CARDIOTECH INTERNATIONAL INC
10QSB, 1999-08-23
PHARMACEUTICAL PREPARATIONS
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1999

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

             For the transition period from _________ to _________

                           Commission File No. 0-28034

                         CardioTech International, Inc.
                         ------------------------------
           (Name of small business issuer as specified in its charter)

       Massachusetts                                              04-3186647
- ------------------------------                               -------------------
State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization                                Identification No.)

78 E Olympia Avenue, Woburn, Massachusetts                          01801
- ------------------------------------------                       ----------
 (Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code             (781) 933-4772
                                                               --------------

The number of shares outstanding of the registrant's class of Common Stock as of
August 9 was 6,138,916. No shares were held in treasury.
<PAGE>

                         CARDIOTECH INTERNATIONAL, INC.
                                   FORM 10-QSB
                       FOR THE QUARTER ENDED JUNE 30, 1999

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

         Condensed Consolidated Balance Sheets at
                  June 30, 1999, and March 31, 1999                         3

         Condensed Consolidated Statements of Operations for the
                  three months ended June 30, 1999 and 1998                 4

         Condensed Consolidated Statements of Cash Flows
                  for the three months ended June 30, 1999 and 1998         5

         Notes to Condensed Consolidated Financial Statements               6-7

Item 2 - Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                       8-12

PART II - OTHER INFORMATION

Item 2 - Changes in Securities and Use of Proceeds                          13

Item 4 - Submission of Matters to a Vote of Security Holders                13

Item 6 - Exhibits and Reports on Form 8-K                                   14

Signatures                                                                  15


                                       2
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

                         CARDIOTECH INTERNATIONAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                         June 30,1999   March 31, 1999
                                                         ------------   --------------
<S>                                                      <C>             <C>
ASSETS
Current Assets:
  Cash and Cash Equivalents                              $    860,000    $  2,392,000
  Accounts receivable -- trade                                124,000          96,000
  Accounts receivable -- other                                374,000         292,000
  Prepaid expenses and other current assets                   133,000          56,000
                                                         ------------    ------------
    Total Current Assets                                    1,491,000       2,836,000

Property and equipment, net                                   591,000         477,000
Intangible Assets                                             747,000               -
Goodwill                                                      393,000               -
Other non-current assets                                      273,000         214,000
                                                         ------------    ------------
Total Assets                                             $  3,495,000    $  3,527,000
                                                         ============    ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
  Accounts payable                                       $    444,000    $    518,000
  Accrued expenses                                            573,000         418,000
                                                         ------------    ------------
    Total Current Liabilities                               1,017,000         936,000
                                                         ------------    ------------
Long Term Obligations:
  7% convertible senior notes due 2003                      1,810,000       1,779,000
  Convertible loan due 2000                                   399,000         429,000
                                                         ------------    ------------
                                                            2,209,000       2,208,000
                                                         ------------    ------------
    Total Liabilities                                       3,226,000       3,144,000
                                                         ------------    ------------
  Series A convertible preferred stock, $.01 par value,
    5,000,000 shares authorized, 500,000 issued and
    outstanding at liquidation value                          500,000         500,000
                                                         ------------    ------------
Commitments and Contingencies

Stockholders' Deficit:
  Common stock, $.01 par value, 20,000,000 shares
    authorized, 6,585,069 and 6,138,916 shares issued
    outstanding at June 30, 1999 and March 31, 1999
    respectively                                               66,000          61,000
  Additional paid-in capital                               10,888,000      10,151,000
  Accumulated deficit                                     (11,019,000)    (10,117,000)
  Notes receivable from officers                             (200,000)       (200,000)
  Cumulative translation adjustment                            34,000         (12,000)
                                                         ------------    ------------
    Total Stockholders' Deficit                              (231,000)       (117,000)
                                                         ------------    ------------
    Total Liabilities, Convertible Preferred Stock and
      Stockholders' Deficit                              $  3,495,000    $  3,527,000
                                                         ============    ============
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       3
<PAGE>

                         CARDIOTECH INTERNATIONAL, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                              For the
                                                     Three Months Ended June 30,
                                                        1999            1998
                                                    -----------     -----------

Research Revenue                                    $   219,000     $   278,000
                                                    -----------     -----------
Operating Expenses:
  Research and development                              615,000         466,000
  Selling, general and administrative                   489,000         263,000
                                                    -----------     -----------

