-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P845ppSAPc/1Jsy6ArDt3V4ISV5fZJRESpog1aFBTqwR/D+Mh6l76g6vbX9fxjwO 3fkGHgclQsXd+TqD40c8vQ== 0000950135-96-001977.txt : 19960513 0000950135-96-001977.hdr.sgml : 19960513 ACCESSION NUMBER: 0000950135-96-001977 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19960510 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDIOTECH INTERNATIONAL INC CENTRAL INDEX KEY: 0001011060 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 043186647 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-28034 FILM NUMBER: 96559809 BUSINESS ADDRESS: STREET 1: 11 STATE ST CITY: WOBURN STATE: MA ZIP: 01801 BUSINESS PHONE: 6179334772 MAIL ADDRESS: STREET 1: 11 STATE ST CITY: WOBURN STATE: MA ZIP: 01801 10-12G/A 1 AMENDMENT NO. 1 TO CARDIOTECH INTERNATIONAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10/A AMENDMENT NO. 1 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 CARDIOTECH INTERNATIONAL, INC. (Exact Name of Registrant as Specified in its Charter) MASSACHUSETTS 04-3186647 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 11 STATE STREET, WOBURN, MASSACHUSETTS 01801 (Address of Principal Executive Offices) (Zip Code) 617-933-4772 (Registrant's Telephone Number, Including Area Code) Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) 2 CARDIOTECH INTERNATIONAL, INC. PART I INFORMATION INCLUDED IN INFORMATION STATEMENT CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
Form 10 Caption in Item Item Caption Information Statement - ---- ------------ --------------------- 1. Business Summary - The Company; Risk Factors; Selected Consolidated Historical and Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business 2. Financial Information Capitalization; Selected Consolidated Historical and Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; and Exhibit A - CardioTech Consolidated Financial Statements 3. Properties Business - Properties 4. Security Ownership of Certain Security Ownership of Beneficial Owners and Management Principal Stockholders and Management 5. Directors and Executive Officers Management 6. Executive Compensation Management - Executive Compensation 7. Certain Relationships and The Distribution - Related Transactions Relationship Between PMI and CardioTech After the Distribution; Certain Transactions 8. Legal Proceedings Business - Legal Proceedings 9. Market Price of and Dividends The Distribution - on the Registrant's Common Trading of CardioTech Equity and Related Stockholder Common Stock; Description Matters of Capital Stock
3 10. Recent Sales of Unregistered Certain Transactions Securities 11. Description of Registrant's Description of Capital Securities to be Registered Stock 12. Indemnification of Directors Indemnification of and Officers Directors and Officers 13. Financial Statements and Index to Consolidated Supplementary Data Financial Statements 14. Changes in and Disagreements with Not Applicable Accountants on Accounting and Financial Disclosure 15. Financial Statements and Index to Consolidated Exhibits Exhibits Financial Statements
4 [POLYMEDICA LETTERHEAD] _______________, 1996 Dear Stockholder: On __________, 1996, the Board of Directors of PolyMedica Industries, Inc., a Massachusetts corporation ("PMI"), declared a stock dividend for the purpose of making a distribution (the "Distribution") by PMI to its stockholders of all of the outstanding shares of Common Stock of CardioTech International, Inc. ("CardioTech"), held by PMI (3,490,638 shares or approximately 91.7% of the outstanding shares). If you are a PMI stockholder on ___________, 1996, you will also become a stockholder of CardioTech. CardioTech was established as a separate subsidiary of PMI in March 1993 to focus on PMI's existing biomaterials business, with particular emphasis on accelerating the research, development and commercialization of small bore vascular graft products through external funding and a more focused and strategic product development effort. These activities build on research and development begun by PMI in 1990 to apply PMI's proprietary polyurethane technologies to develop specialized biomaterials and high-value medical devices incorporating those materials. Today, CardioTech's vascular graft product nearest to commercialization is a vascular access graft. Patients with acute renal failure undergoing hemodialysis require easy routine access to the blood stream. CardioTech believes that the vascular access graft it is developing offers the potential for improved clinical performance. CardioTech has developed a manufacturing process involving cold coagulation casting that results in a microporous compliant graft, with compressible walls and an inherent ability to "self-seal." PMI believes that reducing puncture site bleeding by using a self-sealing polyurethane material may lower morbidity rates. The Board of Directors of PMI believes that the Distribution is in the best interests of PMI, CardioTech and PMI stockholders because it will provide both companies with greater access to the capital markets by permitting the investment community to evaluate each company more effectively. In addition, the Board believes that the Distribution will (i) enable management of each company to adopt strategies and pursue objectives directly focused on its business and products; (ii) enhance the ability of each company to attract and motivate existing and potential key employees by providing them with equity compensation tied directly to the results of their efforts; (iii) eliminate PMI's expenses associated with the development of CardioTech's products; (iv) enable the Board of Directors of PMI to avoid conflicts in the use of limited capital resources by the two companies; and (v) enhance the ability of the two companies to enter into strategic alliances and joint ventures. If you are a holder of PMI Common Stock on __________, 1996, the record date for the Distribution, you will receive one share of CardioTech Common Stock for approximately each two and one fifth shares of PMI Common Stock you own on that date. It is expected that certificates representing CardioTech Common Stock will be mailed to you on or about __________, 1996. CardioTech has applied to have its Common Stock listed on the American Stock Exchange under the symbol "CTE". Additional shares of CardioTech Common Stock may be mailed to you on or about ___________, 1996 depending upon the closing price of the CardioTech Common Stock during the period from ___________, 1996 to ___________, 1996. You will receive an additional notice if such a supplementary distribution will be made. The enclosed Information Statement provides important information regarding the Distribution and CardioTech's organization, business, properties and historical and pro forma financial information. Stockholders are encouraged to read this material carefully. 1 5 Holders of PMI Common Stock on the record date for the Distribution are not required to take any action to participate in the Distribution. PMI is not soliciting your proxy because stockholder approval of the Distribution is not required. Sincerely, Steven J. Lee President and Chief Executive Officer 2 6 Subject to Completion, dated May __, 1996 INFORMATION STATEMENT CARDIOTECH INTERNATIONAL, INC. Distribution of up to 3,977,517 Shares of Common Stock (par value, $.01 per share) This Information Statement is being furnished to stockholders of PolyMedica Industries, Inc., a Massachusetts corporation ("PMI"), in connection with the distribution (the "Distribution") by PMI to its stockholders of all of the outstanding shares of common stock, $.01 par value ("CardioTech Common Stock"), of its majority-owned subsidiary CardioTech International, Inc., a Massachusetts corporation ("CardioTech"), held by PMI (3,490,638 shares or approximately 91.7% of the outstanding shares). The balance of the outstanding shares of CardioTech Common Stock (314,610 shares) are owned by certain officers and employees of PMI and CardioTech. PMI may be entitled to receive up to 486,879 additional shares of CardioTech Common Stock based upon the average closing price of the Common Stock during the first five trading days following the Distribution as a result of its rights under a stock subscription agreement between PMI and CardioTech (the "Adjustment Shares"). See "The Distribution - Restructuring of CardioTech Prior to the Distribution." If any Adjustment Shares are issued, they will be distributed pro rata to PMI stockholders. It is expected that the Distribution will be made beginning on or about ___________, 1996, to holders of record of common stock, $.01 par value, of PMI ("PMI Common Stock") on ___________, 1996 (the "Record Date"), on the basis of one share of CardioTech Common Stock for approximately each two and one fifth shares of PMI Common Stock held. All Adjustment Shares, if any are issued, will be distributed beginning on or about _______, 1996, to holders of record of PMI Common Stock on the Record Date. See "The Distribution - Manner of Effecting the Distribution." No consideration will be required to be paid by PMI stockholders for the shares of CardioTech Common Stock to be received by them in the Distribution, nor will they be required to surrender or exchange shares of PMI Common Stock in order to receive CardioTech Common Stock. No public trading market for the CardioTech Common Stock currently exists. Application has been made to list the CardioTech Common Stock on the American Stock Exchange under the symbol "CTE". See "The Distribution - Listing and Trading of CardioTech Common Stock." In reviewing this Information Statement, you should carefully consider the matters described under the caption "Risk Factors." Neither PMI nor CardioTech will receive any cash or other proceeds from the distribution of CardioTech Common Stock. __________________ STOCKHOLDER APPROVAL IS NOT REQUIRED IN CONNECTION WITH THE DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ________________ The date of this Information Statement is ____________, 1996. 1 7 No person is authorized to give any information or to make any representation other than those contained in this Information Statement, and if given or made, such information or representations must not be relied upon as having been authorized. This Information Statement does not constitute an offer to sell or a solicitation of any offer to buy any securities. This Information Statement presents information concerning CardioTech believed by CardioTech to be accurate as of the date set forth on the cover hereof. This Information Statement presents information concerning PolyMedica believed by PolyMedica to be accurate as of the date set forth on the cover hereof. Changes may occur in the presented information after that date. Neither CardioTech nor PolyMedica plans to update said information except in the course of fulfilling their respective normal public reporting and disclosure obligations.
TABLE OF CONTENTS Item Page SUMMARY.................................................... 4 THE COMPANY................................................ 10 THE DISTRIBUTION........................................... 11 Reasons for the Distribution............................. 11 Restructuring of CardioTech Prior to the Distribution.... 12 Manner of Effecting the Distribution..................... 15 Certain Federal Income Tax Consequences of the Distribution........................................ 16 Listing and Trading of CardioTech Common Stock........... 16 Relationship Between PMI and CardioTech After the Distribution........................................ 17 RISK FACTORS............................................... 18 CAPITALIZATION............................................. 23 SELECTED CONSOLIDATED HISTORICAL CARDIOTECH FINANCIAL DATA ........................................... 24 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CARDIOTECH............................................. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 29 Overview................................................. 29 Results of Operations.................................... 29 Liquidity and Capital Resources.......................... 30 BUSINESS................................................... 32 Vascular Grafts ......................................... 32 Biomaterials............................................. 33 Manufacturing............................................ 34 Marketing ............................................... 34 Competition.............................................. 34 Research and Development................................. 35 Government Regulation.................................... 35 Employees................................................ 36 Properties............................................... 36 Legal Proceedings........................................ 37
2 8 MANAGEMENT................................................................. 38 Executive Officers and Directors......................................... 38 Employment Agreement..................................................... 40 CardioTech Option Plan................................................... 41 Federal Income Tax Aspects of Stock Options.............................. 42 CERTAIN TRANSACTIONS....................................................... 44 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT............................................................ 45 DESCRIPTION OF CAPITAL STOCK............................................... 47 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................. 49 TAX CONSIDERATIONS OF THE DISTRIBUTION..................................... 50 AVAILABLE INFORMATION...................................................... 52 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. 53 EXHIBIT A - CardioTech Consolidated Financial Statements................... A-1 EXHIBIT B - PMI Selected Historical and Pro Forma Consolidated Financial Information and Management's Discussion and Analysis of Financial Condition and Results of Operations............................ B-1 EXHIBIT C - Opinion of Cruttenden Roth Inc................................. C-1
3 9 SUMMARY The following is a brief summary of the matters covered in this Information Statement and is qualified by the more detailed information included elsewhere herein, which should be read in its entirety. Certain terms used in this Summary are defined elsewhere in the Information Statement. Except as otherwise noted, all information contained in this Information Statement reflects amendments to CardioTech's Articles of Organization, effected on March 19, 1996 and May 9, 1996 (i) to effect a net 41.95 for one stock split of the CardioTech Common Stock (reflecting a 54.7328 for one stock split effected on March 19, 1996 and a 0.766453701 for one reverse stock split effected on May 9, 1996) (see Note E of the Notes to the CardioTech Consolidated Financial Statements), (ii) to increase the number of authorized shares of CardioTech Common Stock to 20,000,000 shares, and (iii) to authorize a class of 5,000,000 shares of Preferred Stock.
The Distribution Distributing Company PolyMedica Industries, Inc., a Massachusetts corporation ("PMI"). Distributed Company CardioTech International, Inc., a Massachusetts corporation ("CardioTech"). CardioTech employs certain proprietary polyurethane technologies that it believes have a wide variety of applications in the design and manufacture of small bore implantable synthetic vascular grafts and other medical devices (the "Biomedical Technology"). CardioTech's business plan is to develop, manufacture and market such vascular grafts and specialized proprietary polyurethanes for other medical device applications. See "Business." Shares to be Distributed Approximately 3,490,638 shares of CardioTech Common Stock, representing approximately 91.7% of the CardioTech Common Stock outstanding on the Record Date. In addition, all additional shares of CardioTech Common Stock issued to PMI pursuant to a Common Stock Subscription Agreement between PMI and CardioTech (the "Adjustment Shares") will be distributed to PMI stockholders. See "The Distribution -- Restructuring of CardioTech Prior to the Distribution." CardioTech also intends to grant options to members of its Board of Directors and to certain of its executive officers to purchase CardioTech Common Stock under the CardioTech Option Plan effective as of the Distribution Date. See "Management -- CardioTech Option Plan." Record Date ________________, 1996. Distribution Date On or about __________, 1996. On the Distribution Date, the distribution agent will begin distributing certificates representing CardioTech Common Stock to PMI stockholders. PMI stockholders will not be required to make any payment or to take any other action to receive their CardioTech Common Stock. If any Adjustment Shares are issued, such shares will be
4 10 distributed on or about ____ days after the Distribution Date. See "The Distribution -- Restructuring of CardioTech Prior to the Distribution" and "The Distribution -- Manner of Effecting the Distribution." Distribution Ratio One share of CardioTech Common Stock for approximately each two and one fifth shares of PMI Common Stock. If any Adjustment Shares are issued, they will be distributed pro rata to holders of PMI Common Stock on the Record Date. Fractional Shares of No fractional shares of CardioTech Common Stock CardioTech Common Stock will be distributed. A cash payment will be made to PMI stockholders otherwise entitled to a fractional share of CardioTech Common Stock as a result of the Distribution. See "The Distribution -- Manner of Effecting the Distribution." Trading Market Application has been made to include the CardioTech Common Stock on the American Stock Exchange under the symbol "CTE". Technology Transfer; PMI has granted CardioTech exclusive and PMI Support non-exclusive, perpetual, worldwide, royalty-free licenses to certain Biomedical Technology not already owned by CardioTech and entered into a Facilities and Services Agreement to provide CardioTech with certain facilities and services. See "The Distribution -- Relationship Between PMI and CardioTech after the Distribution." Risk Factors Stockholders should consider certain factors discussed under "Risk Factors." Reasons for the Distribution The Board of Directors of PMI has concluded, based upon its review of alternatives and consideration of advice provided by professional advisors, that the Distribution is in the best interests of PMI, CardioTech and the PMI stockholders because it will provide both companies with greater access to the capital markets by permitting the investment community to evaluate each company more effectively. In addition, the Board believes that the Distribution will (i) enable management of each company to adopt strategies and pursue objectives directly focused on its business and products; (ii) enhance the ability of each company to attract and motivate existing and potential key employees by providing them with equity compensation tied directly to the results of their efforts; (iii) eliminate PMI's expenses associated with the development of CardioTech's products; (iv) enable the Board of Directors to avoid conflicts in the use of limited capital resources by the two companies; and (v) enhance the ability of each of the two companies to
5 11 enter into strategic alliances and joint ventures. See "The Distribution -- Reasons for the Distribution" and "Management." Certain Federal Income Tax PMI believes, based upon advice of its counsel, that the Consequences distribution of the CardioTech Common Stock in the Distribution will qualify as a "tax-free" spinoff under Section 355 of the Internal Revenue Code of 1986, as amended (a "Section 355 Spinoff"). If the Distribution qualifies as a Section 355 Spinoff, neither PMI nor its stockholders will recognize gain or loss as a result of the Distribution of CardioTech Common Stock (other than certain immaterial amounts of gain related to fractional shares). If the Internal Revenue Service were to assert that the Distribution did not so qualify, PMI would recognize taxable gain on the Distribution as if it had sold the CardioTech Common Stock at its fair market value and a PMI stockholder would recognize taxable income in an amount equal to the fair market value of the CardioTech Common Stock received. STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS. See "Tax Considerations of the Distribution." Relationship with PMI In connection with the Distribution, CardioTech and after the Distribution PMI have entered into or will enter into certain intercompany agreements including, without limitation, a Distribution Agreement, a License Agreement, a Tax Matters Agreement and a Facilities and Services Agreement. See "The Distribution -- Relationship Between PMI and CardioTech After the Distribution."
THE COMPANY CardioTech employs proprietary polyurethane technologies that it believes have a wide variety of applications in the design and manufacture of small bore implantable synthetic vascular grafts and other medical devices (the "Biomaterials Technology"). CardioTech's business plan is to continue to develop, manufacture and market its polymer technologies with particular emphasis on the development of implantable synthetic grafts for a broad variety of applications, including vascular access grafts, peripheral grafts and coronary artery bypass grafts. RISK FACTORS This Information Statement contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause CardioTech's actual results to differ materially from those forecast or projected in such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. CardioTech undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 6 12 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF CARDIOTECH The summary historical and pro forma consolidated financial information of CardioTech should be read in conjunction with the CardioTech consolidated financial statements contained in Appendix A and the CardioTech pro forma consolidated financial statements contained elsewhere in this Information Statement. The consolidated balance sheet data presented below as of March 31, 1994 and 1995 and the consolidated statement of operations data presented below for each of the years in the three-year period ended March 31, 1995 have been derived from CardioTech's consolidated financial statements, which have been audited by Coopers & Lybrand L.L.P. The balance sheet data presented below as of December 31, 1995 and the consolidated statement of operations data for the years ended March 31, 1991 and 1992 and the nine-month periods ended December 31, 1994 and 1995 have been derived from the unaudited consolidated financial statements of CardioTech. In the opinion of CardioTech management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the nine months ended December 31, 1995 are not necessarily indicative of the results that may be expected for the year ending March 31, 1996. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included elsewhere in this Information Statement. The following pro forma financial information reflects adjustments to the historical consolidated statements of operations as if the Amended and Restated Common Stock Subscription Agreement had been consummated and the Distribution had occurred at the beginning of each period presented and adjustments to the historical consolidated balance sheet as if the Amended and Restated Common Stock Subscription Agreement had been consummated and the Distribution had occurred at December 31, 1995. Pro forma net loss per share does not take into account shares to be issued in connection with the Amended and Restated Common Stock Subscription Agreement. The historical and pro forma consolidated financial statements of CardioTech do not necessarily reflect the results of operations or financial position that would have been obtained had CardioTech been an independent company. 7 13 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF CARDIOTECH INTERNATIONAL, INC. The financial information set forth below is intended to present management's estimates of the results of consolidated operations and financial condition of CardioTech as if it had operated as a stand-alone company since inception. Certain of the costs and expenses presented in these consolidated financial statements represent intercompany allocations and management estimates of the cost of services provided by PMI and its subsidiaries. As a result, the consolidated financial statements presented may not be indicative of the results that would have been achieved had CardioTech operated as a nonaffiliated entity.
Nine months ended For the years ended March 31, December 31, --------------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1994 1995 -------- --------- --------- ---------- ---------- --------- --------- STATEMENT OF OPERATIONS DATA: Research revenues........................ $380,677 $ 429,123 $ 422,590 $ 285,876 $ 407,510 $ 272,617 $ 143,310 Operating expenses: Research and development(1)............ 217,498 369,347 377,231 699,919 708,723 511,444 633,442 Selling, general and administrative.... 204,142 214,657 228,680 375,886 297,727 208,990 251,923 Total operating expenses............... 421,640 584,004 605,911 1,075,805 1,006,450 720,434 885,365 Net loss................................. (40,963) (154,881) (183,321) (789,929) (598,940) (447,817) (742,055)
At March 31, At December 31, ------------------ --------------- 1994 1995 1995 ------- ------- --------------- BALANCE SHEET DATA(2): Total current assets...................................... $ 504 $ 504 $ 504 Working capital........................................... 504 504 504 Total assets.............................................. 52,222 44,150 37,854 Stockholders' equity...................................... 52,222 44,150 37,854
(1) Included in research and development expenses for the year ended March 31, 1994 is a $114,000 charge for incomplete technology which was purchased in connection with the acquisition of Newtec Vascular Products Limited. (2) Balance Sheet Data prior to 1994 is not meaningful. All intercompany activity related to the Company's operations and all amounts receivable to and payable by the Company are processed by PMI, its parent, and the net amount is recorded as Due to Parent in Stockholders' Equity. 8 14 SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF CARDIOTECH INTERNATIONAL, INC. See "Pro Forma Consolidated Financial Statements of CardioTech" for a description of pro forma adjustments.
