<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-28034
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CardioTech International, Inc.
------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3186647
- ------------------------------ ---------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
78 E Olympia Avenue, Woburn, Massachusetts 01801
- ------------------------------------------ -------------
(Address of principal executive offices) (Zip Code)
11 State Street, Woburn, Massachusetts
- ----------------------------------------------
(Former address, if changed since last report)
Registrant's telephone number, including area code (781) 933-4772
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ------
The number of shares outstanding of the registrant's class of Common Stock as of
February 12, 1999 was 6,138,916. No shares were held in treasury.
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
December 31, 1998, and March 31, 1998 3
Condensed Consolidated Statements of Operations
December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 13
Item 6 - Exhibits and Reports on Form 8-K
Signatures 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets
Cash and Cash Equivalents $ 3,161,613 $ 2,226,691
Accounts Receivables--Trade 22,824 58,707
Accounts Receivables--Other 287,201 328,318
Prepaid Expenses 88,027 26,502
------------ -----------
Total Current Assets 3,559,665 2,640,218
Property and Equipment, net 339,609 187,654
Other non-current assets 206,138 211,766
============ ===========
Total Assets $ 4,105,412 $ 3,039,638
============ ===========
LIABILITIES & STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payables $ 99,145 161,243
Accrued Expenses 517,535 435,296
------------ -----------
Total Current Liabilities 616,680 596,539
Long Term Obligations
7% convertible senior notes due 2003 1,748,684 1,660,000
10% convertible subordinated notes due 2000 419,757 -
------------ -----------
2,168,441 1,660,000
Total Liabilities 2,785,121 2,256,539
Stockholders' Equity:
Series A Convertible Preferred stock,
$.01 par value;
5,000,000 authorized, 500,000 issued
and outstanding 5,000 -
Common Stock, $.01 par value; 20,000,000
shares authorized, 6,138,916 and
4,272,916 issued and outstanding
at December 31, 1998 and
March 31, 1998, respectively 61,389 42,729
Additional Paid in Capital 10,691,419 8,232,579
Accumulated Deficit (9,230,225) (7,495,630)
Notes Receivable from Officers (200,000) -
Cumulative Translation Adjustment (7,292) 3,421
------------ -----------
Total Stockholders' Equity 1,320,291 783,099
------------ -----------
Total Liabilities and Stockholders' Equity $ 4,105,412 $ 3,039,638
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Research Revenue $ 261,020 $ 250,772 $ 784,699 $ 570,834
Operating Expenses
Research and Development 651,983 433,114 1,601,401 1,090,881
Selling, General and Administrative 316,278 265,591 826,699 795,472
--------------- --------------- --------------- ---------------
Total Operating Expenses 968,261 698,705 2,428,100 1,886,353
Other Income and Expenses
Interest Expense (55,774) - (160,066) -
Interest Income 24,269 13,968 68,872 63,884
--------------- --------------- --------------- ---------------
(31,505) 13,968 (91,194) 63,884
Net Loss $ (738,746) $ (433,965) $ (1,734,595) $ (1,251,635)
=============== =============== =============== ===============
Net Loss Per
Common Share
Basic and Diluted $ (0.16) $ (0.10) $ (0.40) $ (0.29)
=============== =============== =============== ===============
Weighted Average Number of
Common Shares Outstanding 4,597,438 4,272,916 4,381,483 4,272,916
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
1998 1997
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (1,734,595) $ (1,251,635)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Interest paid on 7% Convertible Senior Note
by issuance of additional notes 88,684 --
Depreciation and Amortization 79,483 47,197
Changes in assets and liabilities
Accounts receivable 77,000 (159,825)
Prepaid expenses (61,525) 30,910
Increase in non-current assets (23,757) --
Accounts payable (62,098) (11,827)
Accrued expenses 82,239 153,219
------------------- ------------------
Net cash flows from operating activities
(1,554,569) (1,191,961)
=================== ==================
Cash flows from investing activities:
Purchase of property, plant and equipment (202,053) (12,847)
------------------- ------------------
Net cash flows from investing activities (202,053) (12,847)
=================== ==================
Cash flows from financing activities:
Net proceeds from issuance of convertible notes 419,757 --
Net proceeds from issuance of preferred stock 500,000 --
Net proceeds from issuance of common stock 1,782,500 --
------------------- ------------------
Net cash flows from financing activities 2,702,257 --
------------------- ------------------
Effect of exchange rate changes on cash (10,713) (4,143)
Net increase in cash and cash equivalents 934,922 (1,208,951)
Cash and cash equivalents at beginning of period 2,226,691 2,346,366
------------------- ------------------
Cash and cash equivalents at end of period $ 3,161,613 $ 1,137,415
=================== ==================
Supplemental Disclosure of Cash Flow Information:
Issuance of Notes Receivable from Officers $ (200,000) --
=================== ==================
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(UNAUDITED)
Note 1. The unaudited consolidated financial statements included herein have
been prepared by CardioTech International, Inc. ("the Company" or "CardioTech"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. 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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make the
information presented not misleading. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year. It is suggested that these statements be read in conjunction with
the Company's Consolidated Financial Statements and its notes thereto, for the
year ended March 31, 1998, included in the Company's Annual Report to
Shareholders.
Note 2. Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income." This Statement
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires the classification
of items of comprehensive income by their nature in a financial statement and
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. Financial statements for prior periods have been restated.
The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net loss $ (738,746) $ (433,965) $ (1,734,595) $ (1,251,635)
Other comprehensive expense, net of tax:
Currency translation adjustment (9,445) 2,424 (10,713) (4,143)
---------------- --------------- --------------- ----------------
Total other comprehensive income/(expense) (9,445) 2,424 (10,713) (4,143)
================ =============== =============== ================
Total comprehensive income/(loss) $ (748,191) $ (431,541) $ (1,745,308) $ (1,255,778)
================ =============== =============== ================
</TABLE>
Note 3. The Company computes basic and diluted earnings/loss per share ("EPS")
in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", which the Company adopted on October 1, 1997. Basic
earnings/loss per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings/loss per share is based
upon the weighted average number of common shares outstanding during the period
plus additional weighted average common equivalent shares outstanding during the
period. Common equivalent shares result from the assumed exercise of outstanding
stock options and warrants, the proceeds of which are then assumed to have been
used to repurchase outstanding common stock using the treasury stock method.
Common equivalent shares have been excluded from the computation of diluted loss
per share for all periods presented, as their effect would have been
anti-dilutive.
6
<PAGE>
The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the Condensed Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
December 31 December 31
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
In thousands, except for the per share data
<S> <C> <C> <C> <C>
BASIC AND DILUTED EPS
Numerator:
Net income (loss)........................... $ (739) $ (434) $ (1,735) $ (1,252)
Less:
Preferred stock dividends................... 7 - 7 -
Income available to common stockholders.......... $ (746) $ (434) $ (1,742) $ (1,252)
Denominator:
Weighted Average
Common shares outstanding................. 4,597 4,273 4,381 4,273
----- ----- ----- -----
Basic and Diluted EPS............................ $(0.16) $(0.10) $ (0.40) $ (0.29)
</TABLE>
Notes and preferred stock convertible into, and options and warrants to
purchase, 5,033,330 and 916,876 shares of common stock outstanding during the
periods ended December 31, 1998 and 1997, respectively, were excluded from the
calculation of diluted earnings per share because the effect of their inclusion
would have been anti-dilutive.
