company filed a report on Form 8-K on July 22, 1996 notifying the SEC of the commencement of the search for a chief executive officer and also the resignation of the president. The company also filed a report on Form 8-K on September 25, 1996 notifying the SEC that the company received Commumautee European (CE) mark registration to market ORTHOVISC and that J. Melville Engle filled the position of president and chief executive officer. 24 SIGNATURES PURSUANT TO THE REQUIREMENTS 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 ON NOVEMBER 27, 1996. Anika Research, Inc. /s/ Sean F. Moran By: _________________________________ Name: Sean F. Moran Title: Principal Financial & Accounting Officer Date: November 27, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED, ON NOVEMBER 27, 1996. SIGNATURE TITLE /s/ David A. Swann Chairman & Chief - ------------------------------------- Scientific Officer DAVID A. SWANN /s/ J. Melville Engle President, Chief Executive - ------------------------------------- Officer & Director J. MELVILLE ENGLE /s/ Sean F. Moran Chief Financial - ------------------------------------- Officer SEAN F. MORAN /s/ Joseph L. Bower Director - ------------------------------------- JOSEPH L. BOWER /s/ Eugene A. Davidson Director - ------------------------------------- EUGENE A. DAVIDSON /s/ Jonathan D. Donaldson Director - ------------------------------------- JONATHAN D. DONALDSON /s/ Samuel F. McKay Director - ------------------------------------- SAMUEL F. MCKAY /s/ Harvey S. Sadow Director - ------------------------------------- HARVEY S. SADOW /s/ Steven E. Wheeler Director - ------------------------------------- STEVEN E. WHEELER 25 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- + 3.1 Amended and Restated Articles of Organization of Anika Research, Inc. (Anika) as amended. +++ 3.2 Certificate of Vote of Directors Establishing a Series of Convertible Preferred Stock. + 3.3 By-Laws of Anika, as amended. +*10.1 Settlement Agreement dated January 11, 1991 among MedChem Products, Inc., ("MedChem"), Kabi Pharmacia AB, Pharmacia Inc., Dr. Endre Balazs and IOLAB corporation. +*10.2 Third Amendment to Distribution Agreement dated as of January 11, 1991 between Anika and IOLAB Corporation, as amended. +10.3 Fourth Amendment to Distribution Agreement dated as of August 1, 1994 between Anika and IOLAB Corporation, as amended. +*10.4 Supply Agreement dated as of August 1, 1994 between Anika and IOLAB Corporation. +*10.5 Sponsored Research Agreement dated as of June 18, 1992 between Tufts University and Anika, as amended. +10.6 Form of TMJ Agreement dated as of April 29, 1993 between Anika and MedChem. +10.7 Form of Sublease Agreement dated as of April 29, 1993 between Anika and MedChem. +10.8 Form of Tax Matters Agreement dated as of April 29, 1993 between Anika and MedChem. +10.9 Form of Plan and Agreement of Distribution dated as of April 29, 1993 between MedChem and Anika. 10.10 1993 Stock Option Plan, as amended. +10.11 1993 Directors Stock Option Plan. ++*10.12 License Agreement dated as of July 22, 1993 between Tufts University and Anika, as amended. +++10.13 Series A Preferred Stock Purchase Agreement by and among the Purchasers Listed on Schedule 1 thereto and Anika, dated as of May 17, 1995. +++10.14 Shareholders' Agreement by and among Anika and the Stockholders listed on Schedule 1 thereto, dated as of May 17, 1995. +++10.15 Form of Stock Subscriptions Warrant to Purchase Series A Preferred Stock of Anika. ++++10.16 Lease dated March 10, 1995 between Cummings Properties and Anika. +10.17 Form of Employment Agreement dated as of April 29, 1993 between Anika and Dr. Swann. ++++10.18 Letter Agreement dated May 17, 1995, amending the Employment Agreement and the Employee Retention Agreement by and among Anika and Mr. Swann. +++++10.19 Amended and Restated Employment Agreement with David A. Swann, dated as of February 1, 1996. +++++10.20 Non-Disclosure and Non-Competition Agreement with David A. Swann, dated as of February 1, 1996. +++++10.21 Non-Statutory Stock Option Agreement with David A. Swann, dated as of February 1, 1996.
EXHIBIT NO. DESCRIPTION ----------- ----------- +10.22 Form of Employment Agreement dated as of April 29, 1993 between Anika and Mr. Sullivan. ++++10.23 Letter Agreement dated May 17, 1995, amending the Employment Agreement and the Employee Retention Agreement by and among Anika and Mr. Sullivan. 10.24 Resignation and Consulting Agreement dated February 16, 1996 between Anika and Mr. Sullivan. +10.25 Form of Employment Agreement dated as of April 29, 1993 between Anika and Dr. Kuo. ++++10.26 Letter Agreement dated May 17, 1995, amending the Employment Agreement and the Employee Retention Agreement by and among Anika and Dr. Kuo. +10.27 Form of Employment Agreement dated as of April 29, 1993 between Anika and Mr. Moran. ++++10.28 Letter Agreement dated May 17, 1995, amending the Employment Agreement and the Employee Retention Agreement by and among Anika and Mr. Moran. +++++10.29 Portion of Form of Stock Purchase Agreement dated as of March 1, 1996 containing undertaking by the Company to register shares of Common Stock. +++++10.30 (i) Warrant Agreement dated as of April 1, 1996 relating to 146,664 shares of Common Stock. (ii) Warrant Agreement dated as of April 1, 1996 relating to 57,036 shares of Common Stock. 10.31 Employment Agreement dated September 24, 1996 between Anika and Mr. Engle. 11.1 Statement of Computation of Per Share Earnings. 23.1 Consent of Independent Accountants. 27.1 Financial Data Schedule. 28.1 Independent Auditors' Report as to Schedules. 28.4 Schedule II--Valuation and Qualifying Accounts.
- -------- * Confidential treatment granted as to certain portions of this Exhibit. + Incorporated by reference to Exhibits to the Registration Statement on Form 10 (File No. 0-21326) filed by Anika on March 5, 1993. ++ Incorporated by reference to Exhibits to Anika's Form 10-Q for the quarterly period ended May 31, 1993 as filed on July 15, 1993. +++ Incorporated by reference to Exhibits to Anika's Form 10-Q/A for the quarterly period ended May 31, 1995 as filed by Anika on July 29, 1995. ++++ Incorporated by reference to Exhibits to Anika's Form 10-K for the fiscal year ended August 31, 1995 as filed on November 28, 1995 +++++ Incorporated by reference to Exhibits to Anika's Form 10-Q for the quarterly period ended February 29, 1996 as filed on April 15, 1996.