Total Operating Expenses                              1,104,000         729,000

Loss from Operations                                   (885,000)       (451,000)
                                                    -----------     -----------

Other Income and Expense:
  Interest expense                                      (42,000)        (40,000)
  Interest income                                        25,000          24,000
                                                    -----------     -----------
                                                        (17,000)        (16,000)
                                                    -----------     -----------

Net Loss                                            $  (902,000)    $  (467,000)
                                                    ===========     ===========

Other comprehensive income:
Foreign currency translation adjustments                (34,000)         38,000
                                                    -----------     -----------

Comprehensive loss                                  $  (936,000)    $  (429,000)
                                                    ===========     ===========

Net loss per common share basic and diluted         $     (0.15)    $     (0.11)
                                                    ===========     ===========

Shares used in computing Net Loss
  per common share, basic and diluted                 6,138,916       4,272,916
                                                    ===========     ===========

The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       4
<PAGE>

                         CARDIOTECH INTERNATIONAL, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                          For the Three Months
                                                             Ended June 30,
                                                          1999          1998
                                                      ------------  ------------
Cash flows from operating activities:
  Net Loss                                            $  (902,000)  $  (467,000)
Adjustments to reconcile net loss to net
  cash flows from operating activities:
  Interest on convertible senior notes                     31,000        29,000
  Depreciation and amortization                            42,000        24,000
  Changes in assets and liabilities:
    Accounts receivable                                   (77,000)      (27,000)
    Prepaid expenses                                      (53,000)       14,000
    Other non-current assets                             (112,000)      (69,000)
    Accounts payable                                      (85,000)       25,000
    Accrued expenses                                      (31,000)     (108,000)
                                                      -----------   -----------

  Net cash flows used by operating activities          (1,187,000)     (579,000)
                                                      -----------   -----------

Cash flows from investing activities:
  Purchase of property and equipment                      (33,000)      (19,000)
  Acquisition of Tyndale Plains-Hunter, net              (328,000)            -
  Net cash flows used by investing activities            (361,000)      (19,000)
                                                      -----------   -----------

Cash flows from financing activities:
  Net proceeds from issuance of convertible notes               -       422,000
                                                      -----------   -----------
    Net cash flows provided by financing activities             -       422,000
                                                      -----------   -----------

    Effect of exchange rate changes on cash                16,000        (3,000)
                                                      -----------   -----------

    Net increase in cash and cash equivalents          (1,532,000)     (179,000)

    Cash and cash equivalents at beginning of period    2,392,000     2,227,000
                                                      -----------   -----------
    Cash and cash equivalents at end of period        $   860,000   $ 2,048,000
                                                      ===========   ===========

Supplemental Disclosure of Cash Flow Information:

  Interest Paid                                       $         -   $    11,000
  Taxes Paid                                          $     5,500   $     5,500

The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       5
<PAGE>

                         CARDIOTECH INTERNATIONAL, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 1999
                                   (UNAUDITED)

1. The unaudited consolidated financial statements included herein have been
prepared by CardioTech International, Inc. ("the Company" or "CardioTech"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make the
information presented not misleading. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year. It is suggested that these statements be read in conjunction with
the Company's Consolidated Financial Statements and its notes thereto, for the
year ended March 31, 1999, included in the Company's Annual Report to
shareholders.

2. The Company computes basic and diluted earnings/loss per share ("EPS") in
accordance with Statement of Financial Accountings Standards No. 128, "Earnings
Per Share". Basic earnings/loss per share is based upon the weighted average
number of common shares outstanding during the period. Diluted earnings/loss per
share is based upon the weighted average number of common shares outstanding
during the period plus additional weighted average common equivalent shares
issued during the period. Common equivalent shares result from the assumed
exercise of outstanding stock options and warrants, the proceeds of which are
then assumed to have been used to repurchase outstanding common stock using the
treasury stock method. Common equivalent shares have been excluded from the
computation of diluted loss per share for all periods presented, as their effect
would have been anti-dilutive.

      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.
Options to purchase 1,308,055 and 1,064,730 shares of common stock outstanding
during the periods ended June 30, 1999 and 1998, respectively, were excluded
from the calculation of diluted earnings per share because the effect of their
inclusion would have been anti-dilutive.