Nine months ended Year ended December 31, 1995 March 31, 1995 ----------------- -------------- PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA: Research revenues................................... $ 143,310 $ 407,510 Operating expenses: Research and development......................... 633,442 708,723 Selling, general and administrative.............. 450,673 562,727 ---------- ---------- Total operating expenses......................... 1,084,115 1,271,450 ---------- ---------- Net loss............................................ $ (940,805) $ (863,940) ========== ========== Loss per common share............................... $ (.33) $ (.31) Number of common shares............................. 2,831,491 2,831,491
December 31, 1995 ----------------- PRO FORMA CONSOLIDATED BALANCE SHEET DATA: Total current assets...................................... $3,830,504 Working capital........................................... $3,430,504 Total assets.............................................. $4,014,854 Stockholders' equity...................................... $3,614,854
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF PMI Exhibit B to this Information Statement contains certain selected historical consolidated financial information with respect to PMI for its last five fiscal years and for the nine months ended December 31, 1995, as compared with the nine months ended December 31, 1994, and PMI Management's discussion and analysis of financial condition and results of operations. Also included in Exhibit B are summary pro forma statements of operations for PMI for the year ended March 31, 1995 and the nine months ended December 31, 1995, and a pro forma balance sheet for PMI as at December 31, 1995. 9 15 THE COMPANY CardioTech was established as a separate subsidiary of PMI in March 1993 (originally named PolyMedica Biomaterials, Inc.) to focus on PMI's existing biomaterials business, with a particular emphasis on accelerating the research, development and commercialization of small bore vascular graft products through external funding and a more focused and strategic product development effort. These activities build on research and development begun by PMI in 1990 to apply PMI's proprietary polyurethane technologies to develop specialized biomaterials and high-value medical devices incorporating those materials. CardioTech synthesizes, designs and manufactures medical-grade polymers, particularly polyurethanes that are useful in the development of grafts and other implantable devices because they can be synthesized to exhibit compatibility with human blood and tissue. CardioTech uses proprietary polyurethane manufacturing technology to fabricate small bore vascular grafts made of ChronoFlex, a family of polyurethanes that has been demonstrated to be biodurable, blood and tissue compatible and non-toxic. CardioTech owns one United States patent, three United States patent applications, four European patent applications and four other foreign patent applications relating to its vascular graft manufacturing technology. In addition, 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 use in medical applications (the "Implantable Devices and Materials Field"). PMI also owns, jointly with Thermedics, Inc. ("Thermedics"), one U.S. patent, one European patent application and three other foreign applications for certain polyurethane technology (the "Joint Technology") and has granted to CardioTech a non- exclusive perpetual world-wide royalty-free sublicense of the Joint Technology, for use in the Implantable Devices and Materials Field. 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. However, existing small bore graft technologies suffer 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 a family of small bore vascular graft devices using specialized ChronoFlex polyurethane materials that it believes will provide significantly improved performance in the treatment of vascular disorders. CardioTech is focusing its efforts on the development of vascular access grafts, tapered peripheral grafts and coronary artery bypass grafts. The grafts have three layers, similar to natural arteries, and are designed to replicate the physical characteristics of human blood vessels. CardioTech fabricates its grafts using a specialized polymer derived from the ChronoFlex family of biomaterials. CardioTech believes that grafts made of these specialized ChronoFlex materials demonstrate radial compliance similar to that of natural arteries, permitting them to expand and contract with each heartbeat. A compliant graft reduces the stresses generated at the suture line where the graft is attached to the artery, thereby minimizing the development of scar tissue, which can occlude the blood flow through the graft and the artery. CardioTech also collaborates with other medical device manufacturers in developing specialized versions of its premium polymer-based biomaterials for use in both acute and chronically-implanted medical devices. It then manufactures and sells the polymer-based biomaterials to the manufacturers for use in the manufacture of their devices. CardioTech is conducting trials designed to assess the patency (free blood flow) of the vascular access graft in animals. If this initial assessment is successful, and if a historical comparison with existing surgical alternatives provides the justification, CardioTech will seek European regulatory approval to convert the study into a clinical trial in Europe in late 1996. This clinical trial will compare patency and complication rates of the ChronoFlex-based vascular access graft with grafts made from expanded polytetrafluoroethylene ("ePTFE"), the biomaterial currently used for vascular access grafts. 10 16 THE DISTRIBUTION REASONS FOR THE DISTRIBUTION The Board of Directors of PMI has concluded that the Distribution is in the best interests of PMI, CardioTech and the PMI stockholders because it will provide both companies with greater access to the capital markets to enable them to obtain financing for their respective businesses by permitting the investment community to evaluate each company more effectively. In addition, the Board believes that the Distribution also will (i) enable management of each company to adopt strategies and pursue objectives directly focused on its business and products; (ii) enhance the ability of each company to attract and motivate existing and potential key employees by providing them with equity compensation tied directly to the results of their efforts; (iii) eliminate PMI's expenses associated with the development of CardioTech's business; (iv) enable the Board of Directors of PMI to avoid conflicts in the use of limited capital resources by the two companies; and (v) enhance the ability of the two companies to enter into strategic alliances and joint ventures. The Distribution is designed to separate two distinct companies with different missions and financial, investment and operating characteristics so that each can adopt strategies and pursue objectives appropriate to its specific business. The Distribution is intended to enable the management of each company to concentrate its attention and resources on its core business without regard to the objectives and policies of the other company. The Board of Directors of PMI believes the common ownership of PMI's manufacturing and distribution business and its medical device development and specialized biomaterials business has hindered each business' ability to obtain necessary financing. The Board believes the primary reason for this difficulty is that a manufacturing business is evaluated by the financial markets on the basis of its earnings. Although PMI's net product sales from its wound care, pharmaceutical and consumer healthcare businesses were $10.6 million, $22.2 million and $26.6 million in its fiscal years ended March 31, 1993, 1994 and 1995, respectively, a significant portion of the earnings have been used to fund the research and development activities relating to the medical device development and biomaterials business. As a result, the combined earnings of the companies have been significantly depressed, thereby limiting the combined companies' ability to raise significant amounts of financing from outside sources to support research and development. In contrast to manufacturing and distribution businesses, medical device development businesses are generally judged by the financial markets based upon their potential for growth once their products become marketable. However, in the case of PMI and CardioTech, the combined companies cannot be viewed by the financial markets as medical device development businesses because the majority of their combined activities relate to the wound care, pharmaceutical and consumer healthcare businesses. Thus, the combination of the operating businesses of PMI with the medical device development efforts of CardioTech has effectively precluded the combined companies from being favorably viewed by either the portion of the market investing in manufacturing and distribution companies or the portion of the market investing in medical device development companies. For this reason, the Board of Directors of PMI has determined that the separation of PMI and CardioTech will enhance each company's ability to raise financing and will allow the companies to obtain the financing on better terms than if they were to continue on a combined basis. The Distribution also best addresses the following concerns of PMI's Board of Directors: (i) that PMI stockholders be permitted to participate in the future business potential of CardioTech; (ii) that PMI's earnings reflect solely the performance of its core businesses; (iii) that investments in the development of synthetic vascular graft technology be continued at a level determined by management of CardioTech to be appropriate without regard to the requirements of PMI's wound care, pharmaceutical and other businesses; and (iv) that PMI and CardioTech exist as independent companies so as to enhance their abilities to attract investment capital on acceptable terms. The terms of the Distribution were established by members of the managements of PMI and CardioTech. 11 17 RESTRUCTURING OF CARDIOTECH PRIOR TO THE DISTRIBUTION Prior to the Distribution, PMI consolidated its vascular graft and other biomaterials activities within CardioTech and consolidated the wound care, pharmaceutical and consumer healthcare businesses within PMI and its other subsidiaries. This consolidation was achieved primarily by the transfer of certain PMI patents relating to vascular graft manufacturing technologies in connection with the Amended and Restated Common Stock Subscription Agreement between PMI and CardioTech (the "Subscription Agreement") described below and by PMI and CardioTech entering into a License Agreement pursuant to which PMI granted CardioTech a perpetual, worldwide, royalty-free license for the use of PMI's ChronoFlex polyurethane technology and certain other biomaterials in the Implantable Devices and Materials Field. PMI and CardioTech also terminated certain licenses covering PMI technology not related to the vascular graft and biomaterials business. See " -- Relationship Between PMI and CardioTech after the Distribution -- License Agreement." In connection with the Restructuring, PMI entered into the Subscription Agreement pursuant to which PMI purchased an aggregate of 973,758 newly issued shares of CardioTech Common Stock (subject to adjustment) for an aggregate purchase price of $3,830,000 in cash, equipment having an estimated fair market value of approximately $147,000, cancellation of intercompany loans from PMI to CardioTech aggregating approximately $2,449,800 and the transfer of certain vascular graft manufacturing patents (collectively, the "PMI Consideration"). The value of the PMI Consideration was estimated by the Board of Directors of PMI to be approximately $6,426,800. CardioTech intends to use the cash proceeds of this purchase to fund its initial working capital and research and development activities, and believes that such amount will be sufficient to fund such activities for a period of approximately two years after the Distribution Date. PMI has cancelled all amounts of intercompany debt owed by CardioTech to PMI (including costs of the Restructuring and Distribution) incurred from the inception of CardioTech through the estimated Distribution Date. The total of all such indebtedness cancelled is $4,083,000 or $2,449,800 after deduction of the estimated tax benefit from the operating losses funded by such loans, assuming a 40% tax rate, all of which benefit is being retained by PMI. The Board of Directors of PMI determined that an adjustment based upon the actual trading prices of the CardioTech Common Stock after the Distribution was appropriate because it believed that such trading prices would be a significant indicator of the value of the CardioTech Common Stock after the Restructuring. The Board concluded that the number of shares of CardioTech Common Stock to be issued to PMI should be adjusted in the event that the average closing price of CardioTech Common Stock for the five trading days after the Distribution Date (the "Average Trading Price") indicated a market capitalization for CardioTech different from the Mid-Point Valuation (as defined below), based upon whether the Average Trading Price is up to twenty percent (20%) greater than the Mid-Point Valuation (the "Maximum Valuation") or up to twenty percent (20%) less than the Mid-Point Valuation (the "Minimum Valuation"). Based upon the number of shares of CardioTech Common Stock outstanding prior to the Restructuring, the valuation of $6,426,800 attributed by the Board of Directors to the PMI Consideration and the foregoing factors, the Board of Directors determined that the issuance to PMI of a minimum of 973,758 shares (which assumes the Maximum Valuation of CardioTech), to be adjusted based upon the Average Trading Price by the issuance of up to a maximum of 486,879 additional shares (which assumes the Minimum Valuation of CardioTech), would be fair to the shareholders of PMI and CardioTech. Accordingly, the Subscription Agreement provides that the number of shares of CardioTech Common Stock to be issued to PMI is subject to adjustment (the "Adjustment") based upon the Average Trading Price. If the Average Trading Price is less than $4.40 per share, CardioTech will be required to issue to PMI a number of shares equal to the difference between (i) the result obtained by dividing $6,426,800 by the Average Trading Price (ii) and 973,758, up to a maximum of 486,879 additional shares (the "Adjustment Shares"). Subsequent to the Adjustment, PMI will distribute all Adjustment Shares to PMI shareholders as of the Record Date on a pro rata bases. See " -- Manner of Effecting the Distribution." 12 18 Because certain executive officers and directors of PMI also held minority stock interests in CardioTech, the Board of Directors of PMI retained Cruttenden Roth, Incorporated ("CRI") to render an opinion as to whether or not the number of shares of CardioTech Common Stock (including the Adjustment Shares (as defined below), the "CardioTech Consideration") to be issued to PMI by CardioTech pursuant to the Subscription Agreement was fair, from a financial point of view, to PMI and its shareholders. The fairness opinion of CRI, including the factors considered, the assumptions made and the procedures followed, is attached hereto as Exhibit C. CRI is a nationally recognized investment banking firm engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. CRI was selected as financial advisor based upon such expertise and its reputation in investment banking. As compensation for rendering the fairness opinion in connection with the Subscription Agreement, PMI has paid CRI a fee of $187,500. CRI also has been separately engaged to perform other services on behalf of PMI for which CRI has received compensation. In addition, PMI has agreed to reimburse CRI for its reasonable expenses, including reasonable counsel fees, and to indemnify CRI against certain liabilities and expenses, including liabilities arising under the federal securities laws, in connection with CRI's engagements. In the course of CRI's securities business it may trade the securities of PMI and CardioTech for its own account and for the account of customers and, accordingly, may at any time hold a long or short position in such securities. In connection with its fairness opinion, CRI conducted a review of certain financial information and prepared certain financial analyses with respect to CardioTech and the proposed transaction. CRI presented and discussed its final analyses at the meeting of the Board of Directors of PMI on March 18, 1996. The following paragraphs summarize the significant financial analyses performed by CRI in arriving at its opinion as to the fairness, from a financial point of view, of the CardioTech Consideration to be received by PMI pursuant to the Subscription Agreement. CRI estimated a range of values of CardioTech, on a pro forma basis after giving effect to the Restructuring, from $13.2 million to $30.8 million, or a midpoint estimate of $22.0 million (the "Mid-Point Valuation"), of CardioTech Common Stock on a fully distributed basis under conditions existing on March 18, 1996. In reaching its estimate, CRI assumed the CardioTech Common Stock would be fully and widely distributed among investors and are subject only to normal trading activity after the Distribution. However, trading following the Distribution may be characterized by a redistribution among investors during which market prices may be volatile or adversely affected. Estimates of fully distributed values are speculative and subject to uncertainties and contingencies, and do not purport to be appraisals or necessarily reflect the prices at which trading will actually occur or the manner in which any securities may trade at any time. CRI primarily used "discounted cash flow" analysis and "comparable company" analysis in estimating the range of values for the CardioTech Common Stock on a fully distributed bases. CRI also analyzed certain acquisition and spinoff transactions, but generally did not consider the results of such analyses to be as meaningful as the "discounted cash flow" analysis and the "comparable company" analysis in arriving at its estimate of the range of values for the CardioTech Common Stock on a fully distributed basis. DISCOUNTED CASH FLOW ANALYSIS. CRI measured the estimated present value of the future streams of unlevered free cash flows that CardioTech would produce through 2002, assuming that CardioTech performed in accordance with financial forecasts and projections furnished to CRI by CardioTech management. Free cash flow for each of the six fiscal years ending 1997 to 2002 was derived from net income, plus depreciation, amortization and income taxes, less capital expenditures, and plus or minus changes in working capital, as the case may be. The methods and assumptions used in preparing the CardioTech management's projections involved certain elements of subjective judgments on the part of CardioTech management, some or all of which may prove to be incorrect. To estimate the total present value of CardioTech's free cash flow, CRI summed and discounted to present value the projected stream of free cash flows indicated by CardioTech management using a discount rate from the weighted average cost of capital that ranged from 44% to 49%. The equity cost of capital was obtained from the Capital Asset Pricing Model where the five-year Treasury Bill was used as the risk free rate and the product of the 13 19 S&P 500 Index over the last five months was multiplied by a measure of risk relative to the S&P 500 (Beta) of comparable companies (the "Comparable Group") that CRI and CardioTech management considered relevant. Although no company in the Comparable Group is identical to CardioTech, included among the companies comprising the Comparable Group were Datascope Corp., Corvita Corporation, Possis Medical, Thoratec Laboratories, C.R. Bard, Endovascular Technology and Instent, Inc. The was no projected debt for the Company at fiscal year 2002. CRI estimated a terminal value by applying multiples ranging from 6.0 to 8.0 to discounted free cash flow, adjusted for debt and cash, in the year 2002. These multiples were based on current trading multiples for companies included in the Comparable Group. This analysis indicated a present value per share of CardioTech Common Stock to be outstanding on a pro forma basis immediately after giving effect to the Restructuring in a range from $13.2 million to $22.0 million. COMPARABLE COMPANY ANALYSIS. CRI compared selected projected financial and operating data for CardioTech to the corresponding data of companies in the Comparable Group. CRI calculated enterprise value multiples as a function of revenue and EBITDA. CRI calculated market value multiples as a function of net income, book value, revenue and assets. From Comparable Group enterprise value multiples in ranges from 1.8x to 112.9x last twelve month's revenue and (291.0)x to 10.2x EBITDA, multiples for CardioTech's fiscal 1997 revenue and EBITDA were derived at 38.7x and (25.6)x, respectively. The aggregate values for CardioTech implied by such multiples were $22.14 million and $41.77 million, respectively. After CRI applied an additional 20% discount on such values due to CardioTech's pre 510K technology, the aggregate values for CardioTech implied by such multiples were $17.72 million and $33.41 million, respectively. From Comparable Group market value multiples in ranges from (164.2)x to 27.8x last twelve month's net income, 2.1x to 64.1x book value, 1.8x to 137.9x revenue and 1.7x to 49.7x assets, multiples for CardioTech's fiscal 1997 net income, book value, revenue and assets were derived at (24.4)x, 11.8x, 41.5x and 11.8x, respectively. The aggregate values for CardioTech implied by such multiples were $29.82 million, $23.97 million, $24.83 million and $19.06 million, respectively. After CRI applied an additional 20% discount on such values due to CardioTech's pre 510K technology, the aggregate values for CardioTech implied by such multiples were $23.85 million, $19.8 million, $19.86 million and $15.25 million, respectively. This analysis indicated a value per share of CardioTech Common Stock to be outstanding on a pro forma basis immediately after giving effect to the Restructuring in a range from $14.1 million to $30.8 million. Because of the inherent differences between the operations of CardioTech and the operations of the selected companies comprising the Comparable Group, CRI believed that a purely quantitative comparable company analysis would not be meaningful. An appropriate use of a comparable company analysis in this instance would involve qualitative judgments concerning the differences between the financial and operating characteristics of the companies and CardioTech and other factors that could affect the public trading values of the selected companies and CardioTech. The foregoing summary does not purport to be a complete description of CRI's analyses and its reports and presentations to the Board of Directors of PMI. CRI believes that its analyses must be considered as a whole and that selecting portions of CRI's analyses and of the factors considered by CRI, without considering all factors and analyses, could create an incomplete or misleading view of the process underlying CRI's opinion. Furthermore, in arriving at its fairness opinion, CRI did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance or relevance of each analysis and factor. The preparation of a fairness opinion is a complex process and not necessarily susceptible to partial analysis or summary description. In performing its analyses, CRI made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of CardioTech. CRI also used in its analyses projections of future performance, results and conditions which are inherently unpredictable and must be considered not certain of occurrence as projected. The analyses performed by CRI are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as part of CRI's analysis of the fairness, from a financial point of view, of the CardioTech Consideration to be received by PMI pursuant to the Subscription Agreement, and were provided to the Board of Directors of PMI in connection with the delivery of CRI's opinion. In addition, CRI's fairness opinion and presentation to the Board of Directors of PMI was one of many factors taken into consideration by the Board of Directors of PMI in making its determination to approve the terms of the Subscription Agreement. 14 20 The CRI opinion, which is addressed to the Board of Directors of PMI, is directed only to the fairness, from a financial point of view, of the CardioTech Consideration to be received by PMI pursuant to the Subscription Agreement and does not address any other terms of the Distribution or any related agreements or arrangements, including any transactions which might occur among PMI and CardioTech and their respective affiliates after the consummation of the Distribution. The CRI opinion also does not address PMI's underlying business decision to effect the Distribution. MANNER OF EFFECTING THE DISTRIBUTION The general terms and conditions relating to the Distribution are set forth in the Plan and Agreement of Distribution, dated as of __________, 1996 (the "Distribution Agreement"), and the other Intercompany Agreements between PMI and CardioTech. Under the terms and conditions of the Distribution Agreement, PMI will effect the Distribution by providing for the delivery of the CardioTech Common Stock held by PMI to the Distribution Agent for distribution to the PMI stockholders. The Distribution will be made on the basis of one share of CardioTech Common Stock for each 2.21 shares of PMI Common Stock held on the Record Date. Certificates representing shares of CardioTech Common Stock will be mailed or delivered by the Distribution Agent beginning shortly after the Distribution Date. No fractional shares of CardioTech Common Stock will be received by PMI stockholders. Fractional shares, if any, will be aggregated and sold, on behalf of the stockholders entitled to receive such shares, by Distribution Agent. The Distribution Agent will use the net proceeds from the sale of fractional shares to make cash payments to those stockholders otherwise entitled to receive fractional shares in proportion to their respective interests in such fractional shares. Holders of PMI Common Stock will not be required to pay cash or any other consideration for the CardioTech Common Stock received in the Distribution or to surrender or exchange certificates representing shares of PMI Common Stock in order to receive the CardioTech Common Stock. Holders of PMI Common Stock will continue to own their shares of PMI Common Stock and, if such stockholders were stockholders of record on the Record Date, they will also receive shares of CardioTech Common Stock. The Distribution will not otherwise change the number of, or the rights associated with, outstanding shares of PMI Common Stock. PMI may receive up to an additional 973,758 shares of CardioTech Common Stock in connection with the Adjustment, which would subsequently be distributed to holders of PMI Common Stock as of the Record Date. See "--Restructuring of CardioTech Prior to the Distribution." If any Adjustment Shares are to be issued, PMI will send its stockholders a notice indicating the distribution ratio for the Adjustment Shares and the proposed distribution date for such Adjustment Shares. Certificates representing the shares of CardioTech Common Stock constituting the Adjustment Shares (if any) are expected to be mailed or delivered by the Distribution Agent beginning 10 days after the Distribution Date. On January 23, 1993, John Hancock Mutual Life Insurance Company ("Hancock") purchased from PMI warrants to purchase PMI Common Stock (the "Hancock Warrants"). Under the terms of the Hancock Warrants, the holders thereof are entitled to receive any securities distributed by PMI to which the holder of such warrants would have been entitled upon exercise of such warrants. Accordingly, CardioTech will issue to Hancock warrants to purchase shares of CardioTech Common Stock on the same terms as the Hancock Warrants (the "Mirror Warrants") and has reserved for issuance a total of 245,438 shares of CardioTech Common Stock upon the exercise of the Mirror Warrants (subject to adjustment in the event of a stock split, stock dividend and certain dilutive issuances). Under the terms of the Mirror Warrants, CardioTech will be entitled to receive a portion of the proceeds from the exercise of the Hancock Warrants equal to a ratio the numerator of which is the average market capitalization of CardioTech to the average market capitalization of PMI based on the average closing price of CardioTech Common Stock and PMI Common Stock during the five business days following the Distribution Date and the denominator of which is one plus such ratio. All shares of CardioTech Common Stock distributed to PMI stockholders in the Distribution will be fully paid and nonassessable and the holders thereof will not be entitled to preemptive rights. See "Description of Capital Stock." 15 21 Upon the completion of the Distribution, there will be 3,805,248 shares of CardioTech Common Stock outstanding (4,292,127 shares if the maximum number of Adjustment Shares are issued). All of the shares of CardioTech Common Stock distributed to PMI stockholders in the Distribution will be immediately eligible for resale in the public market without restriction under the Securities Act of 1933, as amended (the "Securities Act"), except that any shares owned by "affiliates" of CardioTech, as that term is defined in Rule 144 adopted under the Securities Act ("Affiliates"), may generally only be resold (i) in compliance with the applicable provisions of Rule 144, (ii) under an effective registration statement under the Securities Act, or (iii) pursuant to an exemption from the registration requirements of the Securities Act. Affiliates of CardioTech following the Distribution will include individuals or entities that control, are controlled by, or are under common control with CardioTech and may include certain officers and directors of CardioTech, as well as principal stockholders of CardioTech. Under Rule 144, an Affiliate is entitled to sell, within any three-month period, a number of shares of CardioTech Common Stock that does not exceed the greater of 1% of the then outstanding shares of CardioTech Common Stock (approximately 38,052 shares immediately after the Distribution assuming no Adjustment Shares are issued) or the average weekly trading volume of the CardioTech Common Stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. Upon consummation of the Distribution, Affiliates of CardioTech will hold approximately 353,531 shares of CardioTech Common Stock. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION PMI believes, based upon advice of its counsel, that the Distribution will qualify as a Section 355 Spinoff. If the Distribution qualifies as a Section 355 Spinoff, neither PMI nor its stockholders would recognize gain or loss as a result of the Distribution (other than certain immaterial amounts of gain related to fractional shares). If the Internal Revenue Service were to successfully assert that the Distribution did not so qualify, PMI would recognize taxable gain on the Distribution as if it had sold the CardioTech Common Stock at its fair market value and a PMI stockholder would recognize taxable income in an amount equal to the fair market value of the CardioTech Common Stock received. STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS. See "Tax Considerations of the Distribution." LISTING AND TRADING OF CARDIOTECH COMMON STOCK PMI presently owns 91.7% of the outstanding shares of CardioTech Common Stock, with the balance owned by certain officers and employees of CardioTech and PMI. No trading prices are available with respect to such shares. There can be no assurance as to the price at which PMI Common Stock or CardioTech Common Stock may be traded after the Distribution or whether their initial combined price will be higher or lower than the price of the PMI Common Stock prior to the Distribution. After the Distribution, approximately 3,805,248 shares of CardioTech Common Stock will be issued and outstanding (4,292,127 shares if the maximum number of Adjustment Shares are issued). In addition, CardioTech intends to grant options to purchase approximately 828,000 shares of CardioTech Common Stock under the CardioTech Option Plan to certain executive officers and members of the Board of Directors of CardioTech, effective as of the Distribution Date. See "Management -- CardioTech Option Plan". Application has been made to list the CardioTech Common Stock on the American Stock Exchange under the symbol "CTE". Based on the expected number of holders of PMI Common Stock of record as of the Record Date, CardioTech is expected to initially have approximately 580 stockholders of record on the Distribution Date. The Transfer Agent and Registrar for the CardioTech Common Stock will be The First National Bank of Boston. There can be no assurance that an active trading market in CardioTech Common Stock will develop or, if a market does develop, at what prices CardioTech Common Stock will trade. See "Risk Factors--Absence of Public Market; Possible Volatility of Stock Price; Possible Delisting." 16 22 A "when-issued" trading market in CardioTech Common Stock may develop prior to the Distribution Date. A "when-issued" trading market occurs when trading in shares begins prior to the time stock certificates are actually available or issued. RELATIONSHIP BETWEEN PMI AND CARDIOTECH AFTER THE DISTRIBUTION In order to facilitate CardioTech's transition following the Distribution, PMI and CardioTech have entered or will enter into the Intercompany Agreements. The following is a summary of certain provisions of such agreements and is qualified in its entirety by reference to the full text of such agreements, all of which have been filed as exhibits to the Registration Statement of which this Information Statement is a part. Distribution Agreement. The Distribution Agreement provides for the principal corporate transactions required to effect the Distribution, including, among other things, the preparation of a registration statement registering the CardioTech Common Stock under the Securities Exchange Act of 1934 (the "Exchange Act"). The Distribution Agreement also allocates the costs related to the implementation of the Distribution between PMI and CardioTech and provides that each company will share equally any liabilities under the federal and any state securities laws incurred as a result of the distribution of this Information Statement. License Agreement. PMI has granted to CardioTech an exclusive, perpetual, world-wide, royalty-free license for CardioTech to use the patent and all other necessary intellectual property owned exclusively by PMI, and a non-exclusive perpetual world-wide, royalty-free license of PMI's rights in the Joint Technology, for use in the Implantable Devices and Materials Field (collectively, "PMI Licensed Technology"). PMI, at its own expense, will file patent or other patent applications for the protection of all new inventions formulated, made or conceived by PMI during the term of the license that relate 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 relate 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. Any material breach of the License Agreement by CardioTech will result in CardioTech being obligated to pay PMI $1,000 per day from the date 90 days after notice of the breach or default until the date on which CardioTech cures such material breach or default. CardioTech may seek monetary damages against PMI for any breach of the license agreement by PMI. Tax Matters Agreement. The Tax Matters Agreement provides, among other things, that PMI will be responsible for all federal, state, local and foreign tax liabilities of CardioTech for periods ending on or prior to the Distribution Date and CardioTech will be responsible for all tax liabilities of CardioTech subsequent to that time. The Tax Matters Agreement further provides that for the tax year of PMI that includes the Distribution Date and the tax year of CardioTech that commences immediately following the Distribution Date, PMI will claim on its federal income tax returns certain specified tax benefits and CardioTech will not claim any of such tax benefits through the Distribution Date. Facilities and Services Agreement. PMI will continue to provide certain administrative services, including purchasing, accounting, management and data processing services to CardioTech and will make available certain facilities and equipment to CardioTech. PMI will be reimbursed $15,000 per month by CardioTech for the provisions of such services. The agreement has a term of one year. 17 23 RISK FACTORS Holders of PMI Common Stock should be aware that the Distribution and ownership of CardioTech Common Stock involve certain risks, including those described below, which could adversely affect the value of their holdings. Neither PMI nor CardioTech makes, nor is any other person authorized to make, any representations as to the future market value of the CardioTech Common Stock. Early Stage of Development of Implantable Synthetic Vascular Grafts. Although CardioTech is generally engaged in the business of developing and marketing uses for its polymer-based biomaterials, its primary focus is on the development and marketing of small bore implantable synthetic vascular grafts. CardioTech is in the early stages of pre-clinical testing of its first proposed synthetic vascular graft product, and, accordingly, has not begun to market or generate any revenue from the use of its vascular graft technology. These products will require significant additional investment, research, development, pre-clinical and clinical testing and regulatory approval prior to commercialization. A commitment of substantial resources to conduct clinical trials will be required if CardioTech is to complete the development of its synthetic vascular grafts. See "Business-Government Regulation." There can be no assurance that any of these products will be successfully developed and, if developed, will meet applicable regulatory standards, obtain required regulatory approvals, be capable of being produced in commercial quantities at reasonable costs or be successfully marketed. Success in this market is dependent on CardioTech's ability to complete satisfactorily the development of polyurethane-based vascular grafts which will be safe and effective and will have benefits not available in autologous vein grafts or presently available synthetic vascular grafts and no assurance can be given that it will be successful in doing so. None of CardioTech's vascular graft or other products is expected to be commercially available for several years. Absence of Revenue from Vascular Grafts. CardioTech's future growth will largely depend on its ability to raise capital to support research and development activities and commercialize its vascular graft technology. To date, CardioTech has not generated any revenue from the sale of vascular grafts. PMI has provided approximately $4.5 million in funding to CardioTech from 1991 through May 1, 1996, the majority of which has been expended for research and development expenses. For the past several years, profits from PMI's wound care, pharmaceutical and consumer healthcare businesses have been used to finance the development of CardioTech's vascular graft technology. CardioTech expects that losses from the development, testing and manufacture of its vascular graft technology will increase as it conducts additional animal testing and commences clinical trials and seeks regulatory approvals. CardioTech expects to continue to incur operating losses unless and until such time as product sales and/or royalty payments generate sufficient revenue to fund its continuing operations. Limited Revenue From Other Activities. CardioTech is also engaged in the development, and attempted development, of other uses for its premium polymer-based biomaterials 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 biomaterials, CardioTech's primary focus will be on small bore vascular graft technology. Accordingly, revenues from these sources are expected to be relatively small in the short term. Additional Financing Requirements and Access to Capital. Prior to the Distribution, PMI will invest approximately $3,830,000 in cash in CardioTech in connection with the Subscription Agreement, which CardioTech believes will be sufficient to fund its initial working capital and research and product development activities for approximately two years from the Distribution Date. 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 financings, collaborative arrangements or from other sources. There can be no assurance that additional funding 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 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. 18 24 Limited Rights in Technology; Uncertainty of Patents and Proprietary Rights. CardioTech owns one United States patent and four patents in various European countries relating to vascular graft manufacturing technology. In addition, PMI has granted CardioTech a perpetual, worldwide, royalty-free license to use the Biomaterials Technology in the Implantable Devices and Materials Field. However, PMI 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, PMI has retained the rights to make sales of ChronoFlex and such biomaterials for non-medical applications. As a result, PMI 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, as joint owner with PMI 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 Implantible Devices and Materials Field. CardioTech's success will depend, in large part, on its ability to maintain its existing patents, obtain new patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties or having third parties circumvent CardioTech's rights. PMI has filed and obtained United States and foreign patents covering aspects of the Biomaterials Technology. There can be no assurance that any of CardioTech's or PMI'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, 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. Furthermore, there can be no assurance 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 may be required to obtain licenses from third parties to avoid infringing patents or other proprietary rights. No assurance can be given 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. There can be no assurance, however, that these agreement will provide meaningful protection for 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. See "Business - Patents and Proprietary Information." 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. There can be no assurance that CardioTech's 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. 19 25 Many of CardioTech's competitors have significantly greater experience than CardioTech in conducting pre-clinical testing and clinical trials of medical devices and obtaining Food and Drug Administration ("FDA") and other regulatory approvals of products for use in health care. Moreover, a competitor developing polyurethane-based grafts is presently conducting clinical trials in both the United States and Europe relating to such products. 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. See "Business - Competition." 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. Although CardioTech believes it will be successful in attracting and retaining skilled and experienced scientific personnel, there can be no assurance that CardioTech will be able to attract and retain such personnel on acceptable terms given the competition among numerous medical device companies, universities and non-profit research institutions for experienced scientists. See "Management." 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 current good laboratory practices ("GLP") and good manufacturing practices ("GMP") requirements prescribed by the FDA or 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, it may need to acquire additional manufacturing facilities and improve its manufacturing technology in order to meet the volume and cost requirements for later clinical trials and will require additional manufacturing facilities in order to undertake commercial production of vascular grafts if it elects to do so. There can be no assurance that CardioTech 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 GLP or GMP, as applicable, or that it or its suppliers will be able to manufacture an adequate supply of product. See "Business - Manufacturing." Absence of Sales and Marketing Experience. CardioTech expects to market its synthetic vascular grafts either through a small, targeted direct sales group or co-marketing arrangements with third parties, if and when such products approach FDA marketing approval. 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 staff and sales force with technical expertise. There can be no assurance that CardioTech 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. 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. There can be no assurance that CardioTech's 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 there can be no assurance that such efforts will be successful. See "Business - Marketing." Reliance on PMI for Administrative Services. Prior to the Distribution, CardioTech received administrative and other services through its parent, PMI. The annual expense to CardioTech of operating as a public company after the Distribution may thus be greater than the cost of management services provided by PMI. This would be due to the loss of the economies of scale associated with the provision of accounting, cash management, personnel, regulatory compliance, employee benefits, insurance and other services by PMI, as compared to the cost to CardioTech of replacing all of these necessary functions on a stand-alone basis. Accordingly, although PMI will provide CardioTech with certain management and administrative services for a limited period of time after the Distribution, there can be 20 26 no assurance that CardioTech will develop the necessary management and administrative depth to successfully operate its business or that any increased costs to CardioTech of replacing services and personnel heretofore provided by PMI will not have an adverse effect on CardioTech's business or results of operations. See "The Distribution-Relationship Between PMI and CardioTech After the Distribution" and "Certain Transactions." 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 the United States and other countries. Prior to marketing, any synthetic vascular grafts developed by CardioTech must undergo rigorous pre-clinical testing and clinical trials, as well as an extensive regulatory approval process mandated by the FDA for marketing in the United States or foreign regulatory agencies for marketing in their respective jurisdictions. 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 CardioTech's product introductions. CardioTech has limited experience in conducting and managing the pre-clinical and clinical trials necessary to obtain government approvals. There can be no assurance 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. There also can be no assurance 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. Although CardioTech intends to make use of fast-track regulatory approval programs when possible, there can be no assurance that CardioTech will be able to obtain the clearances and approvals necessary for clinical testing or for manufacturing and marketing its products. Existing or additional government regulation could prevent or delay regulatory approval of CardioTech's products or affect the pricing or marketing of such products. See "Business - Government Regulation." CardioTech's activities relating to the development of uses for its polymer-based biomaterials 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 small bore 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 payors 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 there can be no assurance that adequate third-party coverage will be available for CardioTech to maintain price levels sufficient for the realization of 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 of product liability, and there can be no assurance that substantial product liability claims will not be asserted against CardioTech. CardioTech currently has limited product liability insurance coverage. CardioTech will seek to obtain additional product liability insurance for human clinical trials if and when its vascular graft products are commercialized; however, there can be no assurance that adequate insurance coverage will be available at acceptable costs, if at all, or that a product liability claim would not materially adversely affect the business or financial condition of CardioTech. 21 27 Absence of Public Market; Possible Volatility of Stock Price; Possible Delisting. Prior to the Distribution, there has been no public market for the CardioTech Common Stock, although a "when-issued" trading market may develop prior to the Distribution Date. There can be no assurance regarding the prices at which the CardioTech Common Stock will trade before or after the Distribution Date. The market prices for securities of emerging companies has historically been highly volatile. 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, may have a significant impact on the market price of CardioTech Common Stock. CardioTech has filed an application for listing the CardioTech Common Stock on the American Stock Exchange ("AMEX") but has not yet been approved for listing. There can be no assurance that the CardioTech Common Stock will be listed on AMEX. If the CardioTech Common Stock is listed on AMEX, CardioTech will be subject to AMEX's maintenance requirements. A failure of CardioTech Common Stock to meet AMEX's maintenance requirements may result in a delisting of such securities. In particular, CardioTech may have difficulty maintaining the minimum market capitalization requirements of AMEX because such capitalization is dependent on the price at which the shares of CardioTech Common Stock trade from time to time. The liquidity of securities not listed on an exchange or delisted securities, which would probably trade 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 of CardioTech, and lower prices than might otherwise be attained. Possible Issuances of Preferred Stock. Shares of Preferred Stock may be issued by CardioTech in the future without stockholder approval and upon such terms as the Board of Directors may determine. The rights of holders of CardioTech Common Stock will be subject to, and may be adversely affected by, the rights of the holders of Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding stock of CardioTech. CardioTech has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock -- Preferred Stock." Absence of Dividends. CardioTech has never paid cash dividends on the CardioTech Common Stock and does not anticipate paying any cash dividends in the foreseeable future. 22 28 CAPITALIZATION The following table sets forth, as of December 31, 1995, the capitalization of CardioTech and its pro forma capitalization after giving effect to the Restructuring and the Distribution. The pro forma information may not reflect the debt and capitalization of CardioTech in the future or as it would have been if CardioTech had been a separate, stand-alone company at December 31, 1995.