 
 
                                                                   EXHIBIT 10.10

                             ANIKA RESEARCH, INC.

                            1993 STOCK OPTION PLAN

                                 March 3, 1993

1.   Purpose.

     The purpose of this plan (the "Plan") is to secure for Anika Research, Inc.
(the "Company") and its shareholders the benefits arising from capital stock
ownership by employees, officers and directors of, and consultants or advisors
to, the Company and its parent and subsidiary corporations who are expected to
contribute to the Company's future growth and success and to provide options to
holders of options to purchase the capital stock of MedChem Products, Inc.
("MedChem") in connection with the distribution of shares of the Company's
Common Stock ("Common Stock") by MedChem. Except where the context otherwise
requires, the term "Company" shall include the parent and all present and future
subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the
Internal Revenue Code of 1986, as amended or replaced from time to time (the
"Code"). Those provisions of the Plan which make express reference to Section
422 shall apply only to Incentive Stock Options (as that term is defined in the
Plan).

2.   Type of Options and Administration.

     (a)  Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and may be either incentive stock options
("Incentive Stock Options") meeting the requirements of Section 422 of the Code
or non-statutory options which are not intended to meet the requirements of
Section 422 of the Code.

     (b)  Outright Grant of Shares. The Board of Directors is also authorized to
make outright grants of shares of Common Stock of the Company in all
circumstances in which the Board of Directors deems such grants appropriate, 
subject to such terms, conditions or vesting limitations as from time to time 
determined by the Board of Directors.

     (c)  Administration. The Plan will be administered by the Board of
Directors of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The Board of Directors may
in its sole discretion grant options to purchase shares of the Company's Common
Stock and issue shares upon exercise of such options as provided in the Plan.
The Board shall have authority, subject to the express provisions of the Plan,
to construe the respective option agreements and the Plan, to prescribe, amend
and rescind rules and regulations relating to the Plan, to determine the terms
and provisions of the respective option agreements, which need not be identical,
and to make all other determinations in the judgment of the Board of Directors
necessary or desirable for the administration of the Plan. The Board of
Directors may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any option agreement in the manner and to the
extent it shall deem expedient to carry the Plan into effect and it shall be the
sole and final judge of such expediency. No director or person acting pursuant
to authority delegated by the Board of Directors shall be liable for any action
or determination under the Plan made in good faith. The Board of Directors may,
to the full extent permitted by or consistent with applicable laws or
regulations (including, without limitation, applicable state law and Rule 16b-3
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or
any successor rule ("Rule 16b-3")), delegate any or all of its powers under the
Plan to a committee (the "Committee") which consists solely of two or more 
Non-Employee Directors (as defined in Rule 16b-3) appointed by the Board of
Directors, and if the Committee is so appointed all references to the Board of
Directors in the Plan shall mean and relate to such Committee.

     (d)  Applicability of Rule 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply only to such persons as are required
to file reports under Section 16(a) of the Exchange Act (a "Reporting Person").

3.   Eligibility.

     (a)  General. Options may be granted to persons who are, at the time of
grant, employees, officers or directors of, or consultants or advisors to, the
Company; provided, that the class of employees to whom Incentive Stock Options
may




 
 
be granted shall be limited to all employees of the Company. A person who
has been granted an option may, if he or she is otherwise eligible, be granted
additional options if the Board of Directors shall so determine.

     (b)  MedChem Products, Inc.  Notwithstanding the foregoing paragraph, non-
statutory options may also be granted under the Plan to persons who hold options
to purchase shares of Common Stock of MedChem as of the date on which MedChem
distributes the shares of Common Stock of the Company it holds to its
stockholders pursuant to the terms of the Plan and Agreement of Distribution to
be entered into between MedChem and the Company (the "MedChem Optionees").

     (c)  Grant of Options to Directors and Officers.  From and after the
registration of the Common Stock of the Company under the Exchange Act, the
selection of a director or an officer (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either (i) by the Board of Directors
or (ii) by two or more directors having full authority to act in the matter,
each of whom shall be a Non-Employee Director. For the purposes of the Plan, a
director shall be deemed to be a Non-Employee Director only if such person
qualifies as a Non-Employee Director within the meaning of Rule 16b-3, as such
term is interpreted from time to time.

