U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to _____
Commission File No. 0-28034
CardioTech International, Inc.
(Name of small business issuer in its charter)
Massachusetts 04-3186647
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
78E Olympia Avenue, Woburn, Massachusetts 01801
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (781) 933-4772
Securities registered under Section 12 (b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value per share American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
----------------------
Indicate whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 past 90 days. Yes_X_ No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of 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. [ ]
State issuer's revenues for its most recent fiscal year. $1,083,000
As of June 24, 1999, 6,138,916 shares of the registrant's Common Stock were
outstanding, and the aggregate market value of the registrant's Common Stock
held by non-affiliates of the registrant (without admitting that such person
whose shares are not included in such calculation is an affiliate) was
approximately $8,042,000 based on the last sale price as reported by the
American Stock Exchange on such date.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant hereby incorporates by reference into Part III of this
report portions of its proxy statement for the 1999 annual meeting of
stockholders, which will be filed within 120 days of the registrant's fiscal
year ended March 31, 1999.
Transitional Small Business Disclosure Format (check one):
Yes__ No _X_.
<PAGE>
PART I
Item 1. Description of Business
General
CardioTech International, Inc. ("CardioTech" or the "Company") is using its
proprietary manufacturing technology to develop and manufacture small bore
vascular grafts, or synthetic blood vessels, made of ChronoFlex, a family of
polyurethanes that has been demonstrated to be biocompatible and non-toxic.
Vascular grafts are used to replace, bypass or provide a new lining or arterial
wall for occluded, damaged, dilated or severely diseased arteries and are used
to provide access for patients undergoing hemodialysis treatments. The Company
is developing three types of layered, microporous small bore vascular grafts:
(i) a vascular access graft, called the VascuLink Vascular Access Graft; (ii) a
peripheral graft, called the MyoLink Peripheral Graft, and (iii) a coronary
artery bypass graft, called the CardioPass(TM) Coronary Artery Bypass Graft.
Blood is pumped from the heart throughout the body via arteries. Blood is
returned to the heart at relatively low pressure via veins, which have thinner
walls than arteries and have check valves which force blood to move in one
direction. Because a specific area of the body is often supplied by a single
main artery, rupture, severe narrowing or occlusion of the artery supplying
blood to that area is likely to cause an undesirable or catastrophic medical
outcome.
Vascular grafts are used to replace or bypass occluded, damaged, dilated or
severely diseased arteries and are sometimes used to provide access to the
bloodstream for patients undergoing hemodialysis treatments. Existing small bore
graft technologies suffer from a variety of disadvantages in the treatment of
certain medical conditions, depending upon the need for biodurability,
compliance (elasticity) and other characteristics necessary for long-term
interface with the human body.
CardioTech is developing its grafts using specialized ChronoFlex
polyurethane materials that it believes will provide significantly improved
performance in the treatment of arterial disorders. The grafts have three
layers, similar to natural arteries and are designed to replicate the physical
characteristics of human blood vessels.
Additionally, through its CT Biomaterials(TM) division, the Company
develops, manufactures and markets polyurethane-based biomaterials for use in
both acute and chronically implanted devices such as stents, artificial hearts,
and vascular ports. These premium biomaterials are sold under the tradenames:
ChronoFlex, ChronoThane, HydroThane and ChronoFilm.
CardioTech owns a number of patents relating to its vascular graft
manufacturing technology. In addition, PolyMedica Corporation ("PMI") has
granted to CardioTech an exclusive, perpetual, worldwide, royalty-free license
for the use of one polyurethane patent and related technology in the field
consisting of the development, manufacture and sale of implantable medical
devices and biodurable polymer material to third parties for the use in medical
applications (the "Implantable Device and Materials Field"). PMI also owns,
jointly with Thermedics, Inc., the ChronoFlex polyurethane patents relating to
the ChronoFlex technology ("Joint Technology".) PMI has granted to CardioTech a
non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents
for use in the Implantable Devices and Materials Field.
The Company was founded in 1993 as a subsidiary of PMI. In June 1996, PMI
distributed (the "Spin Off") all of the shares of CardioTech's common stock, par
value $.01 per share (the "common stock"), that PMI owned to PMI stockholders of
record as of June 3, 1996. The Company is headquartered in Woburn, Massachusetts
and also has production facilities in Wrexham, Brymbo U.K.
1
<PAGE>
ChronoFilm is a registered trademark of PMI. ChronoFlex, is a registered
trademark of CardioTech International. ChronoThane, ChronoPrene, HydroThane,
PolyBlend and PolyWeld are tradenames of CardioTech. DuraGraft, VascuLink,
MyoLink, CardioPass are trademarks of CardioTech.
Products in Development
VascuLink Vascular Access Graft
Patients suffering from end-stage renal disease may be required to undergo
hemodialysis. The majority of these patients require long-term vascular access
to facilitate treatment. A point of access for dialysis needles may be created
by connecting an artery and a vein in the patient's arm. However, because kidney
dialysis therapy typically requires patients to undergo hemodialysis treatment
three times per week, these natural shunts often become unusable over time.
Other methods of vascular access for kidney dialysis, such as transcutaneous
catheters, are only designed for temporary use.
A synthetic graft is implanted in hemodialysis patients to provide routine
vascular access. The vast majority of these synthetic grafts are presently made
of polytetafluoroethylene ("ePTFE"). The use of ePTFE grafts is often
accompanied by excessive bleeding when the dialysis needle is withdrawn,
requiring a nurse to apply pressure to help stop the bleeding and requiring the
patient to remain in the treatment area until the bleeding has stopped. In
addition, to limit the risk of graft infection following implant, at least a
four to six week healing period following implantation is required before
initiating dialysis in order to allow for tissue in-growth into the graft.
The Company believes that the Vasculink Vascular Access Graft it is
developing may offer advantages over currently used synthetic grafts because of
its needle-hole-sealing-capability. The Company believes that this
characteristic will be effective in sealing puncture sites in its grafts with
minimal compression time and bleeding as compared with ePTFE grafts and, as a
result, will reduce dialysis procedure and administrative time per patient and
their associated costs. In addition, the Company believes, based on animal
studies, that patients who receive the Vasculink Vascular Access Graft will be
able to be dialyzed in a shorter period of time than four to six weeks.
The Company believes that approximately 185,000 patients in the United
States undergo kidney dialysis each year, of which approximately 140,000 undergo
vascular access surgeries using either natural vessel grafts or synthetic access
grafts. The Company estimates that of these patients, approximately 55,000 are
implanted with synthetic grafts. The Company believes that a comparable market
exists overseas.
The Company is currently conducting clinical trials of the Vasculink
Vascular Access Graft in Holland, France and Sweden with patients undergoing
routine hemodialysis treatment. The Company's clinical trials compared patency
and complication rates of the Company's Vasculink Vascular Access Graft with
ePTFE grafts. The clinical trial in Holland began in November 1996 at one site,
the clinical trial in France began in June 1997 at three sites, and the clinical
trial in Sweden began during the first three months of 1998 at two sites. The
clinical trials in Holland, France, and Sweden involve an aggregate of up to 60
patients. There can be no assurance that the Company's clinical trials will be
successful. The Company received CE marking for the VascuLink Vascular Access
Graft in November 1998 and has begun to market this product in Europe.
MyoLink Peripheral Graft
In the United States, an estimated 16 million people suffer from diabetes,
which is often further complicated by atherosclerosis, or the blockage of
arteries. Eventually, many atherosclerosis patients require vascular grafts to
bypass severely occluded leg arteries, which impede circulation to the lower
extremities and
2
<PAGE>
can ultimately lead to amputation. Lack of adequate circulation to the lower
limbs and toes results in approximately 54,000 yearly amputations in the United
States alone. Current techniques of surgical intervention rely on autologous
saphenous veins from the leg for use as substitute vessels.
However in over 40% of all atherosclerosis patients, the saphenous veins
are deemed unsuitable, making it necessary to use a vein constructed from
artificial materials. The Company is designing the MyoLink Peripheral Graft that
it is developing to be suitable for providing needed circulation from the upper
thigh, across the knee and into the mid calf. In order to accommodate the bend
at the knee, CardioTech has designed the MyoLink graft to be "non-kinking."
Further, CardioTech believes that it has the expertise and capability to
manufacture a graft that tapers. The Company is currently conducting
pre-clinical development studies of the MyoLink Graft at its Wrexham, Brymbo, UK
facility.
On April 1, 1998, the Company, through its wholly owned subsidiary,
CardioTech International, Ltd. ("CTI"), entered into a two year research
collaborative with The Royal Free Hospital School of Medicine (University of
London) ("Royal Free Hospital"), which relates to the investigation and clinical
trials of the MyoLink graft and the clinical evaluation of endothelial
cell-seeding of peripheral vascular grafts. The Company may license the right to
sell the technology relating to the endothelial cell-seeding of the peripheral
vascular grafts from Royal. The research is funded by a loan of (pound)253,000
($420,000) from Freemedic PLC ("Freemedic"), a subsidiary of Royal Free
Hospital, to CTI. The loan accrues interest at the rate of 15% per annum and is
due and payable on April 1, 2000. The loan, plus accrued interest, is
convertible under certain conditions, at either the Company's or Freemedic's
option, into common stock of the Company at a conversion price of $3.70 per
share. The loan is secured by a pledge of all of the assets of CTI and is
guaranteed by the Company. Freemedic may terminate the collaboration at any time
upon a material breach by the Company of any obligation under the collaboration
agreement or upon any event of default under the loan agreement. CardioTech is
also indebted to DKB. See Note I to the Notes to the Consolidated Financial
Statements. If DKB foreclosed on the CTI stock pledged to it to secure the
Freemedic loan, or if CardioTech winds up, makes an assignment for the benefit
of it creditors, goes into liquidation or an administrator is appointed for its
assets, then, such actions would be a default under the Freemedic loan and
Freemedic would be entitled to immediate repayment of the Freemedic loan. As of
March 31, 1999, the outstanding principal balance of the loan was (GBP)266,000
($428,000). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquity and Capital Resources.
CardioPass Coronary Artery Bypass Graft
Coronary artery bypass graft ("CABG") surgery is performed to treat the
impairment of blood flow to portions of the heart. CABG surgery involves the
addition of one or more new vessels to the heart to re-route blood around
blocked coronary arteries.
Autogenous grafts (using the patient's own saphenous vein or mammary
artery) have been successfully used in CABG procedures for a number of years and
have shown a relatively high patency rate (80% to 90% for saphenous veins and
over 90% for mammary arteries one year after surgery) with no risk of tissue
rejection. However, the surgical harvesting of vessels for autogenous grafts
involves significant trauma and expense. In addition, not all patients requiring
CABG surgery have sufficient native vessels as a result of previous bypass
surgeries, or their vessels may be of inferior quality due to trauma or disease.
Cryopreserved saphenous veins are available, but these veins often deteriorate
due to attack by the body's immune system.
The Company is developing the CardioPass Coronary Artery Bypass Graft to be
a synthetic graft of 3mm in diameter specifically designed for use in CABG
surgery. If successfully developed, the Company believes that the CardioPass
Graft may be used initially to provide an alternative to patients with
insufficient or inadequate native vessels for use in bypass surgery as a result
of repeat procedures, trauma, disease or other factors. The Company believes,
however, that the CardioPass Graft may ultimately be used as a substitute for
native saphenous veins, thus avoiding the trauma and expense associated with the
surgical harvesting of the vein.
3
<PAGE>
The Company believes that based on studies performed in 1995, approximately
700,000 CABG procedures were performed worldwide, of which nearly 500,000 were
performed in the United States. The Company believes that approximately 20% of
these CABG procedures were performed on patients who had previously undergone
bypass surgery, and that the number of repeat procedures will continue to
increase as a percentage of procedures performed. Currently, approximately 70%
of CABG procedures are performed utilizing the saphenous vein.