3. On July 16, 1999, CardioTech International, Inc., a Massachusetts corporation
("CardioTech"), completed the acquisition of Tyndale Plains-Hunter, Ltd., a New
Jersey corporation ("TPH"), pursuant to an Agreement and Plan of Merger, dated
as of May 25, 1999 (the "Merger Agreement"), by and among CardioTech, CardioTech
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
CardioTech ("Acquisition Sub"), and TPH. TPH manufactures hydrophilic
polyurethanes, which are used to provide permanent lubricity to the surface of
medical devices, improve blood compatibility and act as drug delivery systems.
The hydrophilic polyurethanes manufactured by TPH are also used in personal care
products including hair and skin creams. CardioTech intends to continue to use
the assets and technology of TPH to manufacture hydrophilic polyurethanes and
incorporate such technologies into the Company's medical devices.

      TPH merged with and into Acquisition Sub (the "Merger"), with Acquisition
Sub surviving the Merger and remaining a wholly-owned subsidiary of CardioTech.
Each share of TPH common stock was (i) converted into the right to receive 0.24
of a share of CardioTech common stock and (ii) exchanged for additional cash
consideration. The purchase price paid by CardioTech consisted of 446,153 shares
of the Company's common stock (valued at


                                       6
<PAGE>

$1.625 per share) and cash of $350,000. Approximately $100,000 of the cash
consideration was placed into escrow pursuant to terms of the Merger Agreement.
In connection with this transaction, the Company assumed liabilities of
approximately $283,000 and incurred acquisition costs of approximately $79,000.
The excess of the purchase price over the net assets is approximately $1,140,000
and has been allocated approximately $747,000 to acquired patents and $393,000
to goodwill. The cost of patents and goodwill will be amortized over their
estimated useful lives of five years on a straight-line basis. The transaction
has been recorded in accordance with the purchase method of accounting and the
designated date of the acquisition for accounting purposes is June 30, 1999.

      The Company is currently in the process of performing an audit of the
historical financial statements of TPH. Upon completion of the audit of TPH, but
not later than September 28, 1999, the Company will file its amended Form 8-K
with the appropriate TPH audited financial statements and proforma financial
information pursuant to the requirements of Item 310 of Regulation S-B. At that
time, the Company will also file an amendment to this quarterly report on Form
10-QSB to reflect the proforma financial information.


                                       7
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations

Overview

      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. The
Company has developed: (i) a vascular access graft, called the VascuLink
Vascular Access Graft; used to provide access for patients undergoing
hemodialysis treatments, The Company is also developing two types of layered,
microporous small bore vascular grafts used to replace, bypass on provide a new
lining or arterial wall for occ;uded, damaged, dilated or severely diseased
arteries: (i.) a peripheral graft, called the MyoLink Peripheral Graft, and (ii)
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. 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.

      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.


                                       8
<PAGE>

Results of Operations:

      Comparison for the Three Months Ended June 30, 1999 and 1998.

      Research revenue for the quarter ended June 30, 1999 was $219,000 compared
to $278,000 for the quarter ended June 30, 1998, a decrease of $59,000, or 21%.
This decrease was primarily the result of a decrease in royalty income of
$37,000 from Bard Access Systems, and lower sales of research biomaterials of
$30,000. It was offset by higher grant income of $8,000.

      Research and development expense for the quarter ended June 30, 1999 was
$615,000, compared to $466,000 for the quarter ended June 30, 1998, an increase
of $149,000, or 32%. This increase was principally the result of increased
research and development expenses related to the clinical trial activities of
the Company's vascular access graft in Europe of $78,000 and increased salaries
related to the vascular access grafts of $57,000.

      Selling, general and administrative expense for the quarter ended June 30,
1999 was $489,000, compared to $263,000 for the quarter ended June 30, 1998 or
an increase of $226,000 or 86%. This increase was primarily due to increased
salary expense of $77,000, increased professional fees of $107,000, and
increased travel expenses of $42,000.

      Other income and expense for the quarter ended June 30, 1999 was expense
of $17,000 compared to $16,000 for the quarter ended June 30, 1998. The increase
primarily resulted from an increase in interest expense of $2,000 on outstanding
loans and was partially offset by an increase in interest income of $1,000
during the period.