4.   Stock Subject to Plan.

     Subject to adjustment as provided in Section 15 below, the maximum number
of shares of Common Stock of the Company which may be issued and sold under the
Plan is 2,000,000 shares. If an option granted under the Plan shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares subject to such option shall again be available for subsequent option
grants under the Plan. If shares issued upon exercise of an option under the
Plan are tendered to the Company in payment of the exercise price of an option
granted under the Plan, such tendered shares shall again be available for
subsequent option grants under the Plan; provided, that in no event shall (i)
the total number of shares issued pursuant to the exercise of Incentive Stock
Options under the Plan, on a cumulative basis, exceed the maximum number of
shares authorized for issuance under the Plan exclusive of shares made available
for issuance pursuant to this sentence or (ii) the total number of shares issued
pursuant to the exercise of options by Reporting Persons, on a cumulative basis,
exceed the maximum number of shares authorized for issuance under the Plan
exclusive of shares made available for issuance pursuant to this sentence.

5.   Forms of Option Agreements.

     As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.

6.   Purchase Price.

     (a)  General.  The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors, provided,
however, that in the case of an Incentive Stock Option, the exercise price shall
not be less than 100% of the fair market value of such stock, as determined by
the Board of Directors, at the time of grant of such option, or less than 110%
of such fair market value in the case of options described in Section 11(b).

     (b)  Payment of Purchase Price.  Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or, to the extent provided in the applicable option agreement, (i) by delivery
to the Company of shares of Common Stock of the Company already owned by the
optionee having a fair market value equal in amount to the exercise price of the
options being exercised, (ii) by any other means (including, without limitations
by delivery of a promissory note of the optionee payable on such terms as are
specified by the Board of Directors) which the Board of Directors determines are
consistent with the purpose of the Plan and with applicable laws and regulations
(including, without limitation, the provisions of Rule 16b-3 and Regulation T
promulgated by the Federal Reserve Board) or (iii) by any combination of such
methods of payment. The fair market value

                                       2

 
of any shares of the Company's Common Stock or other non-cash consideration
which may be delivered upon exercise of an option shall be determined by the
Board of Directors.

7.   Option Period.

     Each option and all rights thereunder shall expire on such date as shall be
set forth in the applicable option agreement, except that, in the case of an
Incentive Stock Option, such date shall not be later than ten years after the
date on which the option is granted and, in all cases, options shall be subject
to earlier termination as provided in the Plan.

8.   Exercise of Options.

     Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.

9.   Nontransferability of Options.

     Incentive Stock Options, and all options granted to Reporting Persons,
shall not be assignable or transferable by the person to whom they are granted,
either voluntarily or by operation of law, except by will or the laws of descent
and distribution, and, during the life of the optionee, shall be exercisable
only by the optionee; provided, however, that non-statutory options may be
transferred pursuant to a qualified domestic relations order (as defined in Rule
16b-3).

10.  Effect of Termination of Employment or Other Relationship.

     Except as provided in Section 11(d) with respect to Incentive Stock
Options, and subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an option
following (i) the termination of the optionee's employment or other relationship
with the Company or, in the case of a MedChem Optionee, with MedChem or, (ii)
the death or disability of the optionee. Such periods shall be set forth in the
agreement evidencing such option.

11.  Incentive Stock Options.

     Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:

     (a)  Express Designation.  All Incentive Stock Options granted under the
Plan shall; at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.

     (b)  10% Shareholder.  If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:

          (i)  The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the fair market value of
one share of Common Stock at the time of grant; and

          (ii) the option exercise period shall not exceed five years from the
date of grant.

     (c)  Dollar Limitation.  For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market value (determined as of
the respective date or dates of grant) of more than $100,000.

                                       3

 
     (d)  Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that: 

          (i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the Company
(or within such lesser period as may be specified in the applicable option
agreement), provided, that the agreement with respect to such option may
designate a longer exercise period and that the exercise after such three-month
period shall be treated as the exercise of a non-statutory option under the
Plan;

          (ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised by the person to whom it is transferred
by will or the laws of descent and distribution within the period of one year
after the date of death (or within such lesser period as may be specified in the
applicable option agreement); and

          (iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while in the employ of
the Company, the Incentive Stock Option may be exercised within the period of
one year after the date the optionee ceases to be such an employee because of
such disability (or within such lesser period as may be specified in the
applicable option agreement).

For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.

12.  Additional Provisions.

     (a)  Additional Option Provisions. The Board of Directors may, in its sole
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.

     (b)  Acceleration, Extension, Etc. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3.

13.  General Restrictions.

     (a)  Investment Representations. The Company may require any person to whom
an option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws, or with covenants or representations made by the Company in
connection with any public offering of its Common Stock.

     (b)  Compliance With Securities Laws. Each option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or that the disclosure of
non-public information or the satisfaction of any other condition is necessary
as a condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless

                                       4

 
 
such listing, registration, qualification, consent or approval, or satisfaction
of such condition shall have been effected or obtained on conditions acceptable
to the Board of Directors. Nothing herein shall be deemed to require the Company
to apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.

14.  Rights as a Shareholder.

     The holder of an option shall have no rights as a shareholder with respect
to any shares covered by the option (including, without limitation any rights to
receive dividends or non-cash distributions with respect to such shares) until
the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.