Note 4. On March 31, 1998, CardioTech sold to Dresdner Kleinwort Benson Private
Equity Partners LP $1,660,000 in Notes that bear interest at 7% per year and are
due in 2003. DKB agreed to purchase $500,000 of additional Notes if CardioTech
established three research sites for clinical trials of its MyoLink Peripheral
Graft. CardioTech established these three sites. However, instead of issuing
$500,000 in additional Notes, on November 12, 1998, CardioTech issued 500,000
shares of Series A Preferred Stock to DKB on substantially the same terms as the
Notes. CardioTech issued the Preferred Stock instead of Notes to improve its
stockholders' equity. The holders of shares of Series A Preferred Stock are not
entitled to any voting rights.
The Series A Preferred Stock accrues dividends at a rate of 10% per year,
payable quarterly in arrears and in priority to the Common Stock or any other
Preferred Stock of CardioTech. Dividend payments will accrue quarterly, unless
DKB elects to receive the dividends in cash. If CardioTech violates its material
obligations to DKB, the dividend rate may increase to 13% per year. CardioTech's
material obligations to DKB include the payment of interest and principal due
under the Notes and other outstanding loans, the payment of dividends on the
Series A Preferred Stock, the redemption or conversion, upon DKB's request, of
the Series A Preferred Stock, and adhering to the covenants set forth in
CardioTech's agreements with DKB.
At any time, DKB may convert the Series A Preferred Stock at its original
cost ($1.00 per share), plus accrued and unpaid dividends, into shares of Common
Stock at the conversion price of $1.818 per share. The conversion price is
subject to anti-dilution adjustment and, as a result of CardioTech's sale of the
Units described in Note 5, has been adjusted to $1.5842 per share. As of
December 30, 1998, $6,805 in dividends had accrued on the Series A Preferred
Stock. If DKB had elected to convert the Series A Preferred Stock into Common
Stock on December 30, 1998, it would have received 319,911 shares of Common
Stock.
Prior to November 12, 2000, CardioTech may redeem the Series A Preferred
Stock in cash at a premium equal to 104% of its original cost ($1.00 per share),
plus accumulated and unpaid dividends. After November 12, 2000, CardioTech may
still redeem the Series A Preferred Stock in cash but the 104% premium decreases
by 1% in each of the following four years.
Upon a change of control of CardioTech, DKB may require that CardioTech
redeem the Series A Preferred Stock in accordance with the formula in the
preceding paragraph. A change of control of CardioTech will occur if
CardioTech's Board of Directors approves a third-party's tender offer for (i)
more than 50% of the Common Stock or (ii) assets of CardioTech that represent
more than 50% of its consolidated earning power. A change of control of
CardioTech will also occur if CardioTech (i) sells more than 30% of its assets,
(ii) terminates Michael Szycher as its Chief Executive Officer, or (iii) sells
its strategic assets so that it is no longer able to pursue its current
business.
Should CardioTech elect to redeem the Series A Preferred Stock or if a
change in the control of CardioTech occurs or if a third party commences a
tender offer for CardioTech that is not approved by CardioTech's Board of
Directors, DKB may elect to convert the Series A Preferred Stock into shares of
Common Stock. On or prior to March 31, 2000, DKB may convert the Series A
Preferred Stock at a conversion price equal to .87 (increasing to .89, .93, .96,
and 1.00 on April 1, 2000, 2001, 2002, and 2003, respectively) times the lower
of (i) the conversion price or (ii) the market price. As of December 31, 1998,
management does not intend to redeem the Series A Preferred Stock prior to
maturity.
If CardioTech is liquidated, the holders of the Series A Preferred Stock
will be entitled to receive, out of CardioTech's remaining assets that are
available for distribution to CardioTech's stockholders, a per share amount
equal to $1.00 plus any accrued and unpaid dividends, before a distribution can
be made to the holders of the Common Stock or any other Preferred Stock.
In addition, DKB has Board representation rights. As long as the Notes and
the Series A Preferred Stock are outstanding, CardioTech must nominate one
representative of DKB for election to CardioTech's Board of Directors. If
elected, the DKB Director must also be a member of CardioTech's Executive
Compensation and Nominating Committees. The failure of CardioTech to nominate a
representative of DKB or the failure of each of CardioTech's officers and
directors who hold Common Stock to vote in favor of such representative
constitutes an event of default under the Notes and will result in the dividend
rate on the Series A Preferred Stock increasing to 13%.
Furthermore, so long as DKB holds Notes and Series A Preferred Stock that
are convertible into at least 10% of the Common Stock issuable pursuant to all
of the Notes and Series A Preferred Stock, neither CardioTech nor CTI Ltd.
shall, without prior written consent of DKB, create any encumbrances on its
properties, incur any additional debt, other than then existing debt, in excess
of $150,000, merge into or consolidate with any other company, sell any of its
assets for less than fair market value, make any investments other than those in
which the consideration is less than $50,000, make any capital expenditures in
excess of $50,000, make any expenditures for services in excess of $100,000,
declare or pay any dividends or certain other specified distributions to its
stockholders, incur any debt senior to the Notes, amend its Articles of
Organization or By-laws in a manner that would adversely affect the rights of
the holders of the Notes or the Series A Preferred Stock, issue equity
securities of equal or superior rank, other than Common Stock or the Series A
Preferred Stock, enter into any material agreement with provisions conflicting
with CardioTech's agreements with DKB, create any subsidiaries which could not
be consolidated with CardioTech for accounting purposes or allow CardioTech's
stockholders' equity plus $1,660,000 (the initial amount of the Notes) to be
less than $750,000.
Note 5. CardioTech raised $2,332,500, including $200,000 in promissory notes
from CardioTech's executive officers, in a unit private placement which
terminated on December 22, 1998. CardioTech sold 1,866,000 units in the offering
at a purchase price of $1.25 per unit. Each unit consisted of one share of the
Company's Common Stock, $.01 par value, and one warrant to purchase one share of
the Company's Common Stock. Each warrant expires on December 15, 2003 and is
exercise at $1.50 per share.
CardioTech paid the placement agent for the offering a cash fee of $127,950
and issued a five-year warrant to purchase 170,600 shares of Common Stock at an
exercise price of $1.475 per share.
7
<PAGE>
CardioTech's executive officers each purchased 40,000 units in the
offering (a total of 160,000 units). The officers paid for their units with
promissory notes in the amount of $50,000 each, payable on December 15, 2003,
with interest at a rate of 4.52% per year compounded annually and payable
annually in arrears. The notes which are with recourse with respect to 25% of
the initial principal amount, are secured by the shares and warrants.
The Company intends to use its best efforts to cause a registration
statement relating to the resale of the 3,582,600 shares sold in, or issuable in
connection with, the private placement to be declared effective April, 1999.
As stated in Note 4, as a result of CardioTech's sale of the Units, the
conversion price of the Series A Preferred Stock has been adjusted to $1.584 per
share. As of December 30, 1998, if DKB had elected to convert the Series A
Preferred Stock into Common Stock, it would have received 319,911 shares of
Common Stock.