The Company estimates that approximately 100,000 patients are diagnosed by
their physicians as having native vessels that are inadequate for use in bypass
surgery. If the CardioPass Graft is successfully developed, the Company believes
that the graft may initially be used for these patients. The Company also
believes that if long-term clinical results are acceptable to clinicians
(generally, greater than 50% patency five years after implant), the graft may
ultimately be used as a direct substitute for autogenous saphenous veins. The
CardioPass Coronary Artery Bypass Graft is in pre-clinical development.
Biomaterials
CardioTech also develops, manufactures and sells a range of polymer-based
materials customized for use in the manufacture of certain medical devices to
other medical device manufacturers. CardioTech sells these custom polymers under
the tradenames ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane,
PolyBlend and PolyWeld. The Company also provides development services relating
to biomaterials to medical device customers. In 1992, PMI entered into a long
term development and materials supply agreement with Bard Access Systems, Inc.
pursuant to which Bard purchases ChronoFlex for use in the manufacture of a line
of catheters and implantable vascular access ports that are used to deliver
doses of pharmaceuticals over an extended period of time or to deliver
chemotherapy agents to specific organs. This agreement expires on November 10,
2000. PMI assigned this agreement to CardioTech prior to the Spin Off.
CardioTech also manufactures and sells its proprietary HydroThane
biomaterials to medical device manufacturers that are evaluating HydroThane for
use in their products. HydroThane(TM) is a thermoplastic, water-absorbing,
polyurethane elastomer, that possesses properties that CardioTech believes make
it well suited for the complex requirements of a variety of catheters. In
addition to its physical properties, CardioTech believes HydroThane exhibits an
inherent degree of bacterial resistance, clot resistance and biocompatibility.
When hydrated, HydroThane has elastic properties similar to living tissue.
During the fiscal year ended March 31, 1999, the Company was the recipient
of two Small Business Innovation Research grants awarded by National Institutes
of Health ("NIH") to support the Company's research and development programs.
Research revenues related to biomaterials were approximately $1,083,000 and
$873,000 for the years ended March 31, 1999 and 1998, respectively. For the
years ended March 31, 1999 and 1998, 74% and 78% of research revenues,
respectively, were generated from Bard Access Systems, Inc. and the NIH.
Manufacturing
CardioTech currently manufactures limited quantities of ChronoFlex and
HydroThane for sale to medical device manufacturers. To date, CardioTech's
manufacturing activities with respect to the specialized ChronoFlex materials
used in vascular grafts have consisted primarily of manufacturing small
quantities of such products for use in clinical trials. CardioTech currently has
the ability to produce quantities of vascular grafts sufficient to support its
current testing needs. CardioTech also has the ability to produce quantities of
vascular grafts sufficient to support its needs for early-stage clinical trials,
as well as early-stage distribution of the Vasculink Vascular Access Graft in
Europe. However, CardioTech may need to acquire manufacturing facilities and
improve its manufacturing technology in order to meet the volume and cost
requirements for later
4
<PAGE>
clinical trials and will require additional manufacturing facilities in order to
undertake large scale commercial production of vascular grafts, if it elects to
do so. To achieve profitability, CardioTech's products must be manufactured in
commercial quantities in compliance with regulatory requirements and at
acceptable costs. Production in commercial quantities will require CardioTech to
expand its manufacturing capabilities significantly and to hire and train
additional personnel. CardioTech has no experience in large-scale manufacturing,
and there can be no assurance that CardioTech will be able to make the
transition to commercial production successfully.
The Company's manufacturing operations in the United Kingdom currently hold
an ISO 9001 Certificate of Registration from National Quality Assurance, Ltd.
This internationally recognized endorsement of ongoing quality management
represents the highest level of certification available.
The development and manufacture of CardioTech's products are subject to
good laboratory practice ("GLP") and good manufacturing practice ("GMP")
requirements prescribed by the Food and Drug Administration ("FDA") and other
standards prescribed by the appropriate regulatory agency in the country of use.
There can be no assurance that CardioTech will be able to obtain or manufacture
products in a timely fashion at acceptable quality and prices, that it or any
suppliers can comply with GLP or GMP, as applicable, or that it or such
suppliers will be able to manufacture an adequate supply of product.
Marketing
CardioTech plans to market its vascular graft products once regulatory
approvals are obtained either through a small targeted direct sales group or
through licensing arrangements with large medical device companies. Pursuant to
this strategy, the Company has retained six firms to distribute its VascuLink
Vascular Access Graft in Spain, Italy, Germany, France, Sweden and the Benelux
countries. Implementation of this strategy will depend on many factors,
including the effectiveness of the Company's distributors, the market potential
for CardioTech's products, and CardioTech's financial resources. The
distribution network provides access to 80% of the European market. There can be
no assurance that CardioTech will be able to successfully market its products.
Competition
Competition in the medical device industry in general is intense and based
primarily on scientific and technological factors, the availability of patent
and other protection for technology and products, the ability to commercialize
technological developments and the ability to obtain governmental approval for
testing, manufacturing and marketing products.
CardioTech will compete with products offered by W.L. Gore and Associates,
Impra, Inc., and Thoratec Corporation. CardioTech believes that W.L. Gore and
Impra, whose synthetic graft products have been sold in the United States and
worldwide for many years, sell approximately 90% of the intermediate diameter
peripheral synthetic vascular grafts and vascular access grafts used throughout
the world. While CardioTech believes that the attributes of its vascular grafts
will allow it to compete effectively, both W.L. Gore and Impra can be expected
to defend their market positions vigorously, and both have substantially greater
financial, technical and other resources than CardioTech. Thoratec has developed
a small bore polyurethane vascular access graft and has begun limited clinical
trials in the United States and foreign countries. Additionally, Thoratec has
begun to sell its product in Japan and has affixed a CE Mark (the approval
marking of the European Community) on its product, which enables it to sell
product throughout Europe. The Joint Technology may be licensed or otherwise
made available to competitors of CardioTech.
5
<PAGE>
Competition among these products will be based, among other things, on
product efficacy, safety, reliability, availability, price and patent position.
An important factor will be the timing of the market introduction of
CardioTech's or competitive products. Accordingly, the relative speed with which
CardioTech can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market is
expected to be an important competitive factor. CardioTech's competitive
position will also depend upon its availability to attract and retain qualified
personnel, to obtain patent protection or otherwise develop proprietary products
or processes, and to secure sufficient capital resources for the often
substantial period between technological conception and commercial sales.
Research and Development
CardioTech's research and development efforts are focused on developing its
synthetic vascular graft technologies. CardioTech's development decisions are
based on (1) development costs, (2) product need, (3) third-party interest and
funding availability, and (4) regulatory considerations. CardioTech believes it
will need substantial additional financing to conduct human clinical trials, and
produce vascular access graft and other planned products. No assurance can be
given, however, that such financing, or other financing, will be available on
terms attractive to CardioTech, if at all. Research and Development expenditures
for the years ended March 31, 1999, and 1998 were $2,284,000, and $1,452,000,
respectively.
Government Regulation
The sale of medical products throughout Europe is extensively regulated by
European Community Law. The Company believes that the sale of its products in
European nations will be subject to the requirements of the newly adopted
European Medical Device Directive ("EMDD") which provides that medical devices
may not be sold in any European country unless the medical device displays a CE
Mark. The CE Mark denotes conformity with European standards for safety and
allows certified medical devices to be placed on the market in all European
countries.
In order to obtain a CE Mark, a manufacturer of medical devices must meet:
(i) the essential safety requirements of the EMDD; (ii) maintain a technical
file consisting of all research data and information about the medical device;
(iii) adopt a conformity route for its product; and (iv) choose a Notified Body,
an independent third party, who will be responsible for reviewing the
manufacturer's technical file to verify that the manufacturer has addressed the
requirements of the EMDD and has satisfied certain clinical trial requirements.
In addition, a manufacturer must obtain ISO 9001 certification, a certification
that a manufacturer's procedures and manufacturing facilities comply with
standards for quality assurance and manufacturing process control. Once a
Notified Body has concluded (i) that it has reviewed the manufacturer's
technical file and that the manufacturer has addressed the essential
requirements of the EMDD; and (ii) that the manufacturer is ISO 9001 compliant,
the manufacturer may declare that its products are in conformity with the EMDD
and affix a CE Mark to its medical device.
The Company is conducting clinical trials of the Vasculink Vascular Access
Graft in the Holland, France and Sweden with patients undergoing routine
hemodialysis treatment. The results of these clinical trials have been placed in
the Company's technical file that was reviewed by a Notified Body. The Company
has selected Lloyd's Register Quality Assurance, Ltd. ("Lloyds") to serve as the
Company's Notified Body. In December 1997, Lloyd's reviewed the Company's
operations and awarded the Company with an ISO 9001 Certification. This
Certification applies to all of the Company's products that are in development.
In August 1998, Lloyd's conducted an ongoing review of the Company's operations
and again concluded that the Company's operations were in compliance with ISO
9001. The Company was awarded the CE Mark in November 1998 as a result of a
review conducted by Lloyds. Accordingly, the Company has begun to sell the
Vasculink Vascular Access Graft in Europe.
6
<PAGE>
There can be no assurance that the Company will be able to maintain
regulatory approval or clearance for its products in Europe. Failure to obtain
or maintain such approval could have a material adverse effect on the Company's
business, financial condition and results of operations.
CardioTech's research and development activities are also subject to
regulation for safety, efficacy and quality by numerous governmental authorities
in the United States. In the United States, the development, manufacturing and
marketing of synthetic vascular grafts are subject to regulation for safety and
efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act.
Synthetic vascular grafts are subject to rigorous FDA regulation, including
pre-clinical and clinical testing. The process of completing clinical trials and
obtaining FDA approvals for a medical device is likely to take a number of
years, requires the expenditure of substantial resources and is often subject to
unanticipated delays. There can be no assurance that any product will receive
such approval on a timely basis, if at all.
There can be no assurance that the FDA will approve any of CardioTech's
products currently under research for marketing, or if they are approved, that
they will be approved on a timely basis. Furthermore, CardioTech 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
CardioTech's products. If clinical studies are suspended, CardioTech may be
unable to continue the development of the investigational products affected.
Employees
As of May 21 1999, the Company has 15 full-time employees. Of these
full-time employees, 4 are in research and development, 4 are in manufacturing
and production, and 7 are in management, administrative, or marketing positions.
None of the Company's employees is covered by a collective bargaining agreement,
and management considers its relations with its employees to be good.
Year 2000 Issues
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 disruptions 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 problems that would
materially adversely affect its operations or financial condition. However,
CardioTech cannot assure its stockholders:
7
<PAGE>
o that it will be able to identify third party year 2000 problems;
o that third party year 2000 problems will be corrected on a timely
basis; or
o that a failure by such entities to correct a Year 2000 problem or a
correction which is incompatible with the Company's information
systems would not have a material adverse effect on the Company's
operations or financial condition.
In addressing Year 2000 issues, CardioTech estimates that total costs will
be approximately $17,000. 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 that
actual Year 2000 costs incurred will be equal to or less than those estimated at
this time.
Although CardioTech believes that its primary IT 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.
Item 2. Description of Property
CardioTech leases a total of approximately 19,000 square feet in Woburn,
Massachusetts and Brymbo, Wrexham, United Kingdom. CardioTech believes that its
current facilities are adequate for the next several years.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company,
through solicitations of proxies or otherwise, during the last quarter of the
fiscal year ended March 31, 1999.
8
<PAGE>
PART II
Item 5. Market Information for Common Equity and Related Stockholder Matters
The common stock trades on the American Stock Exchange under the symbol
"CTE." The following table sets forth the high and low sales prices of the
common stock for each of the last two fiscal years, as reported on the American
Stock Exchange.