15.  Adjustment Provisions for Recapitalizations and Related Transactions.

     (a)  General. If, through or as a result of any merger, consolidation, sale
of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (x) the maximum number
and kind of shares reserved for issuance under the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment would cause the Plan to
fail to comply with Section 422 of the Code or with Rule 16b-3.

     (b)  Board Authority to Make Adjustments. Any adjustments under this
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.

16.  Merger, Consolidation, Asset Sale, Liquidation, etc.

     (a)  General. In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may in its discretion, take
any one or more of the following actions, as to outstanding options: (i) provide
that such options shall be assumed, or equivalent options shall be substituted,
by the acquiring or succeeding corporation (or an affiliate thereof), provided
that any such options substituted for Incentive Stock Options shall meet the
requirements of Section 424(a) of the Code, (ii) upon written notice to the
optionees, provide that all unexercised options will terminate immediately prior
to the consummation of such transaction unless exercised by the optionee within
a specified period following the date of such notice, (iii) in the event of a
merger under the terms of which holders of the Common Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the merger (the "Merger Price"), make or provide for a cash payment to the
optionees equal to the difference between (A) the Merger Price times the number
of shares of Common Stock subject to such outstanding options (to the extent
then exercisable at prices not in excess of the Merger Price) and (B) the
aggregate exercise price of all such outstanding options in exchange for the
termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.

     (b) Substitute Options. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.

                                       5


 
17.  No Special Employment Rights.

     Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or, in the case of a MedChem Optionee, by MedChem or interfere in
any way with the right of the Company or, in the case of a MedChem Optionee,
MedChem at any time to terminate such employment or to increase or decrease the
compensation of the optionee.

18.  Other Employee Benefits.

     Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.

19.  Amendment of the Plan.

     (a)  The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, except that if at any time the approval of the
shareholders of the Company is required under Section 422 of the Code or any
successor provision with respect to Incentive Stock Options, or under Rule
16b-3, the Board of Directors may not effect such modification or amendment
without such approval.

     (b)  The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option agreements in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify (i) the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code and (ii) the terms and
provisions of the Plan and of any outstanding option to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3.

20.  Withholding.

     (a)  The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a fair
market value equal to such withholding obligation. The fair market value of the
shares used to satisfy such withholding obligation shall be determined by the
Company as of the date that the amount of tax to be withheld is to be
determined. An optionee who has made an election pursuant to this Section 20(a)
may only satisfy his or her withholding obligation with shares of Common Stock
which are not subject to any repurchase, forfeiture, unfulfilled vesting or
other similar requirements.

     (b)  Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3.

21.  Cancellation and New Grant of Options, Etc.

     The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option

                                       6


 
exercise price per share which may be lower or higher than the exercise price
per share of the cancelled options or (ii) the amendment of the terms of any and
all outstanding options under the Plan to provide an option exercise price per
share which is higher or lower than the then current exercise price per share of
such outstanding options.

22.  Effective Date and Duration of the Plan.

     (a)  Effective Date. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring shareholder approval shall become effective when adopted by
the Board of Directors; amendments requiring shareholder approval (as provided
in Section 19) shall become effective when adopted by the Board of Directors,
but no incentive Stock Option granted after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.

     (b)  Termination. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate, with respect to Incentive Stock Options, upon the
earlier of (i) the close of business on the day next preceding the tenth
anniversary of the date of its adoption by the Board of Directors, or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise or cancellation of options granted under the
Plan. Unless sooner terminated in accordance with Section 16, the Plan shall
terminate with respect to options which are not Incentive Stock Options on the
date specified in (ii) above. If the date of termination is determined under (i)
above, then options outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.

23.  Provision for Foreign Participants.

     The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.

24.  Change in Control.

     Notwithstanding any other provision of the Plan and except as otherwise
provided in the relevant option agreement, in the event of a "Change in Control
of the Company" (as defined below) the exercise dates of all options then
outstanding shall be accelerated in full and any restrictions on exercising
outstanding options issued pursuant to the Plan prior to any given date shall
terminate. For purposes of the Plan, a "Change in Control of the Company" shall
occur or be deemed to have occurred only if any of the following events occur:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the
Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting power
of the Company's then outstanding securities; (ii) individuals who, as of the
date hereof, constitute the Board (as of the date hereof, the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board, provided
that any person becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's stockholders, was approved
by a vote of at least a majority of the directors then comprising the Incumbent
Board (other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of the directors of the Company, as such terms
are used in Rule

                                       7


 
14a-11 of Regulation 14A under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; (iii) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 50% of the combined voting
power of the Company's then outstanding securities; or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets. Notwithstanding the foregoing, the Board of Directors
of the Company may, in its sole discretion, by a resolution adopted by a
majority of the Incumbent Board prior to the occurrence of any of the events
otherwise constituting a Change in Control of the Company, declare that such
event will not constitute a Change in Control of the Company for the purposes of
the Plan. If such resolution is adopted, such event shall not constitute a
Change in Control of the Company for any purpose of the Plan.

                        Adopted by the Board of Directors on March 3, 1993.

                        Amended by the Board of Directors on April 26, 1993.

                        Approved by the Stockholders on April 26, 1993.

                        Amended by the Board of Directors on March 21, 1995.

                        Approved by the Stockholders on January 10, 1996.

                        Amended by the Board of Directors on October 1, 1996.