As of December 31, 1995 -------------------------------------------- Pro Forma Actual Adjustments(1) Pro Forma ----------- -------------- -------------- Common Stock, $.01 par value, 100,000 shares authorized, 67,500 shares issued and outstanding (actual); 20,000,000 shares authorized, 3,805,248 shares issued and outstanding (pro forma) $ 675 $ 37,377 $ 38,052(2) Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares issued and outstanding (pro forma) -- -- -- Due to parent 2,622,307 (2,622,307) -- Additional paid-in capital -- 6,961,930 6,961,930 Accumulated deficit (2,585,128) (800,000) (3,385,128) ----------- ----------- ----------- Total capitalization $ 37,854 $ 3,577,000 $ 3,614,854 =========== =========== ===========
(1) The pro forma adjustments assume that CardioTech is valued at $22 million prior to the Distribution. This valuation is at the mid-point of the range of values determined to be fair by the Advisor. Based upon this valuation, CardioTech's Common Stock was split resulting in a total of 3,805,248 shares outstanding. PMI has invested $3,830,000 in cash and $147,000 of equipment, and has forgiven all net amounts due to PMI. At the Distribution Date, the amount Due to Parent will be permanently invested. As PMI and CardioTech have agreed to share equally the estimated $800,000 in fees and expenses associated with the Distribution, $400,000 (the portion to be paid by PMI) has been included as an increase in additional paid-in capital. The $800,000 of fees and expenses have been included as an increase to accumulated deficit as they are expenses of CardioTech. (2) Excludes 828,000 shares of CardioTech Common Stock issuable upon the exercise of stock options to be granted on the Distribution Date pursuant to the CardioTech Option Plan and 245,438 shares issuable upon exercise of the Mirror Warrants. 23 29 SELECTED HISTORICAL CARDIOTECH FINANCIAL DATA The consolidated balance sheet data presented below as of March 31, 1994 and 1995 and the consolidated statement of operations data presented below for each of the years in the three-year period ended March 31, 1995 have been derived from CardioTech's consolidated financial statements, which have been audited by Coopers & Lybrand L.L.P. The consolidated balance sheet data presented below as of December 31, 1995 and the consolidated statement of operations data for the years ended March 31, 1991 and 1992 and the nine-month periods ended December 31, 1994 and 1995 have been derived from the unaudited consolidated financial statements of CardioTech. In the opinion of CardioTech management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the nine months ended December 31, 1995 are not necessarily indicative of the results that may be expected for the year ending March 31, 1996. This data should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information included elsewhere in this Information Statement. The financial information set forth below is intended to present management's estimate of the results of consolidated operations and financial condition of CardioTech as if it had operated as a stand-alone company since its inception. Certain of the costs and expenses presented in these consolidated financial statements represent intercompany allocations and management estimates of the cost of services provided by PMI and its subsidiaries. As a result, the consolidated financial statements presented may not be indicative of the results that would have been achieved had CardioTech operated as a nonaffiliated entity.
CARDIOTECH INTERNATIONAL, INC. SELECTED CONSOLIDATED FINANCIAL DATA Nine months ended For the years ended March 31, December 31, ------------------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1994 1995 -------- --------- --------- ---------- ---------- --------- --------- STATEMENT OF OPERATIONS DATA: Research revenues........................ $380,677 $ 429,123 $ 422,590 $ 285,876 $ 407,510 $ 272,617 $ 143,310 Operating expenses: Research and development(1)............ 217,498 369,347 377,231 699,919 708,723 511,444 633,442 Selling, general and administrative.... 204,142 214,657 228,680 375,886 297,727 208,990 251,923 Total operating expenses............... 421,640 584,004 605,911 1,075,805 1,006,450 720,434 885,365 Net loss................................. (40,963) (154,881) (183,321) (789,929) (598,940) (447,817) (742,055)
At March 31, At December 31, ------------------ --------------- 1994 1995 1995 ------- ------- --------------- BALANCE SHEET DATA(2): Total current assets........................ $ 504 $ 504 $ 504 Working capital............................. 504 504 504 Total assets................................ 52,222 44,150 37,854 Stockholders' equity........................ 52,222 44,150 37,854
(1) Included in research and development expenses for the year ended March 31, 1994 is a $114,000 charge for incomplete technology which was purchased in connection with the acquisition of Newtec Vascular Products Limited. (2) Balance Sheet Data prior to 1994 is not meaningful. All intercompany activity related to the Company's operations and all amounts receivable to and payable by the Company are processed by PMI, its parent, and the net amount is recorded as Due to Parent in Stockholders Equity. 24 30 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CARDIOTECH The historical consolidated financial statements of CardioTech found on pages A-1 through A-12 of this Information Statement reflect periods during which CardioTech did not operate as an independent publicly-owned company. Therefore, such historical financial statements may not necessarily reflect the consolidated results of operations or financial position that would have existed had CardioTech been an independent publicly-owned company during those periods. The following pro forma financial statements reflect adjustments to the historical consolidated statements of operations as if the Subscription Agreement had been consummated and the Distribution had occurred at the beginning of each period presented and adjustments to the historical consolidated balance sheet as if the Subscription Agreement had been consummated and the Distribution had occurred at December 31, 1995. Pro forma net loss per share does not take into account shares to be issued in connection with the Subscription Agreement. The pro forma financial statements of CardioTech should be read in conjunction with the historical consolidated financial statements and the notes thereto contained elsewhere in this Information Statement. The pro forma financial information is presented for informational purposes only and does not necessarily reflect the future results of operations or financial position of CardioTech or what the results of operations or financial position would have been had CardioTech been an independent publicly-held company during the periods reflected. 25 31
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS OF CARDIOTECH INTERNATIONAL, INC. (UNAUDITED) Year ended March 31, 1995 --------------------------------------- Pro Forma Pro Historical Adjustments(a) Forma ---------- -------------- ---------- Research revenues......................... $ 407,510 -- $ 407,510 Operating expenses: Research and development................ 708,723 -- 708,723 Selling, general and administrative..... 297,727 265,000(b) 562,727 ---------- ---------- ---------- Total operating expenses................ 1,006,450 265,000 1,271,450 ---------- ---------- ---------- Net loss.................................. $ (598,940) $ (265,000) $ (863,940) ========== ========== ========== Loss per common share..................... $ (.31) ========== Number of common shares................... 2,831,491 2,831,491 ========== ==========
Nine months ended December 31, 1995 ---------------------------------------- Pro Forma Pro Historical Adjustments(a) Forma ---------- -------------- ---------- Research revenues........................ $ 143,310 -- $ 143,310 Operating expenses: Research and development............... 633,442 -- 633,442 Selling, general and administrative. 251,923 198,750(b) 450,673 --------- ---------- ---------- Total operating expenses............... 885,365 198,750 1,084,115 --------- ---------- ---------- Net loss................................. $(742,055) $ (198,750) $ (940,805) ========= ========== ========== Loss per common share.................... $ (.33) ========== Number of common shares.................. 2,831,491 2,831,491 ========== ==========
See accompanying notes to pro forma financial statements. 26 32
PRO FORMA CONSOLIDATED BALANCE SHEET OF CARDIOTECH INTERNATIONAL, INC. (UNAUDITED) December 31, 1995 ------------------------------------------- Pro Forma Pro Historical Adjustments(a) Forma ------------ -------------- ----------- ASSETS Current assets: Cash $ 504 $ 3,830,000 $ 3,830,504 Property and equipment, net 37,350 147,000 184,350 ----------- ----------- ----------- $ 37,854 $ 3,977,000 $ 4,014,854 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Current Liabilities: Accounts payable -- 400,000 400,000 ----------- ----------- ----------- Stockholders' equity: Common stock 675 37,377 38,052 Due to parent 2,622,307 (2,622,307) -- Additional paid-in capital -- 6,961,930 6,961,930 Accumulated deficit (2,585,128) (800,000) (3,385,128) ----------- ----------- ----------- 37,854 3,577,000 3,614,854 ----------- ----------- ----------- $ 37,854 $ 3,977,000 $ 4,014,854 =========== =========== ===========
See accompanying notes to pro forma financial statements 27 33 NOTES TO CARDIOTECH PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (a) The pro forma adjustments assume that CardioTech is valued at $22 million prior to the Distribution. This valuation is at the mid-point of the range of values provided by the Advisor. Based upon this valuation, CardioTech's stock was split so that there would be 3,805,248 shares outstanding. Prior to the Distribution, PMI has invested $3,830,000 in cash, $147,000 of equipment and has forgiven all net amounts due to PMI. As PMI and CardioTech have agreed to share equally the estimated $800,000 in fees and expenses associated with the Distribution, $400,000 (the portion to be paid by PMI) has been included as an increase in additional paid-in capital and $400,000 (the portion to be paid by CardioTech) as an increase in accounts payable. The $800,000 of fees and expense have been included as an increase to accumulated deficit as they will be nonrecurring expenses of CardioTech. (b) Represents estimated annual costs of $265,000 that would be incurred by CardioTech as a public company. Such costs include insurance premiums of $130,000, legal fees of $40,000, exchange listing fees of $35,000, audit fees of $20,000 and other related costs. The Restructuring and the Distribution will occur prior to the Distribution Date. Such costs are estimated to be $800,000 and are nonrecurring in nature. Accordingly, the pro forma statements of operations exclude all costs related thereto. 28 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW CardioTech International, Inc. ("CardioTech") was incorporated as a majority-owned subsidiary of PolyMedica Industries, Inc. ("PMI") in March 1993 under the name PolyMedica Biomaterials, Inc., to continue the biomaterials and vascular graft business which had been operated as a division of PMI starting in 1990. It was renamed CardioTech International, Inc. in March 1996 in anticipation of the Distribution. CardioTech was established as a separate subsidiary to focus on PMI's existing biomaterials business, with a particular emphasis on accelerating the research, development and commercialization of vascular graft products and other proprietary biomaterials. CardioTech's medical device product nearest to commercialization is a vascular access graft. CardioTech has developed a unique manufacturing process involving cold coagulation casting that results in a micropourous compliant graft, with compressible walls and an inherent ability to "self seal." CardioTech believes that reducing puncture site bleeding by using a self-sealing polyurethane material may lower morbidity rates. To date, there have been no sales of CardioTech's vascular grafts. In addition to the graft research and development program, since 1990 CardioTech has been engaged in various internal and joint venture programs with corporate partners for the development and sale of ChronoFlex and other proprietary biomaterials for use in medical devices manufactured by third parties. This activity has generated research revenues for CardioTech. CardioTech is headquartered in Massachusetts and operates from manufacturing and laboratory facilities located in Massachusetts and the United Kingdom. As CardioTech is now focusing more of its research and development resources on the vascular graft program, period to period comparisons of changes in research revenues are not necessarily indicative of results to be expected for any future period. RESULTS OF OPERATIONS CardioTech generates research revenues in connection with the development and sale of ChronoFlex and other proprietary biomaterials for use in medical devices manufactured by third parties. In certain instances, exclusivity, royalty and licensing fees have been earned from various strategic partners with whom CardioTech had contracts. Costs and expenses for CardioTech consist of research and development expenses, which include scientific staff, facility costs, supplies and other costs related to the ongoing development efforts of CardioTech as well as costs incurred in connection with ChronoFlex development contracts, and selling, general and administrative expenses which include all costs associated with the promotion of advanced biomaterials to potential industry partners, management and administrative expenses. Nine Months Ended December 31, 1995 Compared to Nine Months Ended December 31, 1994 CardioTech's quarterly operating results are likely to vary significantly depending on factors such as the timing of new agreements with strategic partners, costs associated with pre-clinical and clinical trials for its vascular access grafts, the results of those trials and the timing of promotional costs to support introduction of future products. Research revenues were $143,000 and $273,000 for the nine months ended December 31, 1995 and 1994. The fluctuation in research revenues was attributable to the completion of one research and development contract and the evolution of a research and development contract into a supply agreement in the 1995 period. 29 35 Research and development expenses were $633,000 and $511,000 for the nine months ended December 31, 1995 and 1994. The increase in these expenses principally related to higher pre-clinical costs incurred in 1995 in connection with CardioTech's development of a vascular access graft for hemodialysis patients. Selling, general and administrative ("SG&A") expenses were $252,000 and $209,000 for the nine months ended December 31, 1995 and 1994. The increases over 1994 principally relate to costs associated with the promotion of advanced biomaterials to potential strategic partners. Fiscal Year Ended March 31, 1995 Compared to the Fiscal Years Ended March 31, 1994 and 1993 Research revenues were $408,000, $286,000 and $423,000 for the years ended March 31, 1995, 1994 and 1993. The fluctuations in research revenues were attributable to changes in the mixture of ongoing development contracts during each period. Research and development expenses were $709,000, $700,000 and $377,000 for the years ended March 31, 1995, 1994 and 1993. The increase in fiscal 1994 was principally due to: (i) the recording of a charge of $114,000 for the purchase of in-process research and development in connection with the September 1993 acquisition of Newtec Vascular Products Limited ("Newtec") and (ii) the inclusion of research and development expenses for Newtec's ongoing vascular graft program for the remainder of fiscal 1994. Research and development expenses in fiscal 1995 include a full year of vascular graft development. SG&A expenses were $298,000, $376,000 and $229,000 for the years ended March 31, 1995, 1994 and 1993. In fiscal 1994, CardioTech incurred new operating costs in connection with the Newtec acquisition, certain legal costs regarding a development agreement and higher promotional costs for its advanced biomaterials. In fiscal 1995, SG&A expenses were lower than fiscal 1994 primarily due to a decrease in legal fees and promotional expenses. LIQUIDITY AND CAPITAL RESOURCES 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 any revenue from the sale of vascular grafts, although it has received a minor amount of research revenues relating to its other biomaterials applications. Since inception, funding from PMI has been used to finance the development of CardioTech's technologies. 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. After the Distribution, CardioTech will conduct its operations with approximately $3,830,000 in cash contributed by PMI. CardioTech estimates such amounts will be sufficient to fund its initial working capital and research and development activities for approximately two years from the Distribution Date. Past spending levels are not necessarily indicative of future spending levels. From the inception of CardioTech's business through December 31, 1995, PMI has funded approximately $2.6 million in operating losses to support CardioTech's research activities. Future expenditures for product development, especially relating to outside testing and clinical trials, are discretionary and, accordingly, can be adjusted to available cash. 30 36 CardioTech will seek to obtain additional funds through public or private equity or debt financings, 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. 31 37 BUSINESS CardioTech was established as a separate subsidiary of PMI in March 1993 to focus on PMI's existing biomaterials business, with a particular emphasis on accelerating the research, development and commercialization of small bore vascular graft products through external funding and a more focused and strategic product development effort. These activities build on research and development begun by PMI in 1990 to apply PMI's proprietary polyurethane technologies to develop specialized biomaterials and high-value medical devices incorporating those materials. CardioTech synthesizes, designs and manufactures medical-grade polymers, particularly polyurethanes that are useful in the development of vascular graft technology and other implantable medical devices because they can be synthesized to exhibit compatibility with human blood and tissue. CardioTech uses proprietary manufacturing technology to fabricate small bore synthetic vascular grafts made of ChronoFlex, a family of polyurethanes that has been demonstrated to be biodurable, blood, tissue compatible and non-toxic. CardioTech owns a number of patents relating to its vascular graft manufacturing technology. In addition, PMI has granted to CardioTech a non-exclusive perpetual, worldwide, royalty-free license for the use of PMI's ChronoFlex polyurethane patents and related technology for use in the Implantable Devices and Materials Field. VASCULAR GRAFTS 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. However, existing small bore graft technologies suffer 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 a family of small bore vascular graft devices using specialized ChronoFlex polyurethane materials that it believes will provide significantly improved performance in the treatment of arterial disorders. CardioTech is focusing its efforts on the development of vascular access grafts, tapered peripheral grafts and coronary artery bypass grafts. The grafts have three layers similar to that of natural arteries designed to replicate the physical characteristics of human blood vessels. Vascular Access Grafts. Several acute and chronic diseases, including kidney disease, diabetes and hypertension, attack and may destroy normal kidney function, resulting in acute renal failure. According to the United States Renal Data Systems database, there were 187,000 patients in the United States at the end of 1995 undergoing hemodialysis, which removes blood from the body and routes it to an artificial kidney machine where it is cleansed and returned to the patient. Patients with acute renal failure undergoing hemodialysis require easy routine access to the blood stream. Vascular access grafts must be punctured in two places three times each week with large gauge needles to withdraw and replace blood cycled through an artificial kidney machine. The synthetic vascular access grafts currently marketed by third parties are made from an expanded polytetrafluoroethylene ("ePTFE") material which loses integrity after repeated punctures and therefore renders the patient susceptible to bleeding and infection. If synthetic grafts bleed profusely when needles used for hemodialysis treatments are removed, then a technician may need to apply pressure to the graft for up to 20 minutes to expedite clotting. CardioTech believes that the vascular access graft it is developing offers the potential of improved clinical performance over the currently available synthetic ePTFE grafts. CardioTech's patented manufacturing process involves cold coagulation casting and results in a tear-resistant graft with compressible walls and an inherent ability to "self-seal." CardioTech believes that using a self-sealing polyurethane material will minimize blood loss after dialysis treatment reducing procedure and administrative time per patient and their associated costs and also lowering infection rates. 32 38 CardioTech is currently conducting trials designed to assess the patency (free blood flow) of the vascular access graft in animals. If the initial assessment is successful, and if a historical comparison with existing surgical alternatives provides the justification, CardioTech will seek European regulatory approval to convert the study into a clinical trial in Europe in late 1996. This trial will compare patency and complication rates of the ChronoFlex-based vascular access graft with grafts made from ePTFE. Tapered Peripheral Grafts. CardioTech is currently working to develop a tapered peripheral graft to be used to treat diabetics plagued with poor circulation in their legs. Poor circulation is usually the result of a deteriorated main artery in the leg, a condition which often results in amputations due to inadequate blood supply to the lower extremities. Currently, there is no acceptable surgical treatment available to alleviate this condition. CardioTech's graft is designed to bypass the artery that runs behind the knee. CardioTech believes it has the expertise and capability to manufacture a graft that tapers from an inside diameter of approximately 6mm for the portion above the knee to an inside diameter of approximately 4mm for the portion below the knee, roughly the same dimensions as the natural artery. Coronary Artery Bypass Grafts. Currently, obstructed coronary arteries are either partially cleared through the use of angioplasty or treated surgically through a coronary bypass operation using a portion of the saphenous vein from the patient's leg. This surgical procedure requires a graft with an inside diameter of 6mm or less. To date, CardioTech believes that no commercially viable synthetic small bore vascular grafts suitable for the bypass of obstructed coronary arteries have been developed. The American Heart Association and the National Center for Health Statistics estimated that there were 468,000 coronary artery bypass operations performed in the United States in 1992. The saphenous veins used today suffer from a series of disadvantages including thrombosis (either early or late), obstruction by clotting, aneurysm formation, creep, suture line deterioration, abnormal healing leading to embolism, and infection. Accordingly, CardioTech perceives a significant market opportunity for a small-bore biodurable polyurethane vascular graft. In 1993, CardioTech acquired small-bore vascular graft intellectual property and manufacturing equipment which is located in its United Kingdom facility. CardioTech fabricates its grafts using its ChronoFlex line of polyurethane-based biomaterials. CardioTech believes that grafts made of ChronoFlex materials demonstrate radial compliance similar to that of natural arteries, permitting them to expand and contract with each heartbeat. A compliant graft reduces the stresses generated at the suture line where the graft is attached to the artery, thereby minimizing the development of scar tissue, which can occlude small arteries. PMI has granted to CardioTech an exclusive, perpetual, world-wide, royalty-free license for CardioTech to use the patent and all other necessary intellectual property owned exclusively by PMI, and a non-exclusive perpetual world-wide, royalty-free license of PMI's rights in the Joint Technology, for use in the Implantable Devices and Materials Field. CardioTech also relies on trade secrets and proprietary know-how. To protect such information, CardioTech requires all employees and consultants to enter into confidentiality agreements limiting the disclosure and use of such information. However, there can be no assurance that confidentiality agreements will be effective in protecting trade secrets or that third parties will not independently develop substantially equivalent or better technology. 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 premium polymers under the tradenames ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane, PolyBlend and PolyWeld. Since 1990, PMI has provided development services and sold related biomaterials for medical device customers. Such customers have included Medtronic, Inc. and Vascor, Inc. 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 and PMI will assign this agreement to CardioTech prior to the Distribution. 33 39 CardioTech also currently manufactures and sells its proprietary HydroThane biomaterials to medical device manufacturers that are evaluating HydroThane for use in their products. HydroThane is a thermoplastic, water-absorbing, polyurethane elastomer, that posses 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. Research revenues related to biomaterials were approximately $408,000 and $143,000 for the year ended March 31, 1995 and the nine months ended December 31, 1995, respectively. For the year ended March 31, 1995, 49%, 19% and 18% of research revenues were generated from Bard Access Systems, Inc., Medtronic Inc. and the National Institutes of Health, respectively. 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. However, CardioTech may need to acquire manufacturing facilities and improve its manufacturing technology in order to meet the volume and cost requirements for later clinical trials and will require additional manufacturing facilities in order to undertake 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 development and manufacture of CardioTech's products are subject to GLP and GMP requirements prescribed by the 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. See "Risk Factors -- Limited Manufacturing Capability." MARKETING CardioTech plans to market its vascular graft products for which it obtains regulatory approvals either through a small targeted direct sales group or through licensing arrangements with large medical device companies. Implementation of this strategy will depend on many factors, including the market potential for CardioTech's products and financial resources. See "Risk Factors - Absence of Sales and Marketing Experience." 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 ("W.L Gore"), Impra, Inc. ("Impra"), Corvita Corporation ("Corvita") and Thoratec Corporation ("Thoratec"). 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 34 40 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. Corvita is developing a broad range of polyurethane based synthetic vascular grafts, including vascular access grafts and has commenced clinical trials of certain of its synthetic vascular graft products in both the United States and Europe. Thoratec has developed a small bore polyurethane vascular access graft and has begun limited clinical trials in foreign countries. The Joint Technology may be licensed or otherwise made available to competitors of CardioTech. 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. GOVERNMENT REGULATION CardioTech's research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. 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. The steps required to qualify a medical device for marketing in the United States are complex. Medical products regulated by the FDA are generally classified as drugs and/or medical devices. Medical devices are classified as Class I, II or III devices. CardioTech believes that its synthetic vascular grafts will be regulated as Class III medical devices. In general, Class I devices require compliance with labeling and record keeping regulations and are subject to other general controls. Class II devices may be subject to special controls, such as market surveillance and are subject to general controls. Class II devices also may not be subject to clinical testing for purposes of pre-market notification to the FDA. Class III devices, such as CardioTech's vascular graft products, require clinical testing to assure safety and effectiveness prior to marketing and distribution. At least 90 days prior to marketing, devices must be subject to pre-market notification to the FDA to determine the product's classification and regulatory status. If a product is found to be "substantially equivalent" to a Class I or Class II device, or a Class III device not subject to a Pre-Marketing Application (PMA) requirement, it may be marketed without further FDA review. The FDA may require the submission of clinical data as a basis for determining whether a device is "substantially equivalent." Such clinical data is often developed under an Investigational Drug Exemption (IDE). Marketing may commence only when the FDA issues a written order finding that the device is "substantially equivalent." If a device is found to be "not substantially equivalent," the device 35 41 manufacturer must file a PMA with the FDA based on testing intended to demonstrate that the product is both safe and effective. CardioTech believes that its products will require the issuance of a PMA from the FDA prior to commercial sale. The PMA process requires the performance of human clinical studies under an IDE. Upon completion of required clinical studies, results are presented to the FDA in a PMA application. In addition to the results of clinical investigations, the PMA applicant must submit other information relevant to the safety and effectiveness of the device, including the results of pre-clinical tests; a full description of the device and its components; a full description of the methods, facilities and controls used for manufacturing; and proposed labelling. The FDA staff then determines whether to accept the application for filing. If accepted for filing, the application is further reviewed by the FDA and then usually reviewed by an FDA scientific advisory panel of physicians and others with expertise in the relevant field. The FDA will also conduct an inspection to determine whether an applicant conforms with the FDA's current GMP. If the FDA's evaluation is favorable, the FDA will subsequently publish an order granting the PMA for the device. Although the initial PMA review process is required to be completed within 180 days from the date that the PMA application is accepted for filing, the FDA routinely raises additional issues which must be addressed prior to the approval of a PMA, which significantly extends the review process. 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. Whether or not FDA approval has been obtained, approval of a medical device by comparable foreign governmental regulatory authorities must be obtained prior to the commencement of clinical trials and subsequent marketing of such products in such countries. Under European Community ("EC") Law, the safety, efficacy and quality of CardioTech's products must be demonstrated prior to marketing, including extrinsic clinical testing of such products. National laws in each of the EC member states govern clinical trials of products, adherence to good manufacturing practice, advertising, promotion and other matters. Certain EC member countries permit the sale of medical devices based upon approvals received in other EC member states. There can be no assurance that approvals will be granted on a timely basis and the failure to receive such approvals could have a material adverse effect on the business, financial condition and results of operation of CardioTech. EMPLOYEES As of the Distribution Date, CardioTech will have six full-time employees, of whom three will be in research and development and three in executive, finance and administration. Two full-time employees have doctorates. Certain services will be provided by PMI to CardioTech on a transitional basis pursuant to the Facilities and Services Agreement. See "The Distribution - Relationship Between PMI and CardioTech After the Distribution." CardioTech has no collective bargaining agreement with its employees, and believes that its employee relations are good. PROPERTIES CardioTech's executive offices are located in Woburn, Massachusetts, a facility owned by PMI. CardioTech leases a total of approximately 7,800 square feet at PMI's facilities in Woburn, Massachusetts and Tarvin, United Kingdom. PMI leases these properties to CardioTech pursuant to the Facilities and Services Agreement. See "The Distribution - Relationship Between PMI and CardioTech After the Distribution." CardioTech believes that its current facilities are adequate for the next twelve months, after which the Facilities and Services Agreement will expire and CardioTech may need to seek replacement facilities. Although CardioTech believes that alternative facilities can be leased on acceptable terms, there is no assurance that CardioTech will be able to do so. LEGAL PROCEEDINGS CardioTech is not a party to any legal proceedings. 36 42 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table provides information about the current executive officers and directors of CardioTech: Name Age Position with CardioTech - ---- --- ------------------------ Michael Szycher, Ph.D. 57 Chairman of the Board, Chief Executive Officer and Treasurer Alan Edwards 48 Director and Executive Vice President Richard J. Zdrahala, Ph.D. 52 Vice President -- Research and Development Gene T. Gargiulo 47 Director Arthur A. Siciliano, Ph.D. 52 Director DR. SZYCHER is Chairman of the Board, Chief Executive Officer and Treasurer of CardioTech. Dr. Szycher has served as a director of CardioTech since 1993. He served as Chairman of PMI since October 1989, Chief Technical Officer of PMI since November 1990 and a director of PMI since its inception and will resign such positions as of the Distribution Date. MR. EDWARDS is Executive Vice President and a director of CardioTech, a position he has held since March, 1996. Since September 1993, Mr. Edwards has served as President of CardioTech's subsidiary. Prior to September 1993, he was the Managing Director and Company Secretary of Newtec. He has spent the last seventeen years in senior management positions with vascular graft companies, ten of these with the W.L. Gore. Mr. Edwards has been a director of CardioTech since March 1996. DR. ZDRAHALA is Vice President of Research and Development of CardioTech, a position he has held since March, 1996. From 1992 to September 1995, Dr. Zdrahala served as the Associate Director of Advanced Development of Mendox Medicals, Inc., a vascular graft manufacturer. MR. GARGIULO has served as Managing Director of Research and Institutional Sales at Brookehill Equities, Inc. since 1994. Prior to joining Brookehill in 1994, Mr. Gargiulo was Executive Vice President - Director of Research at Barington Capital Group, L.P. From 1984 to 1993, Mr. Gargiulo was Vice President of Equity Research at First Boston Corporation and covered the hospital supply industry. Mr. Gargiulo has been a director of CardioTech since March 1996. DR. SICILIANO has served as Executive Vice President of PMI since July 1994, Senior Vice President of PMI since January 1993 and Vice President, Pharmaceutics of PMI since July 1991. Dr. Siciliano served as Vice President, Manufacturing of PMI from June 1990 to July 1991. From PMI's inception until June 1990, he served as its Chief Operating Officer. Dr. Siciliano has been a director of CardioTech since March 1996. 37 43 SUMMARY COMPENSATION TABLE The following table sets forth the cash and noncash compensation paid by PMI during each of the last three fiscal years to CardioTech's Chief Executive Officer and the four most highly compensated executive officers of CardioTech who received compensation in excess of $100,000 during the year ended March 31, 1995 for services provided to PMI. CardioTech will pay the compensation of its executive officers after the Distribution Date.