Fiscal Year Ended March 31, 1998 High Low
---- ---
June 30 2 3/16 1 1/2
September 30 4 9/16 1 1/2
December 31 4 9/16 2 1/4
March 31 2 3/4 1 1/2
Fiscal Year Ended March 31, 1999 High Low
---- ---
June 30 2 7/8 1 11/16
September 30 2 1 1/8
December 31 2 1/8 1
March 31 2 1 1/8
As of June 24, 1999, there were approximately 496 stockholders of record
and 2,752 additional beneficial stockholders (stockholders holding common stock
in brokerage accounts). The Company has never paid a cash dividend on its common
stock and does not anticipate the payment of cash dividends in the foreseeable
future. The Company's loan agreement with DKB prohibits the Company from
declaring or paying any dividends on its common stock.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Year Ended March 31, 1999 vs. March 31, 1998
Revenue
Research revenue consists of revenue from the sale of medical grade
polyurethanes, research grants from the National Institute of Health (NIH) and
royalties from Bard Access Systems. Research revenue for the fiscal year ended
March 31, 1999 were $1,083,000 compared to $873,000 for the fiscal year ended
March 31, 1998, an increase of $210,000, or 24%. This increase was primarily
generated by an increase in sales of research biomaterials of $80,000, research
grant income of $77,000 from NIH Small Business Technology Transfer (STTR)
grants, and an increase of $45,000 in royalty income from Bard Access Systems.
9
<PAGE>
Operating Expense
Research and Development
Research and development expense consists primarily 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 expense have been charged to
operations as incurred. Research and development expense for the fiscal year
ended March 31, 1999 was $2,284,000, compared to $1,452,000 for the fiscal year
ended March 31, 1998, an increase of $832,000, or 57%. This was principally the
result of increased costs for travel of $38,000, outside clinical, consulting,
and regulatory services of $425,000, and salaries and benefits of $300,000
associated with the clinical trials of the Vasculink Vascular Access Graft in
Europe.
Selling, General and Administrative
Selling, general and administrative expense consists primarily 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 expense for the
fiscal year ended March 31, 1999 was $1,313,000, compared to $1,305,000 for the
fiscal year ended March 31, 1998 an increase of $8,000 or 1%. This increase was
primarily due to higher salary and benefits costs of $96,000. These costs were
offset by lower insurance costs of $13,000, legal fees of $34,000 and public
reporting costs of $51,000.
Other Income and Expense, net
Other income and expense, net for the fiscal year ended March 31, 1999 was
expense of $111,000 as compared to income of $75,000 for the fiscal year ended
March 31, 1998, an increase in net expense of $186,000. The increase in other
expense primarily resulted from interest expense of $212,000 on the senior notes
and the Freemedic loan. Interest expense for the fiscal year ended March 31,
1999 was partially offset by interest income of $101,000 earned on excess cash
during the period.
Net Loss
Net loss for the fiscal year ended March 31, 1999 was $2,625,000 compared
to $1,809,000 for the fiscal year ended March 31, 1998, an increase in net loss
of $816,000 or 45%. The increase in net loss is primarily attributable to
continued significant investment in research and development activities as
previously described. Net loss per share for the fiscal year ended March 31,
1999 was $0.55 as compared to $0.42 per share for the fiscal year ended March
31, 1998, an increase in net loss per share of $0.13 per share or 31%.
Liquidity and Capital Resources
The Company recognized a net increase in cash and cash equivalents for the
year ended March 31, 1999 of $165,000. Operating activities used cash of
$2,119,000 during the fiscal year ended March 31, 1999, compared to $1,585,000
for the fiscal year ended March 31, 1998. The principal uses of cash for
operating activities for the fiscal year ended March 31, 1999, were to fund a
net loss of $2,625,000, offset in part by increases in accounts payable of
$356,000. Investing activities used cash of $367,000 for the year ended March
31, 1999, as compared to $29,000 for the year ended March 31, 1998, and is
primarily attributable to the purchase of equipment used in development and
production activities. Financing activities provided cash of $2,666,000 for the
year ended March 31, 1999, as compared to $1,500,000 for the year ended March
31, 1998, and is attributable to net cash proceeds received on the issuance of
convertible senior notes, convertible preferred stock, and common stock,
respectively. Cash and cash equivalents amounted to $2,392,000 at March 31, 1999
as compared to $2,227,000 at March 31, 1998, an increase of $165,000 or 7%.
10
<PAGE>
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. Through March 31, 1999, 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 March 31, 1999, the Company has begun limited
distribution and commercial sales of its Vasculink Vascular Access Graft in
Europe. The Company has distributors in Spain, Italy, Germany, France, Sweden,
and the Benelux countries.
Since the Company's inception, funding has come from PMI of approximately
$4,000,000, senior notes in the principle amount of $1,660,000, the loan from
Freemedic in the amount of (GBP)253,000, (approximately $420,000), the sale of
$500,000 in preferred stock; and the sale of 1,866,000 units, with each unit
consisting of one share of the Company's common stock and one warrant to
purchase an additional share of common stock, netting approximately $1,782,000
in cash (See Note I and J to the Notes to Consolidated Financial Statements.)
The Company anticipates that operating losses will continue to be incurred
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.
As of March 31, 1999, CardioTech was conducting its operations with
approximately $2,392,000 in cash. CardioTech estimates such amount will be
sufficient to fund its working capital and research and development activities
in the near term. 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.
As discussed in Note A of the Consolidated Financial Statements, 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 March 31, 1998, the Company issued $1,660,000, 7% Convertible Senior
Notes (the "Senior Notes") with a maturity date of March 20, 2003 to Dresdner,
Kleinwort Benson Private Partner LP ("DKB") (See Note I to the Notes to the
Consolidated Financial Statements.)
On April 1, 1998 the Company's wholly owned subsidiary, CardioTech
International, Ltd. ("CTI"), signed a collaborative research and development
agreement with the Royal Free Hospital School of Medicine ("Royal Free
Hospital"). (See Note I to the Notes to the Consolidated Financial Statements.)
11
<PAGE>
Preferred Stock
On November 12, 1998, the Company issued 500,000 shares of Series A convertible
preferred stock ("Preferred Stock") to DKB, on substantially the same terms as
the Senior Notes, in consideration of an additional $500,000. (See Note I to the
Notes to the Consolidated Financial Statements.)
On December 22, 1998, the Company completed a private offering of 1,866,000
units at a price of $1.25 per unit. (See Note I to the Notes to the Consolidated
Financial Statements.)
On May 25, 1999, the Company agreed to acquire, subject to the approval of
the Tyndale Plains-Hunter shareholders and other conditions precedent, all of
the common stock of Tyndale Plains-Hunter, Ltd., in exchange for 446,153 shares
of CardioTech's common stock and $350,000 in cash. Tyndale Plains-Hunter is a
maker of specialty polyurethane for the medical and cosmetics industries. There
can be no assurance that CardioTech will be able to complete the acquisition,
that the terms of the acquisition will be favorable to CardioTech or that
CardioTech will be able to successfully integrate Tyndale Plains-Hunter into its
operations.
Going Concern Opinion and Possible AMEX Delisting
The common stock is listed on the American Stock Exchange, or the AMEX, and
CardioTech is subject to the AMEX's maintenance requirements. CardioTech's
failure to meet the AMEX's maintenance requirements may result in a delisting of
the common stock. CardioTech cannot assure you that its common stock will not be
delisted by the AMEX. The determination by the 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 a company which:
(1) 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
(2) has sustained losses which are so substantial to its overall operations
or its existing financial resources, or 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 March 31, 1999, CardioTech had stockholders' deficit of $117,000, and
losses in its last three fiscal years. If CardioTech is unable to increase its
stockholders' equity and its net losses continue, CardioTech's common stock may
be delisted. CardioTech's future financing activities may not provide the
Company with sufficient stockholders' equity to avoid being delisted. Further,
CardioTech has received a "going concern" opinion from its independent public
accountants. This "going concern" opinion may be considered by AMEX in
determining whether it will delist CardioTech's common stock. If CardioTech were
to receive a notification from AMEX indicating that AMEX was considering
delisting CardioTech's common stock, CardioTech would then have an opportunity
to respond to AMEX and to set forth a plan as to why it should not be delisted.
There can be no assurance that CardioTech will be able to avoid delisting.
Delisted securities would probably trade in the over-the-counter markets.
The liquidity of securities traded in the over-the-counter markets may be
impaired, not only in the number of shares that could be bought or sold, but
also through delays in the timing of transactions, reductions in securities
analysts' and media coverage and lower prices.
CardioTech's receipt of the "going concern" opinion is a default condition
pursuant to the Senior Note and Preferred Stock agreement with DKB. On June 25,
1999, DKB waived this default and any additional interest due as a result
thereof. However, if CardioTech's common stock were to be delisted by AMEX, this
would also constitute a default condition under the Senior Note and Preferred
Stock agreement with DKB. DKB may give notice to CardioTech of this default
condition, whereupon CardioTech would have 25 days to cure the default. If
CardioTech was unable to cure the default condition resulting from its
delisting, then an event of default would occur and DKB would be entitled to
demand immediate payment of the Senior Notes. Further, upon the occurrence of an
event of default, the interest rate on the Senior Notes and the dividend rate on
the Preferred Stock would each increase to 13% per annum. The principal balance
of Senior Notes outstanding as of March 31, 1999 was $1,779,000.
12
<PAGE>
The Company has pledged a life insurance policy on the life of Dr. Michael
Szycher and all of the common stock of the Company's wholly owned subsidiary,
CardioTech International, Ltd. ("CTI"), to secure the repayment of the Senior
Notes. Upon the occurrence of an event of default, DKB would have the right to
foreclose on this collateral. If DKB foreclosed on the CTI stock pledged to it
or if CardioTech winds up, makes an assignment for the benefit of its creditors,
goes into liquidation or an administrator is appointed for its assets, then,
such actions would be a default under the Freemedic loan and Freemedic would be
entitled to immediate repayment of the loan. As of March 31, 1999, the
outstanding principal balance of the Freemedic loan was (pound)266,000
($428,000).
Recent Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards (SFAS
No. 130) "Reporting Comprehensive Income" in fiscal 1999. This statement
establishes standards for reporting and displaying comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires the display of the
comprehensive income (loss) and its components in the financial statements. In
the Company's case, comprehensive loss includes net loss, and foreign currency
translation adjustments. The adoption of this Statement has had no material
effect on its financial statements.
The Company has also adopted Statement of Financial Accounting Standards
(SFAS No. 131.) "Disclosures About Segments of an Enterprise and Related
information" in fiscal 1999. This Statement establishes standards for reporting
information about operating segments and related disclosures about its products
and services, geographic areas, and major customers. The Company is organized as
a single operating segment, whereby the chief operating decision maker assesses
the performance of and allocates resources to the business as a whole. The
adoption of this Statement did not affect the Company's results of operations,
liquidity or financial position but resulted in revised and additional
disclosures. (See Note K of the Notes to the Consolidated Financial Statements.)
Forward Looking Statements
The Company believes that this Form 10-KSB contains forward-looking
statements that are subject to certain risks and uncertainties. These forward-
looking statements include statements regarding i) the expected performance of
its grafts, including their needle-hole-sealing-capability, ii) the expected
size of the market for the Company's products in development, iii) the Company's
ablility to manufacture grafts that taper, iv) Hydro Thane's bacterial
resistance, clot resistance and biocompatibility, v) the Company's Year 2000
Readiness, vi) the cost to the Company to address Year 2000 issues, vii) the
sufficiency of the Company's liquidity and capital. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties 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: Possible Amex
Delisting. See "Going Concern Opinion and Possible Amex Delisting" on page 12.
Early Stage of Development of Vascular Grafts.