                                       8


 
                                                                   Exhibit 10.24
                                                                   -------------

             RESIGNATION, CONSULTING AND GENERAL RELEASE AGREEMENT
             -----------------------------------------------------

     This Resignation, Consulting and General Release Agreement (the
"Agreement") is entered into between Bernard P. Sullivan ("you") and Anika
Research, Inc. (the "Company").  This Agreement is effective eight (8) days
after it has been signed by the latter party to sign it.

     In exchange for the mutual promises contained in this Agreement, you and
the Company agree as follows:

     1.  Resignation as Vice President of Operations
         -------------------------------------------

     You agree that you will be considered to have resigned from your position
as Vice President of Operations of the Company effective on February 5, 1996
(the "Resignation Date").  If not already paid, you will be paid all base salary
accrued effective through the Resignation Date, based on your final base salary
rate in that position of One Hundred Twenty Thousand Dollars ($120,000) per year
(your "Salary Rate").

     2.  Consulting
         ----------

     Effective from February 6, 1996 to and including February 5, 1997 (the
"Consulting Term"), you shall be employed by the Company as a Consultant.

     (a) Pay and Benefits as a Consultant.  Effective for the Consulting Term,
         --------------------------------                                     
you shall be paid a salary at your Salary Rate.  Your salary shall be paid in
regular intervals consistent with the Company's practice for other employees.
Effective for that portion of the Consulting Term until you are first employed
in full-time or substantially full-time employment by another employer (the
"Benefits Period"), the Company shall also continue your coverage under the
Company's group medical, dental, life and long term disability insurance plans
and the Company's (S)401(k) plan (collectively, the "employee benefit plans")
provided to you as of the Resignation Date subject to employee benefit plan
changes generally applicable to other employees of the Company and further
subject to your continued eligibility for employee benefit plan participation
under the terms of each such employee benefit plan, including but not limited to
requirements concerning hours of work.  In the event that the Company determines
that you are not eligible for employee benefit plan participation under the
terms of the group medical, dental, life and/or long-term disability insurance
plans during a portion of the Benefits Period due to a minimum hours of work
requirement under such employee benefit plans, the Company shall make a good
faith effort to obtain a waiver of any such minimum hours of work requirement.
In the event that you are not eligible for continued participation in the
Company's group life or long-term disability insurance plans or the Company's
(S)401(k) plan during the Benefits Period for any reason including, without
limitation, any minimum hours of work requirement, other than as a result of an
employee 


 
benefit plan change after the Resignation Date generally applicable to other
employees of the Company, then the Company shall pay to you the amounts it would
have contributed for your benefit or the premiums it would have paid on your
behalf pursuant to this Section 2(a) no later than when such contributions or
premiums would otherwise have been paid. In determining the payment to you under
the preceding sentence based on the amount the Company would have contributed
for your benefit under the (S)401(k) plan, such payment shall be determined
based on your having made the maximum contribution you could have made under the
(S)401(k) plan. If you cease to be eligible for medical and/or dental coverage
under the terms of the Company's medical and/or dental insurance plans, you will
be given the right to continue such benefits under the law known as "COBRA."
Notwithstanding any COBRA notice that you may receive, if you elect COBRA
coverage in a timely manner, the Company will continue to pay the employer
portion of the premium for your medical and/or dental coverages effective for
the remainder of the Benefits Period, provided that you continue to pay any
employee portion in a timely manner and otherwise remain eligible for benefit
continuation under COBRA. To the extent that you have received or may receive
pay and/or benefits attributable to the period after the Resignation Date before
this Agreement becomes effective, all such pay and benefits shall be credited
against the Company's obligations to you under this Agreement. For purposes of
this Agreement, "employment" shall not include legitimate independent contractor
relationships.

     (b) Responsibilities as a Consultant.  Your responsibilities as a
         --------------------------------                             
Consultant may consist of any responsibilities reasonably requested by the
Company which are consistent with your expertise and experience ("Consulting
Services") including, without implication of limitation:  (i) assisting the
Company with the transition of management responsibilities to others at the
Company; and (ii) advising the Company, upon request, with respect to other
matters, including, without implication of limitation, facility, process design
and operational matters.

     (c) Hours and Scheduling of Consulting Services.  From February 6, 1996 to
         -------------------------------------------                           
and including the earlier of (i) the end of the Benefits Period or (ii) June 5,
1996, you may be required to perform Consulting Services for no more than
thirty-two (32) hours per calendar month (subject to pro rata adjustment for
partial months).  After the earlier of (i) or (ii) above, you may be required to
perform Consulting Services for no more than sixteen (16) hours per calendar
month (subject to pro rata adjustment for partial months).  To a reasonable
extent consistent with its business needs, the Company shall make an effort to
schedule your performance of Consulting Services at times that will not unduly
interfere with your other personal or professional commitments.

     (d) Expenses as a Consultant.  The Company agrees to reimburse you for any
         ------------------------                                              
reasonable out-of-pocket expenses incurred by you in rendering Consulting
Services including reasonable travel, food and lodging expenses, if any, subject
to 

                                       2

 
reasonable documentation.  Without limiting the generality of the foregoing,
in the event that you accept full-time employment for another employer during
the Consulting Term and move your principal residence in connection with such
full-time employment to a location more than one hundred (100) miles from the
Company's principal office, reasonable out-of-pocket expenses shall include the
reasonable expenses of travel from such new principal residence to the Company's
principal office (or other location where the Consulting Services are rendered)
and food and lodging expenses in connection with such travel.

     (e) No Employment After Consulting Term.  You acknowledge that you shall
         -----------------------------------                                 
not be eligible for reemployment with the Company after the end of the
Consulting Term.