      Net loss for the quarter ended June 30, 1999 was $902,000, compared to
$467,000 for the quarter ended June 30, 1998, or an increase in net loss of
$435,000 or 93%. The increase in net loss is primarily attributable to continued
significant investment in research and development, as previously described. Net
loss per share for the quarter ended June 30, 1999 was $0.15 per share as
compared to $0.11 per share for the quarter ended June 30, 1998, or an increase
in net loss of $0.04 per share or 36%.

Liquidity and Capital Resources

      The Company used $1,532,000 to fund operations during the three months
ended June 30, 1999 compared to $179,000 for the three months ended June 30,
1998. The principal uses of funds for the three months ended June 30, 1999 were
a net loss of $902,000, the acquisition of Tyndale Plains-Hunter, Ltd. of
$350,000, increase in other current assets of $112,000, increase in accounts
receivable of $77,000 relating to trade customers, increase in prepaid expenses
of $53,000 and the decrease of accounts payable and accrued expenses of
$116,000.

      On July 16, 1999, CardioTech International, Inc., a Massachusetts
corporation ("CardioTech"), completed the acquisition of Tyndale Plains-Hunter,
Ltd., a New Jersey corporation ("TPH"), pursuant to an Agreement and Plan of
Merger, dated as of May 25, 1999 (the "Merger Agreement"), by and among
CardioTech, CardioTech Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of CardioTech ("Acquisition Sub"), and TPH. TPH
manufactures hydrophilic polyurethanes, which are used to provide permanent
lubricity to the surface of medical devices, improve blood compatibility and act
as drug delivery systems. The hydrophilic polyurethanes manufactured by TPH are
also used in personal care products including hair and skin creams. CardioTech
intends to continue to use the assets and technology of TPH to manufacture
hydrophilic polyurethanes and incorporate such technologies into the Company's
medical devices. The purchase price paid by CardioTech consisted of 446,153
shares of the Company's common stock (values at $1.625 per share) and cash of
$350,000 in exchange for all the capital stock of TPH. Approximately $100,000 of
the cash consideration was placed into escrow pursuant to terms of the Merger
Agreement. In connection with this transaction, the Company assumed liabilities
of approximately $283,000 and incurred acquisition costs of $79,000. The excess
of the purchase price over the net assets is approximately $1,158,000 and has
been allocated approximately $700,000 to acquired patents and $458,000 to
goodwill.


                                       9
<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. To date, CardioTech has not generated revenues from the sale
of vascular grafts, although it has received a minor amount of research revenues
relating to its other biomaterial sales and from the NIH to support graft
research. CardioTech expects to continue to incur operating losses unless and
until product sales and/or royalty payments generate sufficient revenue to fund
its continuing operations.CardioTech will require substantial funds for further
research and development, future pre-clinical and clinical trials, regulatory
approvals, establishment of commercial-scale manufacturing capabilities, and the
marketing of its products. CardioTech's capital requirements depend on numerous
factors, including but not limited to: the progress of its research and
development programs; the progress of pre-clinical and clinical testing; the
time and costs involved in obtaining regulatory approvals; the cost of filing,
prosecuting, defending and enforcing any intellectual property rights; competing
technological and market developments; changes in CardioTech's development of
commercialization activities and arrangements; and the purchase of additional
facilities and capital equipment.

      In addition, CardioTech is currently conducting its operations with
approximately $860,000 in cash. CardioTech estimates such amount will be
sufficient to fund its working capital and research and development activities
through October 1999. Past spending levels are not necessarily indicative of
future spending levels. 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.

      The Company is currently negotiating with a financial institution, for an
additional cash infusion of approximately $340,000, however, there can be no
assurance that such financing will be made available to the Company. CardioTech
is actively seeking 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.


                                       10
<PAGE>

Exchange Listing

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 June 30, 1999, CardioTech had stockholders' deficit of $231,000, 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 received a "going concern" opinion from its independent public
accountants as of March 31, 1999. This "going concern" opinion may be considered
by AMEX in determining whether it will delist CardioTech's common stock.