The $1,660,000 in Notes that CardioTech issued to DKB that are
described in Note 4 accrue interest at a rate of 7.0% per annum, payable
quarterly in cash and/or additional Notes. As of December 30, 1998, DKB had
elected to receive an aggregate of $88,684.04, representing the June, September
and December 1998 quarterly interest payments, in additional Notes. The Notes
were initially convertible into Common Stock at a conversion price of $1.995 per
share. However, the conversion price of the Notes is subject to anti-dilution
protection and, as a result of CardioTech's sale of the Units, the conversion
price of the Notes has been adjusted to $1.676 per share. As of December 30,
1998, if DKB had elected to convert all of the Notes into Common Stock, it would
have received 1,080,873.20 shares of Common Stock.
In June 1996, CardioTech issued Warrants to purchase Common Stock to
John Hancock Mutual Life Insurance Company. As of CardioTech's last fiscal
quarter, September 30, 1998, 279,707.92 shares were issuable to John Hancock
under these Warrants at an exercise price of $3.37448 per share. However, the
exercise price of the Warrants is subject to anti-dilution protection. As a
result of CardioTech's sale of the Series A Preferred Stock and the Units and
the payment of interest due under the Notes in additional Notes, the exercise
price of the Warrants has been adjusted to $2.341 per share and 403,063.46
shares are issuable to John Hancock upon exercise of the Warrants.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
CardioTech synthesizes, designs and manufactures medical-grade
polymers, particularly polyurethanes that it believes are useful in the
development of vascular graft technology and other implantable medical devices
because they can be synthesized to exhibit compatibility with human blood and
tissue. CardioTech is using proprietary manufacturing technology to develop and
fabricate small bore synthetic vascular grafts made of ChronoFlex(R), a family
of polyurethanes that has been demonstrated to be biodurable, blood and tissue
compatible and non-toxic.
In addition to the graft research and development program, since 1990,
CardioTech has been engaged in various internal programs and joint venture
programs with corporate partners and internal programs for the development and
sale of ChronoFlex and other proprietary biomaterials for use in medical devices
manufactured by third parties. This activity has generated research revenues for
CardioTech.
As CardioTech is now focusing most of its research and development
resources on the vascular graft program, period to period comparisons of changes
in research revenues are not necessarily indicative of results to be expected
for any future period.
CardioTech is headquartered in Massachusetts and operates from
manufacturing and laboratory facilities located in Woburn, Massachusetts and
Brymbo, Wrexham, United Kingdom. CardioTech was spun off by PolyMedica
Industries, Inc. (PMI) in June, 1996.
9
<PAGE>
Results of Operations:
Comparison for the Three Months Ended December 31, 1998 and 1997.
Research revenue consists of revenues from the sale of medical grade
polyurethanes, research grants from the National Institute of Health (NIH)
and royalties from Bard Access Systems pursuant to a polyurethane supply
agreement. Research revenues for the three months ended December 31, 1998 were
$261,020 compared to $250,772 for the three months ended December 31, 1997, an
increase of $10,248, or 4.1%. This increase was primarily generated by an
increase in sales of research biomaterials of $20,576 and offset by lower
royalty income of $12,500 from Bard Access Systems.
Research and development expenses consist principally of
employment-related costs for scientific staff, facility costs, pre-clinical and
clinical testing costs, costs related to on-going development efforts and NIH
grant expenses. To date, all of the Company's research and development expenses
have been charged to operations as incurred. Research and development expenses
for the three months ended December 31, 1998 were $651,983 compared to $433,114
for the three months ended December 31, 1997, an increase of $218,869, or 50.5%.
This was principally the result of increased costs for travel ($17,500), outside
clinical and regulatory services ($65,700) and salaries and benefits ($87,000)
associated with the clinical trials of the Company's VascuLink Vascular Access
Graft in Europe. In addition, the Company incurred higher facilities costs
($24,000) and production materials costs ($15,600).
Selling, general and administrative expenses consist principally of
employment-related costs for executive, selling and administrative personnel,
professional fees, consulting fees, system support costs and other general and
administrative expenses. Selling, general and administrative expenses for the
three months ended December 31, 1998 were $316,278 compared to $265,591 for the
three months ended December 31, 1997 or an increase of $50,687 or 19.08%. This
increase was primarily due to higher salary and benefits costs ($29,000), public
reporting costs ($9,500), occupancy costs ($9,000), advertising costs ($5,700),
and recruitment costs ($6,200). These costs were partially offset by lower
insurance costs ($5,000) and outside professional services ($4,000).
Other income and expenses is comprised of interest income related to
the Company's invested cash balances, offset by interest expense on the Notes
issued to DKB and on a convertible loan from Freemedic. Other income and
expenses for the three months ended December 31, 1998 were expenses of $31,505
compared to income of $13,968 for the three months ended December 31, 1997. The
increase in expenses primarily resulted from interest expense of $55,774 on the
Notes issued to DKB. Interest expense for the three months ended December 31,
1998 was partially offset by interest income of $24,269 during the period. In
the three months ended December 31, 1997, the Company's other income consisted
of earned interest income of $13,968.
Comparison for the Nine Months Ended December 31, 1998 and 1997.
Research revenues for the nine months ended December 31, 1998 were
$784,699 compared to $570,834 for the nine months ended December 31, 1997, an
increase of $213,865, or 37.5%. This increase was primarily generated by higher
research revenues earned under research grants from the NIH ($96,000), higher
sales of medical grade polyurethanes ($54,400), and increased earned royalty
income from Bard Access Systems ($54,160).
Research and development expenses for the nine months ended December
31, 1998 were $1,601,401 compared to $1,090,881 for the nine months ended
December 31, 1997, an increase of $510,520, or 46.8%. This increase was
principally due to increased costs related to the Company's VascuLink Vascular
Access Graft clinical trials in Europe, travel ($33,800), increased outside
clinical and regulatory services ($267,500), increased salary and benefit
expenses ($158,500), and additional costs for materials ($48,000).
Selling, general and administrative expenses for the nine months ended
December 31, 1998 were $826,699 compared to $795,472 for the nine months ended
December 31, 1997, an increase of $31,227 or 3.9%. This increase was primarily
due to increased salary and benefits ($41,100) and increased recruitment costs
($12,900). These expenses were partially offset by lower insurance expenses
($8,900) and decreased outside professional services ($11,700).
Other income and expenses for the nine months ended December 31, 1998
were expenses of $91,194 compared to income of $63,884 for the nine months ended
December 31, 1997. The increase in expenses primarily resulted from interest
expense of $160,066 on the Notes issued to DKB and on a convertible loan from
Freemedic. Interest expense for the nine months ended December 31, 1998 was
partially offset by interest income of $68,872. In the nine months ended
December 31, 1997, the Company's other income consisted of earned interest
income of $63,884.
10
<PAGE>
Liquidity and Capital Resources
The Company used $1,554,569 to fund operations during the nine months
ended December 31, 1998 compared to $1,191,961 for the nine months ended
December 31, 1997. The principal uses of funds for the nine months ended
December 31, 1998 were a net loss of $1,734,595, increases in prepaid expenses
of $61,525 and the pay down of accounts payable of $62,098. These increases were
partially offset by increases in accrued expenses of $82,239 and a decrease in
accounts receivable related to trade customers of $77,000.