     3.  Vacation Pay
         ------------

     Although the Company asserts that its policy is not to permit carryover of
vacation time after December 31 of any year, the Company will treat you as
having four hundred seventy-three (473) hours of accrued but unused vacation
time as of the Resignation Date, subject to its use pursuant to this Agreement.
Before or promptly after this Agreement becomes effective, the Company shall pay
you for eighty (80) hours of vacation time, reducing the remaining vacation
balance to three hundred ninety-three (393) hours.  That vacation balance shall
be considered used by you to the extent that the Company does not require you to
perform Consulting Services up to the applicable maximum for a month, as set
forth in Section 2(c).  For example, if you were required to perform fifteen
(15) hours of Consulting Services during a month within the Benefits Period and
before June, 1996, your vacation balance would be reduced in that month by
seventeen (17) hours.  The Company shall make two (2) further payments to you
during the Consulting Term, each for eighty (80) hours of vacation time, to be
paid in June and October, 1996.  These payments shall be applied to reduce the
vacation balance, provided that they shall be paid regardless of whether they
would reduce the vacation balance below zero (0) hours.  Any remaining balance
of vacation time after all reductions pursuant to this Section 3 shall be paid
to you promptly after the end of the Consulting Term.  Payment of vacation pay
pursuant to this Section 3 shall be calculated at your Salary Rate.

     4.  Stock Options
         -------------

     The Consulting Term shall be considered to be a continuation of your
employment for purposes of the following stock option agreements with the
Company, all entitled "Incentive Stock Option Agreement," with the following
dates of grants and total shares (subject to vesting as set forth in each
Incentive Stock Option Agreement):