Long-Term Compensation Annual Compensation Awards ------------------- ------------ Other Securities Annual Underlying All Other Salary Bonus Compensation Options Compensation Name and Principal Position Year ($) ($)(1) ($)(2) (#)(3) ($)(4) - --------------------------- ---- -------- -------- ------------- ------------ ------------ Michael Szycher, Ph.D.............. 1995 $231,785 $132,500 $4,500 131,250 $2,421 Chairman, Chief 1994 214,048 120,000 4,620 13,125 2,223 Executive Officer and 1993 198,357 120,000 4,497 156,009 1,181 Treasurer
(1) These amounts were either paid or accrued in the year shown. (2) Represents PMI's matching cash contribution paid or accrued under PMI's 401(k) Plan. Other compensation in the form of perquisites and other personal benefits has been omitted in those instances where such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total salary and bonus the named executive officer for such year. (3) Represents options granted under PMI's 1990 Stock Option Plan. (4) Represents the taxable portion of group term life insurance paid by PMI. 38 44 The following table sets forth certain information regarding options to purchase PMI Common Stock granted during the year ended March 31, 1995 by PMI to the executive officer named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants Potential --------------------------------------------------- Value at Assumed Number of Percentage of Annual Rates of Stock Securities Total Options Exercise Price Appreciation for Underlying Granted to or Option Term(4) Options Employees in Base Price Expiration ---------------------- Name Granted(#)(1) year 1995 ($/Sh)(2) Date(3) 5% 10% - ---- ------------- ------------- ---------- ---------- -- --- Michael Szycher, Ph.D.... 131,250 27.90% $4.40 6/9/04 $363,187 $920,386 (1) Of the above grant, 52,500 shares vest immediately with the remainder vesting over twelve installments, commencing three months after the date of grant. (2) The exercise price is equal to the fair market value of PMI's Common Stock on the date of grant. (3) Options expire at the end of the option term, which is ten years from the date of grant. (4) Amounts represent hypothetical gains that could be achieved for options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date options are granted.
The following table sets forth certain information regarding the exercise of options to purchase PMI Common Stock during the fiscal year ended March 31, 1995 and options to purchase PMI Common Stock held as of March 31, 1995 by the executive officer named in the Summary Compensation Table: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options Shares Value At Fiscal year End(#) Fiscal year End($)(1) Acquired on Realized -------------------------- -------------------------- Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ------------ -------- ----------- ------------- ----------- ------------- Michael Szycher, Ph.D...... 0 0 302,066 79,052 425,150 $701,103 (1) Total value of "in-the-money" unexercised options is based on the difference between the last sales price of PMI's Common Stock on the AMEX on March 31, 1995 ($6.25 per share) and the exercise price of the "in-the-money" options, multiplied by the number of "in-the-money" option shares.
EMPLOYMENT AGREEMENT CardioTech has entered into an employment agreement with Dr. Szycher (the "Employment Agreement"), pursuant to which Dr. Szycher serves as Chief Executive Officer of the Company. CardioTech will use its best efforts to cause Dr. Szycher to be elected a member, and Chairman, of the Board of Directors. Pursuant to the terms of the Employment Agreement, Dr. Szycher receives an annual base salary, which is initially $150,000 and which will be reviewed annually by the Board of Directors. Dr. Szycher may also entitled to receive an annual bonus payment in an amount, if any, to be determined by the Compensation Committee of the Board of Directors. The Employment 39 45 Agreement terminates on May 13, 1998. Thereafter, the term of the Employment Agreement will be deemed to continue on a month-to-month basis if not expressly extended while Dr. Szycher remains employed by CardioTech. Both Dr. Szycher and CardioTech have the right to terminate the Employment Agreement at any time, with or without cause (as defined in the Employment Agreement), upon thirty (30) days' prior written notice. In the event that CardioTech terminates the Employment Agreement without cause, or Dr. Szycher terminates his employment for good reason following a change in control (as such terms are defined in the Employment Agreement) or CardioTech fails to renew the Employment Agreement within two (2) years following the occurrence of a change in control, Dr. Szycher will be entitled to receive 2.99 times his annual base salary at termination. Dr. Szycher will not compete with CardioTech for one (1) year following termination of his employment. CARDIOTECH OPTION PLAN CardioTech's 1996 Employee, Director and Consultant Stock Option Plan (the "CardioTech Option Plan") was approved by CardioTech's Board of Directors and stockholders in March 1996. A total of 1,100,000 shares of CardioTech Common Stock have been reserved for issuance under the CardioTech Option Plan, of which options exercisable for 828,000 shares will be granted effective as of the Distribution Date to members of CardioTech's Board of Directors and to certain of its executive officers at the fair market value of CardioTech Common Stock on the date of the grant. Of such options, options to purchase 400,000 shares of CardioTech Common Stock will be granted to Dr. Szycher pursuant to the CardioTech Option Plan. Options granted under the CardioTech Option Plan may be either (i) options intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) non-qualified stock options. Incentive stock options may be granted under the CardioTech Option Plan to employees of CardioTech and its affiliates. Non-qualified stock options may be granted to consultants, Directors, employees or officers of CardioTech and its affiliates. The CardioTech Option Plan also provides for the automatic grant of non-qualified options to non-employee Directors of CardioTech. Any new non-employee Director, upon joining the Board, is granted a ten-year option to purchase 14,000 shares of CardioTech Common Stock (the "Initial Grant") at the then current fair market value of the Common Stock, vesting over one (1) year, assuming continued membership on the Board. Thereafter, on each anniversary of the Initial Grant, the non-employee Director will receive an additional ten-year option to purchase 14,000 shares of CardioTech Common Stock, with an exercise price equal to the then fair market value of the Common Stock, which will vest over a one-year period, assuming continued Board membership. Generally, under the CardioTech Option Plan, an option is not transferable by the optionholder except by will or by the laws of descent and distribution. No option may be exercised more than 90 days following termination of employment or service as a director unless the termination is due to death or disability, in which case the option is exercisable for a maximum of 180 days after such termination, in the case of a non-employee director, and one year after such termination, in all other instances. Options granted under the CardioTech Option Plan expire ten years from the date of grant or five years from the date of grant in the case of incentive stock options issued to employees holding more than 10% of the total voting power of CardioTech. The CardioTech Option Plan is administered by the Compensation Committee of the Board of Directors, which is composed of disinterested directors of CardioTech. Subject to the provisions of the CardioTech Option Plan, the Compensation Committee has the authority to select the optionees and determine the terms of the options granted, including: (i) the number of shares subject to each option, (ii) when the option becomes exercisable, (iii) the exercise price of the option (which in the case of an incentive stock option cannot be less than the market price of the CardioTech Common Stock as of the date of grant or, in the case of employees holding more than 10% of the voting power of CardioTech, 110% of the market price of the CardioTech Common Stock as of the date of grant), (iv) the duration of the option, and (v) the time, manner and form of payment upon exercise of an option. The aggregate fair market value (determined at the time of grant) of shares issuable pursuant to incentive stock options which become exercisable in any calendar year under any incentive stock option plan of CardioTech by an employee or officer may not exceed $100,000. Incentive stock options granted under the CardioTech Option Plan may not be granted at a price less than 100% of the fair market value of the CardioTech Common Stock on the date of grant (or 110% of fair market value in the case of employees or officers holding 10% or more of the voting stock of 40 46 CardioTech). Incentive stock options granted under the CardioTech Option Plan expire not more than ten years from the date of grant, or not more than five years from the date of grant in the case of incentive stock options granted to an employee or officer holding 10% or more of the voting stock of CardioTech. An option granted under the CardioTech Option Plan is exercisable, during the optionholder's lifetime, only by the optionholder and is not transferable by him except by will or by the laws of descent and distribution. FEDERAL INCOME TAX ASPECTS OF STOCK OPTIONS The following is a general summary of the federal income tax treatment of the options issuable under the CardioTech Option Plan. Incentive Stock Options. No taxable income will be recognized by an optionee upon the grant or exercise of an incentive stock option granted under the CardioTech Option Plan (provided that the difference between the option exercise price and the fair market value of the stock on the date of exercise must be included in the optionee's "alternative minimum taxable income" as described below), and no corresponding business expense deduction will be available to CardioTech. Generally, if an optionee holds shares acquired upon the exercise of incentive stock options until the later of (i) two years from the grant of the option and (ii) one year from the date of transfer of the purchased shares to him or her (the "Statutory Holding Period"), any gain to the optionee upon a sale of such shares will be treated as capital gain and CardioTech will not be entitled to a corresponding business expense. The gain recognized upon the sale of the stock is the difference between the option price and the sale price of the stock. The net federal income tax effect on the holder of incentive stock options is to defer, until the stock is sold, taxation of any increase in the stock's value from the time of grant to the time of exercise, and to cause all such increase to be treated as capital gain. If the optionee sells the shares prior to the expiration of the Statutory Holding Period (a "disqualifying disposition"), he or she will realize taxable income at ordinary tax rates in an amount equal to the lesser of (i) the fair market value of the shares on the date of exercise less the option price, or (ii) the amount realized on the sale less the option price, and CardioTech will receive a corresponding business expense deduction. Any additional gain will be treated as long-term capital gain if the shares are held for more than one year prior to the sale and as short-term capital gain if the shares are held for a shorter period. If the optionee sells the stock for less than the option price, he or she will recognize a capital loss equal to the difference between the sale price and the option price. The loss will be a long-term capital loss if the shares are held for more than one year prior to the sale and as a short-term capital loss if the shares are held for a shorter period. Special rules may apply to options held by directors and officers. If the optionee making a disqualifying disposition is a person subject to the reporting requirements of Section 16(a) of the Exchange Act (a "Reporting Person"), and the option was exercised within six months of the date of grant, the amount of taxable income realized at ordinary income tax rates (and the amount of CardioTech's business expense deduction) will be equal to the lesser of (i) the fair market value of the shares on the date that is six months after the date of grant less the option price, or (ii) the amount realized on sale less the option price. For purposes of the "alternative minimum tax" applicable to individuals, the exercise of an incentive stock option is treated in the same manner as the exercise of a non-statutory option. Thus, an optionee must, in the year of option exercise, include the difference between the exercise price and the fair market value of the stock on the date of exercise in alternative minimum taxable income. The alternative minimum tax is imposed upon an individual's alternative minimum taxable income at rates of 26% to 28%, but only to the extent that such tax exceeds the taxpayer's regular income tax liability for the taxable year. Non-Statutory Stock Options. No taxable income is recognized by the optionee upon the grant of a non-statutory stock option under the CardioTech Option Plan. The optionee must recognize as ordinary income in the year in which the option is exercised the amount by which the fair market value of the purchased shares on the date of exercise exceeds the option price (and CardioTech is required to withhold an appropriate amount for tax purposes). However, the following special rules apply to Reporting Persons. If such a person (executive offices and directors of CardioTech) exercises the option within six months of the date of grant, upon exercise of such option, no income will 41 47 be recognized by the optionee until six months have expired from the date the option was granted, and the income then recognized will include any appreciation in the value of the shares during the period between the date of exercise and the date six months after the date of grant, unless the optionee makes an election under Section 83(b) of the Code to have the difference between the exercise price and fair market value at the time of exercise recognized as ordinary income as of the time of exercise. CardioTech will be entitled to a business expense deduction equal to the amount of ordinary income recognized by the optionee. Any additional gain or any loss recognized upon the subsequent disposition of the purchased shares will be a capital gain or loss, and will be a long-term gain or loss if the shares are held for more than one year. 42 48 CERTAIN TRANSACTIONS PMI and CardioTech have entered or will enter into certain Intercompany Agreements. See "The Distribution - Relationship Between PMI and CardioTech After The Distribution." In the three years preceding the filing of this Information Statement, CardioTech has sold the following securities that were not registered under the Securities Act. In connection with the formation of CardioTech in 1993, PMI purchased 2,516,881 shares of CardioTech Common Stock, representing 88.89% of the outstanding shares, of CardioTech Common Stock. The following executive officers of CardioTech and PMI purchased the indicated number of shares of common stock of CardioTech: Mr. Lee (94,886 shares; 3.35%) Dr. Szycher (102,185 shares, 3.61%); Dr. Reed (43,752 shares, 1.55%); Dr. Siciliano (41,948 shares; 1.48%); Mr. Walters (21,352 shares; 0.75%) and Mr. Zappa (10,487 shares, 0.37%). The shares were purchased by PMI and such executive officers of CardioTech and PMI in April 1993 (except for Mr. Zappa, who purchased his shares in October 1993) for the price of $.00024 per share, the fair market value of the stock on the date of purchase. On March 19, 1996 and May 9, 1996, CardioTech agreed to issue an additional 973,758 (subject to adjustment) shares of CardioTech Common Stock in the aggregate to PMI pursuant to the terms and conditions of the Subscription Agreement in connection with the Restructuring. See "The Distribution - Restructuring of CardioTech Prior to the Distribution." CardioTech will issue to Hancock the Mirror Warrants. See "The Distribution - Manner of Effecting the Distribution." No person acted as an underwriter with respect to the transactions set forth above. In each of the foregoing instances, CardioTech relied on Section 4(2) of the Securities Act for the exemption from the registration requirements of the Securities Act, because no public offering was involved. 43 49 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT PMI will own 3,490,638 of the outstanding shares of CardioTech Common Stock immediately prior to the Distribution. The following table sets forth the number of shares and percentage of CardioTech Common Stock expected to be received on the Distribution Date by (i) each person who is expected by CardioTech to beneficially own more than five percent of CardioTech Common Stock, (ii) each of CardioTech's directors and the executive officers named in the Summary Compensation Table, and (iii) all of CardioTech's directors and executive officers as a group following the Distribution Date based on certain information known to CardioTech with respect to such persons' beneficial ownership of shares of PMI Common Stock as of April 30, 1996. The table assumes that ownership of PMI Common Stock by such persons will not change before the Record Date.
Shares of CardioTech Beneficially Owned --------------------- Name Number(1) Percent - ---- --------- ------- Kennedy Capital Management(2) 237,557 5.9% 425 N. Dallas Road, Suite 181 St. Louis, MO 63141 U.S. Bancorp(3) 233,710 5.8% 111 S.W. Fifth Avenue Portland, OR 97204 John Hancock Mutual Life Insurance Company(4) 245,438 6.1% 200 Clarendon Street Boston, MA 02116 Michael Szycher, Ph.D.(5) 192,871 4.8% Alan Edwards(6) 0 * Richard J. Zdrahala, Ph.D 0 * Gene Gargiulo 0 * Arthur A. Siciliano, Ph.D.(7) 70,205 1.8% All directors and executive officers as a group 263,076 6.6% (5 persons) - ------------------ *Less than 1% (1) The persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to the information contained in the footnotes to this table. Amounts shown include shares issuable pursuant to the exercise of options or warrants exercisable within 60 days after April 30, 1996. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. (2) Based upon a Schedule 13G filed by Kennedy Capital Management pursuant to the Exchange Act and the rules promulgated thereunder reporting the beneficial ownership by it of 525,000 shares of PMI Common Stock. Kennedy Capital Management has shared voting power and shared investment power with respect to all shares of Common Stock beneficially owned by them.
44 50 (3) Based upon a Schedule 13G filed by U.S. Bancorp pursuant to the Exchange Act and the rules promulgated thereunder reporting the beneficial ownership by it of 516,500 shares of PMI Common Stock. U.S. Bancorp shared voting power and shared investment power with respect to all shares of Common Stock beneficially owned by them. (4) Reflects the issuance of 245,438 shares of CardioTech Common Stock issuable upon the exercise of a stock purchase warrant with CardioTech issues as a result of the adjustment provisions of certain warrants issued by PMI in connection with the sale by a subsidiary of the PMI of $25 million 10.65% Guaranteed Senior Secured Notes due January 31, 2003, to the John Hancock Mutual Life Insurance Company. (5) Does not include 368,781 shares of PMI Common Stock that are subject to currently exercisable stock options to purchase shares of PMI Common Stock. If such options are exercised prior to the Distribution Date, Dr. Szycher will be entitled to receive 166,869 additional shares of CardioTech Common Stock. (6) Does not include 9,168 shares of PMI Common Stock that are subject to currently exercisable stock options to purchase shares of PMI Common Stock. If such options are exercised prior to the Distribution Date, Mr. Edwards will be entitled to receive 4,148 additional shares of CardioTech Common Stock as a result of his ownership of such shares of PMI Common Stock. (7) Does not include 156,010 shares of PMI Common Stock that are subject to currently exercisable stock options to purchase shares of PMI Common Stock. If such options are exercised prior to the Distribution Date, Dr. Siciliano will be entitled to receive 70,593 additional shares of CardioTech Common Stock as a result of his ownership of such shares of PMI Common Stock. 45 51 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of CardioTech consists of 20,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"). COMMON STOCK Holders of CardioTech Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of CardioTech Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of CardioTech Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of CardioTech, the holders of CardioTech Common Stock are entitled to receive ratably the net assets of CardioTech available after the payment of all debts and liabilities and subject to the prior rights of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. Holders of CardioTech Common Stock are, and the shares being distributed in the Distribution will be, when distributed, fully paid and nonassessable. The rights, preferences and privileges of holders of CardioTech Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which CardioTech may designate and issue in the future. PREFERRED STOCK The Board of Directors may, without further action of the stockholders of CardioTech, issue Preferred Stock in one or more series and fix the rights and preferences thereof, including the dividend rights, dividend rates, conversion rights, voting rights, pre-emptive rights, terms of redemption (including sinking fund provisions), redemption prices and liquidation preferences. The Certificate of Incorporation of CardioTech grants the Board of Directors authority to issue Preferred Stock and to determine its rights and preferences without the need for further stockholder approval to eliminate delays associated with a stockholder vote on specific issuances. The issue of Preferred Stock, while providing desirable flexibility in connection with possible financings, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of CardioTech. CardioTech has no present plans to issue any shares of Preferred Stock and there are no such shares of Preferred Stock outstanding. MASSACHUSETTS LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS Under Chapter 110F of the Massachusetts General Laws, a Massachusetts corporation with more than 200 stockholders may not engage in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder or (iii) the business combination is approved by both the Board of Directors and the holders of two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 5% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, a stock or asset sale, and certain other specified transactions resulting in a financial benefit to the interested stockholder. The By-Laws of CardioTech include a provision that excludes CardioTech from the applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation of Control Share Acquisitions." In general, this statute provides that any stockholder of a corporation subject to this statute who acquires 20% or more of the 46 52 outstanding voting stock of a corporation subject to the statute may not vote such stock unless stockholders of the corporation so authorize. The Board of Directors may amend CardioTech's By-Laws at any time to subject CardioTech to this statute prospectively. Massachusetts General Laws Chapter 156B, Section 50A requires that publicly held Massachusetts corporations have a classified board of directors consisting of three classes as nearly equal in size as possible. In accordance with such law, CardioTech's Articles of Organization provide for the division of the Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms. The Articles of Organization and CardioTech's By-Laws provide that directors may only be removed either for cause by the vote of the holders of 80% of the outstanding voting power of CardioTech or by the vote of at least three-quarters of the directors then serving. The affirmative vote of the holders of 80% of the voting power is required to amend or repeal the provision creating a classified board or to adopt any provision inconsistent with it. CardioTech's By-Laws require that nominations for the Board of Directors made by a stockholder comply with particular notice procedures. A notice by a stockholder of a planned nomination must be given not less than 60 and not more than 90 days prior to a scheduled meeting, provided that if less than 70 days' notice is given of the date of the meeting, a stockholder will have ten days within which to give such notice. The stockholder's notice of nomination must include particular information about the stockholder, the nominee and any beneficial owner on whose behalf the nomination is made. CardioTech may require any proposed nominee to provide such additional information as is reasonably required to determine the eligibility of the proposed nominee. The By-Laws require that a stockholder seeking to have any business conducted at a meeting of stockholders must give notice to CardioTech not less than 60 and not more than 90 days prior to the scheduled meeting, provided in certain circumstances that a ten-day notice rule applies. The notice from the stockholder must describe the proposed business to be brought before the meeting and include information about the stockholder making the proposal, any beneficial owner on whose behalf the proposal is made, and any other stockholder known to be supporting the proposal. CardioTech's Articles of Organization also include provisions eliminating the personal liability of CardioTech's directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the Massachusetts Business Corporation Law. CardioTech's By-Laws include provisions indemnifying CardioTech's directors and officers to the fullest extent permitted by Massachusetts law, including under circumstances in which indemnification is otherwise discretionary, and permitting the Board of Directors to grant indemnification to employees and agents to the fullest extent permitted by Massachusetts law. CardioTech intends to enter into indemnity agreements with each of its directors and certain executive officers. Those agreements will require, with limited exceptions, that CardioTech indemnify such individuals to the fullest extent permitted by Massachusetts law. The provisions in CardioTech's By-Laws pertaining to stockholders, directors and indemnification (including the provisions described above pertaining to nominations, the presentation of business before a meeting of the stockholders and the removal of directors) may not be amended and no provision inconsistent therewith may be adopted without the approval of either the Board of Directors or holders of at least 80% of the voting power of CardioTech. The Articles of Organization provide that certain transactions, such as the sale, lease or exchange of all or substantially all of CardioTech's property and assets and the merger or consolidation of CardioTech into or with any other corporation, may be authorized by the approval of a majority of the shares of each class of stock entitled to vote thereon, rather than by two-thirds as otherwise provided by statute, provided that the transactions have been authorized by a majority of the members of the Board of Directors and the requirements of any other applicable provisions of the Articles of Organization have been met. The Articles of Organization contain a "fair price" provision (the "Fair Price Provision") which provides that certain Business Combinations with any Interested Stockholder (as each term is defined in the Fair Price Provision) may not be consummated without an 80% stockholder vote, unless approved by at least a majority of the Disinterested 47 53 Directors (as defined in the Fair Price Provision) and, in certain circumstances, certain minimum price and procedural requirements are met. An "Interested Stockholder" is defined to include any individual or entity who is (or who is an affiliate and during the prior two years was) the beneficial owner of more than 15% of the voting stock of CardioTech. A Business Combination includes (i) a merger or consolidation, (ii) the sale or other disposition of 10% or more of CardioTech's assets, (iii) the issuance of stock having a value in excess of 10% of CardioTech's assets, (iv) any reclassification or recapitalization which increases the proportionate share holdings of an Interested Stockholder, and (v) the adoption of a plan of liquidation or dissolution proposed by or on behalf of an Interested Stockholder. A significant purpose of the Fair Price Provision is to deter a purchaser from using two-tiered pricing and similar unfair or discriminatory tactics in an attempt to acquire CardioTech. The affirmative vote of the holders of 80% of the voting power is required to amend or repeal the Fair Price Provision or adopt any provision inconsistent with it. The provisions of Massachusetts law, the Articles of Organization and By-Laws discussed above would make more difficult or discourage a proxy contest or the assumption of control by a holder of a substantial block of CardioTech's stock or the removal of the incumbent Board of Directors. Such provisions could also have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of CardioTech, even though such an attempt might be beneficial to Cardiotech and its stockholders. In addition, since the Articles of Organization and By-Laws are designed to discourage accumulations of large blocks of Cardiotech's stock by purchasers whose objective is to have such stock repurchased by CardioTech at a premium, such provisions could tend to reduce the temporary fluctuations in the market price of CardioTech's stock which are caused by such accumulations. Accordingly, stockholders could be deprived of certain opportunities to sell their stock at a temporarily higher market price. DIVIDENDS CardioTech currently anticipates that it will retain all of its earnings for use in the development of its business and does not anticipate paying any cash dividends in the foreseeable future. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for CardioTech Common Stock is the First National Bank of Boston. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 67 of the Massachusetts Business Corporation Law, CardioTech's By-Laws provide it may indemnify its officers and directors. Such indemnification may include payment by CardioTech of expenses incurred in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if such person is adjudicated to be not entitled to indemnification under the Massachusetts Business Corporation Law, which undertaking may be accepted without reference to the financial ability of such person to make repayment. Any such indemnification may be provided although the person to be indemnified is no longer an officer, director, employee or agent of CardioTech. CardioTech will not indemnify any person with respect to any matter as to which such person shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of CardioTech. CardioTech intends to enter into indemnity agreements with each of its directors and certain executive officers. Those agreements will require, with limited exceptions, that CardioTech indemnify such individuals to the fullest extent permitted by the Massachusetts Business Corporation Law. In addition, CardioTech's Articles of Organization limit the liability of directors to the maximum extent permitted by the Massachusetts Business Corporation Law. Massachusetts law permits a corporation's articles of organization to provide that the directors of a Massachusetts corporation will not be personally liable to such 48 54 corporation or its stockholders for monetary damages for breach of their fiduciary duties as directors, except for liability (i) for any breach of their duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, or for certain loans to officers and directors of the corporation that are not repaid, as provided in Section 61 and Section 62, respectively, of the Massachusetts Business Corporation Law; or (iv) for any transaction from which the director derives an improper personal benefit. CardioTech intends to purchase a liability insurance policy that insures: (i) CardioTech, under certain circumstances, in the event it indemnifies a director or officer of CardioTech pursuant to the foregoing provisions of CardioTech's By-Laws or otherwise; and (ii) directors and officers, under certain circumstances, against liability and costs (including the cost of defending any action) incurred by directors or officers in their capacity as such. TAX CONSIDERATIONS OF THE DISTRIBUTION The following discussion sets forth certain federal income tax considerations under the Internal Revenue Code of 1986, as amended (the "Code"), relating to the Distribution. It is intended to be for general information only and does not address all possible federal income tax consequences of the Distribution and does not address the unique federal income tax consequences that may be relevant to particular PMI stockholders (e.g., foreign persons, dealers in securities and those person who received their PMI Common Stock in compensatory transactions). Nor does the discussion address state, local or foreign tax considerations. The discussions contained herein is based upon an opinion of Hale and Dorr, counsel to PMI. Although such opinion is based upon the best judgment of counsel as to how a court would rule if presented with the issues, it is not binding upon either the Internal Revenue Service (the "IRS") or the courts. Accordingly, NO ASSURANCE CAN BE GIVEN THAT THE IRS WILL NOT BE ABLE TO SUCCESSFULLY CHALLENGE SOME OR ALL OF THE CONCLUSIONS SET FORTH BELOW. ALL STOCKHOLDERS ARE THEREFORE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE DISTRIBUTION. Counsel has advised PMI that the Distribution will qualify as a Section 355 Spinoff. However, as discussed in more detail below, such conclusion is, in turn, based upon the conclusion that the Distribution will meet certain requirements of Code Section 355 that are subjective in nature or with respect to which there is a relative absence of authority addressing their application on facts similar to those presented by the Distribution. Accordingly, it is possible that the IRS and the courts could reach a different conclusion. If the Distribution constitutes a Section 355 Spinoff: (i) No gain or loss will be recognized by (and no income will be includable in the income of) a holder of PMI Common Stock upon the receipt of CardioTech Common Stock; provided, however, that holders who receive cash in lieu of fractional shares of CardioTech Common Stock will be treated as if they had received the fractional shares and then resold them in a transaction in which gain or loss (capital gain or loss if the PMI Common Stock was held as a capital asset) was recognized. (ii) A stockholder's basis of the PMI Common Stock immediately before the Distribution will be allocated between such stock and the CardioTech Common Stock distributed thereon in accordance with their relative fair market values; (iii) The holding period of the CardioTech Common Stock received in the Distribution will include the holding period of the PMI Common Stock with respect to which it was distributed, provided the PMI Common Stock is held as a capital asset; and (iv) PMI and CardioTech will not recognize any unrealized gain or loss inherent in the Common Stock or the CardioTech assets upon the Distribution other than certain immaterial amounts related to fractional shares. 