CardioTech's future growth will depend on its ability to raise capital
to support research and development activities and to commercialize its vascular
graft technology. To date, CardioTech has not generated revenues from the sale
of vascular grafts, although it has received a minor amount of research revenues
relating to its other biomaterial sales and from the NIH to support graft
research. Since inception, funding has come from PMI, $1,660,000 in Notes, a 10%
convertible loan from Freemedic in the amount of (GBP) 252,942, (approximately
$420,000), the sale of $500,000 in Series A Preferred Stock, and the sale of the
Units netting approximately $1,782,500 in cash. See Notes 4 and 5 of the notes
to condensed consolidated financial statements. CardioTech expects to continue
to incur operating losses unless and until product sales and/or royalty payments
generate sufficient revenue to fund its continuing operations.
CardioTech will require substantial funds for further research and
development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing
of its products. CardioTech's capital requirements depend on numerous factors,
including but not limited to, the progress of its research and development
programs, the progress of pre-clinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any intellectual property rights, competing
technological and market developments, changes in CardioTech's development of
commercialization activities and arrangements, and the purchase of additional
facilities and capital equipment.
CardioTech is currently conducting its operations with approximately
$3,161,600 in cash. CardioTech estimates such amount will be sufficient to fund
its working capital and research and development activities through April, 2000.
However, CardioTech's spending level may increase depending on the Company's
ability to raise additional capital.
Past spending levels are not necessarily indicative of future spending
levels. From the inception of CardioTech's business through March 31, 1996, PMI
has funded approximately $4.7 million in operating losses to support
CardioTech's research activities. Future expenditures for product development,
especially relating to outside testing and clinical trials, are discretionary
and, accordingly, can be adjusted based on the availability of cash.
CardioTech will seek to obtain additional funds through public or
private equity or debt financing, collaborative arrangements, or from other
sources. There can be no assurance that additional financing will be available
at all or on acceptable terms to permit successful commercialization of
CardioTech's technology and products. If adequate funds are not available,
CardioTech may be required to curtail significantly one or more of its research
and development programs, or obtain funds through arrangements with
collaborative partners or others that may require CardioTech to relinquish
rights to certain of its technologies, product candidates or products.
On November 12, 1998, the Company issued 500,000 shares of Series A
Preferred Stock to Dresdner Kleinwort Benson Private Equity Partners LP. See
Note 4 of the notes to condensed consolidated financial statements.
On December 22, 1998, the Company raised $2.3 million, including
$200,000 in promissory notes from the Company's executive officers, through a
private placement, consisting of 1,866,000 units, each unit being composed of
one share of the Company's Common Stock, $.01 par value per share, and a warrant
to purchase one share of Common Stock. The warrants are exercisable at $1.50 at
any time before December 15, 2003. Fechtor Detwiler & Co., Inc. acted as agent
for the Company in this offering. ( See Note 5 of the notes to condensed
consolidated financial statements.)
11
<PAGE>
Exchange Listing
The Company's common stock is currently listed and traded on the
American Stock Exchange ("AMEX") under the symbol "CTE ." However, there can be
no assurance that these shares will not be delisted by the AMEX. The
determination by AMEX to delist a company is not based on a precise mathematical
formula, but rather on a review of all relevant facts and circumstances in light
of the AMEX's policies. The AMEX will normally consider delisting securities of
a company which (i) has stockholders' equity of less than $2,000,000 if such
company has sustained losses from continuing operations and/or net losses in two
of its three most recent fiscal years; or (ii) has sustained losses which are so
substantial to its overall operations or its existing financial resources, or if
its financial condition has become so impaired that it appears questionable, in
the opinion of the AMEX, as to whether such company will be able to continue
operations and/or meet its obligations as they mature. As of December 31, 1998,
the Company had stockholders' equity of $1,320,805, and had losses in all three
of its most recent fiscal years. If the Company is unable to increase its
stockholders' equity and its net losses continue, the Company may be delisted.
The Company has attempted to increase its stockholders' equity through the
private placement of its equity securities. This includes the recently
consummated private placement of $2.3 million in Units, and the issuance of
$500,000 of Series A Preferred Stock described in Notes 5 and 4 of the notes to
the condensed consolidated financial statements. However, these financing
activities may not provide the Company with sufficient stockholders' equity to
avoid being delisted. Failure of the Company to maintain the listing of its
Common Stock on AMEX will constitute an event of default under the Notes and
entitle DKB to demand immediate payment of the Notes, as well as result in the
dividends payable under the Series A Preferred Stock increasing from 10% to 13%.
Upon such a default, actions taken by DKB may result in a default under the
Freeemedic convertible loan. At this time, repayment of such indebtedness would
deplete CardioTech's reserves.
Forward Looking Statements
The Company believes that this Form 10-Q contains forward-looking
statements that are subject to certain risks and uncertainties. These
forward-looking statements include statements regarding the Company's Year 2000
readiness, the sufficiency of the Company's liquidity and capital and the
Company's intention to sell equity to raise its stockholders' equity. Such
statements are based on management's current expectations and are subject to a
number of factors that could cause actual results to differ materially from the
forward-looking statements. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements, as a
result of various factors including but not limited to the following: the
Company's ability to obtain financing (with or without the sale of equity) to
support its working capital needs on acceptable terms, the Company's ability to
avoid the delisting of its Common Stock, the timely development of products by
the Company, intense competition related to the development of synthetic grafts
and difficulties inherent in developing synthetic grafts. As a result, the
Company's further development involves a high degree of risk. For further
information, refer to the more specific risks and uncertainties discussed
throughout this report.
ChronoFlex(R) is a registered trademark of PolyMedica Corporation that
----------
has been licensed to CardioTech.
Year 2000 Compliance
The Year 2000 Issue refers to potential problems with computer systems
or any equipment with computer chips or software that use dates where the date
has been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
date recording mechanism incorporating the date sensitive software which uses
only two digits to represent the year may recognize a date using 00 as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar business activities. To address the Year 2000 Issue, CardioTech has
implemented a program with respect to its (1) internal information technology
systems, (2) non-information technology systems, and (3) external suppliers of
goods and services.
CardioTech has completed a review of its internal information systems
to determine the extent of any Year 2000 problem. Based on this review,
CardioTech does not currently believe that it has material exposure to the Year
2000 Issue with respect to its own information systems, since its core existing
business information systems correctly define the year 2000. Additionally,
CardioTech has completed an evaluation of its internal non-information systems
and expects to have its remediation and testing phases for these systems
completed by the end of September 1999.
CardioTech is contacting its major customers and suppliers regarding
their Year 2000 problems. To date, CardioTech is unaware of any such problems
that would materially adversely affect its operations or financial condition.
However, CardioTech cannot assure its stockholders:
. that it will be able to identify third party Year 2000 problems;
. that third party Year 2000 problems will be corrected on a timely
basis; or
. that a failure by such entities to correct a Year 2000 problem or
a correction which is incompatible with CardioTech's information
systems would not have a material adverse affect on CardioTech's
operations or financial condition.