                                       3

 
Date of Grant Shares - ------------- ------ May 21, 1993 2,250 May 21, 1993 6,750 May 21, 1993 9,000 August 8, 1994 1,500 August 8, 1994 4,500 August 8, 1994 15,000 August 8, 1994 25,000 March 21, 1995 20,000
The foregoing (and no other agreements) are referred to hereinafter as the "Stock Option Agreements." 5. Outplacement ------------ The Company shall pay up to Three Thousand Dollars ($3,000) for outplacement services for you to be provided by any legitimate outplacement services provider selected by you. You shall arrange for direct billing to the Company of the cost of such services (subject to the maximum). 6. Litigation Cooperation ---------------------- During and after the Consulting Term, you agree to cooperate fully with the Company in the defense or prosecution of any claims or actions which already have been brought or which may be brought in the future against or on behalf of the Company which relate to events or occurrences that transpired during your employment with the Company or which may transpire during your future work as a Consultant for the Company. Your full cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness when requested by the Company at reasonable times designated by the Company. The Company agrees to reimburse you for any reasonable out-of-pocket expenses incurred in connection with such cooperation, subject to reasonable documentation. Any time reasonably spent by you in connection with such cooperation, including travel time, during the Consulting Term shall be credited as Consulting Services rendered under this Agreement, provided that the Company may require you to engage in litigation cooperation above the maximum hours limitations applicable to Consulting Services. The Company shall compensate you for your time by paying you at the rate of Seventy-Five Dollars ($75) per hour for any time reasonably spent by you, including travel time, in connection with litigation cooperation either (a) above the applicable maximum hours limitation applicable to Consulting Services at the time performed; or (b) after the expiration of the Consulting Term. 4 7. Non-Disclosure and Non-Competition Obligations ---------------------------------------------- The Non-Disclosure and Non-Competition Agreement between you and MedChem dated April 20, 1983 (the "Non-Disclosure Agreement") shall remain in full force and effect. You acknowledge that all references to the "Company" in the Non- Disclosure Agreement shall be construed to refer to the Company as defined in this Agreement. Nothing in this Agreement shall be construed to limit the effectiveness or enforceability of the Non-Disclosure Agreement. Without limiting the scope of the Non-Disclosure Agreement, you acknowledge that the noncompetition obligation set forth in Section 10 of the Non-Disclosure Agreement prohibits you from rendering services under certain circumstances more fully described therein both during the Consulting Term and for a one year period after the end of the Consulting Term. For the purpose of assisting in administration of the Non-Disclosure Agreement and Section 2 of this Agreement, you shall promptly give notice to the Company when you agree to commence any new employment or independent contractor relationship and you shall promptly provide the Company with any information that it reasonably requests concerning such employment or independent contractor relationship related to the Non-Disclosure Agreement or Section 2 of this Agreement. 8. Taxation of Payments -------------------- Salary, vacation and any other payments to you pursuant to this Agreement shall be subject to any deductions and withholdings that the Company reasonably determines to be required for tax purposes. 9. General Releases ---------------- As part of the consideration for reaching this Agreement, you unconditionally and irrevocably release and discharge the Company (and the directors, officers, employees, agents, successors, assigns, affiliates, stockholders, predecessors and successors of the Company) (collectively, "Anika") from any and all charges, complaints, claims, promises, agreements, causes of action, damages, and debts of any nature whatsoever, known or unknown ("Claims") which you now have or could claim to have against Anika. This general release of Claims includes, without implication of limitation, all Claims related to your employment with the Company and its predecessors, your activities on behalf of the Company and its predecessors and the resignation of your employment with the Company, including, without implication of limitation, any Claims of wrongful discharge, any Claims of intentional or negligent misrepresentation, any Claims of discrimination under the common law or any statute (including, without implication of limitation, Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act) and any Claims for vacation pay (provided that the immediately foregoing clause shall 5 not be construed as limiting or otherwise affecting the Company's obligations under Section 3 of this Agreement). You also waive any Claim for attorneys' fees or costs. Basically, and without limiting the foregoing, you agree that you will not bring any lawsuits or charges against the Company or its representatives or either of them concerning your employment, your resignation or any other events that have occurred or matters that have arisen at any time up to the present. As part of the consideration for reaching this Agreement, the Company unconditionally and irrevocably releases and discharges you from any and all Claims which it now has or could claim to have against you. This general release of Claims includes, without implication of limitation, all Claims related to your employment with the Company and its predecessors, your activities on behalf of the Company and its predecessors and the resignation of your employment with the Company. The Company also waives any Claim for attorneys' fees or costs. Notwithstanding the foregoing, the Company's release and discharge of Claims does not include any Claims based on intentional tortious conduct, intentional breach of any fiduciary duty or any other intentional misconduct (collectively, "Intentional Misconduct Claims") except to the extent that an Intentional Misconduct Claim is currently known to the Company. For purposes of this Section 9, a Claim shall be considered to be known to the Company if and only if one of the Company's officers (other than you) knows of or has reason to believe facts that would give the Company a basis for initiating legal proceedings against you. Basically, without limiting the foregoing and subject to the exception applicable to Intentional Misconduct Claims not known to the Company, the Company agrees that it will not bring any lawsuits or charges against you based on any Claims concerning your employment, your resignation or any other events that have occurred or matters that have arisen at any time up to the present. 10. Entire Agreement ---------------- Except as set forth below, this Agreement is the entire agreement between you and the Company and all previous agreements, arrangements, or promises between you and the Company (including but not limited to the Employment Agreement dated April 29, 1993 and the Employee Retention Agreement dated May 3, 1993 (both as modified by the May 17, 1995 letter agreement that you signed)) are superseded, null and void. Notwithstanding the foregoing, this Agreement does not affect your rights or obligations under the Stock Option Agreements or the Non-Disclosure Agreement (except as modified by this Agreement). In addition, nothing in this Agreement is intended to affect your rights 6 or obligations, if any, under the January 11, 1991 Consulting Agreement between you and Johnson & Johnson. 11. Review of Agreement ------------------- You acknowledge that you have been given the opportunity, if you so desired, to consider this Agreement for twenty-one (21) days before executing it. If not signed by you and returned to me so that I receive it within twenty- one (21) days of your receipt of the Agreement, this Agreement will not be valid. In the event that you execute and return this Agreement within less than twenty-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 letter agreement for the entire twenty-one (21) day period. The Company acknowledges that for a period of seven (7) days from the date of the execution of this Agreement, you shall retain the right to revoke this Agreement by written notice that I receive at or before the end of such period, and that this Agreement shall not become effective or enforceable until the expiration of such revocation period. By signing this Agreement, you acknowledge that you are doing so voluntarily. You also acknowledge that you are not relying on any representations by me or any other representative of the Company concerning the meaning of any aspect of this Agreement. You also acknowledge that you have been advised by the Company to obtain the advice of an attorney concerning this Agreement. 12. Interpretation and Amendment ---------------------------- 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. The law of Massachusetts will govern any dispute about this Agreement, including any interpretation or enforcement of this Agreement. This Agreement may be modified by a written agreement signed by you and an authorized representative of the Company. 13. Arbitration of Disputes ----------------------- Any controversy or claim arising out of or relating to this Agreement or the breach thereof or otherwise arising out of your consulting relationship with the Company shall be settled by arbitration under the auspices of the American Arbitration Association ("AAA") in Boston, Massachusetts in accordance with the employment dispute resolution arbitration rules and procedures of the AAA, including, without implication of limitation, the rules and procedures applicable to the selection of arbitrators. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the 7 foregoing, any claim for enforcement of the Non-Disclosure Agreement shall be brought in any court having jurisdiction thereof. 14. Waiver ------ No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 15. Notices ------- Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to you at the last address you have filed in writing with the Company or, in the case of the Company, at its main offices, attention of the Chief Operating Officer. 16. Successors: Binding Agreement. ----------------------------- The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle you to immediate payment from the Company of all amounts then or thereafter due you under this Agreement including, without limitation, vacation pay for the vacation balance at such time computed in accordance with Section 3 hereof and Section 10 of the Non- Disclosure Agreement referred to in Section 7 hereof shall terminate forthwith and be without force or effect. This Agreement may not be assigned by you and shall be binding on your heirs, executors and administrators. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized officer, and by Bernard P. Sullivan, on the date of signature of the latter party to sign it, as set forth below. ANIKA RESEARCH, INC. By: /s/ Robert S. DuFresne February 16, 1996 ------------------------ ----------------- Date /s/ Bernard P. Sullivan February 16, 1996 ----------------------- ----------------- Bernard P. Sullivan Date 8

 
                                                                  EXHIBIT 10.31
 
September 24, 1996
 
Mr. J. Melville Engle
10503 Laurel Hill Cove
Austin, TX 78730
 
Dear Mel:
 
  As discussed with you recently, it is my pleasure to offer you the following
employment package:
 
1. Title: President and Chief Executive Officer, Member of the Board of
   Directors. You agree to resign from the Board of Directors if you are no
   longer employed at the Company.
 