CardioTech primarily develops and markets implantable synthetic vascular
grafts. Presently, CardioTech is conducting clinical testing of its first
product in development, the VascuLink Vascular Access Graft. CardioTech has not
begun to market this technology in the United States and has not generated any
revenue from the use of this technology. CardioTech recently received government
authority to sell its VascuLink Vascular Access Graft in Europe and has just
begun to market this product there. CardioTech cannot assure you that any of its
products in development:
13
<PAGE>
will be successfully developed;
will meet applicable regulatory standards, if developed;
will obtain required regulatory approvals;
will be producible in commercial quantities at reasonable costs; or
will be successfully marketed.
To succeed in this market, CardioTech will have to complete the development
of polyurethane-based vascular grafts which (1) will be safe and effective and
(2) will have benefits not available in human vein grafts or presently available
synthetic vascular grafts. CardioTech cannot assure you that it will be
successful in doing this. CardioTech's products in development will require
significant additional investment, research, development, pre-clinical and
clinical testing and regulatory approval prior to commercialization. CardioTech
will have to commit substantial additional resources to complete the development
of its synthetic grafts.
History of Operating Losses and Accumulated Deficit.
CardioTech cannot assure you that it will ever be profitable. For the years
ended March 31, 1999, and 1998, CardioTech had net losses attributable to common
stockholders of $2,625,000, and $1,809,000, respectively; and as of March 31,
1999, CardioTech had an accumulated deficit of $10,117,000. CardioTech expects
to incur additional operating losses over the next several years from the
development, testing and manufacturing of its vascular graft technology as it:
engages in additional research and development;
conducts additional animal testing;
continues clinical trials;
and seeks regulatory approvals
CardioTech expects its cumulative deficit to increase for the foreseeable
future as it expands its efforts in the areas indicated above.
CardioTech's ability to become profitable is dependent, in large part, on:
completing product development and commercialization;
obtaining regulatory approvals for its products; and
making the transition from research and development to manufacturing and
marketing.
CardioTech cannot assure you that it will be able to achieve any of these
objectives. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this Form 10-KSB.
Proposed Acquisition
CardioTech has entered into an agreement to purchase all of the stock of Tyndale
Plains-Hunter, a maker of specialty polyurethanes for the medical and cosmetics
industries. CardioTech anticipates that it will pay $350,000 in cash and issue
446,153 shares of its common stock. The purchase will be subject to a number of
conditions, including both parties' completion of their due diligence review.
There can be no assurance that CardioTech will be able to complete the
acquisition, that the terms of the acquisition will be favorable to CardioTech
or that CardioTech will be able to successfully integrate Tyndale Plains-Hunter
into its operations.
Absence of Revenue from Vascular Grafts.
CardioTech's future growth will largely depend on its ability to
commercialize its vascular graft technology. CardioTech cannot assure you that
it will be able to accomplish this goal. To date, CardioTech has not generated
any revenue from the sale of vascular grafts in Europe and cannot assure you
that it will be successful in selling this product there. CardioTech is
currently in the initial stages of introducing its VascuLink Vascular Access
Graft for sale. CardioTech cannot assure you that it will be able to generate
sufficient revenue from product sales, sales of materials or development
services to fund its continuing operations.
14
<PAGE>
Limited Revenue From Other Activities.
CardioTech is also engaged in the development of other uses for its premium
polymer-based materials in collaboration with other medical-device
manufacturers. Although such activities may generate revenues from medical
device manufacturers for development services performed by CardioTech or in
connection with the sale of materials, CardioTech's primary focus will be on its
vascular graft technology. Accordingly, CardioTech expects that revenues from
these other sources will be relatively small in the short term.
Access to Capital and Additional Financing Requirements.
CardioTech's future growth also will depend on its ability to raise
additional capital to support its research and development activities.
PolyMedica provided approximately $4.0 million in funding to CardioTech from
1991 through June 1996. In addition, CardioTech raised approximately $2,590,000
through the sale of (1) senior notes and preferred stock to DKB; and (2)
convertible notes to Freemedic. CardioTech also raised an additional $2,332,500,
including $200,000 in promissory notes from CardioTech's executive officers,
through a unit offering private placement which terminated on December 22, 1998.
The majority of these funds is being expended for research and development.
CardioTech cannot assure you that it will be able to raise sufficient additional
funds to adequately support its research and development efforts.
As of March 31, 1999, CardioTech had cash and cash equivalents of
approximately $2,392,000, which CardioTech expects to consume at a rate of
approximately $150,000 per month. Accordingly, such cash and cash equivalents
should be adequate to maintain CardioTech's currently planned operations until
approximately May 2000. CardioTech will need additional funding to complete the
clinical trials for, and market, its VascuLink Vascular Access Graft in Europe
and to begin clinical trials in the United States. 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 will seek to obtain additional funds for these purposes through:
public or private equity or debt financing;
collaborative arrangements; or
from other sources.
CardioTech cannot assure you that it will be able to raise sufficient
additional funding at all or on acceptable terms to permit successful
commercialization of CardioTech's technology and products. If CardioTech cannot
raise adequate additional funds, it may be required to curtail significantly one
or more of its research or 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.
Possible Amex Delisting.
See "Possible AMEX Delisting" on page 13
15
<PAGE>
Possible Volatility of Stock Price.
CardioTech cannot assure you of the prices at which its common stock will
trade. The market prices for securities of emerging companies historically have
been highly volatile. The following factors may have a significant impact on the
market price of the common stock:
announcements of technological innovations or new commercial products by
CardioTech or its competitors;
regulatory developments;
disputes concerning patent or proprietary rights;
publicity regarding actual or potential medical results relating to
products under development by CardioTech or its competitors;
public concern as to the safety of CardioTech's products; and
economic and other external factors, as well as period-to-period
fluctuations in financial results.
Limited Rights in Technology; Uncertainty of Patents and Proprietary Rights.
CardioTech owns two U.S. patents and four patents in various European
countries relating to vascular graft manufacturing technology. In addition,
PolyMedica granted CardioTech a perpetual, worldwide, royalty-free license to
use certain proprietary polyurethane technologies (the "Biomaterial Technology")
in the field consisting of development, manufacture and sale of implantable
medical devices and biodurable polymer materials to third parties for use in
medical applications (the "Implantable Devices and Materials Field"). However,
PolyMedica and CardioTech each have rights to use the Biomaterials Technology to
fabricate medical products (other than implantable medical devices) themselves
or in joint ventures with third parties. In addition, PolyMedica has retained
the rights to make sales of certain formulations of ChronoFlex and such
materials for non-medical applications. As a result, PolyMedica may compete with
CardioTech if CardioTech decides to commercialize applications of the
Biomaterials Technology in fields other than those in which it has been granted
an exclusive license. Also, Thermedics, Inc., as joint owner with PolyMedica of
a patent and patent applications relating to certain polyurethane technology, is
free to use such rights or license them to others in any field, including the
Implantable Devices and Materials Field.
CardioTech's success will depend, in large part, on the following
abilities:
to maintain it's existing patents;
to obtain new patents;
to maintain trade secret protection; and
to operate without infringing on the proprietary rights of third
parties or having third parties circumvent CardioTech's rights.
PolyMedica has filed and obtained U.S. and foreign patents covering aspects
of the Biomaterials Technology. CardioTech cannot assure you, however:
that any of CardioTech's or PolyMedica's existing patents will not be
challenged or future patent applications will result in the issuance of
patents;
that CardioTech will develop additional proprietary products that are
patentable;
that any additional patents issued to CardioTech will provide CardioTech
with any competitive advantages or will not be challenged by any third
parties; or
that the patents of others will not impede the ability of CardioTech to do
business, or
that third parties will not be able to circumvent CardioTech's patents and
licensed technology.
16
<PAGE>
Furthermore, CardioTech cannot assure you that others will not
independently develop or duplicate similar technology or products, or, if
patents are issued or licensed to CardioTech, design around the patents issued
or licensed to CardioTech.
CardioTech might have to obtain licenses from third parties to avoid
infringing patents or other proprietary rights. CardioTech cannot assure you
that any licenses required under any such patents or proprietary rights would be
made available, if at all, on terms acceptable to CardioTech. If CardioTech does
not obtain such licenses, it could encounter delays in product introductions, or
could find that the development, manufacture or sale of products requiring such
licenses could be prohibited. In addition, CardioTech could incur substantial
costs in defending itself in suits brought against it with respect to patents it
might infringe or in filing suits against others to have such patents declared
invalid.
Some of CardioTech's know-how and technology may not be patentable. To
protect its rights, CardioTech requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. CardioTech cannot assure
you, however, that these agreements will protect CardioTech's trade secrets,
know-how or other proprietary information in the event of any unauthorized use
or disclosure. Further, CardioTech's business may be adversely affected by
competitors who independently develop competing technologies, especially if
CardioTech obtains no, or only narrow, patent protection.
Technological Change and Competition.
The medical device industry is subject to rapid and substantial
technological change. Several companies currently sell synthetic graft products
for certain specific applications in the United States and worldwide and have
done so for many years. Although CardioTech believes that the attributes of its
polyurethane-based grafts will allow its products to compete effectively, these
companies can be expected to defend their market positions vigorously. Moreover,
while CardioTech is aware of only two competitors developing polyurethane-based
vascular grafts currently, potential competitors of CardioTech in the United
States and abroad are numerous and include, among others:
both large and small synthetic materials companies;
medical device firms;
universities; and
other research institutions.
CardioTech cannot assure you that its potential competitors will not
succeed in developing technologies and products that are more effective than any
that are being developed by CardioTech or that would render CardioTech's
technologies and products obsolete or noncompetitive. Many of these potential
competitors have substantially greater financial and technical resources and
production and marketing capabilities than CardioTech.
Additionally, many of CardioTech's competitors have significantly greater
experience than CardioTech in conducting pre-clinical testing and clinical
trials of medical devices and obtaining FDA and other regulatory approvals of
products for use in health care. Moreover, Thoratec Corporation, one of the
Company's competitors, has developed a polyurethane vascular access graft and
has begun limited clinical trials in the United States and foreign countries. In
addition, Thoratec Corporation has begun to sell its product in Japan and has
affixed a CE Mark (the approval marking of the European Community) on its
product, which enables it to sell the product throughout Europe. Accordingly,
CardioTech's competitors may succeed in obtaining FDA approval for products more
rapidly than CardioTech. If CardioTech commences significant commercial sales of
its vascular graft products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited experience.
17
<PAGE>
Attraction and Retention of Key Employees and Scientific Collaborators.
CardioTech is highly dependent on the principal members of its management
and scientific staff, the loss of whose services could have a material adverse
effect on CardioTech. Furthermore, recruiting and retaining qualified scientific
personnel to perform research and development work in the future will also be
critical to CardioTech's success. CardioTech cannot assure you that it will be
able to attract and retain skilled and experienced scientific personnel on
acceptable terms given the Company's financial resources and competition among
numerous medical device companies, universities and non-profit research
institutions for experienced scientists. CardioTech's anticipated growth and
expansion into areas and activities requiring additional expertise such as
clinical testing, governmental approvals, production and marketing, are expected
to place increased demands on CardioTech's resources. These demands are expected
to require the addition of new management personnel and the development of
additional expertise by existing management personnel. The failure to acquire
such services or to develop such expertise could materially adversely affect
CardioTech's business.
Limited Manufacturing Capability.
The development and manufacture of CardioTech's products are subject to:
(1) the Quality System Requirements and other relevant requirements
prescribed by the FDA; or
(2) other standards prescribed by the appropriate regulatory agency in the
country of use.
Although CardioTech currently has the ability to produce quantities of
synthetic vascular grafts sufficient to support its current needs and its needs
for early-stage clinical trials, as well as early-stage distribution of the
Vasculink Vascular Access Graft in Europe, it may need to acquire additional
manufacturing facilities and improve its manufacturing technology to meet the
volume and cost requirements for later clinical trials. CardioTech will require
additional manufacturing facilities to undertake commercial production of
vascular grafts if it elects to do so. CardioTech cannot assure you:
that it will be able to obtain or manufacture such products in a timely
fashion at acceptable quality and prices;
that it or its suppliers can comply with the Quality System Requirements or
other relevant requirements prescribed by the FDA or appropriate foreign
regulatory agencies;
or that it or its suppliers will be able to manufacture an adequate supply
of product.