In addressing Year 2000 issues, CardioTech estimates that total costs
will be approximately $17,500. To date, $5,000 of such expenses have been
incurred and expensed. Total costs consist primarily of external consulting fees
and personal computer replacements. The estimated costs are based on
management's current assessment and could change in the future. CardioTech
cannot assure you that actual Year 2000 costs incurred will be equal to or less
than those estimated at this time.
Although CardioTech believes that its primary information technology
system correctly defines the year 2000, prudent business practices call for the
development of contingency plans. CardioTech's contingency plans will include
strategies for dealing with Year 2000-related system failures or malfunctions
due to CardioTech's internal systems or from external parties. A Year 2000
systems failure, either internal or that of an external provider, could prevent
CardioTech from being able to continue its operations, or could disrupt
financial and management controls and reporting systems. The Company expects to
complete its contingency plans by September 30, 1999.
CardioTech does not expect the Year 2000 Issue to have a material
adverse effect on its results of operations or financial position; however, if
not effectively remediated, negative effects from Year 2000 Issues, including
those related to internal systems, vendors, or customers, could have a material
adverse effect on CardioTech's operations or financial condition. CardioTech
cannot assure its stockholders that even if all planned actions are completed,
it will not experience some adverse effects from Year 2000 related issues.
12
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On November 12, 1998, CardioTech issued 500,000 shares of Series A
Preferred Stock for $1.00 per share to DKB, an accredited investor. On December
15, 1998, CardioTech sold 1,866,000 units for $1.25 per share to 47 individuals
and entities, of whom 45 were accredited investors and of whom 2 were not
accredited investors. Each unit consisted of one share of Common Stock and one
warrant to purchase one share of Common Stock. Each warrant expires on December
15, 2003 and is exercisable at $1.50 per share. In addition, on December 15,
1998, CardioTech issued a warrant to purchase 170,600 shares of Common Stock at
an exercise price of $1.475 per share to the unit placement agent, Fechtor
Detwiler & Co., Inc., an accredited investor. See Notes 4 and 5 of the notes to
condensed consolidated financial statements for a description of each of these
transactions.
All of these sales of securities were made by CardioTech in reliance upon
Section 4(2) of the Securities Act of 1933 and did not involve a public
offering. CardioTech relied on Rule 506 of Regulation D as a safeharbor for all
of these sales.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 3.1 Certificate of Correction dated December 11, 1998
Exhibit 10.1 John E. Mattern Employment Agreement dated
November 11, 1998
Exhibit 27 Financial Data Schedule
Exhibit 99.1 Form of Unit Purchase Agreement between CardioTech
International, Inc. and certain individuals, incorporated
herein by reference to the Company's Form S-3 filed with the
Securities and Exchange Commission on February 12, 1999.
Exhibit 99.2 Form of Warrant to Purchase Shares of Common Stock of
CardioTech International, Inc. issued to certain
individuals, incorporated herein by reference to the
Company's Form S-3 filed with the Securities and Exchange
Commission on February 12, 1999.
Exhibit 99.3 Form of Warrant Agreement by and among CardioTech
International, Inc., Fechtor, Detwiler & Co., Inc., and
certain of Fechtor, Detwiler's employees, and related form
of Warrant Certificate to Purchase Shares of CardioTech
International, Inc. Common Stock incorporated herein by
reference to the Company's Form S-3 filed with the
Securities and Exchange Commission on February 12, 1999.
(b) Reports on Form 8-K
Not applicable
14
<PAGE>
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.
CARDIOTECH INTERNATIONAL, INC.
/s/ Michael Szycher
------------------------------------------
Michael Szycher, Ph.D.
Chairman and Chief Executive Officer
/s/ John E. Mattern
------------------------------------------
John E. Mattern
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
Dated: February 16, 1998
15
<PAGE>
EXHIBIT 3.1
FEDERAL IDENTIFICATION
NO. 04-3186647
THE COMMONWEALTH OF MASSACHUSETTS
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
CERTIFICATE OF CORRECTION
(General Laws, Chapter 156B, Section 6A)
1. Exact name of corporation: CardioTech International, Inc.
2. Document to be corrected: Certificate of Vote of Directors Establishing
a Class or Series of Stock
3. The above mentioned document was filed with the Secretary of the Commonwealth
on November 12, 1998.
4. Please state the inaccuracy or defect in said document: In the last sentence
of Section 2(c) the word "not" was omitted following the word "election".
5. Please state corrected version of the document: Delete Section 2(c) and
substitute the following paragraph on Continuation Sheet 5A in lieu thereof,
Note: This correction should be signed by the person(s) required by law to sign
the original document.
SIGNED UNDER THE PENALTIES OF PERJURY, this 11th day of December, 1998.
/s/ Michael Szycher, Ph.D.
- ---------------------------------, *President
Michael Szycher, Ph.D.
/s/ John Mattern
- ---------------------------------, *Clerk
John Mattern
*Delete the inapplicable words
Note: If the inaccuracy or defect to be correct is not apparent on the face of
the document, minutes of the meeting substantiating the error must be filed with
the certificate. Additional information may be provided on separate 8 1/2 x 11
sheets of white paper with a left margin of at least 1 inch.
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CERTIFICATE OF CORRECTION
CONTINUATION SHEET 5A
(c) Unless the Requisite Series A Stockholders, at their option and in
their sole discretion, require the Corporation to make payment in cash of
such dividend payable on a Dividend Payment Date with respect to the
outstanding shares of Series A Preferred Stock, such dividends shall not be
paid in cash but shall continue to accrue in accordance with this Section 2
and shall not otherwise be paid in cash as a dividend pursuant to Section
2(a) on a later Dividend Payment Date without the prior written consent of
the Requisite Series A Stockholders. The Requisite Series A Stockholders
shall give irrevocable written notice to the Corporation of their election
not to defer such cash payment of dividends not less than 5 Business Days
nor more than 60 Business Days prior to the applicable Dividend Payment
Date.
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
PARTIES
-------
This Employment Agreement (this "Agreement"), dated as of the 11th day of
November, 1998, is entered into by and between CardioTech International, Inc., a
Massachusetts corporation having its principal place of business at 78E Olympia
Avenue, Woburn, Massachusetts 01801 (the "Company"), and John E. Mattern, an
individual with an address at 34 Samoset Road, Duxbury, Massachusetts 02332 (the
"Executive").
TERMS OF AGREEMENT
------------------
In consideration of this Agreement and the continued employment of the
Executive by the Company, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, on a full-time
----------
basis, to act as Chief Operating Officer, Chief Financial Officer and Clerk of
the Company and to perform such acts and duties and furnish such services to the
Company in connection with and related to those positions as are customary for
persons with similar positions in like companies, and as the Chief Executive
Officer of the Company shall from time to time reasonably direct. The Executive
shall be an officer of the Company. The Executive hereby accepts said
employment. The Executive shall use his best and most diligent efforts to
promote the interests of the Company; shall discharge his duties in a highly
competent manner; and shall devote his full business time and his best business
judgment, skill and knowledge to the performance of his duties and
responsibilities hereunder. The Executive shall report directly to the Chief
Executive Officer of the Company. Nothing contained herein shall preclude the
Executive from devoting incidental and insubstantial amounts of time to
activities other than the business of the Company.