2. Annualized Salary: $200,000
 
  a. Sign-on bonus $10,000 payable immediately
 
  b. An annual bonus opportunity of up to 25% based on attainment of
     objectives relating to the financial and operating performance of the
     Company. The specific objectives will be determined by the Board within
     30 days of your joining the Company, subject to reasonable agreement.
 
3. A grant of Stock Options in the amount of 250,000 shares of the Company,
   vesting in equal installments over 4 years, at a fair market value exercise
   price to be determined on the earliest date provided for in the Company's
   Stock Option Plan.
 
4. Severance in the event of termination:
 
    Termination without cause (non-performance related): Severance of six
    months base salary and six months medical benefits for employee and
    family;
 
    Constructive termination in the event of a "hostile" change of control:
    Severance of twelve months (including medical benefits) if employee is
    not retained in a substantially equivalent position.
 
5. Reimbursement of Relocation Expenses:
 
    Reasonable cost of transportation of you and your family to the Boston
    area.
    Reasonable cost of transportation of normal household effects.
    Reasonable cost of temporary housing for up to 6 months.
    Reasonable brokerage commission & closing expenses for the sale of your
    house in Texas.
    Reasonable expenses (to exclude financing related expenses) incidental
    to the purchase of a house in the Boston area.
    The Company will gross up relocation expenses so the income tax impact
    is mitigated.
 
6. Anika Employee Benefits--Outline is Attached.
 
7. Execution of a confidentiality, non-disclosure and non-compete agreement as
   required by Axiom Venture's documents. Upon your acceptance of this offer,
   you will be an employee-at-will of the Company.
 
  I understand you have agreed to begin at Anika on September 26, 1996.
 
  Please sign and return one copy of this letter acknowledging your acceptance
of this employment offer. I and the entire Board remain quite enthusiastic
about Anika's future prospects and we all look forward to your leadership of
our management team.
 
Sincerely,                                Accepted,
 
 
/s/ Steven E. Wheeler                     /s/ J. Melville Engle
 
 
Steven E. Wheeler                         J. Melville Engle
Director                                  Date: September 24, 1996

 
                                                                    EXHIBIT 11.1
 
                              ANIKA RESEARCH, INC.
 
          COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
 
YEARS ENDED AUGUST 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- PRIMARY AND FULLY DILUTED: Net loss:................................ $(2,848,879) $(1,954,506) $(1,439,849) Weighted average number of common shares outstanding.................... 4,052,596 3,225,205 3,177,094 Dilutive effect of outstanding stock options, warrants and redeemable convertible preferred stock........... 0 0 0 ----------- ----------- ----------- Weighted average number of common shares as adjusted.................... 4,052,596 3,225,205 3,177,094 ----------- ----------- ----------- Primary and fully diluted earnings per share........................... $ (0.70) $ (0.61) $ (0.45) =========== =========== ===========

 
                                                                   EXHIBIT 23.1
 
                       INDEPENDENT ACCOUNTANT'S CONSENT
 
The Board of Directors
Anika Research, Inc.:
 
We consent to incorporation by reference in the registration statement (No.
333-6275) on Form S-8 of Anika Research, Inc. of our report dated October
18,1996, relating to the balance sheets of Anika Research, Inc. as of August
31, 1996, and 1995, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
August 31, 1996, and all related schedules, which report appears in the August
31, 1996 annual report on Form 10-KSB of Anika Research, Inc.
 
                                          KPMG Peat Marwick LLP
 
Boston, Massachusetts
November 27, 1996
 


5 12-MOS AUG-31-1996 AUG-31-1995 AUG-31-1996 3,651,023 0 631,916 0 2,514,280 7,299,426 4,745,923 3,465,175 8,580,174 1,441,316 0 2,523,483 0 48,407 4,366,968 8,580,174 4,612,918 4,612,918 4,472,214 4,472,214 0 0 0 (2,963,193) 0 (2,963,193) 0 0 0 (2,848,879) (0.70) (0.70)

 
                                                                   EXHIBIT 28.1
 
                         INDEPENDENT AUDITORS' REPORT
 
The Stockholders and Board of Directors
Anika Research, Inc.:
 
  Under date of October 18, 1996, we reported on the balance sheets of Anika
Research, Inc. as of August 31, 1996 and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended August 31, 1996, as contained in the annual report on
Form 10-KSB for the year 1996. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule listed in Item 13(a)(2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
 
  In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
 
                                          KPMG Peat Marwick LLP
 
Boston, Massachusetts
October 18, 1996

 
                                                                    EXHIBIT 28.4
 
                              ANIKA RESEARCH, INC.
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
               FISCAL YEARS ENDED AUGUST 31, 1994, 1995, AND 1996
 
BALANCE AT BALANCE AT BEGINNING END OF YEAR ADDITIONS RETIREMENTS OF YEAR ---------- --------- ----------- ---------- AUGUST 31, 1994 Classification: Reserve for potential losses on AMVISC manufacturing contract... $520,757 $520,757 -------- --- ------- -------- $520,757 0 0 $520,757 ======== === ======= ======== AUGUST 31, 1995 Classification: Reserve for potential losses on AMVISC manufacturing contract... $520,757 $520,757 -------- --- ------- -------- $520,757 0 0 $520,757 ======== === ======= ======== AUGUST 31, 1996 Classification: Reserve for potential losses on AMVISC manufacturing contract... $520,757 520,757 $ 0 -------- --- ------- -------- $520,757 0 520,757 $ 0 ======== === ======= ========