49 55 If the Distribution fails to qualify as a Section 355 Spinoff: (i) PMI will recognize gain, if any, measured by the difference between PMI's tax basis in the CardioTech Common Stock distributed in the Distribution and the fair market value (on the Distribution Date) of that stock; (ii) Each PMI stockholder will be considered to have received a taxable corporate distribution in an amount equal to the sum of the amount of cash and the fair market value (on the Distribution Date) of CardioTech Common Stock distributed to such stockholder as discussed below; (iii) The holding period of the CardioTech Common Stock received in the Distribution will begin on the Distribution Date; and (iv) Each PMI stockholder will have a tax basis in the CardioTech Common Stock distributed to him or her equal to the fair market value on the CardioTech Common Stock on the Distribution Date. The Distribution, if taxable, would generally be treated as ordinary dividend income to a PMI stockholder to the extent of PMI's current and accumulated earnings and profits and would therefore generally be subject to back-up withholding with respect to individuals who, prior to the Distribution, had not provided their correct taxpayer identification numbers on the IRS's Form W-9 or a substitute thereof. If the Distribution were found to be taxable, it is likely that PMI would have sufficient current and accumulated earnings and profits to result in the entire amount of the Distribution constituting a dividend for federal income tax purposes. However, to the extent the amount of the Distribution exceeded the amount of earnings and profits, the excess would be treated first as a basis-reducing, tax-free return of capital to the extent of a stockholder's basis in his or her PMI Common Stock (determined separately for blocks of stock not purchased at the same time and at the same price) and then as capital gain (assuming the PMI Common Stock is held as a capital asset by the PMI stockholder). For corporate stockholders, the portion of the taxable Distribution that constituted a dividend would be eligible for the dividends-received deduction (subject to certain limitations contained in the Code) and could be subject to the Code's extraordinary dividend provisions which, if applicable, would require a reduction in a corporate holder's basis in the PMI Common Stock to the extent of such deduction. The Code and applicable regulations impose both subjective and objective requirements that must be met in order for a distribution of stock of a subsidiary to qualify as a Section 355 Spinoff. As noted above, because of the subjective nature of some of these requirements and the lack of relevant legal authority on others, it is not completely certain that the Distribution will qualify as a Section 355 Spinoff. While satisfaction of any or all of the requirements of a Section 355 Spinoff may be subject to challenge by the IRS, the principal uncertainty as to whether the Distribution will qualify as a Section 355 Spinoff involves three specific requirements: the "active trade or business test," the "business purpose text" and the "device test." The active trade or business test will be satisfied only if, among other things, following the Distribution, PMI and CardioTech are each considered to be engaged in an active trade or business that had been actively conducted for the five-year period preceding the Distribution. The regulations define an active trade or business as a specific group of activities which (i) are carried on for the purpose of earning income or profit, and (ii) include "every operation that forms a part of, or a step in, the process of earning income or profit." According to the regulations, such group of activities "ordinarily" must include the collection of income. Following the Distribution, the business that will be conducted by PMI and its remaining subsidiaries should constitute an active trade or business carried on for at least five years by them. Accordingly, the active trade or business text will be satisfied with respect to the Distribution provided that the activities to be conducted by CardioTech will also be considered to be such an active trade or business. Hale and Dorr believes that the activities of CardioTech will constitute the requisite active trade business. However, the scope of the activities that constitute an active trade or business for purposes of Section 355 of the Code is unclear. If CardioTech is considered to be engaged in the trade or business of developing and marketing specialized polymer-based products, the active trade or business 50 56 test should be met. In addition, if CardioTech were considered only to be engaged in a trade or business consisting of the development and marketing of ChronoFlex for medical-related uses, the active trade or business test still would likely be met. However, if the trade or business conducted by CardioTech were even more narrowly defined to include, for example, only vascular grafts, the active trade or business test would not be met since PMI and its affiliates have not been engaged in such business for at least five years. Although counsel has advised PMI that it believes such a narrow view of CardioTech's historic trade or business is factually incorrect and likely inappropriate as a matter of law, given the lack of authority expressly addressing the issue on similar facts, there can be no assurances that counsel's opinion could not be successfully challenged by the IRS. The business purpose test will require, among other things, a showing the (i) the Distribution was carried out for a "real and substantial non-federal tax" corporate (rather than stockholder) purpose that was "germane to the business" of PMI or CardioTech; (ii) there was no practical tax-free alternative to the Distribution for achieving such purpose; and (iii) the Distribution was "required by business exigencies." Although counsel believes that the stated reasons for the Distribution should satisfy the business purpose test, because of the subjectivity of the test, the IRS may not adopt a similar view. See "The Distribution -- Reasons for the Distribution." The device test requires that the Distribution not be "a transaction used principally as a device for the distribution of the earnings and profits" of PMI, CardioTech, or both. Application of this test is uncertain because the regulations simply state that the device test will be applied on the basis of all surrounding facts and circumstances, but do not provide specific guidelines for determining whether a transaction constitutes a device. Although PMI is undertaking the Distribution for substantial business reasons (see 'The Distribution -- Reasons for the Distribution") and has represented that the Distribution does not have a principal purpose of avoiding federal income tax on the distribution of PMI's earnings and profits, because of the subjectivity of the device test, no assurances can be given that the IRS or the courts would concur. The foregoing is only a summary of certain federal income tax considerations of the Distribution under current law and is intended for general information only. Each stockholder should consult his or her tax advisor as to (i) whether to report the Distribution as a Section 355 Spinoff and (ii) the particular consequences of the Distribution to such stockholder, in light of his or her personal circumstances, including the application of state, local and foreign tax laws. AVAILABLE INFORMATION CardioTech intends to furnish to holders of CardioTech Common Stock annual reports containing consolidated financial statements prepared in accordance with generally accepted accounting principles and audited and reported on, with an opinion expressed, by an independent public accounting firm, as well as quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. This Information Statement does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, as certain items are omitted in accordance with the rules and regulations of the Commission. Reference is made to such Registration Statement and the exhibits and schedules thereto, which may be inspected, without charge, at the office of the Commission at 450 Fifth St., N.W., Washington, D.C. 20549, and copies of which may be obtained from the Commission at prescribed rates. Statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. 51 57 EXHIBIT A
INDEX OF FINANCIAL STATEMENTS Page ---- Report of Independent Accountants A-2 Consolidated Balance Sheets as of March 31, 1994 and 1995 and December 31, 1995 (unaudited) A-3 Consolidated Statements of Operations for each of the three years in the period ended March 31, 1995 and for the nine months ended December 31, 1994 and 1995 (unaudited) A-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 1995 and for the nine months ended December 31, 1994 and 1995 (unaudited) A-5 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 1995 and for the nine months ended December 31, 1994 and 1995 (unaudited) A-6 Notes to Consolidated Financial Statements A-7
A-1 58 Report of Independent Accountants To the Board of Directors and Stockholders of CardioTech International, Inc.: We have audited the accompanying consolidated balance sheets of CardioTech International, Inc. as of March 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CardioTech International, Inc. as of March 31, 1994 and 1995, and results of its operations and its cash flows and for the three years in the period ended March 31, 1995 in conformity with generally accepted accounting principles. The Company is a majority-owned subsidiary of PolyMedica Industries, Inc. As explained in Note B to the financial statements, certain of the costs and expenses presented in the financial statements represent intercompany allocations and management estimates of the costs of services provided by PolyMedica Industries, Inc. As a result, the financial statements presented may not be indicative of the financial position or results of operations that would have been achieved had the Company operated as a nonaffiliated entity. Boston, Massachusetts Coopers & Lybrand L.L.P. March 18, 1996, except as to the information presented in the second paragraph of Note E for which the date is May 9, 1996 A-2 59 CardioTech International, Inc. Consolidated Balance Sheets
March 31, 1994 March 31, 1995 December 31, 1995 -------------- -------------- ----------------- (Unaudited) ASSETS Current assets: Cash $ 504 $ 504 $ 504 Property and equipment, net 51,718 43,646 37,350 ----------- ----------- ----------- Total assets $ 52,222 $ 44,150 $ 37,854 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none issue and outstanding Common stock, $.01 par value, 20,000,000 shares authorized; 2,831,491 shares issued and outstanding 2,831 2,831 2,831 Due to parent 1,293,524 1,884,392 2,620,151 Accumulated deficit (1,244,133) (1,843,073) (2,585,128) ----------- ----------- ----------- Total stockholders' equity 52,222 44,150 37,854 ----------- ----------- ----------- Total liabilities and stockholders' equity $ 52,222 $ 44,150 $ 37,854 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. A-3 60 CardioTech International, Inc. Consolidated Statements of Operations
Nine Months Ended Years Ended March 31, December 31, 1993 1994 1995 1994 1995 ------------------------------------------------------------------------------- (Unaudited) Research revenues $ 422,590 $ 285,876 $ 407,510 $ 272,617 $ 143,310 Operating expenses: Research and development 377,231 699,919 708,723 511,444 633,442 Selling, general and administrative 228,680 375,886 297,727 208,990 251,923 ----------- ----------- ----------- ----------- ----------- Total operating expenses 605,911 1,075,805 1,006,450 720,434 885,365 ------------------------------------------------------------------------------- Net loss (183,321) (789,929) (598,940) (447,817) (742,055) =============================================================================== Pro forma financial information: Pro forma loss per share $ (.31) $ (.33) Pro forma shares outstanding 2,831,491 2,831,491
The accompanying notes are an integral part of the consolidated financial statements. A-4 61 CardioTech International, Inc. Consolidated Statements of Stockholders' Equity For the years ended March 31, 1993, 1994 and 1995, and for the nine months ended December 31, 1995 (unaudited)
Common stock Total ----------------- Number Due to Accumulated Stockholders' of shares Amount Parent Deficit Equity ------------------------------------------------------------------------------- Balance at March 31, 1992 $270,883 ($270,883) $0 Issuance of common stock 2,831,491 $ 2,831 (2,156) 675 Net loss (183,321) (183,321) Advance from parent 182,646 182,646 ------------------------------------------------------------------------------- Balance at March 31, 1993 2,831,491 2,831 451,373 (454,204) 0 Net loss (789,929) (789,929) Advance from parent 842,151 842,151 ------------------------------------------------------------------------------- Balance at March 31, 1994 2,831,491 2,831 1,293,524 (1,244,133) 52,222 Net loss (598,940) (598,940) Advance from parent 590,868 590,868 ------------------------------------------------------------------------------- Balance at March 31, 1995 2,831,491 2,831 1,884,392 (1,843,073) 44,150 Net loss (742,055) (742,055) Advance from parent 735,759 735,759 ------------------------------------------------------------------------------- Balance at December 31, 1995 (unaudited) 2,831,491 $ 2,831 $ 2,620,151 ($2,585,128) $ 37,854 ===============================================================================
The accompanying notes are an integral part of the consolidated financial statements. A-5 62 CardioTech International, Inc. Consolidated Statements of Cash Flows
Nine Months Ended Years Ended March 31, December 31, 1993 1994 1995 1994 1995 --------- --------- --------- --------- --------- (Unaudited) Cash flows from operating activities: Net loss $(183,321) $(789,929) $(598,940) $(447,817) $(742,055) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation -- 4,547 8,912 6,182 6,296 Loss on disposal of fixed assets -- 2,330 3,434 -- -- --------- --------- --------- --------- --------- Net cash flows from operating activities (183,321) (783,052) (586,594) (441,635) (735,759) Cash flows from financing activities: Advance from parent 182,646 783,556 586,594 441,635 735,759 Proceeds from issuance of common stock 675 -- -- -- -- --------- --------- --------- --------- --------- Net cash flows from financing activities 183,321 783,556 586,594 441,635 735,759 --------- --------- --------- --------- --------- Net increase in cash -- 504 -- -- -- --------- --------- --------- --------- --------- Cash at beginning of period -- -- 504 504 504 --------- --------- --------- --------- --------- Cash at end of period $ -- $ 504 $ 504 $ 504 $ 504 ========= ========= ========= ========= ========= Supplemental cash flow information: Noncash transactions: Transfer of property and equipment from parent -- $ 58,595 -- -- --
The accompanying notes are an integral part of the consolidated financial statements. A-6 63 CardioTech International, Inc. Notes to Consolidated Financial Statements (Information as of and for the nine months ended December 31, 1994 and 1995 is unaudited.) A. Nature of Business: CardioTech International, Inc. (including its subsidiary, collectively "CardioTech") develops, manufactures and markets its polymer technologies with particular emphasis on the development of implantable synthetic grafts for a broad variety of applications, including vascular access grafts, peripheral grafts and coronary artery bypass grafts. It is headquartered in Massachusetts and operates from manufacturing and laboratory facilities located in Massachusetts and the United Kingdom. Basis of Presentation CardioTech's business, which is the basis for these financial statements, is a spinoff of a portion of the business of PolyMedica Biomaterials, Inc. ("Biomaterials"), a majority-owned subsidiary of PolyMedica Industries, Inc. ("PMI") which was incorporated in March 1993. The accompanying financial statements, which are derived from the historical books and records of PMI, include the assets, liabilities, revenues and expenses of CardioTech at historical cost. The other portion of Biomaterials business will be retained by PMI. CardioTech's spunoff business operated as a division of PMI starting in 1990. In September 1993, it purchased certain assets of Newtec Vascular Products Limited ("Newtec"), a company that had conducted development work on small bore vascular grafts. Newtec operated as a division of PMI until June 1995 when it was incorporated as a wholly-owned subsidiary of CardioTech. These financial statements are intended to present management's estimates of the results of consolidated operations and financial condition of CardioTech as if it had operated as a stand-alone company since inception. As explained below in this note, certain of the costs and expenses presented in these consolidated financial statements represent intercompany allocations and management estimates of the cost of services provided by PMI and its subsidiaries. As a result, the consolidated financial statements presented may not be indicative of the results that would have been achieved had CardioTech operated as a nonaffiliated entity. B. Summary of Significant Accounting Policies: Future Operations CardioTech's future growth will largely 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 any revenue from the sale of vascular grafts, although it has received a minor amount of research revenue related to its other biomaterials applications. Since inception, funding from PMI has been used to finance the development of CardioTech's technologies. CardioTech expects to continue to incur operating losses until vascular graft 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 A-7 64 CardioTech International, Inc. Notes to Consolidated Financial Statements (Information as of and for the nine months ended December 31, 1994 and 1995 is unaudited.) technological and market developments, changes in CardioTech's development of commercialization activities and arrangements, and the purchase of additional facilities and capital equipment. After the Distribution, CardioTech will conduct its operations with approximately $3.8 million in cash contributed by PMI. CardioTech estimates such amounts will be sufficient to finance its operations at its current level of development activity for approximately two years from the Distribution. CardioTech will seek to obtain additional funds through public or private equity or debt financings, 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. Interim Financial Information The unaudited consolidated financial statements included herein have been prepared by CardioTech 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. 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. CardioTech believes, however, that its disclosures are adequate to make the information presented not misleading. The results for the interim periods presented are unaudited and are not necessarily indicative of results to be expected for the full fiscal year. Due to Parent, Advance from Parent All intercompany charges related to CardioTech's operations and all amounts receivable to and payable by CardioTech are processed by PMI, its parent, and records the net amount as Advance from Parent in Stockholders' Equity. Amounts due to parent will be permanently invested by the parent in connection with the Common Stock Subscription Agreement. Pro Forma Net Loss per Common Share The pro forma net loss per common share is calculated using the estimated number of outstanding shares (2,831,491) of CardioTech before the Distribution and stock split as described in Note E and reflects estimated additional costs that would have been incurred by CardioTech had it been an independent public company for the periods presented. CardioTech estimates such costs to be $265,000 annually. A-8 65 CardioTech International, Inc. Notes to Consolidated Financial Statements (Information as of and for the nine months ended December 31, 1994 and 1995 is unaudited.) Research Revenue Research revenue is generated in connection with the development and sale of ChronoFlex and other proprietary biomaterials for use in medical devices. In certain instances, exclusivity, royalty and license fees are earned from various strategic partners with whom CardioTech has contracts. 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. Research and Development Expenses Research and development expenses are charged to expense as incurred. 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 net deferred assets is recorded, if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. For income purposes, CardioTech's results have been consolidated with the results of PMI. Therefore, no estimated income tax benefits have been reflected. After the Distribution, CardioTech's results of operations will no longer be combined with PMI. Accordingly, CardioTech will not receive any benefit from net operating losses incurred through the date of the Distribution. C. Arrangements with PMI and Subsidiaries: Since CardioTech's inception, all facilities and support services, including research and administrative support, have been provided by PMI. For these services, CardioTech was charged $180,000, $842,000, $591,000, $445,000, and $736,000 for the years ended March 31, 1993, 1994 and 1995 and for the nine months ended December 31, 1994 and 1995, respectively. These charges represent an allocation of CardioTech's proportionate share of PMI's overhead costs using formulas which management believes are reasonable based upon CardioTech's use of facilities and services. All other costs for all periods presented, including payroll costs, are directly attributed to CardioTech and have been paid by PMI and charged to CardioTech. In connection with the Distribution, CardioTech expects to enter into the following agreements with PMI: Distribution Agreement This agreement provides for the principal corporate transactions required to effect the Distribution, including, among other things, the preparation of a registration statement registering the CardioTech common stock under the Exchange Act and an undertaking by CardioTech to prepare a registration statement registering the shares of CardioTech common stock to be issued upon the exercise of the CardioTech warrants under the Securities Act. This agreement also allocates the costs related to the implementation of the Distribution between PMI and CardioTech and provides that each company will share equally any liabilities under the federal and any state securities laws incurred as a result of the distribution of the Information Statement. Facilities and Services Agreement This agreement provides that PMI will continue to provide certain administrative services including purchasing, benefits administration, accounting, management and data processing services to CardioTech and will make available certain facilities and equipment to CardioTech. PMI will be reimbursed monthly by CardioTech for the direct costs and expenses incurred in connection with the provisions of such services. The agreement has a term of one year. CardioTech is committed to make monthly fixed payments of $15,000, or $180,000 annually. A-9 66 CardioTech International, Inc. Notes to Consolidated Financial Statements (Information as of and for the nine months ended December 31, 1994 and 1995 is unaudited.) License Agreement PMI has granted to CardioTech a non-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. Tax Matters Agreement The Tax Matters Agreement provides, among other things, that PMI will be responsible for all federal, state, local and foreign tax liabilities of CardioTech for periods ending on or prior to the Distribution Date and CardioTech will be responsible for all tax liabilities of CardioTech subsequent to that time. The Tax Matters Agreement further provides that for the tax year of PMI that includes the Distribution Date and the tax year of CardioTech that commences immediately following the Distribution Date, PMI will claim on its federal income tax returns certain specified tax benefits and CardioTech will not claim any of such tax benefits through the Distribution Date. D. Property and Equipment: Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the various assets which range from five to seven years. Upon retirement or disposal of fixed assets, the costs and accumulated depreciation are removed from the accounts, and any gain or loss is reflected in income. Expenditures for repairs and maintenance are charged to expense as incurred. Property and equipment consist of the following:
March 31, March 31, December 31, 1994 1995 1995 ---- ---- ---- Laboratory equipment $ 44,796 $ 44,796 $ 44,796 Furniture, fixtures and office equipment 11,312 12,330 12,330 -------- -------- -------- 56,108 57,126 57,126 Less accumulated depreciation (4,390) (13,480) (19,776) -------- -------- -------- $ 51,718 $ 43,646 $ 37,350 ======== ======== ========
Depreciation expense for property and equipment for the years ended March 31, 1993, 1994 and 1995 and for the nine months ended December 31, 1994 and 1995 was approximately $0, $4,500, $8,900, $6,200 and $6,300, respectively. A-10 67 CardioTech International, Inc. Notes to Consolidated Financial Statements (Information as of and for the nine months ended December 31, 1994 and 1995 is unaudited.) E. Stockholders' Equity: CardioTech was incorporated in March 1993 and issued 67,500 shares of its common stock, of which 60,000 shares were issued to PMI and 7,500 shares were issued to certain founders. There were 100,000 shares of Common Stock authorized for issuance. See Notes H and I. On March 19 and May 9, 1996, CardioTech amended its Articles of Organization to: (i) effect a net 41.95 for one stock split of CardioTech Common Stock (reflecting a 54.73 for one stock split effected on March 19, 1996 and a 0.77 for one reverse stock split effected on May 9, 1996), (ii) increase the number of authorized shares of CardioTech Common Stock to 20,000,000 shares and (iii) authorize a class of 5,000,000 shares of Preferred Stock. The financial statements have been restated to reflect these amendments. F. Purchase of Certain Assets from Newtec Vascular Products Limited: In September 1993, PMI purchased certain assets from Newtec for $176,500 and transferred the assets to CardioTech. These assets principally consisted of laboratory equipment, patents and know-how related to vascular graft technology. The purchase price was allocated to the tangible and intangible assets based on the fair market value of those assets. At the time of the purchase, CardioTech evaluated the purchased technology and considered the additional development work necessary to produce safe, reliable and effective grafts for commercial sale. Based on CardioTech's evaluation, it was determined that the purchased technology was incomplete and, because the technology had no alternative future use (in other research and development projects or otherwise), the portion of the purchase price allocated to the patent and related know-how, or $113,600, was charged to research and development expense in September 1993. G. Major Customers: Customers comprising more than 10% of CardioTech's research revenues are shown as follows:
Year Ended Nine Months Ended March 31, December 31, --------- ------------ 1993 1994 1995 1994 1995 ---- ---- ---- ---- ---- Customer A 33% 38% 49% 46% 43% Customer B 31% 28% 19% 23% -- Customer C 12% -- -- -- -- Customer D 15% -- -- -- -- Customer E -- -- 18% 16% 30%
H. Related Party Transactions: As of December 31, 1995, the following executive officers and directors of PMI owned a total of 7,500 shares of CardioTech: Michael Szycher, Ph.D., Steven J. Lee, Arthur A. Siciliano, Ph.D., Andrew M. Reed, Ph.D. , Eric G. Walters and Robert J. Zappa. See Note I. One officer of PMI currently serves on CardioTech's board of Directors. I. Subsequent Events (unaudited): On March 19 and May 9, 1996, CardioTech entered into a Common Stock Subscription Agreement pursuant to which CardioTech agreed to issue 973,758 shares of CardioTech Common Stock for $3.8 million in cash, equipment having an estimated market value of $147,000, the transfer of certain vascular graft manufacturing patents, and the forgiveness of all amounts due PMI. After PMI acquired these shares, it owned 3,490,638 shares, or 91.7% of CardioTech Common Stock. All of such shares will be distributed by PMI to its stockholders. The Board of Directors of PMI expects to declare a stock dividend for the purpose of making a distribution (the "Distribution") to PMI's stockholders of all of the outstanding shares it owns in CardioTech. PMI believes that the distribution of CardioTech Common Stock in the Distribution will qualify as a "tax-free" spinoff under Section 355 of the Internal Revenue Code of 1986, as amended. A-11 68 CardioTech International, Inc. Notes to Consolidated Financial Statements (Information as of and for the nine months ended December 31, 1994 and 1995 is unaudited.) CardioTech's 1996 Employee, Director and Consultant Stock Option Plan (the "Plan") was approved by CardioTech's Board of Directors and stockholders in March 1996. A total of approximately 1,100,000 shares of CardioTech Common Stock have been reserved for issuance under the Plan, of which options exercisable for approximately 828,000 shares will be granted effective as of the Distribution Date to members of CardioTech's Board of Directors and to certain of its executive officers at the fair market value of CardioTech Common Stock on the date of the grant. Of such options, options to purchase approximately 400,000 shares of CardioTech Common Stock will be granted to Dr. Szycher pursuant to the Plan. A-12 69 EXHIBIT B --------- POLYMEDICA INDUSTRIES, INC. SELECTED CONSOLIDATED FINANCIAL DATA The balance sheet data presented below as of March 31, 1992, 1993, 1994 and 1995 and the statement of operations data presented below for each of the years in the five-year period ended March 31, 1995 have been derived from the consolidated financial statements of PolyMedica Industries, Inc., which have been audited by Coopers & Lybrand L.L.P. The balance sheet data presented below as of March 31, 1991 and December 31, 1995 and the consolidated financial data for the nine month periods ended December 31, 1994 and 1995 have been derived from the unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the nine months ended December 31, 1995 are not necessarily indicative of the results that may be expected for the year ending March 31, 1996. This data should be read in conjunction with the other financial information included elsewhere in this Information Statement.