2. Term of Employment. The Company agrees to employ the Executive for the
------------------
period commencing on the date hereof and ending on December 31, 1999 (the
"Employment Period"). Notwithstanding the foregoing, both the Executive and the
Company shall have the right to terminate the Executive's employment under this
Agreement upon thirty (30) days written notice to the other party, subject to
the Company's obligation to pay severance benefits under certain circumstances
as provided in Sections 3.6 and 3.7 hereof. If the Executive shall remain in
the employ of the Company beyond the Employment Period, in the absence of any
other express agreement between the parties, this Agreement shall be deemed to
continue on a month-to-month basis (the "Extended Employment Period").
<PAGE>
3. Compensation and Benefits; Disability.
-------------------------------------
3.1. Salary. During the Executive's employment, the Company shall pay the
------
Executive an annualized base salary of One Hundred Forty Thousand Four Hundred
Dollars ($140,400) (the "Base Salary"), payable in equal installments pursuant
to the Company's customary payroll policies in force at the time of payment (but
in no event less frequently than monthly), less required payroll deductions and
state and federal withholdings. The Base Salary may be adjusted from time to
time in the sole discretion of the Board of Directors of the Company (the
"Board"), except that the Executive, if a Director, shall not be entitled to
vote thereon. The Base Salary shall be reviewed annually by the Board.
3.2. Bonus Payment. During the Employment Period, the Executive may receive,
-------------
in the sole discretion of the Compensation Committee of the Board (the
"Compensation Committee"), an annual bonus payment in an amount, if any, to be
determined by the Compensation Committee, except that the Executive, if a member
of the Compensation Committee, shall not be entitled to vote thereon.
3.3. Executive Benefits. During the Employment Period, the Executive shall
------------------
receive such benefits as are customarily provided to other officers and
employees of the Company, including but not limited to the following benefits:
(a) Health Insurance. Non-contributory health insurance pursuant to a Freedom
----------------
Care policy or substantially similar policy; and
(b) Life Insurance. Life insurance on the life of the Executive with an
--------------
Executive-directed beneficiary in the amount of one hundred fifty percent
(150%) of the Base Salary.
3.4. Vacation. The Executive may take four weeks of paid vacation during
--------
each year at such times as shall be consistent with the Company's vacation
policies and (in the Board's judgment) with the Company's vacation schedule for
officers and other employees.
3.5. Disability or Death. If during the Employment Period, the Executive
-------------------
shall (i) become ill, disabled or otherwise incapacitated so as to be unable to
perform his usual duties (a) for a period in excess of one hundred twenty (120)
consecutive days or (b) for more than one hundred eighty (180) days in any
consecutive twelve (12) month period, or (ii) die, then the
-2-
<PAGE>
Company shall have the right to terminate this Agreement, in accordance with
applicable laws, on thirty (30) days written notice to the Executive or his
estate.
3.6. Severance Payment. In the event (i) the Company terminates this
-----------------
Agreement without Cause (i.e., other than pursuant to Section 3.5 or Section 4
hereof) at any time (including during the Extended Employment Period), or (ii)
the Executive terminates his employment for Good Reason following a Change in
Control of the Company, or (iii) the Company fails to renew this Agreement
within two (2) years following the occurrence of a Change in Control, the
Company shall pay the Executive a severance payment equal to the Executive's
then current Base Salary multiplied by 1.00; such severance payment to be
adjusted to the extent necessary to avoid such payment being treated as an
"excess parachute payment" for purposes of Section 280G of the Internal Revenue
Code of 1986.
"Good Reason" shall mean, during the nine (9) month period following a Change
in Control, (1) a good faith determination by the Executive that as a result of
such Change in Control he is not able to discharge his duties effectively or (2)
without the Executive's express written consent, the occurrence of any of the
following circumstances: (a) the assignment to the Executive of any duties
inconsistent (except in the nature of a promotion) with the position in the
Company that he held immediately prior to the Change in Control or a substantial
adverse alteration in the nature or status of his position or responsibilities
or the conditions of his employment from those in effect immediately prior to
the Change in Control; (b) a reduction by the Company in the Base Salary as in
effect on the date of the Change in Control; (c) the Company's requiring the
Executive to be based more than twenty-five (25) miles from the Company's
offices at which he was principally employed immediately prior to the date of
the Change in Control except for required travel on the Company's business to an
extent substantially consistent with his present business travel obligations; or
(d) the failure by the Company to continue in effect any material compensation
or benefit plan in which the Executive participates immediately prior to the
Change in Control unless an equitable arrangement (embodied in an ongoing
substitute or alterative plan) has been made with respect to such plan, or the
failure by the Company to continue the Executive's participation therein (or in
such substitute or alterative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of his
participation relative to other participants, than existed at the time of the
Change in Control. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance constituting
Good Reason hereunder.
-3-
<PAGE>
For purposes of this Agreement, a "Change in Control" 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 any majority owned subsidiary
thereof, the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, any trustee or other fiduciary of a trust
treated for federal income tax purposes as a grantor trust of which the Company
is the grantor, 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 50% or more of the combined voting power
of the Company's then outstanding securities on any matter which could come
before its stockholders for approval; (ii) individuals who, as of the date
hereof, constitute the Board (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 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.
-4-
<PAGE>
3.7. Benefits After Termination. Except as otherwise required by law, the
--------------------------
Executive shall not be entitled to any employee benefits provided under Section
3.3 hereof after termination of the employment of the Executive, whether or not
severance pay is being provided, except that if the Executive is entitled to the
severance payment described in Section 3.6 of this Agreement, (i) the Company
shall continue in full force and effect, at its expense, the life insurance
provided for in Section 3.3(b) hereof for a period of one (1) year after
termination of the Executive's employment hereunder or until the Executive
becomes employed, whichever first occurs, and (ii) during the six (6) month
period following the termination of the Executive's employment, the Company
shall reimburse the Executive for out-of-pocket health insurance expenses
incurred by the Executive pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1986 ("COBRA"). If the Executive elects not to maintain
health insurance pursuant to COBRA, the Company is under no obligation to
reimburse the Executive for his otherwise elected coverage. The Executive shall
be obligated to give the Company prompt notice of his employment.
4. Discharge for Cause. The Company may discharge the Executive and
-------------------
terminate his employment under this Agreement for Cause without further
liability to the Company by a majority vote of the Board, except that Executive,
if a Director, shall not be entitled to vote thereon. As used in this
Agreement, "Cause" shall mean any or all of the following:
(a) misconduct of the Executive during the course of his employment which is
materially injurious to the Company and which is brought to the attention
of the Executive promptly after discovery by the Company, including but not
limited to, theft or embezzlement from the Company, the intentional
provision of services to competitors of the Company, or improper disclosure
of proprietary information, but not including any act or failure to act by
the Executive that he believed in good faith to be proper conduct not
adverse to his duties hereunder;
(b) willful disregard or neglect by the Executive of his duties or of the
Company's interests that continues after being brought to the attention of
the Executive;
(c) unavailability (except as provided in Section 3.5 hereof) of the Executive
to substantially perform the duties provided for herein;
(d) conviction of a fraud or felony or any criminal offense involving
dishonesty, breach of trust or moral turpitude during the Executive's
employment;
-5-
<PAGE>
(e) the Executive's breach of any of the material terms of this Agreement
(including the failure of the Executive to discharge his duties in a highly
competent manner) or any of the agreements executed in connection herewith
as enumerated in Section 10.1 hereof.