Absence of Sales and Marketing Experience.
CardioTech expects to market its vascular grafts either through independent
distributors/sales agents or co-marketing arrangements with third parties. To
date, CardioTech has had no experience in sales, marketing or distribution of
vascular grafts or other implantable devices. In order to market vascular grafts
directly, CardioTech would need to develop a marketing and sales staff with
technical expertise. CardioTech cannot assure you:
that it will be able to build such a marketing staff or sales force;
that the cost of establishing such a marketing staff or sales force will
not exceed any product revenue; or
that CardioTech's direct sales and marketing efforts will be successful.
18
<PAGE>
In addition, if CardioTech succeeds in bringing one or more products to
market, it may compete with other companies that currently have extensive and
well-funded marketing and sales operations. CardioTech cannot assure you that
its marketing and sales efforts would compete successfully against such other
companies. To the extent CardioTech enters into co-marketing arrangements, any
revenue received by CardioTech will be dependent on the efforts of third parties
and CardioTech cannot assure you that such efforts will be successful.
Extensive Government Regulation.
The production and marketing of CardioTech's products and ongoing research
and development activities are subject to extensive regulation by numerous
governmental authorities in Europe, the United States and other countries. Prior
to marketing any synthetic vascular grafts developed by CardioTech in Europe,
CardioTech must affix a CE Mark, or mark of approval from the European
Community, to its product. The CE Mark denotes conformity with European
standards and allows certified medical devices to be placed on the market in all
European countries. In order to obtain a CE Mark, CardioTech must meet:
the essential safety requirements of the European Medical Device Directive
("EMDD");
maintain a technical file consisting of all research data and information
about the medical device;
adopt a conformity route for its product; and
choose a Notified Body, an independent third party, who will be responsible
for reviewing the manufacturer's technical file to verify
that the manufacturer has addressed the requirements of the EMDD and has
satisfied certain clinical trial requirements.
In November 1998, CardioTech was awarded the right to affix the CE Mark to
its VascuLink Vascular Access Graft. As a result of this award, CardioTech has
begun to market this product in Europe. CardioTech cannot assure you, however,
that it will be able maintain regulatory approval or clearance for the sale of
this product in Europe. Additionally, CardioTech cannot assure you that with
regard to its other products, a Notified Body will determine that CardioTech's
technical file satisfies the requirements of the EMDD or that its products other
than the VascuLink Vascular Access Graft meet the essential safety requirements
of the EMDD. As a result, CardioTech cannot assure you that it will be able to
affix a CE Mark to its other implantable products;
sell such other products in Europe; or
maintain regulatory approval or clearance for its other products in Europe.
Failure to obtain CE Marking or maintain regulatory approval or clearance
for its products could have a material adverse effect on CardioTech's business,
financial condition and results of operations.
Furthermore, prior to marketing any synthetic vascular grafts developed by
CardioTech in the United States, such products may undergo rigorous pre-clinical
testing and clinical trials, as well as an extensive regulatory approval process
mandated by the FDA. FDA approval may take many years and require the
expenditure of substantial resources. In addition, modifications to regulations
and changes in interpretation of regulations occur regularly and can materially
and adversely affect the timing and cost of the sale of CardioTech's product
introductions.
19
<PAGE>
CardioTech has limited experience in conducting and managing the
pre-clinical and clinical trials necessary to obtain government approvals.
CardioTech cannot assure you that the results of such clinical trials will be
consistent with the results obtained in pre-clinical studies or that the results
obtained in later phases of clinical trials will be consistent with those
obtained in earlier phases. CardioTech also cannot assure you that
polyurethane-based synthetic vascular grafts or other implantable products will
be shown to be safe and effective or that regulatory approval for any such
product will be obtained on a timely basis, if at all. Delays in obtaining
regulatory approvals would adversely affect the marketing of products developed
by CardioTech and CardioTech's ability to receive product revenue or royalties.
CardioTech's activities relating to the development of uses for its
polymer-based materials and implantable medical devices in collaboration with
other medical-device manufacturers may also be subject to regulatory approval
processes similar to those described above relating to vascular grafts.
Quarterly Fluctuations.
CardioTech's quarterly operating results are likely to vary significantly
depending on factors such as the results of pre-clinical or clinical trials and,
if CardioTech is able to commercialize its vascular graft products, the timing
of significant orders for vascular grafts. CardioTech's expense levels are based
in part on its expectations as to future revenue. If revenue levels are below
expectations, operating results will be adversely affected.
Health Care Reimbursement.
CardioTech's ability to commercialize vascular grafts successfully will
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health coverage insurers and other
organizations. Third-party payers are increasingly challenging the price of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and CardioTech
cannot assure you that adequate third-party coverage will be available to
maintain price levels sufficient for an appropriate return on its investment in
product development.
Product Liability.
The testing, marketing and sale of human healthcare products entail an
inherent risk of allegations or product liability, and CardioTech cannot assure
you that substantial product liability claims will not be asserted against it.
CardioTech currently has limited product liability insurance. CardioTech cannot
assure you that a product liability claim would not materially adversely affect
its business or financial condition.
Absence of Dividends.
CardioTech has never paid cash dividends on its common stock and does not
anticipate paying any cash dividends in the foreseeable future. CardioTech's
loan agreement with DKB currently prohibits the payment of cash dividends
without DKB's prior written consent.
20
<PAGE>
Item 7. Financial Statements Page
----
The following documents are filed as part of this report on Form 10-KSB
Report of Independent Accountants F-1
Consolidated Balance Sheet at March 31, 1999 F-2
Consolidated Statements of Operations for the two years
ended March 31, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the two years
ended March 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the two years ended
March 31, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - F16
All schedules have been omitted because they are inapplicable or the required
information is included in the notes to the consolidated financial statements.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in accounts or disagreements with
accountants on accounting and financial disclosure matters.
21
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by this item will be set forth in the sections
entitled "Management" and "Section 16(a) Beneficial Ownership, Reporting, and
Compliance" in the Proxy Statement for the Annual Meeting of Stockholders to be
held on August 12, 1999 and to be filed with the Securities and Exchange
Commission not later than July 29, 1999, and is incorporated herein by this
reference.
Item 10. Executive Compensation
The information required by this item will be set forth under the section
entitled "Executive Compensation" in the Proxy Statement for the Annual Meeting
of Stockholders to be held on August 12, 1999 and to be filed with the
Securities and Exchange Commission not later than July 29, 1999, and is
incorporated herein by this reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be set forth in the sections
entitled "Share Ownership" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on August 12, 1999 and to be filed with the Securities
and Exchange Commission not later than July 29, 1999, and is incorporated herein
by this reference.
Item 12. Certain Relationships and Related Transactions
The information required by this item will be set forth in the section
entitled "Certain Relationships and Related Transactions" in the Proxy Statement
for the Annual Meeting of Stockholders to be held on August 12, 1999 and to be
filed with the Securities and Exchange Commission not later than July 29, 1999,
and is incorporated herein by this reference.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 10-KSB
(a) The following are filed as part of this Form 10-KSB:
(1) Financial Statements: For a list of financial statements which are
filed as part of this Form 10-KSB, See Page 23
(2) Financial Statement Schedules: All schedules are omitted because they
are not applicable, or not required, or because the required
information is included in the Financial Statements as notes thereto.
(3) Exhibits
Exhibit Number:
2 Plan and Agreement of Distribution between PMI and CardioTech,
dated May 13, 1996 was filed as Exhibit 2 to CardioTech's Form 10
filed on March 20, 1996, as amended (the "Form 10"), and is
incorporated herein by reference.
3.1 Articles of Incorporation were filed as Exhibit 3.1 of the Form
10 and are incorporated herein by reference.
22
<PAGE>
3.1.1 Certificate of Vote of Directors Establishing a Class or Series
of Stock for Series A Preferred Stock was filed as Exhibit 3.1 to
CardioTech's Form 10-Q for the quarter ended September 30, 1998,
filed on November 16, 1998, and is incorporated herein by
reference.
3.1.2 Certificate of Correction dated December 11, 1998 was filed as
Exhibit 3.1 to CardioTech's Form 10-Q for the quarter ended
December 31, 1998, filed on February 16, 1999, and is
incorporated herein by reference.
3.2 Bylaws were filed as Exhibit 3.2 of the Form 10 and are
incorporated herein by reference.
10.1 Amended and Restated Common Stock Subscription Agreement between
PMI and CardioTech, dated May 9, 1996, was filed as Exhibit 10.1
of the Form 10 and is incorporated herein by reference.
10.2 Tax Matters Agreement between PMI and CardioTech, dated May 13,
1996, was filed as Exhibit 10.2 of the Form 10 and is
incorporated herein by reference.
10.3 Amended and Restated License Agreement between PMI and
CardioTech, dated May 13, 1996, was filed as Exhibit 10.4 of the
Form 10 and is incorporated herein by reference.
10.4 CardioTech 1996 Employee, Director and Consultant Stock Option
Plan, as amended, was filed as Exhibit 10.4 to CardioTech's Form
10-K for the year ended March 31, 1998, filed on June 29, 1998,
and in incorporated herein by reference.
10.5 Employment Agreement of Michael Szycher, dated March 26, 1998,
was filed as Exhibit 10.5 to CardioTech's Form 10-K for the year
ended March 31, 1998, filed on June 29, 1998, and in incorporated
herein by reference.
10.6 Employment Agreement of Alan Edwards, dated March 24, 1998, was
filed as Exhibit 10.6 to CardioTech's Form 10-K for the year
ended March 31, 1998, filed on June 29, 1998, and in incorporated
herein by reference.
10.7 Service Agreement of Alan Edwards, dated March 24, 1998, was
filed as Exhibit 10.7 to CardioTech's Form 10-K for the year
ended March 31, 1998, filed on June 29, 1998, and in incorporated
herein by reference.
10.8 Warrant issued by CardioTech to John Hancock Mutual Life
Insurance Company was filed as Exhibit 10.8 of the Form 10 and is
incorporated herein by reference.
10.9 Letter Agreement between CardioTech, PMI, and John Hancock Mutual
Life Insurance Company was filed as Exhibit 10.9 of the Form 10
and is incorporated herein by reference.
10.10 Development, Supply and License Agreement between PMI and Bard
Access Systems, dated November 11, 1992, was filed as Exhibit
10.10 of the Form 10 and is incorporated herein by reference.
23
<PAGE>
10.11 Lease Agreement between CardioTech and Cummings Properties
Management, Inc., dated June 26, 1998, was filed as Exhibit 10.11
to CardioTech's Form 10-K for the year ended March 31, 1998,
filed on June 29, 1998, and in incorporated herein by reference.
10.12 Loan and Option Agreement dated as of March 31, 1998 and among
CardioTech, CardioTech International Ltd. ("CTI, Ltd."), the
Royal Free Hospital School of Medicine ("Royal Free Hospital")
and Freemedic PLC ("Freemedic"), was filed as Exhibit 10.12 to
CardioTech's Form 10-K for the year ended March 31, 1998, filed
on June 29, 1998, and in incorporated herein by reference.
10.13 CTI, Ltd. and Royal free Hospital Research Agreement in respect
of the Development of Vascular Grafts, dated April 1, 1998, was
filed as Exhibit 10.13 to CardioTech's Form 10-K for the year
ended March 31, 1998, filed on June 29, 1998, and in incorporated
herein by reference.
10.14 Freemedic and CTI, Ltd. License Agreement, dated as of April 1,
1998, was filed as Exhibit 10.14 to CardioTech's Form 10-K for
the year ended March 31, 1998, filed on June 29, 1998, and in
incorporated herein by reference.