Nine Months Ended Year Ended March 31, December 31, ------------------------------------------------------------ ---------------------- 1991 1992 1993 1994 1995 1994 1995 ------------------------------------------------------------ ---------------------- (in thousands, except per share data) Statement of Operations Data: Revenues: Net product sales $ 4,610 $ 6,041 $ 9,814 $ 21,785 $ 25,110 $ 18,787 $ 18,891 Royalties, exclusivity, development and license fees 438 744 1,208 696 1,910 714 436 -------- -------- -------- -------- -------- -------- -------- Total revenues 5,048 6,785 11,022 22,481 27,020 19,501 19,327 Cost of product sales 3,341 3,915 5,230 8,943 10,014 7,331 7,458 Non-recurring inventory charge -- -- 1,077 163 -- -- -- -------- -------- -------- -------- -------- -------- -------- Total revenues, less cost of product sales and non-recurring inventory charge 1,707 2,870 4,715 13,375 17,006 12,170 11,869 Operating expenses: Selling, general and administrative 2,551 5,437 7,462 11,375 11,922 8,959 7,134 Research and development 288 1,097 795 1,239 1,138 744 1,178 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations (1,132) (3,664) (3,542) 761 3,946 2,467 3,557 Other income and expense: Investment income 99 198 841 349 566 376 620 Interest expense (121) (342) (770) (2,714) (2,668) (2,003) (1,997) Other income (expense) -- -- (468) 1,279 -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes (1,154) (3,808) (3,939) (325) 1,844 840 2,180 Provision for income taxes -- -- -- 90 55 55 55 -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ (1,154) $ (3,808) $ (3,939) $ (415) $ 1,789 $ 785 $ 2,125 ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common share $ (.33) $ (.94) $ (.56) $ (.06) $ .26 $ .12 $ .29 ======== ======== ======== ======== ======== ======== ======== Weighted average number of common shares outstanding 3,491 4,071 6,982 6,866 6,790 6,581 7,330
B-1 70
At March 31, At December 31, ------------------------------------------------------------------- -------------- BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1995 ------------------------------------------------------------------- -------------- Cash and investments (1) $1,305 $35,165 $11,469 $13,261 $14,006 $19,761 Total assets 5,058 42,714 64,144 64,532 65,753 71,118 Total liabilities 2,260 2,698 28,173 29,188 29,027 28,569 Total debt 1,144 763 24,595 24,510 24,433 24,487 Total stockholders' equity 2,798 40,016 35,971 35,344 36,726 42,549 (1) Includes cash, cash equivalents and marketable securities.
B-2 71 POLYMEDICA INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW PolyMedica Industries, Inc. (the "Company") generates revenues from sales of medical devices and products, consisting of advanced wound dressings, consumer healthcare products and prescription and non-prescription pharmaceutical products. In determining net product sales, the Company records an allowance for future returns of its products as an adjustment to gross sales. In addition, it generates revenues from royalties, exclusivity, development and license fees on certain of its products and from research and development activities for specific product improvements. The Company sells its products through a combination of national distributors, wholesalers and retail chains. It has established exclusive relationships with Bristol-Myers Squibb, Mylan Labortatories, Inc. ("Mylan"), Hisamitsu Pharmaceutical Co., Inc. ("Hisamitsu") and other distributors for the sale of its advanced wound dressings to institutional customers, such as hospitals, nursing homes and other healthcare providers. Consumer healthcare and pharmaceutical products are sold through a network of more than 100 independent sales representatives and national wholesalers such as McKesson Drug Company, Bergen Brunswig Corporation and FoxMeyer Corporation and to retailers including CVS HC Inc., Jack Eckerd Co., OSCO (American Drug Stores, Inc.) and Rite-Aid Corp. The Company promotes sales of its products through national advertising in consumer and professional publications, on television and at professional and trade group meetings, as well as through retail advertising. Although certain of the Company's products are seasonal in nature, the Company does not believe its net product sales, in the aggregate, are generally subject to material seasonal fluctuations. Thermometer sales to consumers are higher during the winter cold and flu season. The Company's non-prescription urological products show higher retail sales during the warmer months, as well as from Patch Kits for People , which are used for outdoor sports activities during the summer and fall seasons. The Company expects uneven ordering patterns from the U.S. distributors of its wound care products as annual minimum purchase requirements pursuant to distribution agreements with the Company are fulfilled in order for those distributors to maintain territorial exclusivity. The Company believes that the changes in ordering patterns are due to inventory level adjustments at those distributors. The Company is completing approvals on a comprehensive line of new wound dressing products to be sold directly to the professional market. This is an expansion of the Company's marketing and distribution focus. The Company's goal is to provide superior wound management in each major reimbursement category and to use its competitive edge as an efficient, vertically-integrated manufacturer of wound care products to offer high technology, low-cost wound dressings directly to wholesalers and distributors already in its healthcare distribution network. The Company operates from manufacturing, distribution, and research and development facilities located in Massachusetts, Colorado and the United Kingdom. Virtually all of the Company's product sales are denominated in U.S. dollars. The Company produces proprietary polyurethane materials from which it manufactures advanced wound dressings as well as vascular grafts currently under development. The Company's research and development activities are principally funded from ongoing operations and consist of the design, development and manufacture of polyurethane-based medical products derived from proprietary technology and manufacturing processes. Integral to the Company's growth strategy is the acquisition of complementary products and businesses. The Company has successfully integrated five acquisitions since 1990. Period to period comparisons of changes in net product sales are not necessarily indicative of results to be expected for any future period. B-3 72 RESULTS OF OPERATIONS Nine Months Ended December 31, 1995 Compared to Nine Months Ended December 31, 1994 The Company's net income increased by 171.3% to $2.13 million, or $.29 per common share, in the nine months ended December 31, 1995. This performance represents an increase from net income of $785,000, or $.12 per common share, reported in the nine months ended December 31, 1994. Operating margins increased to 18.4%, or $3.56 million, in the nine months ended December 31, 1995, as compared with 12.6%, or $2.47 million, in the nine months ended December 31, 1994. Total wound care net product sales of MITRAFLEX and SPYROFLEX increased by 5.0% to $5.08 million in the nine months ended December 31, 1995 as compared with $4.84 million in the nine months ended December 31, 1994. The overall 5.0% increase in net product sales was principally the result of an increase in total unit volume, stated on a 4" x 4" equivalent basis, offset by a lower average unit price. Net product sales of SPYROFLEX to Mylan increased by 16.6% to $2.36 million in the nine months ended December 31, 1995 as compared with $2.02 million in the nine months ended December 31, 1994, primarily as a result of a 28.0% increase in unit sales, partially offset by a decrease in average unit price. Net product sales of MITRAFLEX remained stable in the nine months ended December 31, 1995 as compared with the nine months ended December 31, 1994. Net product sales in the United Kingdom decreased by 17.1% to $794,000 in the nine months ended December 31, 1994 as compared with $958,000 in the nine months ended December 31, 1995, primarily due to a 27.6% decrease in unit sales. The decrease was primarily due to shipments of stocking orders of new OTC wound care product to European purchasers. The decrease in overall average unit price in the nine months ended December 31, 1995 as compared with the nine months ended December 31, 1994 was the result of volume discounts to one distributor, a change in the mix of product sizes and the inclusion of sales of a new, lower-priced wound care product. Consumer healthcare net product sales increased by 14.0% to $4.55 million in the nine months ended December 31, 1995 as compared with $3.99 million in the nine months ended December 31, 1994. This increase was primarily due to larger sales volumes of digital and glass fever thermometers and ear, nose and throat kits and the introduction of the Patch Kits for People consumer wound care product line. Net product sales of the Company's prescription and non-prescription pharmaceutical products decreased by 6.8% to $9.09 million in the nine months ended December 31, 1995 as compared with $9.75 million in the nine months ended December 31, 1994. The Company believes that this decrease is due to the affect of promotional pricing programs for the nine months ended December 31, 1994 which were not repeated for the nine months ended December 31, 1995, as well as the effect of a strategic decision in fiscal 1995 to focus on the profitability of these products. Royalty, exclusivity, development and license fees decreased by 38.9% to $436,000 in the nine months ended December 31, 1995 as compared with $714,000 in the nine months ended December 31, 1994. This decrease is primarily due to reductions in fees earned (i) from the Company's exclusive distributor of wound care products in the United Kingdom, (ii) for the development of ChronoFlex for specific product applications and (iii) from the Company's program with a distributor for the exclusive licensing and distribution of certain new wound dressings during the nine months ended December 31, 1994. As a percentage of net product sales, overall gross margins were relatively unchanged at 60.5% in the nine months ended December 31, 1995 and 61.0% in the nine months ended December 31, 1994. SG&A expenses decreased by 20.4% in the nine months ended December 31, 1995 to $7.13 million as compared with $8.96 in the nine months ended December 31, 1994. Included in SG&A expenses were depreciation and amortization, wages, benefit costs, and outside professional services totalling $3.41 million in the nine months ended December 31, 1995, or 47.8% of SG&A expenses, as compared with $4.12 million or 45.8% of SG&A expenses in the nine months ended December 31, 1994. Amortization expense decreased by $663,000 in the nine months ended December 31, 1995, as compared with the nine months ended December 31, 1994, as a result of the B-4 73 extension in March 1995 of a covenant not to compete made by Alcon, and the related amortization period by five years to ten years. In addition, marketing and sales expenses for the promotion of pharmaceutical products decreased by 55.2% to $1.03 million in the nine months ended December 31, 1995, as compared with $2.30 million in the nine months ended December 31, 1994, due to a strategic decision in fiscal 1995 to focus on the profitability of these products. Research and development expenses increased by 58.6% to $1.18 million in the nine months ended December 31, 1995, as compared with $774,000 in the nine months ended December 31, 1994. This increase is primarily due to an acceleration of the Company's ongoing vascular graft development projects and costs associated with the initiation of pilot production testing of the Company's in-house pharmaceutical manufacturing equipment. Investment income increased by 64.9% to $620,000 in the nine months ended December 31, 1995, as compared with $376,000 in the nine months ended December 31, 1994, as the Company earned interest on larger average cash balances, in part due to proceeds from the Company's common stock offering in November 1995, at higher overall interest rates. Interest expense was relatively unchanged in the nine months ended December 31, 1995 as compared with the nine months ended December 31, 1994, as the Company accrued interest expense in both periods on the Hancock Notes. Year Ended March 31, 1995 ("fiscal 1995") Compared to Year ended March 31, 1994 ("fiscal 1994") Total revenues increased by 20.2% to $27.02 million in fiscal 1995 as compared with $22.48 million in fiscal 1994. Total wound care net product sales increased by 121.0% to $6.73 million in fiscal 1995 as compared with $3.05 million in fiscal 1994. The overall 121.0% increase in net product sales was substantially the result of an increase in total unit volume for all wound dressings, stated on a 4" x 4" equivalent basis. Net product sales of FLEXZAN to Mylan increased 429.8% to $2.73 million in fiscal 1995 as compared with $515,000 in fiscal 1994 primarily as a result of a 409.5% increase in unit sales in fiscal 1995 as compared with fiscal 1994. Net product sales of MITRAFLEX, principally to Bristol-Myers Squibb, increased by 14.5% to $2.57 million in fiscal 1995 as compared with $2.25 million in fiscal 1994 principally as a result of a 13.2% increase in unit sales in fiscal 1995 as compared with fiscal 1994. In addition, European wound care net product sales, which products are primarily manufactured and sold from the Company's United Kingdom facility, increased to $1.43 million in fiscal 1995, a fivefold increase as compared with $284,000 in fiscal 1994, due to sales of new products introduced into the European consumer and sports marketplace. Consumer healthcare net product sales decreased by 3.4% to $5.46 million in fiscal 1995 as compared with $5.65 million in fiscal 1994. Sales in fiscal 1995 of these products, principally thermometers, were affected by unusually warm fall and winter temperatures, resulting in a below-normal cough and cold season. Net product sales of the Company's prescription and non-prescription pharmaceutical products decreased by 1.6% to $12.65 million in fiscal 1995 as compared with $12.86 million in fiscal 1994. The Company believes that this difference reflected changes in the timing of orders. Royalty, exclusivity, development and license fees grew by 174.5% to $1.91 million in fiscal 1995 as compared with $696,000 in fiscal 1994. This increase was due primarily to $1.00 million which the Company received in January 1995 from Merck & Co., Inc. ("Merck"), the then-exclusive United States distributor of MITRAFLEX, in connection with the transfer of exclusive distribution rights from Merck to Bristol-Myers Squibb. As a percentage of net product sales, overall gross margins (excluding a non-recurring inventory charge in the amount of $163,000 in fiscal 1994) increased to 60.1% in fiscal 1995 from 58.9% in fiscal 1994. Included in fiscal 1995 cost of product sales were a one-time manufacturing charge from Alcon and certain obsolescence reserves. Gross margins in fiscal 1994 were reduced by inventory charges for a discontinued product. B-5 74 SG&A expenses increased by 4.8% in fiscal 1995 to $11.92 million as compared with $11.37 million in fiscal 1994. Included in SG&A expenses were depreciation and amortization, wages, benefit costs, and outside professional fees totalling $5.69 million in fiscal 1995, or 47.8% of SG&A expenses. This amount is comparable to $5.38 million, or 47.3% of SG&A expenses, in fiscal 1994. Excluding a fiscal 1994 one-time valuation writedown for certain laboratory and pilot processing equipment in the United Kingdom wound care facility of $267,000, research and development expenses increased by 17.2% to $1.14 million in fiscal 1995 as compared with $971,000 in fiscal 1994. In fiscal 1994, the Company reached an agreement with Alcon in which the requirement for Alcon to manufacture a certain size of ANESTACON was terminated. The Company received $1.28 million from Alcon as a result of this agreement and recorded it as Other Income. Investment income increased by 62.1% to $566,000 in fiscal 1995 as compared with $349,000 in fiscal 1994, as the Company earned interest both on larger average cash balances and from higher overall interest rates. Interest expense was relatively unchanged at $2.67 million in fiscal 1995 as compared with $2.71 million in fiscal 1994, as the Company accrued and paid interest in both periods on the Hancock Notes. The Company's net income increased to $1.79 million, or $.26 per common share, in fiscal 1995. This performance represents an increase from a net loss of $415,000, or $.06 per common share, in fiscal 1994. Year Ended March 31, 1994 ("fiscal 1994") Compared to Year Ended March 31, 1993 ("fiscal 1993") Total revenues increased by 104.0% to $22.48 million in fiscal 1994 as compared with $11.02 million in fiscal 1993. Included in fiscal 1993 were three and one-half months of pharmaceutical product sales compared with twelve months in fiscal 1994, which is the principal reason for the substantial revenue increase in fiscal 1994. Total wound care net product sales of MITRAFLEX, SPYROFLEX and FLEXZAN increased by 25.3% to $3.05 million in fiscal 1994 as compared with $2.43 million in fiscal 1993. The overall 25.3% increase in net product sales was principally the result of an increase in total unit volume for all wound dressings stated on a 4" x 4" equivalent basis, partially offset by a decrease in average unit price. This increase in net product sales and unit volume was primarily a result of first time sales of FLEXZAN of $515,000. In addition, net product sales of MITRAFLEX increased by 7.3% to $2.25 million in fiscal 1994 as compared with $2.10 million in fiscal 1993, principally as a result of a 27.5% increase in unit sales and partially offset by a decrease in average unit price. The decrease in average unit price in fiscal 1994 was principally due to the inclusion of larger shipments of lower-priced FLEXZAN in fiscal 1994. Consumer healthcare net product sales increased by 27.0% to $5.65 million in fiscal 1994 as compared with $4.45 million in fiscal 1993. This increase was largely attributable to the expanded sales in the categories of digital and glass thermometers both in branded and private label markets and the performance of new home healthcare kits. Net product sales of the Company prescription and non-prescription pharmaceutical products were $12.86 million in fiscal 1994 and $2.93 million for the three and one-half month-period from the acquisition of these products in December 1992 to March 1993. Royalty, exclusivity, development and license fees decreased by 42.4% to $696,000 in fiscal 1994 as compared with $1.21 million in fiscal 1993. Included in fiscal 1993 was a $200,000 signing fee paid by Mylan for the appointment of Mylan as the exclusive distributor for FLEXZAN and a $231,750 signing fee paid by Hisamitsu in connection with the appointment of Hisamitsu as the exclusive distributor of SPYROFLEX in Japan. As a percentage of net product sales, overall gross margins (excluding non-recurring inventory charges in the amount of $163,000 and $1.08 million in fiscal 1994 and fiscal 1993, respectively) increased to 58.9% in fiscal 1994 from 46.7% in fiscal 1993, reflecting a full year in fiscal 1994 of higher pharmaceutical gross margins and improved wound care gross margins. These increases were partially offset by an inventory obsolescence write-off of $378,000 B-6 75 for a discontinued product in fiscal 1994, which adjusted the value of such existing discontinued product inventory to zero. SG&A expenses increased by 52.4% in fiscal 1994 to $11.37 million as compared with $7.46 million fiscal 1993. Included in SG&A expenses were depreciation and amortization, wages, benefit costs, and outside professional fees totalling $5.38 million in fiscal 1994, or 47.3% of SG&A expenses. This amount was comparable to $3.97 million or 55.4% of SG&A expenses in fiscal 1993. Significant reasons for the increase were a full year of intangibles amortization in fiscal 1994 for the pharmaceutical division acquired in December, 1992 and the introduction in fiscal 1994 of a marketing plan for the promotion of prescription and non-prescription pharmaceutical products. Research and development expenses increased by 55.8% to $1.24 million in fiscal 1994 from $795,000 in fiscal 1993. The increase was mainly due to an investment by the Company in the vascular graft development project to test the feasibility of ChronoFlex for small-bore (4-6mm) vascular grafts as well as a write-off of certain development equipment. In fiscal 1994, the Company reached an agreement with Alcon in which the requirement for Alcon to manufacture a certain size of ANESTACON was terminated. The Company received $1.28 million as a result of this agreement and recorded it as Other Income. Investment income decreased by 58.5% to $349,000 in fiscal 1994 as compared with $841,000 in fiscal 1993, as the Company earned interest on lower average cash balances in fiscal 1994 as compared with fiscal 1993 due to the acquisition of the WEBCON product line in December 1992, a portion of the purchase price for which was paid from corporate cash. Interest expense increased to $2.71 million in fiscal 1994 from $770,000 in fiscal 1993 as the Company accrued and paid interest for a full year in fiscal 1994 on the Hancock Notes. The Company incurred a net loss in fiscal 1994 of $415,000 as compared with the net loss of $3.94 million in fiscal 1993. On a per share basis, the Company lost $0.06 per share in fiscal 1994 as compared with $.56 loss per share in fiscal 1993. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has raised $50.71 million in gross equity capital, of which $39.00 million was from its March 1992 initial public offering, $4.55 million from a November 1995 public offering of 700,000 shares of common stock and $7.16 million from prior private placement financings. In January 1993, the Company sold to Hancock $25.00 million of 10.65% Guaranteed Senior Secured Notes due January 31, 2003. As of December 31, 1995, the Company had working capital of $24.24 million, including cash and cash equivalents of $19.76 million. The Company generated $3.35 million of cash flow from operations in the nine months ended December 31, 1995, as compared with a generation of $677,000 in the nine months ended December 31, 1994. A major factor contributing to the increase in cash flow from operations during the nine months ended December 31, 1995 was the decrease in net purchases of inventory when compared to the nine months ended December 31, 1994, as the Company reached its goal of higher finished goods inventory balances of its pharmaceutical products as it moves to in-house production. In February 1996, the Company purchased 15,000 shares of its common stock on the open market for approximately $96,325 under the 1 million share program previously authorized by the Company's Board of Directors. Cumulative repurchases of treasury stock under this program were 78,000 shares at an aggregate cost of $340,700. Pilot production of certain pharmaceutical products is continuing at the Company's Woburn, Massachusetts facility. The Company believes that this laboratory and manufacturing complex will support both pharmaceutical manufacturing and advanced materials development. In addition, due to the growth in demand for the wound care B-7 76 products manufactured in its Colorado and United Kingdom facilities, the Company is currently investing in additional manufacturing equipment for its wound care operations, which it expects to continue doing during fiscal 1996. In the nine months ended December 31, 1995, the Company purchased an aggregate of $1.39 million of property, plant and equipment, which was funded by working capital. Under the terms of the Hancock Notes, Hancock has a security interest in all of the assets of two of the Company's directly and indirectly owned subsidiaries, PolyMedica Pharmaceuticals (U.S.A.), Inc. ("PMP USA") and PolyMedica Pharmaceuticals (Puerto Rico), Inc. ("PMP PR") which amounted to approximately $51 million as of December 31, 1995. The Company is also subject to certain financial covenants and ratios. In January 1996, the Company signed an amendment to the Hancock Notes with Hancock. Under the terms of the amendment, scheduled semi-annual repayments of principal commence at $1.00 million each in fiscal 1998, increase to $2.08 million each beginning in January 2000 and are completed with a $7.50 million payment at January 31, 2003. Pursuant to the amendment, the exercise price for the Hancock warrant, exercisable for 536,993 shares of common stock of the Company, was reduced from $8.38 to $7.00 per share and the interest rate of the Hancock Notes was increased to 10.9%. In addition, the Company obtained less restrictive dividend terms and revised financial covenants. The Company expects that its current working capital and funds generated from future operations will be adequate to meet its liquidity and capital requirements for current operations. In the event that the Company undertakes to make acquisition of complementary businesses or products, the Company may require substantial additional funding beyond currently available working capital and funds generated from operations. Currently, the Company is conducting an active search for strategic acquisition of complementary businesses or products in which the Company can profit from its strong operating margins by maximizing operating efficiencies. The Company has no present commitments or agreements with respect to any such acquisition. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). The Company is required to adopt SFAS 121 in fiscal 1997. Management believes that the impact of the adoption of SFAS 121 will not be material. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") was issued and will require the Company to elect either expense recognition under FAS 123 or its disclosure-only alternative for stock-based employee compensation. The expense recognition provision encouraged by FAS 1234 would require fair-value based financial accounting to recognize compensation expense for employee stock compensation plans. FAS 123 must be adopted in the Company's fiscal 1996 financial statements with comparable disclosures for the prior years. The Company has determined that it will elect the disclosure-only alternative. The Company will be required to disclose the pro forma net income or loss and per share amounts in the notes to the financial statements using the fair value based method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The Company has not determined the impact of these pro forma adjustments. At March 31, 1995, the Company had approximately $5.3 million of net operating loss carryforwards for income tax purposes. Pursuant to the Tax Reform Act of 1986, the Company believes that the use of these net operating loss carryforwards in any particular year will be limited as a result of changes in ownership which occurred in prior periods. INFLATION The moderate rate of inflation has not had a material effect on the Company's operations. B-8 77 POLYMEDICA INDUSTRIES, INC. PRO FORMA FINANCIAL INFORMATION The pro forma financial data reflects adjustments to the historical consolidated statements of operations, as if the Distribution had occurred at the beginning of the period presented and adjustments to the historical consolidated balance sheet as if the Distribution occurred at December 31, 1995. The historical and pro forma consolidated financial statements of PolyMedica Industries, Inc. do not necessarily reflect the results of operations or financial position that would have been obtained had PolyMedica been an independent company.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (In thousands, except per share data) Year ended March 31, 1993 ---------------------------------- CardioTech Statement of Pro Historical Operations(a) Forma ---------- ------------- ----- Total revenues $11,022 $ (423) $10,599 Cost of product sales 5,230 -- 5,230 ------- ------- ------- Non-recurring inventory charge 1,077 -- 1,077 Total revenues, less cost of product sales 4,715 (423) 4,292 Operating expenses: Selling, general, and administrative 7,462 (229) 7,233 Research and development 795 (377) 418 ------- ------- ------- Total operating expense 8,257 (606) 7,651 ------- ------- ------- Income (loss) from operations (3,542) 183 (3,359) Other income and expenses: Investment income 841 -- 841 Interest expense (770) -- (770) Other income (expense) (468) -- (468) ------- ------- ------- Total other income/expense (397) -- (397) ------- ------- ------- Income (loss) before income taxes (3,939) 183 (3,756) Provision for income taxes -- -- -- ------- ------- ------- Net income (loss) $(3,939) $ 183 $(3,756) ======= ======= ======= Net income (loss) per common share $ (.56) $ (.54) ======= ======= Weighted average number of common shares outstanding 6,982 6,982 ======= =======
See accompanying notes to pro forma financial statements. B-9 78
Year ended March 31, 1994 ---------------------------------- CardioTech Statement of Pro Historical Operations(a) Forma ---------------------------------- Total revenues $22,481 $ (286) $22,195 Cost of product sales 8,943 -- 8,943 ------- ------- ------- Non-recurring inventory charge 163 -- 163 Total revenues, less cost of product sales 13,375 (286) 13,089 Operating expenses: Selling, general, and administrative 11,375 (376) 10,999 Research and development 1,239 (700) 539 ------- ------- ------- Total operating expense 12,614 (1,076) 11,538 ------- ------- ------- Income from operations 761 790 1,551 Other income and expenses: Investment income 349 -- 349 Interest expense (2,714) -- (2,714) Other income (expense) 1,279 -- 1,279 ------- ------- ------- Total other income/expense (1,086) -- (1,086) ------- ------- ------- Income (loss) before income taxes (325) 790 465 Provision for income taxes 90 40 130 ------- ------- ------- Net income (loss) $ (415) $ 750 $ 335 ======= ======= ======= Net income (loss) per common share $ (.06) $ .05 ======= ======= Weighted average number of common shares outstanding 6,866 6,866 ======= =======
See accompanying notes to pro forma financial statements. B-10 79 Year ended March 31, 1995 ---------------------------------- CardioTech Statement of Pro Historical Operations(a) Forma ---------- ------------- ----- Total revenues $27,020 $ (408) $26,612 Cost of product sales 10,014 -- 10,014 ------- ------- ------- Total revenues, less cost of product sales 17,006 (408) 16,598 Operating expenses: Selling, general, and administrative 11,922 (298) 11,624 Research and development 1,138 (708) 430 ------- ------- ------- Total operating expense 13,060 (1,006) 12,054 ------- ------- ------- Income from operations 3,946 598 4,544 Other income and expenses: Investment income 566 -- 566 Interest expense (2,668) -- (2,668) ------- ------- ------- Total other income/expense (2,102) -- (2,102) ------- ------- ------- Income before income taxes 1,844 598 2,442 Provision for income taxes 55 18 73 ------- ------- ------- Net income $ 1,789 $ 580 $ 2,369 ======= ======= ======= Net income per common share $ .26 $ .35 ======= ======= Weighted average number of common shares outstanding 6,790 6,790 ======= =======
See accompanying notes to pro forma financial statements. B-11 80
Nine months ended December 31, 1995 ----------------------------------- CardioTech Statement of Pro Historical Operations(a) Forma ---------- ------------- ----- Total revenues $19,327 $ (143) $19,184 Cost of product sales 7,458 -- 7,458 ------- ------- ------- Total revenues, less cost of product sales 11,869 (143) 11,726 ------- ------- ------- Operating expenses: Selling, general, and administrative 7,134 (252) 6,882 Research and development 1,178 (633) 545 ------- ------- ------- Total operating expense 8,312 (885) 7,427 ------- ------- ------- Income from operations 3,557 742 4,299 ------- ------- ------- Other income and expenses: Investment income 620 -- 620 Interest expense (1,997) -- (1,997) ------- ------- ------- Total other income/expense (1,377) -- (1,377) ------- ------- ------- Income before income taxes 2,180 742 2,922 Provision for income taxes 55 19 74 ------- ------- ------- Net income $ 2,125 $ 723 $ 2,848 ======= ======= ======= Net income per common share $ .29 $ .39 ======= ======= Weighted average number of common shares outstanding 7,330 7,330 ======= =======
See accompanying notes to pro forma financial statements. B-12 81
PRO FORMA CONSOLIDATED BALANCE SHEET OF POLYMEDICA INDUSTRIES, INC. (unaudited) (Dollars in Thousands) December 31, 1995 ------------------------------------- Pro Forma Pro ASSETS Historical Adjustments Forma ---------- ----------- ----- Current assets: Cash and cash equivalents $19,761 $(3,830)(c) $15,931 Accounts receivable - trade, net of allowance for doubtful accounts of $104 3,100 -- 3,100 Accounts receivable -- other 85 -- 85 Inventories 4,917 -- 4,917 Prepaid expenses and other current assets 463 -- 463 ------- ------- ------- Total current assets 28,326 (3,830) 24,496 Property, plant, and equipment, net 6,068 (184)(b) 5,884 Intangible assets, net 36,211 -- 36,211 Other assets, net 513 -- 513 ------- ------- ------- Total assets $71,118 $(4,014) $67,104 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable -- trade $ 395 $ -- $ 395 Accrued expenses 3,687 -- 3,687 ------- ------- ------- Total current liabilities 4,082 -- 4,082 Senior debt, net of unamortized discount of $513 24,487 -- 24,487 ------- ------- ------- Total liabilities 28,569 -- 28,569 ------- ------- ------- Commitments Stockholders' equity: Preferred stock $.01 par value; 2,000,000 shares authorized, none issued or outstanding -- -- -- Common stock, $.01 par value, 20,000,000 shares authorized, 7,674,245 issued 76 -- 76 Treasury stock, at cost, 144,905 shares (939) -- (939) Additional paid-in capital 52,248 (4,014) 48,234 Accumulated deficit (8,254) -- (8,254) Notes receivable from officers (415) -- (415) Currency translation adjustment (167) -- (167) ------- ------- ------- Total stockholders' equity 42,549 (4,014) 38,535 ------- ------- ------- Total liabilities and stockholders' equity $71,118 $(4,014) $67,104 ======= ======= =======