In the event the Company exercises its right to terminate the Executive's
employment under this Section 4, the Executive shall not be entitled to receive
any severance pay or other termination benefits, except as required by law.
5. Termination Without Cause. The Company may terminate this Agreement
-------------------------
without Cause, without further liability to the Company except as set forth in
Sections 3.6 and 3.7 hereof, by a majority vote of the Board. The Executive, if
a Director, shall not be entitled to vote on the termination of this Agreement
without Cause.
6. Expenses. Pursuant to the Company's customary policies in force at the
--------
time of payment, the Executive shall be promptly reimbursed, against
presentation of vouchers or receipts therefor, for all authorized expenses
properly incurred by him on the Company's behalf in the performance of his
duties hereunder.
7. Additional Agreements. Upon execution of this Agreement, the Executive
---------------------
shall execute and deliver to the Company an Agreement Not to Compete (the
"Noncompetition Agreement") and a Confidential and Proprietary Information
Agreement (the "Confidential and Proprietary Information Agreement"),
substantially in the forms attached hereto as Exhibits A and B. The agreements
----------------
attached hereto as Exhibits A and B shall survive the expiration of or
----------------
termination of this Agreement and the termination of Executive's employment with
the Company for any reason.
8. Arbitration. All disputes and claims relating to this Agreement and the
-----------
rights, obligations and performance of the parties hereto shall be settled by a
single arbitrator sitting in Boston, Massachusetts under the applicable rules of
the American Arbitration Association.
9. Notices. Any notice of communication given by any party hereto to the
-------
other party or parties shall be in writing and personally delivered, mailed by
certified mail, return receipt requested, postage prepaid, or delivered by a
recognized overnight carrier, to the addresses provided above. All notices
shall be deemed given when actually received. Any person entitled to receive
notice (or a copy thereof) may designate in writing, by notice to the others,
another address to which notices to such person shall thereafter be sent.
-6-
<PAGE>
10. Miscellaneous.
-------------
10.1. Entire Agreement. This Agreement contains the entire understanding of
----------------
the parties in respect of its subject matter and supersedes all prior agreements
and understandings between the parties with respect to such subject matter;
provided, however, that nothing in this Agreement shall affect the Executive's
or the Company's obligations under the Noncompetition Agreement or the
Confidential and Proprietary Information Agreement each dated as of November 11,
1998, between the parties hereto.
10.2. Amendment; Waiver. This Agreement may not be amended, supplemented,
-----------------
cancelled or discharged, except by written instrument executed by the party
affected thereby. No failure to exercise, and no delay in exercising, any
right, power or privilege hereunder shall operate as a waiver thereof. No
waiver of any breach of any provision of this Agreement shall be deemed to be a
waiver of any preceding or succeeding breach of the same or any other
provisions.
10.3. Binding Effect; Assignment. The rights and obligations of this
--------------------------
Agreement shall bind and inure to the benefit of any successor of the Company by
reorganization, merger or consolidation, or any assignee of all or substantially
all of the Company's business and properties. The Executive's rights or
obligations under this Agreement may not be assigned by the Executive; except
that the Executive's right to compensation to the earlier of the date of death,
disability pursuant to Section 3.5 hereof, or termination of actual employment,
shall pass to the Executive's executor or administrator.
10.4. Headings. The headings contained in this Agreement are for reference
--------
purposes only and shall not affect the meaning or interpretation of this
Agreement.
10.5. Governing Law; Interpretation. This Agreement shall be construed in
-----------------------------
accordance with and governed for all purposes by the laws and public policy of
the Commonwealth of Massachusetts applicable to contracts executed and to be
wholly performed within such Commonwealth. Service of process in any dispute
shall be effective (a) upon the Company, if service is made on any officer of
the Company other than the Executive; (b) upon the Executive, if served at the
Executive's residence last known to the Company with an information copy to the
Executive at any other residence, or in care of a subsequent employer of which
the Company may be aware.
-7-
<PAGE>
10.6. Further Assurances. Each of the parties agrees to execute,
-------------------
acknowledge, deliver and perform, or cause to be executed, acknowledged,
delivered or performed, at any time, or from time to time, as the case may be,
all such further acts, deeds, assignments, transfers, conveyances, powers of
attorney and assurances as may be necessary or proper to carry out the
provisions or intent of this Agreement.
10.7. Severability. If any one or more of the terms, provisions, covenants
------------
or restrictions of this Agreement shall be determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated. If,
moreover, any one or more of the provisions contained in this Agreement shall
for any reason be determined by a court of competent jurisdiction to be
excessively broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting or reducing it so as to be enforceable to the
extent compatible with then applicable law.
EXECUTION
---------
The parties executed this Agreement as a sealed instrument as of the date
first above written, whereupon it became binding in accordance with its terms.
CARDIOTECH INTERNATIONAL, INC.
By: /s/ Michael Szycher, Ph.D.
---------------------------------
Michael Szycher, Ph.D.
Chief Executive Officer
EXECUTIVE
/s/ John E. Mattern
---------------------------------
John E. Mattern
-8-
<PAGE>
Attachments:
Exhibit A: Noncompetition Agreement
---------
Exhibit B: Confidential and Proprietary Information Agreement
---------
-9-
<PAGE>
EXHIBIT A
AGREEMENT NOT TO COMPETE
-------------------------
I recognize that CardioTech International, Inc., a Massachusetts corporation
(the "Company", which term shall include its subsidiaries and affiliated
entities), desires to retain me in its employ and that the Company wishes to
ensure that I do not compete with the Company, as specified below, in the event
my employment with the Company is terminated.
In consideration of the Company's employment or continued employment of me, I
agree as follows:
1. I will not, for a period of one (1) year commencing with the termination
of my employment with the Company, engage (directly or indirectly) in any
activities or render any services similar or reasonably related to those in
which I shall have engaged or those which I shall have rendered as an employee
of the Company during any part of the two-year period preceding my termination
for any trade or business which directly competes with the Company in any place
where the Company does or may do business in any line of business engaged in (or
planned to be engaged in) by the Company, whether now existing or hereafter
established, nor shall I engage in such activities nor render such services for
any other person or entity engaged or about to become engaged in such activities
to, for or on behalf of any such trade or business.
2. I agree that for a period of one (1) year following termination of my
employment with the Company, I will not solicit or in any manner encourage
employees of the Company to leave their employ. I further agree that during
such period I will not offer or cause to be offered employment to any person who
was employed by the Company at any time during the six (6) months prior to the
termination of my employment with the Company.
3. For purposes of this Agreement, "termination of employment" shall mean
voluntary termination by me or termination by the Company for "cause" (as that
term is defined in an Employment Agreement of even date herewith between me and
the Company).
4. I understand that nothing in this Agreement shall affect my obligations
under the "Confidential and Proprietary Information Agreement" between the
Company and myself of even date herewith.