10.15 Note Purchase Agreement dated as of March 31, 1998 between
CardioTech and Dresdner Kleinwort Benson Private Equity Partners,
LP ("Kleinwort Benson") was filed as Exhibit 99.1 to CardioTech's
Form 8-K filed with the Securities and Exchange Commission (the
"Commission") on April 15, 1998 and is incorporated herein by
reference.
10.15.1 Amendment, dated as of November 12, 1998, to Note Purchase
Agreement and Registration Rights Agreement was filed as Exhibit
10.1 to CardioTech's Form 10-Q for the quarter ended September
30, 1998, filed on November 16, 1998 and is incorporated herein
by reference.
10.16 7% Convertible Senior Note dated as of March 31, 1998 between
CardioTech and Kleinwort Benson was filed as Exhibit 99.2 to
CardioTech's Form 8-K filed with the Commission on April 15, 1998
and is incorporated herein by reference.
10.17 John E. Mattern Employment Agreement dated November 11, 1998 was
filed as Exhibit 10. 1 to CardioTech's Form 10-Q for the quarter
ended December 31, 1998, filed on February 16, 1999, and is
incorporated herein by reference.
10.18 Form of Unit Purchase Agreement between CardioTech and certain
individuals was filed as Exhibit 99.1 to CardioTech's Form S-3,
filed with the Securities and Exchange Commission on February 12,
1999, and is incorporated herein by reference.
10.19 Form of Warrant to Purchase Shares of Common Stock of CardioTech
issued to certain individuals was filed as Exhibit 99.2 to
CardioTech's Form S-3, filed with the Securities and Exchange
Commission on February 12, 1999, and is incorporated herein by
reference.
10.20 Form of Warrant Agreement by and among CardioTech, Fechtor,
Detwiler, & Co., Inc. and certain Fechtor, Detwiler, & Co., Inc.
employees was filed as Exhibit 99.3 to CardioTech's Form S-3,
filed with the Securities and Exchange Commission on February 12,
1999, and is incorporated herein by reference.
24
<PAGE>
21 Subsidiaries of CardioTech
23 Consent of PricewaterhouseCoopers L.L.P.
27 Financial Data Schedule
(b) Reports on Form 8-K1: None
25
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of CardioTech International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' deficit, and cash flows
present fairly, in all material respects, the financial position of CardioTech
International, Inc. (the "Company") at March 31, 1999, and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note A. The financial
statements do not included any adjustments that might result from the outcome of
this uncertainty.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 25, 1999, except as to the information presented in the second paragraph of
Note S, for which the date is June 25, 2999
F-1
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
March 31,
1999
------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 2,392,000
Accounts Receivable - Trade 96,000
Accounts Receivable - Other 292,000
Prepaid Expenses and Other Current Assets 56,000
------------
Total Current Assets 2,836,000
Property and Equipment, net 477,000
Other Assets 214,000
------------
Total Assets $ 3,527,000
============
LIABILITIES CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable $ 518,000
Accrued Expenses 418,000
------------
Total Current Liabilities 936,000
Long Term Obligations (Note I):
7% Convertible Senior Notes due 2003 1,779,000
Convertible Loan due 2000 429,000
------------
2,208,000
------------
Total Liabilities 3,144,000
Series A Convertible Preferred Stock, $.01 par value, 5,000,000
shares authorized, 500,000 issued and outstanding 500,000
Commitments and Contingencies (Note H) --
Stockholders' Deficit:
Common Stock, $.01 par value, 20,000,000 shares
authorized, 6,138,916 shares issued and outstanding
at March 31, 1999 and March 31, 1998 respectively 61,000
Additional Paid-In Capital 10,151,000
Accumulated Deficit (10,117,000)
Notes Receivable From Officers (200,000)
Cumulative Translation Adjustment (12,000)
------------
Total Stockholders' Deficit (117,000)
------------
Total Liabilities Convertible Preferred Stock and
Stockholders' Deficit $ 3,527,000
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
1999 1998
----------- -----------
Research Revenue $ 1,083,000 $ 873,000
Operating Expense:
Research and Development 2,284,000 1,452,000
Selling, General and Administrative 1,313,000 1,305,000
----------- -----------
Total Operating Expense 3,597,000 2,757,000
Loss from Operations $(2,514,000) $(1,884,000)
=========== ===========
Other Income and Expense:
Interest Expense (212,000) --
Interest Income 101,000 75,000
----------- -----------
(111,000) 75,000
----------- -----------
Net Loss $(2,625,000) $(1,809,000)
=========== ===========
Other comprehensive income:
Foreign currency translation adjustments 12,000 3,000
----------- -----------
Comprehensive loss $(2,613,000) $(1,806,000)
=========== ===========
Net loss per common share basic and diluted $ (0.55) $ (0.42)
=========== ===========
Shares used in computing Net Loss per
common share, basic and diluted 4,814,823 4,272,916
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CardioTech International, Inc.
Statement of Stockholders' Equity (Deficit)
For the Years Ended March 31, 1999, and 1998
<TABLE>
<CAPTION>
Additional Notes Cumulative Stockholders'
Common Stock Paid In Accumulated Receivable Translation Equity
Shares Amount Capital Deficit from Officers Adjustment (Deficit)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997 4,272,916 $ 43,000 $ 8,232,000 $ (5,686,000) -- $ 9,000 $ 2,598,000
Effect of Cumulative
Translation Adjustment -- -- -- -- -- (6,000) (6,000)
Net Loss -- -- -- (1,809,000) -- -- (1,809,000)
---------- ---------- ------------ ------------ ------------ ---------- ------------
Balance at March 31, 1998 4,272,916 $ 43,000 $ 8,232,000 $ (7,495,000) $ -- $ 3,000 $ 783,000
========== ========== ============ ============ ============ ========== ============
Issuance of Common Stock
Private Placement net of
issuance costs 1,866,000 18,000 1,919,000 -- -- -- 1,937,000
Notes Receivable from
Officers -- -- -- -- (200,000) -- (200,000)
Effect of Cumulative
Translation Adjustment -- -- -- 3,000 -- (15,000) (12,000)
Net Loss -- -- -- (2,625,000) -- -- (2,625,000)
---------- ---------- ------------ ------------ ------------ ---------- ------------
Balance at March 31, 1999 6,138,916 $ 61,000 $ 10,151,000 $(10,117,000) $ (200,000) $ (12,000) $ (117,000)
========== ========== ============ ============ ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(2,625,000) $(1,809,000)
Adjustments to reconcile Net Loss to Net
Cash Flows used by Operating
Activities:
Interest paid by Issuance of Convertible Senior Notes 119,000 --
Loss on Disposal of Property and Equipment 1,000
Depreciation and Amortization 118,000 72,000
Changes in Assets and Liabilities:
Accounts Receivable (1,000) (285,000)
Prepaid Expenses and Other Current Assets (30,000) 61,000
Increase in Other Assets (40,000) (36,000)
Accounts Payable 356,000 111,000
Accrued Expenses (17,000) 301,000
----------- -----------
Net Cash Flows used by Operating Activities (2,119,000) (1,585,000)
=========== ===========
Cash Flows from Investing Activities:
Purchase of Property and Equipment (367,000) (29,000)
----------- -----------
Net Cash Flows used by Investing Activities (367,000) (29,000)
=========== ===========
Cash flows from Financing Activities:
Net Proceeds from Issuance of Convertible Senior Notes 429,000 1,500,000
Net Proceeds from Issuance of Preferred Stock 455,000 --
Net Proceeds from Issuance of Common Stock 1,782,000 --
----------- -----------
Net Cash Flows provided by Financing Activities 2,666,000 1,500,000
----------- -----------
Effect of Exchange Rate Changes on Cash (15,000) (5,000)
Net Increase in Cash and Cash Equivalents 165,000 (119,000)
Cash and Cash Equivalents at Beginning of year 2,227,000 2,346,000
----------- -----------
Cash and Cash Equivalents at End of Year $ 2,392,000 $ 2,227,000
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Issuance of Notes Receivable from Officers $ (200,000) $ --
</TABLE>
The accompanying notes are in integral part of the consolidated financial
statements.
F-5
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Nature of Business:
CardioTech International, Inc. (including its subsidiary, collectively
"CardioTech" or the "Company") is using its proprietary technology to develop
and manufacture small bore vascular grafts, or synthetic blood vessels, made of
ChronoFlex, a family of polyurethanes that have been demonstrated to be
biocompatible and non-toxic. The Company is headquartered in Massachusetts and
operates from manufacturing and laboratory facilities located in Massachusetts
and the United Kingdom.
The accompanying financial statements for the year ended March 31, 1999
have been prepared assuming that the Company will continue as a going concern,
which contemplates continuity of operations, realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
However, the Company has incurred recurring losses from operations (including a
net loss of approximately $2.6 million for the year ended March 31, 1999); is in
technical default under the 7% Convertible Senior Notes Agreement ("the Senior
Notes") (See Note I); and expects that additional sources of financing may be
required before May 2000. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. These financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Management's plans include the sale of additional equity securities under
appropriate market conditions and other business transactions, which would
generate sufficient resources to assure continuation of the Company's
operations. However, there can be no assurance that the Company will be able to
obtain sufficient resources to assure continuation of the Company's operations.
Management estimates that these efforts will provide adequate resources to fund
the Company's operations.
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. Through March 31, 1999, 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 March 31, 1999, the Company has begun distribution
and commercial sales of its Vasculink Vascular Access Graft in Europe. The
Company has distributors in Spain, Italy, Germany, France, Sweden, and the
Benelux countries.
Since the Company's inception, funding has come from PMI of approximately
$4,000,000, 7% convertible senior notes in the principle amount of $1,660,000, a
10% convertible loan from Freemedic in the amount of (pound)253,000,
(approximately $420,000), the sale of $500,000 in Series A preferred stock; and
the sale of 1,866,000 units, with each unit consisting of one share of the
Company's common stock and one warrant to purchase an additional share of common
stock, netting approximately $1,783,000 in cash (See Note I and J to the Notes
to Consolidated Financial Statements.) The Company anticipates that operating
losses will continue to be incurred 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.
F-6
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 1999, CardioTech was conducting its operations with
approximately $2,392,000 in cash. CardioTech estimates such amount will be
sufficient to fund its working capital and research and development activities
in the near term. However, CardioTech may increase its spending level depending
on the Company's ability to raise additional capital. 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.
B. Summary of Significant Accounting Policies:
Basis of Presentation
CardioTech was incorporated in March 1993. CardioTech and CardioTech Ltd.
were spun off of PolyMedica Industries, Inc. ("PMI) in June 1996.
The consolidated financial statements include the accounts of the Company
and it's wholly owned subsidiary. All significant inter-company balances and
transactions have been eliminated.
Uses of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates and such
differences may be material to the financial statements.
Uncertainties
The Company is subject to risks common to companies in the medical device
industry, including, but not limited to, development of new technology
innovations by competitors of the Company, dependence on key personnel,
protection of proprietary technology, and compliance with FDA government
regulations.
Cash and Cash Equivalents
Cash and Cash Equivalents include cash on hand, demand deposits and short
term investments with original maturities of three months or less.
Accounts Receivable - Other
Accounts Receivable - Other principally consist of revenue receivable from
research and development work completed on National Institute of Health Small
Business Innovative Research Grants, and Royalty Income Receivable.
F-7
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research Revenue
Research Revenue is generated in connection with the development and sale
of ChronoFlex and other proprietary biomaterials for use in medical devices. The
Company has also received royalty fees from Bard Access Systems. CardioTech
recognizes these fees as revenue in accordance with the terms of the contracts.
Contracted development fees from corporate partners are recognized upon
completion of service or the attainment of technical benchmarks, as appropriate.
During the year ended March 31, 1999, the Company earns revenue from two
Small Business Innovation Research (SBIR) grants, awarded by the National
Institute of Health to support the Company's research and development programs.
Revenue from these grants is recognized ratably over one year, which properly
matches costs with related revenues.