See accompanying notes to pro forma financial statements. B-13 82 NOTES TO POLYMEDICA PRO FORMA FINANCIAL STATEMENTS (a) The pro forma adjustments eliminate revenues and expenses of CardioTech for the periods shown. Adjustment to provision for income taxes eliminates the tax benefits resulting from the inclusion of CardioTech's results of operations for the periods shown. (b) The reduction of property, plant and equipment consists of $37,000 of equipment owned by a subsidiary of CardioTech and $147,000 of equipment transferred by the Company to CardioTech in connection with the Restructuring prior to the Distribution. (c) Prior to the Distribution, PMI will invest $3,830,000 in cash and $147,000 in equipment in CardioTech and will forgive all net amounts due to PMI. PMI will receive CardioTech Common Stock pursuant to the Restructuring. PMI will treat the operating losses of CardioTech and the costs relating to the Restructuring and Distribution as charges from discontinued operations in its statement of operations for the fiscal year ending March 31, 1996. B-14 83 EXHIBIT C --------- CRUTTENDEN ROTH, INCORPORATED 18301 Von Karman, Suite 100 Irvine, California 92715 March 18, 1996 Board of Directors PolyMedica Industries, Inc. 11 State Street Woburn, Massachusetts 01801 Ladies and Gentlemen: The Board of Directors (the "Board") of PolyMedica Industries, Inc. ("PolyMedica," and together with its subsidiaries, the "Company") has retained Cruttenden Roth, Incorporated ("CRI") to advise PolyMedica in connection with its proposed restructuring (the "Restructuring") in which PolyMedica will distribute (the "Distribution") to its shareholders all of its ownership interests in its subsidiary, CardioTech International, Inc. ("CardioTech"), which will retain or acquire all of the assets and liabilities of the Company associated with the development and marketing of polyurethane-based medical products, including in particular certain vascular graft products (the "Biomedical Business"). All of the Company's other existing business will be retained by the Company (the "Retained Business"). Information about the Restructuring is included in the information statement (the "Information Statement") contained in the registration statement on Form 10 (the "Registration Statement") to be filed with the Securities and Exchange Commission on or about March 19, 1996, a definitive form of which will be sent to PolyMedica's shareholders in connection with the Restructuring. We understand that in connection with the Restructuring and as more particularly described in the Information Statement, the Company and CardioTech will enter into a Common Stock Subscription Agreement (the "Subscription Agreement") pursuant to which the Company will purchase 476,449 newly issued shares (the "New Shares") (subject to adjustment) of common stock of CardioTech for an aggregate purchase price of $1,500,000 in cash, equipment having an estimated fair market value of approximately $147,000, cancellation of intercompany loans from the Company to CardioTech aggregating approximately $1,301,267 and the transfer of certain 84 Board of Directors March 18, 1996 Page 2 vascular graft manufacturing patents (collectively, the "PolyMedica Consideration"). In addition to the New Shares, and for no additional consideration from the Company, CardioTech will issue to the Company additional shares of common stock of CardioTech based upon the average closing price of CardioTech's common stock for the five trading days after the Distribution, up to a maximum of 238,225 additional shares (the "Adjustment Shares"). The New Shares and the Adjustment Shares are collectively referred to as the "CardioTech Consideration." You have requested our opinion, as investment bankers, as to whether or not the proposed CardioTech Consideration to be received by the Company pursuant to the Subscription Agreement is fair, from a financial point of view, to the Company and its shareholders. In conducting our analysis and arriving at our opinion as expressed herein we have reviewed and analyzed, among other things, the following: (1) the Information Statement, including the Subscription Agreement and the other exhibits filed therewith; (2) the reports and other information filed by the Company with the Securities and Exchange Commission since March 31, 1993, including the current and historical financial statements contained therein; (3) the historical and pro forma financial statements included in the Information Statement for the Company and CardioTech; (4) management's projected financial statements for the Company (both prior to and after the Restructuring) and CardioTech for each of the fiscal years ending March 31, 1996 through 2002; (5) the historical market prices and trading volume for the Company's common stock; (6) certain publicly available information concerning certain other companies engaged in businesses which we believe to be comparable to the Company (both prior to and after the Restructuring) and CardioTech and the historical market prices and trading volume of such companies' securities; and 85 Board of Directors March 18, 1996 Page 3 (7) the terms of certain comparable transactions which have been effected in the past five years which we believe to be relevant. We also met with certain senior officers and employees of the Company and CardioTech who provided us with additional information concerning the Company's and CardioTech's operations, assets, condition, prospects and financing needs and we undertook such other studies, analyses and investigations as we deemed appropriate. In arriving at our opinion, we have visited but have not conducted a physical inspection of the properties and facilities of the Company or CardioTech, nor have we made or obtained any independent evaluation or appraisal of such properties and facilities or of the business of the Company or CardioTech. We have assumed and relied upon the accuracy and completeness of the financial and other information used by us in arriving at our opinion and have not attempted to independently verify such information. With respect to the projected financial statements referred to above, management of the Company has advised us that such projections have been reasonably prepared on bases reflecting the best currently available estimates and judgments of management as to the future financial performance of the Company and CardioTech and that we may assume in arriving at our opinion that the Company and CardioTech will perform in accordance with those projections. We have also assumed, with your consent and without any independent investigation on our part, that (i) no material amount of income, gain or loss will be recognized by the Company or CardioTech for federal or state income tax purposes as a result of the Restructuring or any related transaction, (ii) the receipt of the common stock of CardioTech in the Restructuring will be tax-free for federal and state income tax purposes to the shareholders of PolyMedica, with the exception of the receipt of cash in lieu of fractional shares of common stock of CardioTech, (iii) the Restructuring will have no effect on the Company's federal income tax net operating loss carryforwards, and (iv) the aggregate fair market value of the PolyMedica Consideration, as determined solely by the Board of Directors of PolyMedica, is approximately $2,948,267. Our opinion addresses only the fairness to the Company and its shareholders, from a financial point of view, of the proposed CardioTech Consideration to be received by the Company pursuant to the Subscription Agreement. We do not express any views on any other terms of the Restructuring or any related agreements or 86 Board of Directors March 18, 1996 Page 4 arrangements, including any transactions which might occur among the Company and CardioTech and their respective affiliates after the consummation of the Restructuring. Our opinion also does not address the Company's underlying business decision to effect the Restructuring. We were not requested to, and did not, solicit any third party offers to acquire all or any part of the Company or CardioTech or make any determination as to whether any such offers could be obtained, if solicited. In arriving at our opinion as expressed herein, we have considered such financial and other factors as we have deemed appropriate and reasonable under the circumstances, including (i) the current and historical financial position and results of operations of the Company, including revenues, earnings, profit margin, net worth and capitalization; (ii) the financial and business prospects for the Retained Business and the Biomedical Business and the industry segments in which they operate; (iii) the current and historical trading markets for PolyMedica's common stock, including prices and price-earnings ratios, and for the equity securities of certain companies that we believe to be comparable to the Company (both prior to and after the Restructuring) and CardioTech; and (iv) the terms of certain comparable transactions that we believe to be relevant. We have also taken into account our assessment of the general economic, market and financial conditions, as well as our experience as investment bankers generally. Our opinion necessarily is based upon conditions as they exist and can be evaluated on the date hereof. Our opinion assumes that the Restructuring is completed on the basis set forth in the Information Statement and that the shares of common stock of CardioTech are fully and widely distributed among investors and are subject only to normal trading activity. We note that the estimation of market trading prices of newly distributed securities is subject to uncertainties and contingencies, all of which are difficult to predict and beyond the control of the firm making such estimates. Because of the large aggregate amount of shares of common stock of CardioTech being issued to shareholders of the Company and other factors, such securities may trade initially at prices below those at which they would trade on a fully distributed basis. In addition, the market prices of such securities will fluctuate with changes in market conditions, the conditions and prospects, financial and otherwise, of the Company and CardioTech, and other factors which generally influence the prices of securities. In rendering our opinion, we are not opining as to the price at which the common 87 Board of Directors March 18, 1996 Page 5 stock of the Company or CardioTech will trade after the Restructuring is effected. CRI is acting as financial advisor to the Company in connection with the Restructuring and will receive a fee for our services irrespective of whether or not the Restructuring is consummated. CRI personnel who prepared this opinion have no direct business or financial interest in the Company or any affiliated entity. From time to time, in the ordinary course of business, CRI may hold long or short positions in securities of PolyMedica and/or CardioTech for its own account or the accounts of its customers and employees. CRI has performed investment banking services for the Company prior to this engagement in connection with the Restructuring, and may provide services to the Company and/or CardioTech in connection with or following the Restructuring. It is understood that our advice and this letter is provided solely for the benefit of the Board in evaluating the Restructuring and are not on behalf of, and are not intended to convert any rights or remedies upon, the Company, CardioTech, any shareholder of the Company or CardioTech or any person other than the members of the Board. Neither this letter nor our advice is to be quoted or referred to, in whole or in part, in any registration statement, prospectus, proxy or information statement, or in any other written document, nor shall this letter or our advice be used for any other purpose, in each case, without our prior written consent. Based upon and subject to the foregoing, it is our opinion as investment bankers that, as of the date hereof, the proposed CardioTech Consideration to be received by the Company pursuant to the Subscription Agreement is fair, from a financial point of view, to the Company and its shareholders. Very truly yours, /s/ Cruttenden Roth, Incorporated Cruttenden Roth, Incorporated 88 [LETTERHEAD OF CRUTTENDEN ROTH] May 8, 1996 Mr. Steven J. Lee President and Chief Executive Officer POLYMEDICA INDUSTRIES, INC. 11 State Street Woburn, MA 01801 Dear Mr. Lee: Reference is made to our opinion letter dated March 1996 to the Board of Directors of Polymedica Industries, Inc., which was delivered in connection with its proposed Restructuring. The capitalized terms used herein shall have the same meanings as set forth in our above-referenced opinion letter. You have requested that we confirm our earlier opinion to you. This letter is to advise you that you are entitled to rely on our earlier opinion letter with respect to the Restructuring as if that opinion letter was dated and delivered to you on and as of the date hereof, subject to the same qualifications, assumptions and considerations as set forth therein, except that we understand (i) the Company and CardioTech have entered an Amended and Restated Subscription Agreement pursuant to which the Company purchased an aggregate of 973,758 New Shares of common stock of CardioTech for an aggregate purchase price of $3,830,000 in cash, equipment having an estimated fair market value of approximately $147,000, cancellation of intercompany loans from the Company to CardioTech aggregating approximately $2,449,800 and the transfer of certain vascular graft manufacturing patents and (ii) the aggregate fair market value of the Polymedica Consideration, as determined solely by the Board of Directors, is approximately $6,426,800. Neither this letter nor our advice is to be quoted or referred to in whole or in part, in any registration statement, prospectus, proxy or information statement, or in any other written document, in each case, without our prior written consent. Very truly yours, CRUTTENDEN ROTH, INC. /s/ Christopher D. Jennings Christopher D. Jennings Managing Director Corporate Finance 89 II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) Consolidated Financial Statements - CardioTech International, Inc. 1. Report of Independent Accountants 2. Consolidated Balance Sheets as of March 31, 1994 and 1995 and December 31, 1995 (unaudited) 3. Consolidated Statements of Operations for each of the three years in the period ended March 31, 1995 and for the nine months ended December 31, 1994 and 1995 (unaudited) 4. Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 1995 and for the nine months ended December 31, 1994 and 1995 (unaudited) 5. Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 1995 and for the nine months ended December 31, 1994 and 1995 (unaudited) 6. Notes to Consolidated Financial Statements (b) Exhibits Exhibit No. Description ------- ----------- 2 Form of Plan and Agreement of Distribution between PMI, Inc. ("PMI") and CardioTech International, Inc. ("CardioTech") to be executed on the effective date of the Registration Statement on Form 10 filed by CardioTech on March 20, 1996 (the "Form 10"). 3.1 Articles of Organization of CardioTech. 3.2* Bylaws of CardioTech. 8 Form of Opinion of Hale and Dorr Re: Tax Matters. 10.1 Amended and Restated Common Stock Subscription Agreement between PMI and CardioTech (including Assignment of Patents Agreement). 10.2 Form of Tax Matters Agreement between CardioTech and PMI to be executed on the effective date of the Form 10. 10.3 Form of Facilities and Services Agreement between CardioTech and PMI to be executed on the effective date of the Form 10. 10.4 Amended and Restated License Agreement between PMI and CardioTech. 10.5 Form of Distribution Agency Agreement between CardioTech and The First National Bank of Boston to be executed on the effective date of the Form 10. 52 90 10.6 CardioTech 1996 Employee, Director and Consultant Option Plan. 10.7 Form of Employment Agreement of Michael Szycher. 10.8 Form of Warrant issued by CardioTech to the John Hancock Mutual Life Insurance Company. 10.9 Form of Letter Agreement between CardioTech, PMI and John Hancock Mutual Life Insurance Company. 10.10+* Development, Supply and License Agreement between PMI and Bard Access Systems, Inc. dated November 11, 1992. 14 Material Foreign Patent 21* Subsidiaries of CardioTech. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Hale and Dorr ------------------------- * Previously filed + Confidential treatment requested as to certain portions. 53 91 Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, CardioTech International, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized. CARDIOTECH INTERNATIONAL, INC. Date: May 9, 1996 By: /s/ Michael Szycher -------------------------- Name: Michael Szycher Title: Chairman, Chief Executive Officer and Treasurer 54 92 EXHIBIT INDEX Exhibit No. Description - ------ ----------- 2 Form of Plan and Agreement of Distribution between PMI, Inc. ("PMI") and CardioTech International, Inc. ("CardioTech") to be executed on the effective date of the Registration Statement on Form 10 filed by CardioTech on March 20, 1996 (the "Form 10"). 3.1 Articles of Organization of CardioTech. 3.2* Bylaws of CardioTech. 8 Form of Opinion of Hale and Dorr Re: Tax Matters. 10.1 Amended and Restated Common Stock Subscription Agreement between PMI and CardioTech (including Assignment of Patents Agreement). 10.2 Form of Tax Matters Agreement between CardioTech and PMI to be executed on the effective date of the Form 10. 10.3 Form of Facilities and Services Agreement between CardioTech and PMI to be executed on the effective date of the Form 10. 10.4 Amended and Restated License Agreement between PMI and CardioTech. 10.5 Form of Distribution Agency Agreement between CardioTech and The First National Bank of Boston to be executed on the effective date of the Form 10. 10.6 CardioTech 1996 Employee, Director and Consultant Option Plan. 10.7 Form of Employment Agreement of Michael Szycher. 10.8 Form of Warrant issued by CardioTech to the John Hancock Mutual Life Insurance Company. 10.9 Form of Letter Agreement between CardioTech, PMI and John Hancock Mutual Life Insurance Company. 10.10+* Development, Supply and License Agreement between PMI and Bard Access Systems, Inc. dated November 11, 1992. 14 Material Foreign Patent 21* Subsidiaries of CardioTech. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Hale and Dorr 27 Financial Data Schedule ------------------------- * Previously filed + Confidential treatment requested as to certain portions. EX-2 2 PLAN & AGREEMENT OF DISTRIBUTION 1 EXHIBIT 2 PLAN AND AGREEMENT OF DISTRIBUTION THIS PLAN AND AGREEMENT OF DISTRIBUTION (the "Agreement") is made as of the day of May, 1996, between PolyMedica Industries, Inc., a Massachusetts corporation ("PolyMedica"), and CardioTech International, Inc., a Massachusetts corporation ("CardioTech"). RECITALS WHEREAS, PolyMedica is the holder of 3,490,638 shares of Common Stock, $.01 par value per share, of CardioTech ("CardioTech Common Stock"), comprising approximately 91.7% of the issued and outstanding shares of CardioTech Common Stock; and WHEREAS, PolyMedica has contributed certain technology and certain assets to CardioTech and intends to make other arrangements to establish CardioTech as a separate enterprise for the purpose of applying CardioTech's proprietary polyurethane and related polymer technologies for use in the development, manufacture and sale of vascular grafts and other implantable medical devices and premium biomaterials (the "Implantable Medical Device and Materials Business"); and WHEREAS, it is the intention of PolyMedica to distribute all of the issued and outstanding shares of CardioTech Common Stock held by PolyMedica to the stockholders of PolyMedica in a transaction satisfying the requirement of Section 355 of the Internal Revenue Code of 1986, as amended (the "Distribution"); and WHEREAS, PolyMedica and CardioTech have determined that it is necessary and desirable to set forth the principal corporate transactions required to effect the Distribution and to set forth other agreements that will govern certain other matters following such Distribution. NOW, THEREFORE, in consideration of the mutual covenants and agreements made herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 General. As used in this Agreement and the Exhibits hereto, the following terms shall have the following meanings: Action: any action, claim, suit, litigation, arbitration, inquiry, subpoena, discovery request, proceeding or investigation by or before any court or grand jury, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. 2 Affiliate: with respect to any specified person, a person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person; provided, however, that PolyMedica (and its subsidiaries) shall not be deemed to be Affiliates of CardioTech (and its subsidiaries), and vice versa, for purposes of this Agreement. Agent: The First National Bank of Boston, the distribution agent appointed by PolyMedica to distribute the shares of CardioTech Common Stock in connection with the Distribution. Ancillary Agreements: all of the agreements, instruments, understandings, assignments or other arrangements entered into in connection with the transactions contemplated hereby, including, without limitation, the License Agreement, the Distribution Agency Agreement, the Tax Matters Agreement, the Facilities and Services Agreement and the Subscription Agreement. CardioTech Board: the Board of Directors of CardioTech. CardioTech Common Stock: as defined in the Recitals. Code: the Internal Revenue Code of 1986, as amended. Commission: the Securities and Exchange Commission. Distribution: as defined in the Recitals. Distribution Agency Agreement: the Distribution Agency Agreement between PolyMedica and the Agent, the proposed form of which is attached as Exhibit A, providing for, among other things, the dissemination of the Information Statement to PolyMedica stockholders as of the Distribution Record Date and the distribution of certificates evidencing shares of CardioTech Common Stock to such stockholders. Distribution Date: the proposed date of effecting the Distribution, as determined by the PolyMedica Board or the PolyMedica Special Committee. Distribution Record Date: the date determined by the PolyMedica Board or the PolyMedica Special Committee as of which the holders of PolyMedica Common Stock and their respective stock holdings shall be determined for purposes of distributing CardioTech Common Stock to such PolyMedica stockholders. Exchange Act: the Securities Exchange Act of 1934, as amended. Facilities and Services Agreement: the Facilities and Service Agreement between PolyMedica and CardioTech, the proposed form of which is attached as Exhibit B, providing for, among other -2- 3 things, the provision of certain administrative support services by PolyMedica to CardioTech after the Distribution. Form 10: the Registration Statement on Form 10 to be filed by CardioTech with the Commission to effect the registration of the CardioTech Common Stock pursuant to the Exchange Act. Information Statement: the Information Statement, constituting a part of the Form 10, in the form to be distributed to the holders of PolyMedica Common Stock as of the Distribution Record Date in connection with the Distribution, and as it may be amended or supplemented subsequent to such dissemination. Liabilities: any and all debts, liabilities and obligations, absolute or contingent, mature or unmature, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising (unless otherwise specified in this Agreement), including all costs and expenses relating thereto, and those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. License Agreement: the Amended and Restated License Agreement between PolyMedica and CardioTech, the proposed form of which is attached as Exhibit C, providing for, among other things, the licensing to CardioTech of the polymer technologies in connection with the Implantable Medical Devices and Materials Business. Implantable Medical Device and Materials Business: as defined in the Recitals. PolyMedica Board: the Board of Directors of PolyMedica. PolyMedica Common Stock: the Common Stock, $.01 par value per share, of PolyMedica. PolyMedica Special Committee: the Special Committee of the Board of Directors of PolyMedica. Securities Act: the Securities Act of 1933, as amended. Subscription Agreement: the Amended and Restated Common Stock Subscription Agreement between PolyMedica and CardioTech, a copy of which is attached hereto as Exhibit D. Tax Matters Agreement: the Tax Matters Agreement between PolyMedica and CardioTech, the proposed form of which is attached as Exhibit E, providing for, among other things, the allocation of liabilities with respect to federal, state and local income taxes and the procedures for filing returns with respect to such taxes. -3- 4 ARTICLE II ACKNOWLEDGMENT OF MATERIAL FACTS 2.1 Organization. PolyMedica and CardioTech acknowledge that each is duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, with requisite corporate power to own their respective properties and assets and to carry on their respective businesses as presently conducted or contemplated. PolyMedica is the owner of 3,490,638 of the issued and outstanding shares of CardioTech Common Stock. ARTICLE III PRELIMINARY ACTION 3.1 Cooperation Prior to the Distribution (a) Ancillary Agreements. PolyMedica and CardioTech shall use their respective best efforts to cause, on or before the Distribution Date, the execution and delivery by PolyMedica and CardioTech, or their respective Affiliates, of the Ancillary Agreements and any other agreements, instruments or other documents deemed necessary or desirable by the applicable parties to establish and govern their post-Distribution relationships. (b) Form 10. PolyMedica and CardioTech have prepared, and CardioTech has filed with the Commission, the Form 10, which includes the Information Statement, setting forth appropriate disclosure concerning CardioTech, the Distribution and any other appropriate matters required to be stated therein. PolyMedica and CardioTech shall use their respective reasonable efforts to cause the Form 10 to become effective under the Exchange Act, and thereafter PolyMedica shall promptly mail the Information Statement to all of the appropriate holders of PolyMedica Common Stock. (c) Blue Sky. PolyMedica and CardioTech shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States in connection with the transactions contemplated by this Agreement and the Ancillary Agreements. (d) Listing. PolyMedica and CardioTech shall prepare, and CardioTech shall file and pursue, an application to effect the listing of the CardioTech Common Stock on the American Stock Exchange. 3.2 Consents. Each party hereto understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, representing or warranting in any way that the obtaining of any consents or -4- 5 approvals, the execution and delivery of any agreements or the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable laws or judgments except as expressly represented, warranted or covenanted herein or in the Ancillary Agreements. Notwithstanding the foregoing, the parties shall use reasonable efforts to obtain all consents and approvals, to enter into all agreements and to make all filings and applications which may be required for the consummation of the transactions contemplated by this Agreement, including, without limitation, all applicable regulatory filings or consents under federal or state laws and all necessary consents, approvals, agreements, filings and applications. ARTICLE IV THE DISTRIBUTION 4.1 The Distribution. Prior to the Distribution Date, PolyMedica shall deliver to CardioTech the certificates for the 3,490,638 shares of CardioTech Common Stock owned by PolyMedica, and CardioTech shall cancel such certificates. In exchange therefor, and upon receipt from the Agent of a certificate as to the number of shares of PolyMedica Common Stock outstanding as of the Distribution Record Date, CardioTech shall deliver to the Agent on the Distribution Date on behalf of PolyMedica and for the benefit of the holders of record of PolyMedica Common Stock as of the Distribution Record Date, an omnibus stock certificate representing in the aggregate one share of CardioTech Common Stock for every 2.21 shares of PolyMedica Common Stock outstanding as of the Distribution Record Date. Effective as of 5:00 p.m., Boston Time, on the date of the delivery of such omnibus stock certificate to the Agent, ownership of the CardioTech Common Stock held by PolyMedica shall pass to PolyMedica's stockholders. PolyMedica shall instruct the Agent to distribute, beginning on or promptly following the Distribution Date, to such holders of PolyMedica Common Stock on the Distribution Record Date, certificates representing one share of CardioTech Common Stock for every 2.21 shares of PolyMedica Common Stock outstanding as of the Distribution Record Date. CardioTech agrees to provide to the Agent sufficient certificates in such denominations as the Agent may request in order to effect the Distribution. All of the shares of CardioTech Common Stock issued in the Distribution shall be fully paid, nonassessable and free of preemptive rights. Holders of PolyMedica Common Stock shall not be required to pay cash or other consideration for the CardioTech Common Stock received in the Distribution. No fractional shares of CardioTech Common Stock will be received by PolyMedica stockholders. Fractional shares, if any, will be aggregated and sold, on behalf of the stockholders entitled to receive such shares, by the Agent. The Agent will use the net proceeds from the sale of fractional shares to make cash -5- 6 payments to those stockholders otherwise entitled to receive fractional shares in proportion to their respective interests in such fractional shares. 4.2 PolyMedica Board Action (a) The PolyMedica Board or the PolyMedica Special Committee shall establish in its sole discretion and in accordance with all applicable rules of the American Stock Exchange, the Distribution Record Date, the Distribution Date, the date on which certificates representing CardioTech Common Stock shall be mailed to holders of PolyMedica Common Stock and all appropriate procedures in connection with the Distribution. (b) In its sole discretion for any reason, the PolyMedica Board (or the PolyMedica Special Committee) may rescind the declaration of the Distribution, and after the declaration and until the Distribution Date, the PolyMedica Board or the PolyMedica Committee may postpone, withdraw, cancel or abandon the Distribution for any reason and simultaneously terminate this Agreement and the Ancillary Agreements. ARTICLE V EMPLOYEES OF CARDIOTECH 5.1 Acknowledgments. PolyMedica and CardioTech acknowledge that CardioTech has hired or intends to hire certain persons who are or have been employees of PolyMedica. ARTICLE VI MISCELLANEOUS LIABILITIES AND INDEMNIFICATION 6.1 CardioTech Liabilities; Indemnification. CardioTech shall be liable for any and all claims and Liabilities incurred by it subsequent to the Distribution Date and hereby agrees to indemnify and hold harmless PolyMedica from and against such claims and Liabilities. In addition, CardioTech hereby assumes responsibility for all claims and Liabilities relating to the employment of individuals by CardioTech on and after the Distribution Date. In the event PolyMedica incurs any Liability or expense to be borne by CardioTech hereunder, CardioTech agrees to reimburse, indemnify and hold harmless PolyMedica for any expense or Liability associated therewith. CardioTech shall also indemnify PolyMedica for any claim or Liability incurred by PolyMedica as a consequence of any misstatement or omission of a material fact with respect to CardioTech based on information supplied by CardioTech in any documents or filings prepared for purposes of compliance or qualification under applicable securities laws in connection with the Distribution, and related -6- 7 transactions, including, without limitation, the Information Statement and the Form 10. 6.2 PolyMedica Liabilities; Indemnification. PolyMedica shall be liable for any and all claims and Liabilities relating to its business and assets not transferred to CardioTech and the Liabilities not assumed by CardioTech under the terms of this Agreement, including, without limitation, (i) Liabilities arising out of operation of the business of CardioTech and the Implantable Medical Device and Materials Business (as defined in the License Agreement) prior to the Distribution Date and (ii) Liabilities relating to the employment of individuals prior to the Distribution Date, and hereby agrees to indemnify and hold harmless CardioTech from and against such claims and Liabilities. In the event CardioTech incurs any Liability or expense to be borne by PolyMedica hereunder, PolyMedica agrees to reimburse, indemnify and hold harmless CardioTech for any expense or Liability associated therewith. PolyMedica shall also indemnify CardioTech for any claim or Liability incurred by CardioTech as a consequence of any misstatement or omission of a material fact with respect to PolyMedica based on information supplied by PolyMedica in any documents or filings prepared for purposes of compliance or qualification under applicable securities laws in connection with the Distribution and related transactions, including, without limitation, the Information Statement and the Form 10. 6.3 Tax Liabilities. Notwithstanding the provisions of Sections 6.1 and 6.2, all tax Liabilities relating to the business of CardioTech including, without limitation, income taxes, franchise taxes, sales taxes, use taxes, payroll taxes and employment taxes, shall be assumed by the party to whom the Liability has been allocated in the Tax Matters Agreement. ARTICLE VII ADDITIONAL ASSURANCES 7.1 Mutual Assurances. PolyMedica and CardioTech agree to cooperate with respect to the implementation of this Agreement and the Ancillary Agreements and to execute such further documents and instruments as may be necessary to confirm the transactions contemplated hereby. Such cooperation may include joint meetings with corporate partners, suppliers, customers and others to assure the orderly transition of the business and assets contemplated hereby; provided, however, that nothing herein shall be deemed to obligate either PolyMedica or CardioTech to take any action or reach any understandings which may violate any applicable laws. PolyMedica and CardioTech agree that they will not take any action inconsistent with the facts and representations set forth in the "no-action letter" request filed with the Commission in connection with the Distribution or the conditions of the "no-action letter" received from the Commission in connection with the same, and will -7- 8 use their best efforts to cause such facts to remain true and correct, to satisfy such conditions and to maintain the effectiveness of such letter and, if either PolyMedica or CardioTech shall take any such inconsistent action, or fail to use such best efforts, it will indemnify the other party for any expense or Liability incurred as a consequence thereof. PolyMedica and CardioTech also agree that the Distribution is intended to qualify under Section 355 of the Code, and that the characterization of the transactions contemplated hereunder for tax purposes and the liability of the parties for taxes shall be governed by the Tax Matters Agreement. Except as otherwise specifically provided herein or as agreed between the parties from time to time, PolyMedica and CardioTech shall bear their own expenses associated with the Distribution. ARTICLE VIII CONDITIONS TO EFFECTIVENESS OF DISTRIBUTION The Distribution shall be subject to the implementation of the portions of this Agreement which are contemplated to become effective prior to the Distribution and to the satisfaction or waiver of the following conditions: 8.1 Board Approval. This Agreement and the Ancillary Agreements (including exhibits and schedules) shall have been approved by the PolyMedica Board and the CardioTech Board and shall have been executed and delivered by appropriate officers of PolyMedica and CardioTech. 8.2 Securities Laws Compliance. The transactions contemplated hereby shall be in compliance with applicable federal and state securities laws. 8.3 Form 10 Effective. The Form 10 shall have become effective under the Exchange Act. 8.4 Consents. PolyMedica shall have received such consents, and shall have received executed copies of such agreements or amendments of agreements, as it shall deem necessary in connection with the completion of the transaction contemplated by this Agreement. 8.5 Resignation of Officers and Directors. With the exception of Arthur A. Siciliano, Ph.D., who will continue as an executive officer of PolyMedica and director of Cardiotech after the Distribution, all persons who hold positions as officers or directors of PolyMedica who are or are to become employees, officers or directors of CardioTech shall have resigned such positions with PolyMedica. 8.6 Other Instruments. All action and other documents and instruments deemed necessary or advisable in connection with the -8- 9 transactions contemplated hereby shall have been taken or executed, as the case may be, in form and substance satisfactory to PolyMedica and CardioTech. 