5. I agree that in addition to any other rights and remedies available to the
Company for any breach by me of my obligations hereunder, the Company shall be
entitled to enforcement of my obligations hereunder by court injunction.
<PAGE>
6. If any provision of this Agreement shall be declared invalid, illegal or
unenforceable, then such provision shall be enforceable to the extent that a
court shall deem it reasonable to enforce such provision. If such provision
shall be unreasonable to enforce to any extent, such provision shall be severed
from this Agreement and all remaining provisions shall continue in full force
and effect.
This Agreement shall be governed in all respects by the laws of the Commonwealth
of Massachusetts.
IN WITNESS WHEREOF I have executed this Agreement under seal as of November
11, 1998.
/s/ John E. Mattern
---------------------------
John E. Mattern
ACCEPTED AND AGREED TO:
CardioTech International, Inc.
By: /s/ Michael Szycher, Ph.D.
---------------------------------
Michael Szycher, Ph.D.
Chief Executive Officer
-2-
<PAGE>
EXHIBIT B
FOR EMPLOYEES
-------------
CONFIDENTIAL AND PROPRIETARY INFORMATION AGREEMENT
--------------------------------------------------
In consideration of my employment by CardioTech International, Inc., a
Massachusetts corporation (the "Company"), I hereby agree as follows:
1. I will make full and prompt disclosure to the Company of all inventions,
improvements, modifications, discoveries, methods, data, ideas and developments
(all of which are collectively termed "developments" hereinafter), whether
patentable or not, made or conceived or reduced to practice or learned by me
either alone or jointly with others or under my direction during the period of
my employment, whether or not made or conceived during normal working hours or
on the premises of the Company. I do not have any developments other than those
I have already disclosed to you.
2. I agree that all developments covered by Paragraph 1 shall be the sole
property of the Company and its assigns, and the Company and its assigns shall
be the sole owner of all patents and other rights in connection therewith. I
hereby assign to the Company any rights in connection therewith. I hereby assign
to the Company any rights I may have or acquire in all developments. I further
agree as to all developments to assist the Company in every proper way (but at
the Company's expense) to obtain and from time to time enforce patents in
developments in any and all countries, and to that end I will execute all
documents for use in applying for and obtaining such patents thereon and
enforcing same, as the Company may desire, together with any assignments thereof
to the Company or persons designated by it. My obligation to assist the Company
in obtaining and enforcing patents for developments in any and all countries
shall continue beyond the termination of my employment, but the Company shall
compensate me at a reasonable rate after such termination for time actually
spent by me at the Company's request on such assistance.
I understand that this Paragraph 2 does not apply to developments for which no
equipment, supplies, facility or trade secret information of the Company was
used and which was developed entirely on my own time, and (a) which does not
relate (1) to the business of the Company or (2) to the Company's actual or
demonstrable anticipated research or development, and (b) which does not result
from any work performed by me for the Company, but I agree that the Company
shall have a non-exclusive royalty-free license to use such developments for all
purposes.
3. I hereby represent that, to the best of my knowledge, I have no present
obligation to assign to any former employer or any
<PAGE>
other person, corporation or firm, any development covered by Paragraph 2. I
represent that my performance of all the terms of this Agreement as an employee
of the Company does not and will not breach any agreement to keep in confidence
proprietary information acquired by me in confidence or in trust prior to my
employment by the Company. I have not entered into, and I agree I will not enter
into, any agreement (either written or oral) in conflict herewith.
4. I will also assign to the Company any and all copyrights and reproduction
rights to any material prepared by me in connection with my employment.
5. I understand as part of the consideration for the offer of employment
extended to me by the Company and of my employment or continued employment by
the Company, that I have not brought and will not bring with me to the Company
or use in the performance of my responsibilities at the Company any materials or
documents of a former employer which are not generally available to the public,
unless I have obtained written authorization from the former employer for their
possession and use.
6. During the course of my employment by the Company, I may learn of the
Company's confidential information or confidential information entrusted to the
Company by other persons, corporations, or firms. The Company's confidential
information includes matters not generally known outside the Company, such as
developments relating to existing and future products and services marketed or
used by the Company and data relating to the general business operations of the
Company (e.g., concerning sales, costs, profits, organizations, customer lists,
pricing methods, etc.). I agree not to disclose any confidential information of
the Company or of such other persons, corporations, or firms to others or to
make use of it, except on the Company's behalf, whether or not such information
is produced by my own efforts. Also, I may learn of developments, ways of
business, etc., which in themselves are generally known, but whose use by the
Company is not generally known, and I agree not to disclose to others such use,
whether or not such use is due to my own efforts.
7. At the time I begin my employment and during the term of my employment by
the Company, I will not become employed by or act on behalf of any other person,
corporation, or firm which is engaged in any business or activity similar to or
competitive with that of the Company, unless such employment has been approved
by the Company in writing and signed by an appropriate personnel manager of the
Company.
8. In the event that my employment is transferred by the Company to a
subsidiary or affiliated company (as the case may
-2-
<PAGE>
be), my employment by such company will, for the purposes of this Agreement, be
considered as continued employment by the Company, unless I execute an agreement
substantially similar in substance to this Agreement, in which event my
employment by the Company shall be deemed to continue until the effective date
of said agreement in any such company for which I become employed.
9. I hereby give the Company and its assigns permission to reasonably use
photographs of me, either during or after my employment, with or without using
my name, for whatever purposes it deems necessary.
10. Upon termination of my employment, unless my employment is transferred to
a subsidiary or affiliated company of the Company, I agree to leave with the
Company all records, drawings, notebooks, and other documents pertaining to the
Company's confidential information, whether prepared by me or others, and also
any equipment, tools or other devices owned by the Company, then in my
possession however such items are obtained, and I agree not to reproduce any
document or data relating thereto.
11. My obligations under this Agreement shall survive the termination of my
employment regardless of the manner of such termination, and shall be binding
upon my heirs, executors, and administrators.
12. Contemporaneously with entering the employ of the Company I have
terminated employment with all past employers.
13. I represent that I have made no developments relevant to the subject
matter of my employment by the Company that have been made or conceived or first
reduced to practice by me alone or jointly with others prior to my engagement by
the Company.
14. I agree that in addition to any other rights and remedies available to
the Company for any breach by me of my obligations hereunder, the Company shall
be entitled to enforcement of my obligations hereunder by court injunction.
15. If any provision of this Agreement shall be declared invalid, illegal or
unenforceable, then such provision shall be enforceable to the extent that a
court shall deem it reasonable to enforce such provision. If such provision
shall be unreasonable to any extent, such provision shall be severed from this
Agreement and all remaining provisions shall continue in full force and effect.
16. This Agreement shall be effective as of the date set forth below next to
my signature.
17. This Agreement shall be governed in all respects by the laws of the
Commonwealth of Massachusetts.
-3-
<PAGE>
IN WITNESS WHEREOF, I have executed this Agreement under seal as of
November 11, 1998.
/s/ John E. Mattern
-----------------------------
John E. Mattern
ACCEPTED AND AGREED TO:
CardioTech International, Inc.
By: /s/ Michael Szycher, Ph.D.
---------------------------------
Michael Szycher, Ph.D.
Chief Executive Officer
-4-
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