      On August 17, 1999, the Company received a written notification that the
AMEX was reviewing CardioTech's listing eligibility on the basis that the
Company's financial condition is impaired, raising questions about whether it
will be able to continue operations. The written notification also states that
the review process allows the Company to meet with AMEX's Listing Qualifications
representatives to present information in support of continued listing. The
Company has scheduled a meeting with the AMEX's Listing Qualifications
representatives for August 26, 1999 to present information and a plan in support
of continued listing. This presentation will include, but will not be limited
to, information regarding: (i) the Company's current efforts to raise additional
equity financing, (ii) the Company's projected incremental increase in cash flow
as a result of its acquisition of TPH, and (iii) the Company's availability of
an approved vascular access graft product for which orders are currently being
taken from the Company's European distributors and product shipments scheduled
to occur in September 1999. Although management believes that the business plan
to be presented to the AMEX is achievable and supports continued listing, there
can be no assurance that the financing necessary to execute the business plan
will be available. There can also be no assurance that CardioTech will be able
to avoid delisting subsequent to its presentation of information in support of
continued listing.

      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.

      If CardioTech's common stock were to be delisted by AMEX, this would
constitute a default condition under the Senior Note and Preferred Stock
agreement with Dresdner Kleinwort Benson ("DrKB"), where upon DrKB may give
notice to CardioTech of this default condition, and CardioTech would have 25
days to cure this default. If CardioTech were unable to cure a default condition
resulting in the event of a delisting, then an event of default would occur and
DrKB would be entitled to demand immediate payment of the Senior Notes. Further,
upon


                                       11
<PAGE>

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 June 30, 1999 was
$1,810,000.

      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, DrKB would have the right to
foreclose on this collateral. If DrKB 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 June 30, 1999, the
outstanding principal balance of the Freemedic loan was (pounds)266,000
($428,000).

Forward Looking Statements

      The Company believes that this FORM 10-QSB contains forward-looking
statements that are subject to certain risks and uncertainties. These
forward-looking statements include statements regarding the sufficiency of the
Company's liquidity and capital, the Company's intention to sell equity, and
a potential investment of $340,000 by a financial institution. Such statements
are based on management's current expectations and are subject to a number of
factors that could cause actual results to differ materially from the
forward-looking statements. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements, as a
result of various factors including but not limited to the following: the
Company's ability to obtain financing (with or without the sale of equity) to
support its working capital needs on acceptable terms, the Company's ability to
avoid the delisting of its Common Stock, the timely development of products by
the Company, intense competition related to the development of synthetic grafts
and difficulties inherent in developing synthetic grafts. As a result, the
Company's further development involves an high degree of risks. For further
information, refer to the more specific risks and uncertainties discussed
throughout this report.

Year 2000 Compliance

      The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits (e.g., 97 for 1997.) On January 1, 2000, any date
recording mechanism incorporating the date sensitive software which uses only
two digits to represent the year may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing 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:

o     that it will be able to identify third party year 2000 problems;


                                       12
<PAGE>

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.


                                       13
<PAGE>

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

Item 4. Submission of Matters to a Vote of Security Holders

      On August 12, 1999 the Company held its annual meeting of its
stockholders. The following matters were voted on at that meeting:

1.    The reelection of Michael Szycher as a class III director.

2.    The ratification upon a proposal to increase by 1,938,971 shares the
      aggregate number of shares for which stock options may be granted under
      CardioTech's 1996 Employee, Director and Consultant Stock Option Plan.

The following chart shows the number of votes cast for or against, as well as
the number of abstentions and board non-votes, at to each matter voted on at the
special meeting:

             Matter                       For      Against   Abstain   Non-votes
             ------                       ---      -------   -------   ---------

Reelection of Dr. Szycher              4,567,468   165,256     n/a        n/a
Ratification of Increase in
  Stock Options                        2,359,377   386,015   227,596   1,759,736

Item 6. Exhibits and Reports on Form 8-K:

(a)   Exhibits:

            Exhibit 27 Financial Data Schedule

(b)   Reports on Form 8-K - N/A


                                       14
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                            CARDIOTECH INTERNATIONAL, INC.


                                            /s/ Michael Szycher
                                            ------------------------------------
                                            Michael Szycher, Ph.D.
                                            Chairman and Chief Executive Officer


                                            /s/ David C. Volpe
                                            ------------------------------------
                                            David C. Volpe
                                            Chief Financial Officer

Dated:  August 20, 1999


                                       15


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