Research and Development Expense
Research and development expense is charged to expense as incurred.
Foreign Currency Translation
In accordance with Statement of Financial Accounting Standard No. 52,
"Foreign Currency Translation," assets and liabilities of the Company's foreign
subsidiary are translated into US dollars using current exchange rates at the
balance sheet date and revenues and expenses are translated at average exchange
rates prevailing during the period. The resulting translation adjustments are
recorded in a separate component of Stockholders' Equity/Deficit. Transaction
gains and losses are recorded in the Consolidated Statements of Operations.
Equipment and Leasehold Improvements
Equipment and Leasehold improvements are stated at cost. Equipment is
depreciated using the straight-line method over the estimated useful lives of
the assets, ranging from five to seven years, and leasehold improvements are
amortized using the straight-line method over the shorter of the estimated life
of the asset or the remaining term of the lease. Expenditures for repairs and
maintenance are charged to expense as incurred. When assets are retired or
disposed of, the cost and accumulated depreciation thereon is removed from the
accounts and related gains and losses are included in operations.
Basic and Diluted Earnings Per Share
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is based
upon the weighted average number of common shares outstanding during the period
plus additional weighted average common equivalent shares issued during the
period. 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.
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 also result from convertible debt, and convertible
Preferred Stock is using the "If Converted" method.
F-8
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates expected to be in effect when they are
realized. A valuation reserve against the net deferred assets is recorded, if,
based upon weighed available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
Debt Issuance Cost
The costs related to the issuance of debt are capitalized and amortized to
interest expense on a straight line basis over the life of the debt.
Recent Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards (SFAS
No. 130) "Reporting Comprehensive Income" in fiscal 1999. This statement
establishes standards for reporting and displaying comprehensive income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires the display of the
comprehensive income (loss) and its components in the financial statements. In
the Company's case, comprehensive loss includes net loss, and foreign currency
translation adjustments. The adoption of this Statement has had no material
effect on its financial statements.
The Company has also adopted Statement of Financial Accounting Standards
(SFAS No. 131.) "Disclosures About Segments of an Enterprise and Related
information" in fiscal 1999. This Statement establishes standards for reporting
information about operating segments and related disclosures about its products
and services, geographic areas, and major customers. The Company is organized as
a single operating segment, whereby the chief operating decision maker assesses
the performance of and allocates resources to the business as a whole. The
adoption of this Statement did not affect the Company's results of operations,
liquidity or financial position but resulted in revised and additional
disclosures (See Note K.)
Financial Statement Presentation
The prior year's financial statements have been reclassified to conform
with the current years' presentation.
C. License Agreement
PMI has granted to CardioTech an exclusive, perpetual, world-wide,
royalty-free license for CardioTech to use all of the necessary patent and other
intellectual property owned by PMI in the implantable devices and materials
field (collectively, "PMI Licensed Technology"). PMI, at its own expense, will
file patent or other applications for the protection of all new inventions
formulated, made or conceived by PMI during the term of the license that related
to PMI Licensed Technology and all such inventions will be part of the
technology licensed to CardioTech. CardioTech, at its own expense, will file
patent or other applications for the protection of all new inventions
formulated, made, or conceived by CardioTech during the term of the license that
related to PMI Licensed Technology and all such inventions shall be exclusively
licensed to PMI for use by PMI in fields other than the implantable devices and
materials field.
F-9
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. Property and Equipment:
Property and equipment at March 31, 1999 consist of the following:
Laboratory equipment $ 531,000
Furniture, fixtures and office equipment 104,000
Leasehold improvements 114,000
---------
749,000
Less accumulated depreciation (272,000)
---------
$ 477,000
=========
Depreciation expense for property and equipment for the fiscal years ended
March 31, 1999, and 1998 was approximately $81,000, and $72,000,
respectively. During fiscal year 1999, the Company wrote off $37,000 of
fully depreciated assets.
E. Accrued Expenses:
Accrued Expenses at March 31, 1999 consist of:
Legal and Professional Fee $ 83,000
Salaries and Benefits 30,000
Research & Development 166,000
Other 139,000
--------
$418,000
========
F. Income Taxes:
Loss before income taxes was generated as follows in the years ended March 31,:
1999 1998
----------- -----------
United States $(1,712,000) $(1,112,000)
----------- -----------
Foreign (913,000) (697,000)
----------- -----------
$(2,625,000) $(1,809,000)
=========== ===========
A reconciliation between the Company's effective tax rate for continuing
operations and the United States statutory rate is as follows:
1999 1998
Expected Federal Tax Rate (34.00)% (34.00)%
State income taxes, net of federal tax benefit (4.1%) (3.9%)
Change in Valuation Allowance 35.1% 37.3%
Meals & Entertainment and Other Permanent Items 0.2% 0.6%
Foreign Tax Rate Differential 2.8%
Effective Tax Rate 0.00% 0.00%
F-10
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A valuation allowance has been recorded to offset the related deferred tax
assets due to uncertainty of realizing the benefit of these assets. The
following is a summary of the significant components of the Company's deferred
tax assets and liabilities as of March 31, 1999.
Deferred Tax Assets:
Net Operating Loss $ 2,339,000
Tax Credits 4,000
Other 6,000
-----------
$ 2,349,000
-----------
Deferred Tax Liability
Depreciation $ 26,000
-----------
-----------
Valuation Allowance (2,323,000)
-----------
Net Deferred Tax Asset $ -0-
===========
As of March 31, 1999, the Company had Federal net operating loss carry
forwards of approximately $4,273,000 available to offset future taxable income
which begin to expire in 2010. The Company has Foreign net operating loss carry
forwards of approximately $2,100,000.
G. Major Customers:
Customers comprising more than 10% of CardioTech's Research Revenues for
the years ended March 31 are shown as follows:
1999 1998
---- ----
Customer A 13% 26%
Customer B 11% 56%
H. Lease Commitments:
The Company leases offices, laboratory and manufacturing space under
non-cancelable operating leases. Future minimum lease payments are as follows:
Year ending March 31:
2000 $ 215,000
2001 221,000
2002 221,000
2003 221,000
2004 108,000
-----------
$ 986,000
===========
F-11
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for operating leases was $215,000, and $194,000 for the years
ended March 31, 1999, and 1998 respectively.
I. Long Term Obligations:
7% Convertible Senior Notes due 2003
On March 31, 1998, the Company issued $1,660,000 of 7% Convertible Senior
Notes (the "Senior Notes") with a maturity date of March 20, 2003 to Dresdner,
Kleinwort Benson Private Partners LP ("DKB"). Interest accrues annually and is
payable quarterly in cash and/or additional Senior Notes at the option of DKB.
As of March 31, 1999, accrued interest on the Senior Notes amounted to $119,000.
This accrued interest was converted into additional senior notes at the election
of DKB. The principal balance of Senior Notes outstanding as of March 31, 1999
was $1,779,000.
The Senior Notes rank senior to all other securities of the Company upon
liquidation. At any time prior to maturity, DKB may convert the Senior Notes, in
whole or in part, plus accrued interest into common stock of the Company at a
conversion price of $1.995, which is subject to adjustment in certain events. As
a result of the private placement of the Units, as described in Note J, the
conversion price was adjusted to $1.676 per share.
Prior to maturity, the Senior Notes are redeemable by the Company at a
premium, which ranges from 105% to 100% of principal. Should the Company elect
to redeem the Senior Notes in the first year, DKB may elect to convert the
Senior Notes to shares of common stock at a conversion price equal to .87
(increasing each of the following years) times the lower of (i) the conversion
price or (ii) the market price. Upon the occurrence of a change of control, DKB
may require the Company to repurchase the Senior Notes at a premium in
accordance with the formula in the preceding two sentences. At maturity, and
under certain conditions, the Company may repay the Senior Notes, plus accrued
interest, by converting them, in whole or in part, into common stock of the
Company at the conversion price.
In connection with the Senior Notes, DKB has certain Board representation
rights. In addition, certain financial and other covenants exist, including, but
not limited to, maintenance of working capital and positive net worth,
maintenance of share listing on the AMEX (or other acceptable national
exchange), and receipt of an unqualified audit opinion without a going concern
emphasis of matter paragraph from independent public accountants. Since a "going
concern" paragraph has been included in the audit opinion on these financial
statements, DKB may have demanded immediate payment of the amounts due under the
Senior Notes and Preferred Stock (See Note J), plus accrued interest and
dividends. In addition, actions taken by DKB may have resulted in a default
under the loan agreement with Freemedic PLC (Freemedic). However, on June 25,
1999, the Company received a waiver of the default relating to the "going
concern" paragraph through the earlier of a new audit opinion or June 30, 2000.
At this time, CardioTech is unable to repay its indebtedness to DKB and
Freemedic PLC.
The Company has pledged a life insurance policy on the life of the CEO and
all of the common stock of the Company's wholly owned subsidiary, CardioTech
International, Ltd. ("CTI"), to secure the repayment of the Senior Notes.
F-12
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Loan due 2000
On April 1, 1998, the Company's wholly owned subsidiary, Cardio Tech
International, Ltd. ("CTI"), signed a collaborative research and development
agreement with the Royal Free Hospital School of Medicine ("Royal Free
Hospital"). This research and development is funded by a loan of (pound)253,000
($420,000) from Freemedic PLC (" Freemedic") a subsidiary of the Royal Free
Hospital, to CTI. The loan accrues interest at a rate of 15% per annum and is
due and payable on April 1, 2000.
The Convertible loan is convertible, at Freemedic's option, into the
Company's common stock at a conversion price of $3.70 per share from April 1,
1998 until March 20, 2000. During this same period, the convertible loan is also
convertible at the Company's option into common stock of the Company at $3.70,
provided that the market price for the Company's common stock exceeds $3.70,
from the day that the Company gives notice of such conversion until seven
business days thereafter. The Convertible loan is secured by a pledge of all the
assets of CTI and is guaranteed by the Company.
J. Convertible Preferred Stock and Stockholders' Equity
Convertible Preferred Stock
On November 12, 1998, the Company issued 500,000 shares of Series A
Convertible Preferred Stock (the "Preferred Stock") to DKB, on substantially the
same terms as the Senior Notes, in consideration for $500,000. This additional
financing of cash was a result of the Company meeting certain milestones
pursuant to the terms of the Senior Notes.
The Preferred Stock accrues dividends at the rate of 10% per annum, payable
quarterly in arrears and in priority to the common stock or any other preferred
stock. At the option of DKB, accrued dividends can be paid in cash or converted
in additional shares of the Preferred Stock. The principal amount of the
Preferred Stock, plus accrued and unpaid dividends, is convertible into shares
of the Company's common stock at a price of $1.818 per share. The conversion
price is subject to anti-dilution adjustments. As a result of the Company's
issuance of the Units as described below, the conversion price has been adjusted
to $1.5842 per share. As of March 31, 1999, accrued dividends of the Preferred
Stock were $19,000. There were no payments or conversions of accrued dividends
during fiscal 1999. The Preferred Stock has a liquidation preference of $1.00
per share. The holders of shares of the Preferred Stock are not entitled to any
voting rights.
Prior to November 12, 2000, CardioTech may redeem the Preferred Stock in
cash at a premium equal to 104% of its original principal balance plus
accumulated and unpaid dividends. After November 12, 2000, the redemption
premium to be paid by the Company is reduced by one percent (1%) per annum for
each of the subsequent years. In the event a change of control occurs, DKB may
require redemption of the Preferred Stock. 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 as defined per the terms of the Preferred Stock agreement
If the Company elects to redeem the Preferred Stock, a change in control
occurs, or a third party commences a hostile tender offer to acquire the
Company, then DKB may convert the Preferred Stock into shares of the Company's
common stock. On or prior to March 31, 2000, DKB may convert the Preferred Stock
at an adjusted conversion price that is equal to .87 (increasing to .89, .93,
.96, and 1.00 on April 1, 2000, 2001, 2002, and 2003 respectively) times the
lesser of (i) the conversion price or (ii) the market price. As of March 31,
1999, management does not intend to redeem the Preferred Stock prior to
maturity.
F-13
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The terms of the Preferred Stock provide for certain material obligations
to DKB as defined, including the payment of interest and principal due under the
Senior Notes and other outstanding loans; the payment of dividends on the
Preferred Stock; the redemption or conversion, upon DKB's request, of the
Preferred Stock; and adherence to the covenants set forth in the Company's
agreements with DKB. In the event of a default in the Company's material
obligations to DKB, the dividend rate may be increased to 13% per annum.
In addition, DKB has Board representation rights. As long as the Senior
Notes and the 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 Preferred Stock increasing to 13%.
Furthermore, as long as DKB holds Senior Notes and Preferred Stock that are
convertible into at least 10% of the common stock issuable, pursuant to all of
the Senior Notes and Preferred Stock, neither CardioTech nor CTI 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 Senior Notes; amend its Articles of Organization or
By-laws in a manner that would adversely affect the rights of the holders of the
Senior Notes or the Preferred Stock; issue equity securities of equal or
superior rank, other than common stock or the 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 Senior Notes) to be less than $750,000.
Common Stock and Warrants
On December 22, 1998, the Company completed a private offering of 1,866,000
units at a price of $1.25 per Unit. Each Unit consisted of one share of the
Company's common stock, (the "Units"), and one warrant to purchase one share of
the Company's common stock. Each warrant expires on December 15, 2003 and is
exercisable at $1.50 per share. In connection with this offering, the Company's
executive officers purchased 160,000 Units in exchange for promissory notes
having a principal balance of $200,000. The Company received net proceeds of
$1,782,000, net of placement agent fees of $128,000, promissory notes of
$200,000, and related offerings costs of $223,000. In addition to these fees,
the Company issued to the placement agent a warrant to purchase 170,600 shares
of the Company's common stock at an exercise price of $1.475 per share. The
warrants are exercisable at any time and from time to time after the grant date
and prior to December 15, 2003.
The principal balance of the promissory notes issued by the Company's
executives is payable on December 15, 2003. The promissory notes bear interest
at 4.25% per annum and are payable annually in arrears. The promissory notes,
which are with recourse with respect to 25% of the initial principal balance,
are secured by the common stock and warrants underlying the Units. Interest in
the amount of $3,000 was accrued as of March 31, 1999.
In connection with the transaction in which the Company was spun-off from
Polymedica, the Company issued warrants (the "Hancock Warrants") to John Hancock
Mutual Life Insurance Company to purchase up to 255,100 shares of common stock
at $3.70 per share. The Hancock Warrants are exercisable beginning on June
F-14
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19, 1996 and expire on January 31, 2000. As a result of antidilutive provisions,
the Company is required to issue additional warrants to John Hancock when
additional common shares or common share equivalents are issued to third parties
at a price lower than the exercise price. As of March 31, 1999, the exercise
price of the Hancock Warrants has been adjusted to $2.339 per share and the
number of shares subject to the Hancock Warrants was adjusted to 403,403 shares.
The Company filed a registration statement on Form S-3 with the Securities and
Exchange Commission on February 12, 1999, as amended on April 5, 1999, for the
purposes of registering 3,582,600 shares. The shares offered pursuant to this
Form S-3 were issued by the Company in connection with the private placement of
1,866,000 units, consisting of 1,866,000 shares of the Company's Common Stock
and warrants to purchase an additional 1,866,000 shares of Common Stock (See
Note J). This registration statement will provide for the registration of
1,706,000 shares of the Common Stock and 1,706,000 shares of the Common Stock
underlying the warrants issued to the selling stockholders and 170,600 shares of
the Common Stock underlying the warrants issued to the placement agent."
K. Enterprise and Related Geographic Information:
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company manages its business on the basis of one
reportable operating segment. Net sales by geographic area are presented by
attributing revenues from external customers or distributors on the basis of
where the products are sold. Long lived assets by geographic areas and
information about products and services are included as enterprise-wide
disclosures.
March 31, 1999 March 31, 1998
Net Sales:
Domestic 1,027,000 861,000
Europe 56,000 12,000
---------- ----------
Total 1,083,000 873,000
========== ==========
March 31, 1999 March 31, 1998
Net Income
Domestic (1,712,000) (1,308,000)
Europe (913,000) (697,000)
---------- ----------
(2,625,000) (2,005,000)
========== ==========
March 31, 1999 March 31, 1998
Total Assets
Domestic 2,741,000 2,999,000
Europe 786,000 40,000
---------- ----------
Total 3,527,000 3,039,000
========== ==========
March 31, 1999 March 31, 1998
Long Lived Assets, net:
Domestic 307,000 179,000
Europe 170,000 9,000
---------- ----------
Total 477,000 188,000
========== ==========
F-15
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. Supplemental Disclosures for Stock-Based Compensation:
CardioTech's 1996 Employee, Director and Consultants Stock Option Plan (the
"Plan") was approved by CardioTech's Board of Directors and Stockholders in
March 1996. A total of approximately 1,167,000 shares have been reserved for
issuance under the Plan. Under the terms of the Plan the exercise price of
Incentive Stock Options issued under the Plan must be equal to the fair market
value of the common stock at the date of grant. In the event that Non Qualified
Options are granted under the Plan the exercise price may be less than the fair
market value of the at the time of the grant (but not less than par value). On
October 1, 1996, the Compensation Committee of the Board of Directors of the
Company, which administers the Plan, reprised stock options to purchase 866,208
shares of common stock, at the fair market value on the date of reprising.
Number Weighted average
of Shares exercise price
--------- --------------
Outstanding March 31, 1997 902,022 $1.98
Granted 57,854 2.01
Cancelled (14,854) 1.94
Exercised -- --
---------- -----
Outstanding March 31, 1998 945,022 $1.98
Granted 181,208 1.87
Cancelled (49,529) 1.88
Exercised -- --
---------- -----
Outstanding March 31, 1999 1,076,701 $1.97
========== =====
Summarized information about stock options outstanding at March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Exercisable
Weighted -----------------------------
Average Weighted Weighted
Number of Remaining Average Average
Range of Options Contractural Exercise Number of Exercise
Exercise Prices Outstanding Life Price Options Price
- --------------- ------------ ---- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$1.31 - $1.97 941,993 7.41 $1.93 768,776 $1.93
- -------------------------------------------------------------------------------------------------------------------------
$1.98 - $2.56 119,708 9.08 $2.19 63,569 $2.37
- -------------------------------------------------------------------------------------------------------------------------
$4.55 15,000 2.6 $4.55 15,000 $4.55
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options exercisable at March 31, 1999 and March 31, 1998 were 847,345 and
605,447 respectively.
The fair value of each option granted during the fiscal year 1999 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
1999 1998
Dividend yield None None
Expected volatility 85% 78%
Risk-free interest rate 5.4% 6.2%
Expected life 4 4
F-16
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted average fair value of options granted at fair value during:
1999 $1.31
1998 $1.67
Had compensation cost for the Company's 1999 stock option grants been
determined consistent with SFAS 123, the Company's net loss and net loss per
share would approximate the pro forma amounts below:
Net Loss per fully
Net Loss diluted share
As reported:
1999 $ (2,625,000) $ (0.55)
1998 1,809,000) (0.42)
Pro forma: 5.4% 6.2%
1999 $ (3,231,000) $ (0.67)
1998 $ (2,159,000) (0.51)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), the Company applies APB
Opinion No. 25 and related Interpretations in Accounting for the Plan. SFAS 123,
issued in 1995, defined a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. The
Company elected to continue to apply the accounting provisions of APB Opinion
No. 25 for stock options. The required disclosures under SFAS 123, as if the
Company had applied the new method of accounting, are made above.
M. Earnings Per Share
The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations shown on the Consolidated Statements
of Operations for the years ended March 31,
1999 1998
BASIC AND DILUTED EPS
Numerator:
Net income (loss)
$(2,625) $(1,809)
------- -------
Denominator:
Common shares outstanding 4,815 4,273
------- -------
Basic and Diluted EPS
$ (0.55) $ (0.42)
======= =======
Convertible Debt, Convertible Preferred Stock, and Options to purchase
1,076,701 and 945,022 shares of common stock outstanding during the periods
ended March 31, 1999 and March 31, 1998, respectively, were excluded from the
calculation of diluted earnings per share because the effect of their inclusion
would have been anti-dilutive.
N. Subsequent Events
On May 25, 1999, the Company agreed to acquire, subject to the approval of
the Tyndale Plains-Hunter shareholders, all of the common stock of Tyndale
Plains-Hunter, Ltd., through its wholly owned subsidiary, CardioTech Acquisition
Corp, in exchange for 446,153 shares of the Company's, valued at $1.625 per
share and $350,000 in cash. The acquisition is structured as a tax-free
reorganization under Section 368(a) of the
F-17
<PAGE>
CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internal Revenue Code and will be accounted for pursuant to the purchase method
of accounting. The excess of the consideration paid over the estimated fair
value of the net assets acquired will be recorded as goodwill and will be
amortized on a straight-line basis over a period of five years. Operating
results for CardioTech Acquisition Corp will be included in CardioTech's
consolidated statement of operations beginning on the effective date of the
acquisition, which is expected to occur during the Company's first quarter of
fiscal 2000.
On June 25, 1999, the Company received from DKB a waiver of the default,
through the earlier of a new audit opinion or June 30, 2000, relating to receipt
of an audit opinion without an emphasis of matter going concern paragraph.
O. Related Party Transactions
On December 15, 1998, certain executive officers of the Company purchased
in the aggregate 200,000 units during a private placement offering. The
purchases, valued at $200,000, were funded by a note issued by each officer to
the Company. The terms of the note provide for each executive to repay the
Company with interest at 4.25% per annum, within five years. The promissory
notes, which are with recourse with respect to 25% of the initial principal
amount, are secured by the common stock and warrants underlying the units. The
principal balance due is shown as Notes Receivable from Officers in
stockholders' deficit on the consolidated balance sheet.
F-18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: June 29, 1999 CardioTech International, Inc.
By: /s/ Michael Szycher
------------------------------------
Michael Szycher
Chairman and Chief Executive Officer
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 and on the dates indicated.
Dated: June 29, 1999 /s/ Michael Szycher
------------------------------------
Michael Szycher
Chairman, Chief Executive Officer
(Principal Executive Officer)
Dated: June 29, 1999 /s/ Michael F. Adams
------------------------------------
Michael F. Adams
Chief Operating Officer
Dated: June 29, 1999 /s/ Carl Franzblau
------------------------------------
Carl Franzblau
Director
Dated: June 29, 1999 /s/ Jonathan Walker
------------------------------------
Jonathan Walker
Director
Dated: June 29, 1999 /s/ Alan Edwards
------------------------------------
Alan Edwards
Director
Dated: June 29, 1999 /s/ Michael Barretti
------------------------------------
Michael Barretti
Director
Dated: June 29, 1999 /s/ Pam McCarthy
------------------------------------
Pam McCarthy
Controller
EXHIBIT 21
SUBSIDIARIES OF
CARDIOTECH INTERNATIONAL, INC.
State or Other Jurisdiction of
Name
Incorporation or Organization
- -----------------------------
CardioTech International Limited United Kingdom
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the previously filed
registration statement on Form S-8, dated June 12, 1996, and Form S-3, dated
February 12, 1999, of CardioTech International, Inc. of our report dated May 25,
1999, except as to the information presented in the fourth paragraph of Note I,
for which the date is June 25, 1999, which included an emphasis of matter going
concern paragraph, on our audit of the consolidated financial statements of
CardioTech International, Inc. as of March 31, 1999, and for each of the two
years in the period ended March 31, 1999, which report is included in the
Company's Annual Report on Form 10-KSB.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 29, 1999