8.7 Legal Proceedings. No legal proceedings affecting or arising out of the transactions contemplated hereby or which could otherwise affect PolyMedica or CardioTech in a materially adverse manner shall have been commenced or threatened against PolyMedica, CardioTech or the directors or officers of either PolyMedica or CardioTech. 8.8 Material Changes. No material adverse change shall have occurred with respect to PolyMedica or CardioTech, the securities markets or general economic or financial conditions which shall, in the reasonable judgment of PolyMedica and CardioTech, make the transactions contemplated by this Agreement inadvisable. ARTICLE IX ACCESS TO INFORMATION AND SERVICES 9.1 Provision of Corporate Records. Upon CardioTech's request, PolyMedica shall arrange as soon as practicable following the Distribution Date for the delivery to CardioTech of existing corporate records in the possession of PolyMedica relating to the Implantable Medical Devices and Materials Business, together with all active agreements and any active litigation files relating to the Implantable Medical Devices and Materials Business, except to the extent such items are already in the possession of CardioTech. Such records shall be the property of CardioTech but shall be available to PolyMedica for review and duplication until PolyMedica shall notify CardioTech in writing that such records are no longer of use to PolyMedica. 9.2 Access to Information. From and after the Distribution Date, PolyMedica shall afford to CardioTech and its authorized accountants, counsel and other designated representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") within PolyMedica's possession relating to CardioTech's business, insofar as such access is reasonably required by CardioTech. CardioTech shall afford to PolyMedica and its authorized accountants, counsel and other designated representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing Information) and duplicating rights during normal business hours to Information within CardioTech's possession relating to PolyMedica's business as constituted after the Distribution, insofar as such access is reasonably required by PolyMedica. Information may be requested under this Article IX for, without limitation, audit, accounting, claims, litigation and -9- 10 tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing the transactions contemplated in this Agreement and the Ancillary Agreements. 9.3 CardioTech Securities Filings. For a period of three years following the Distribution Date, CardioTech shall provide to PolyMedica, promptly following such time at which such documents shall be filed with the Commission, copies of all documents which shall be filed by CardioTech with the Commission pursuant to the periodic and interim reporting requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder. 9.4 Production of Witnesses. At all times from and after the Distribution Date, each of PolyMedica and CardioTech shall use reasonable efforts to make available to the other, upon written request, its officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required in connection with legal, administrative or other proceedings in which the requesting party may from time to time be involved. 9.5 Reimbursement. Except to the extent otherwise contemplated by any Ancillary Agreement, a party providing Information to the other party under this Article IX shall be entitled to receive from the recipient, upon the presentation of invoices therefor, payments for such amounts, relating to supplies, disbursements and other out-of-pocket expenses, as may be reasonably incurred in providing such Information. 9.6 Retention of Records. For a period of ten (10) years following the Distribution Date, each of PolyMedica and CardioTech shall retain all Information relating to the other, except as otherwise required by law or set forth in an Ancillary Agreement or except to the extent that such Information is in the public domain or in the possession of the other party; provided, that, after the expiration of such retention period, such Information shall not be destroyed or otherwise disposed of at any time, unless, prior to such destruction or disposal, (i) the party proposing to destroy or otherwise dispose of such Information shall provide no less than ninety (90) days' prior written notice to the other, specifying in reasonable detail the Information proposed to be destroyed or disposed of and (ii) if a recipient of such notice shall request in writing prior to the scheduled date for such destruction or disposal that any of the Information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such of the Information as was requested, at the expense of the party requesting such Information. 9.7 Confidentiality. Subject to any contrary requirement of law and the right of each party to enforce its rights hereunder in any legal action, each party shall keep strictly confidential, and -10- 11 shall cause its employees and agents to keep strictly confidential, any Information of or concerning the other party which it or any of its agents or employees may acquire pursuant to, or in the course of performing its obligations under, any provisions of this Agreement or any Ancillary Agreement; provided, however, that such obligation to maintain confidentiality shall not apply to Information which: (i) at the time of disclosure was in the public domain, not as a result of improper acts by the receiving party; (ii) was already independently in the possession of the receiving party at the time of disclosure; or (iii) is received by the receiving party from a third party who did not receive such Information from the disclosing party under an obligation of confidentiality. ARTICLE X COVENANTS 10.1 Listing. CardioTech hereby agrees to use its reasonable efforts to effect and maintain the listing of the CardioTech Common Stock on the American Stock Exchange. 10.2 Issuance of CardioTech Common Stock relating to Warrants. Upon the effectiveness of the Distribution CardioTech shall issue a Warrant to John Hancock Mutual Life Insurance Company (the "Holder") for the purchase of 245,438 shares of CardioTech Common Stock, subject to adjustment, on the terms set forth in a Letter from CardioTech and PolyMedica to the Holder dated May , 1996, a copy of which is attached hereto as Exhibit G. 10.3 Ancillary Agreements. The parties agree that they shall comply with and provide all services and take any and all actions required to be provided or taken by the terms of any and all of the Ancillary Agreements following the Distribution. 10.4 Fees and Expenses. The parties agree that they will pay fifty percent (50%) of the aggregate of all fees and expenses incurred by the parties collectively in connection with the Distribution, exclusive of PolyMedica management time. ARTICLE XI MISCELLANEOUS 11.1 Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts (excluding the conflict of laws provisions thereof). 11.2 Construction. Each provision of this Agreement shall be interpreted in a manner to be effective and valid to the fullest extent permissible under applicable law. The invalidity or unenforceability of any particular provision of this Agreement -11- 12 shall not affect the other provisions of this Agreement which shall remain in full force and effect. 11.3 Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement or any of the Ancillary Agreements (including any questions of fraud or questions concerning the validity and enforceability of this Agreement or any of the Ancillary Agreements or any of the rights herein conveyed), shall be determined and settled by arbitration in Boston, Massachusetts, pursuant to the commercial arbitration rules then in effect of the American Arbitration Association as modified by this paragraph. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in any court having competent jurisdiction. The party submitting such dispute shall give written notice to that effect to the other party, stating the dispute to be arbitrated and the name and address of a person designated to act as arbitrator on its behalf. Within fifteen (15) days after such notice, the other party shall give written notice to the first party stating the name and address of a person designated to act as substitute on its behalf. In the event that the second party shall fail to notify the first party of its designation of an arbitrator within the time specified, then the first party shall request the American Arbitration Association to appoint a second arbitrator. The two arbitrators so chosen shall meet within fifteen (15) days after the second arbitrator has been appointed to appoint a third arbitrator. If the two arbitrators are unable to agree on the appointment of a third arbitrator within such fifteen (15) day period, either party may request the American Arbitration Association to appoint a third arbitrator. Each arbitrator appointed hereunder shall be independent of the parties and either party may disqualify an arbitrator who is or is affiliated with a supplier, customer or competitor of either party without the consent of the other party. Each arbitrator shall be reasonably knowledgeable regarding the area or areas in dispute. All costs and expenses, including attorney's fees, of all parties incurred in any dispute which is determined and/or settled by arbitration pursuant to this paragraph shall be borne by the party determined to be liable in respect of such dispute; provided, however, that if complete liability is not assessed against only one party, the parties shall share the total costs in proportion to their respective amounts of liability so determined. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Both parties, and the arbitrators, shall use their best efforts, subject to reasonable prosecution of the arbitration, court order and disclosure required under securities laws, to keep the subject matter of the arbitration and confidential information of each party confidential, and the arbitrators are authorized to impose such protective orders as they may deem appropriate for such purpose. Either prior to or as part of any award, the arbitrators shall be authorized to grant injunctive relief or other equitable remedies, including granting security for a prospective or final -12- 13 award, but the arbitrators shall have no authority to award punitive damages or other penalties. 11.4 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement. 11.5 Exhibits. Exhibits to this Agreement shall be deemed to be an integral part hereof, and schedules or exhibits to such Exhibits shall be deemed to be an integral part thereof. Except as otherwise specifically provided therein, all provisions of this Article XI shall apply to each agreement constituting an Ancillary Agreement or to which reference is made herein. 11.6 Amendments; Waivers. This Agreement may be amended or modified only in writing executed on behalf of PolyMedica and CardioTech. No waiver shall operate to waive any further or future act and no failure to object of forbearance shall operate as a waiver. 11.7 Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is given, (ii) on the day of transmission if sent via facsimile transmission to the facsimile number given below, provided telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the business day after delivery to an overnight courier service or the Express mail service maintained by the United States Postal Service, provided receipt of delivery has been confirmed, or (iv) on the fifth day after mailing, if mailed by registered or certified mail, postage prepaid, properly addressed and return-receipt requested, in all cases to the parties as follows: PolyMedica Industries, Inc. 11 State Street Woburn, MA 01801 Attention: Chief Executive Officer Telephone: (617) 933-2020 Telecopier: (617) 938-6950 with a copy to: John K.P. Stone III, Esq. Hale and Dorr 60 State Street Boston, MA 02109 Telephone: (617) 526-6000 Telecopier: (617) 526-5000 -13- 14 or to: CardioTech International, Inc. 11 State Street Woburn, MA 01801 Attention: Chief Executive Officer Telephone: (617) 933-4772 Telecopier: [ ] with a copy to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC One Financial Center 41st Floor Boston, MA 02111-2657 Attention: Jeffrey Wiesen Telephone: (617) 542-6000 Telecopier: (617) 542-2241 11.8 Successors and Assigns. This Agreement and any of the rights and obligations of each party hereunder shall not be assigned, in whole or in part, without the prior written consent of the other party, which consent shall not be unreasonably withheld, provided that either party may sell, assign, transfer, delegate or otherwise dispose of its rights and obligations hereunder in connection with its merger or consolidation or the sale of substantially all of its assets. This Agreement shall be binding upon the parties and their respective successors and assigns to the extent such assignments are in accordance with this Section 11.8. 11.9 Interpretation. The Article and Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. As used in this Agreement, the term "person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. -14- 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. POLYMEDICA INDUSTRIES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ CARDIOTECH INTERNATIONAL, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ -15- EX-3.1 3 ARTICLES OF ORGANIZATION OF CARDIOTECH 1 THE COMMONWEALTH OF MASSACHUSETTS EXHIBIT 3.1 ----------- - ---------- Examiner WILLIAM FRANCIS GALVIN FEDERAL IDENTIFICATION Secretary of State ONE ASHBURTON PLACE, BOSTON, MA 02108 NO. 04-3186647 ---------- RESTATED ARTICLES OF ORGANIZATION GENERAL LAWS, CHAPTER 156B, SECTION 74 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the restated articles of organization. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. ---------- I, Michael Szycher, Ph.D., President and Clerk of CardioTech International, Inc. ............................................................................... (Name of Corporation) located at 11 State Street, Woburn, Massachusetts 01801 ..................................................................... do hereby certify that the following restatement of the articles of organization of the corporation was duly adopted May 9, 1996 by vote of 4,964,746 Common Stock 4,964,746 ...............shares of...............out of............shares outstanding, (Class of Stock) ...............shares of...............out of............shares outstanding, and (Class of Stock) ...............shares of...............out of............shares outstanding, (Class of Stock) being at least two-thirds of each class of stock outstanding and entitled to vote and of each class or series of stock adversely affected thereby: C / / 1. The name by which the corporation shall be known is:CardioTech P / / International, Inc. M / / RA / / 2. The purposes for which the corporation is formed are as follows: (a) To engage in the business of inventing, developing, acquiring, using, manufacturing, licensing, marketing, distributing, selling and otherwise commercializing products and related technology consisting of, in whole or in part, medical grade polyurethanes. (b) To carry on any business or other activity which may lawfully be carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, whether or not related to those referred to in the preceding paragraph. - --------- 2 3. The total number of shares and the par value, if any, of each class of stock which the corporation is authorized to issue is as follows:
WITHOUT PAR VALUE WITH PAR VALUE ----------------- -------------- CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE - -------------- ---------------- ---------------- --------- Preferred 5,000,000 $.01 Common 20,000,000 $.01
*4. If more than one class is authorized, a description of each of the different classes of stock with, if any, the preferences, voting powers, qualifications, special or relative rights or privileges as to each class thereof and any series now established: See Continuation Sheets 4A - 4C herewith. *5. The restrictions, if any, imposed by the articles of organization upon the transfer of shares of stock of any class are as follows: None. *6. Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Continuation Sheets 6A - 6J herewith. *If there are no such provisions, state "None". 2 3 Continuation Sheet 4A ARTICLE 4 The authorized classes of capital stock of the Corporation shall be designated, respectively, the Common Stock, $.01 par value (the "Common Stock") and the Preferred Stock, $.01 par value (the "Preferred Stock"). Every one (1) share of Common Stock outstanding on March 19, 1996 shall hereby be changed and reclassified, effective March 19, 1996, but without any further action on the part of the Corporation or its stockholders, into fifty-four and seven thousand three hundred and twenty-eight ten-thousandths (54.7328) fully paid and nonassessable shares of Common Stock. Each person, as of March 19, 1996, holding of record any issued and outstanding shares of Common Stock shall receive upon surrender to the Corporation, a stock certificate or certificates to evidence and represent the number of shares of post-split Common Stock to which such stockholder is entitled after giving effect to the stock split. Every one (1) share of Common Stock outstanding on the date of the filing of these Restated Articles of Organization shall hereby be changed and reclassified, effective upon filing of these Restated Articles of Organization, but without any further action on the part of the Corporation or its stockholders, into .766453701 of a fully paid and nonassessable share of Common Stock. Each person, as of the filing of these Restated Articles of Organization, holding of record any issued and outstanding shares of Common Stock shall receive upon surrender to the Corporation (i) a stock certificate or certificates to evidence and represent the number of shares of post-split Common Stock to which such stockholder is entitled after giving effect to the reverse stock split and (ii) a cash payment for the fractional share of Common Stock, if any, which such stockholder would otherwise be entitled to receive in an amount equal to the fractional share which such stockholder would otherwise be entitled to receive multiplied by $5.50. The relative powers, designations, preferences, special rights, restrictions and other matters relating to such Common Stock and Preferred Stock are as set forth below in this Article 4. 1. Common Stock ------------ The Common Stock shall be designated as Common Stock, $.01 par value per share. Except as otherwise required by law, each holder of shares of Common Stock shall be entitled to one vote for all purposes for each share of Common Stock held. Except for and subject to those rights expressly granted to the holders of any series of Preferred Stock, and except to the extent otherwise provided in the Corporation's Articles of Organization or By-Laws or by applicable law, the holders of Common Stock shall have exclusively all rights of stockholders of the Corporation under the Massachusetts Business Corporation Law. 2. Preferred Stock --------------- The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article 4, to provide for the issuance from time to time of the shares of Preferred Stock in one or more series, and, by filing a certificate pursuant to the applicable law 4 Continuation Sheet Continuation Sheet 4B of the Commonwealth of Massachusetts (the "Certificate of Designation"), to establish from time to time the number of shares to be included in each such series and to fix the designation, preferences, voting powers, qualifications and special or relative rights or privileges of the shares of each such series. In the event that at any time the Board of Directors shall have established and designated one or more series of Preferred Stock consisting of a number of shares less than all of the authorized number of shares of Preferred Stock, the remaining authorized shares of Preferred Stock shall be deemed to be shares of an undesignated series of Preferred Stock until designated by the Board of Directors as being a part of a series previously established or a new series then being established by the Board of Directors. Notwithstanding the fixing of the number of shares constituting a particular series, the Board of Directors may at any time thereafter authorize the issuance of additional shares of the same series except as set forth in the Certificate of Designation. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, determination of the following: (i) the number of shares constituting that series and the distinctive designation of that series, and whether additional shares of that series may be issued; (ii) whether any dividends shall be paid on shares of that series, and, if so, the dividend rate on the shares of that series; whether dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (iii) whether shares of that series shall have voting rights in addition to the voting rights provided by law and, if so, the terms of such voting rights; (iv) whether shares of that series shall be convertible into shares of Common Stock or another security and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) whether or not the shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and the different redemption dates; and whether that series shall have a sinking fund for the redemption or purchase of shares of that series and, if so, the terms and amount of such sinking fund; (vi) whether, in the event of a purchase or redemption of the shares of that series, any shares of that series shall be restored to the status of 5 Continuation Sheet 4C authorized but unissued shares or shall have such other status as shall be set forth in the Certificate of Designation; (vii) the rights of the shares of that series in the event of the sale, conveyance, exchange or transfer of all or substantially all of the property and assets of the Corporation, or the merger or consolidation of the Corporation into or with any other corporation, or the merger of any other corporation into it, or the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of the shares of that series to payment in any such event; (viii) whether the shares of that series shall carry any preemptive right in or preemptive right to subscribe to any additional shares of Preferred Stock or any shares of any other class of stock which may at any time be authorized or issued, or any bonds, debentures or other securities convertible into shares of stock of any class of the Corporation, or options or warrants carrying rights to purchase such shares or securities; and (ix) any other designations, preferences, voting powers, qualifications, and special or relative rights or privileges of the shares of that series. 6 Continuation Sheet 6A ARTICLE 6 6A. CERTAIN BUSINESS COMBINATIONS (a) VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. (1) HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to any affirmative vote required by law or these Articles of Organization, and except as otherwise expressly provided in paragraph (b) of this Article 6A: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (ii) any sale, lease, license, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) equal to or greater than ten percent (10%) of the combined assets of the Corporation and its Subsidiaries; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value equal to or greater than ten percent (10%) of the combined assets of the Corporation and its Subsidiaries, except pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or (iv) any reclassification of securities of the Corporation (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which are directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder shall require the affirmative vote of the holders of at least eighty 7 Continuation Sheet 6B percent (80%) of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote in the election of directors (the "Voting Stock"), voting together as a single class (it being understood that for purposes or this Article 6A, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article 4 of these Articles of Organization). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified by law or by any other provision of these Articles of Organization or any Certificate of Designation (as defined in Article 4 of these Articles of Organization), or in any agreement with any national securities exchange or otherwise. (2) DEFINITION OF "BUSINESS COMBINATION". The term "Business Combination" as used in this Article 6A shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of subparagraph (a)(1). (b) WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of paragraph (a) of this Article 6A shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Organizations, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following subparagraph (b)(1) is met, or, in the case of any other Business Combination, all of the conditions specified in the following subparagraphs (b)(1) and (b)(2) are met: (1) APPROVAL BY DISINTERESTED DIRECTORS. The Business Combination shall have been approved by a majority of the members of the Board of Directors of the Corporation (the "Board") who are Disinterested Directors (as hereinafter defined), it being understood that this condition shall not be capable of satisfaction unless there is at least one Disinterested Director. (2) PRICE AND PROCEDURAL REQUIREMENTS. All of the following conditions shall have been met: (i) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of Common Stock of the Corporation in such Business Combination shall be at least equal to the higher of the following: (A) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock of the Corporation acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; or 8 Continuation Sheet 6C (B) the Fair Market Value per share of Common Stock of the Corporation on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date"), whichever is higher. (ii) The aggregate amount of the cash and the Fair Market Value, as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock, shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b)(2)(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (A) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder or any of its Affiliates for any shares of such class of Voting Stock acquired or beneficially owned by it that were acquired (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; or (B) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary liquidation, dissolution or winding up of the Corporation; or (C) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (iii) The price determined in accordance with subparagraphs (i) and (ii) of this subparagraph (b)(2) shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (iv) The holders of all outstanding shares of Voting Stock not beneficially owned by the Interested Stockholder immediately prior to the consummation of any Business Combination shall be entitled to receive in such Business Combination cash or other consideration for their shares meeting all of the terms and conditions of this subparagraph (b)(2) (provided, however, that the failure of any stockholders who are exercising their statutory rights to dissent from such Business Combination and receive payment of the fair value of their shares in exchange for their shares in such Business Combination shall not be deemed to have prevented the condition set forth in this subparagraph (2)(iv) from being satisfied). (v) The consideration to be received by holders of any particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of such class of 9 Continuation Sheet 6D Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. (vi) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (A) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock of the Corporation; (B) there shall have been (I) no reduction in the annual rate of dividends paid on the Common Stock of the Corporation (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (II) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (C) neither such Interested Stockholder nor any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (vii) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (viii) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act or such rules or regulations) shall be mailed to stockholders of the Corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act or subsequent provisions). Such proxy or information statement shall contain, if a majority of the Disinterested Directors so requests, an opinion of a reputable investment banking firm which shall be selected by a majority of the Disinterested Directors, furnished with all information such investment banking firm reasonably requests and paid a reasonable fee for its services by the Corporation upon the Corporation's receipt of such opinion, as to the fairness (or lack of fairness) of the terms of the proposed Business Combination from the point of view of the holders of shares of Voting Stock (other than the Interested Stockholder). 10 Continuation Sheet 6E (c) CERTAIN DEFINITIONS. For the purposes of this Article 6A: (1) A "person" shall include any individual, group acting in concert, corporation, partnership, association, joint venture, pool, joint stock company, trust, unincorporated organization or similar company, syndicate, or any group formed for the purpose of acquiring, holding or disposing of securities. (2) "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i) is the beneficial owner, directly or indirectly, of more than fifteen percent (15%) of the voting power of the then outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of fifteen percent (15%) or more of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended. (3) A person shall be a "beneficial owner" of any shares of Voting Stock: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly, within the meaning of Rule 13d-3 of the Exchange Act, as in effect on March 13, 1996; or (ii) which such person or any of its Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to an agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the beneficial owner of securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person's Affiliates or Associates until such tendered securities are accepted for purchase; or (B) the right to vote pursuant to any agreement, arrangement, understanding or otherwise; provided, however, that a person shall not be deemed the beneficial owner of any security if the agreement, arrangement or understanding to vote such security (I) arises solely from a revocable proxy or consent solicitation made pursuant to, and in accordance with, the Exchange Act and (II) is not also then reportable on Schedule 13D under the Exchange Act (or a comparable or successor report); or 11 Continuation Sheet 6F (iii) which are beneficially owned, directly or indirectly within the meaning of Rule 13d-3 under the Exchange Act, as in effect on March 13, 1996 by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except to the extent permitted by the provision of subparagraph (c)(3)(ii)(B) above) or disposing of any shares of Voting Stock; provided, however, that in the case of any employee stock ownership plan or similar plan of the Corporation or of any Subsidiary in which the beneficiaries thereof possess the right to vote any shares of Voting Stock held by such plan, no such plan nor any trustee with respect thereto (nor any Affiliate of such trustee), solely by reason of such capacity of such trustee, shall be deemed, for any purposes hereof, to beneficially own any shares of Voting Stock held under any such plan. (4) For the purposes of determining whether a person is an Interested Stockholder pursuant to subparagraph (c)(2), the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph (c)(3), but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants, or options, or otherwise. (5) "Affiliate" and "Associate" shall have the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on March 13, 1996. (6) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in subparagraph (c)(2), the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (7) "Disinterested Director" means any Director of the Corporation who is not an Affiliate or Associate of the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any Director who is thereafter chosen to fill any vacancy on the Board or who is elected and who, in either event, is not an Affiliate or Associate of the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Disinterested Directors then serving on the Board. (8) "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding and including the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such exchange, on the principal United States securities exchange registered 12 Continuation Sheet 6G under the Exchange Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding and including the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or, if no such quotations are available, the fair market value on the date in question of a share of such stock as determined in good faith by a majority of the Disinterested Directors; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Disinterested Directors. (9) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraphs (b)(2)(i) and (ii) of this Article 6A shall include the shares of Common Stock of the Corporation and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. (10) For the purposes of determining the "Announcement Date," in the event that the first public announcement of the proposal of the Business Combination is made after the close on such date of any securities exchange registered under the Exchange Act on which any shares of the Voting Stock of the Corporation are traded, or of the National Association of Securities Dealers, Inc. Automated Quotations System, or any other system on which any shares of the Voting Stock of the Corporation are listed, then the Announcement Date shall be deemed to be the next day on which such exchange or quotations system is open. (d) POWERS OF THE BOARD OF DIRECTORS. A majority of the Board shall have the power and duty to determine for the purposes of this Article 6A, on the basis of information known to them after reasonable inquiry, whether a person is an Interested Stockholder, which determination shall be conclusive. Once the Board has made a determination, pursuant to the preceding sentence, that a person is an Interested Stockholder, then a majority of Disinterested Directors shall have the power and duty to determine for the purposes of this Article 6A, on the basis of information known to them after reasonable inquiry, (i) the number of shares of Voting Stock beneficially owned by any person, (ii) whether a person is an Affiliate or Associate of another, (iii) whether the assets which may be the subject of any Business Combination have, or the consideration which may be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value equal to or greater than ten percent (10%) of the combined assets of the Corporation and its Subsidiaries and (iv) whether all of the applicable conditions set forth in subsection (b)(2) shall have been met with respect to any Business Combination, any of which determinations by a majority of the Disinterested Directors shall be conclusive. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article 6A, which interpretation shall be conclusive. (e) NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED STOCKHOLDERS. Nothing contained in this Article 6A shall be construed to relieve any Interested Stockholder of any fiduciary obligation imposed by law. 13 Continuation Sheet 6H (f) AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of these Articles of Organization or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage or no vote may be specified by law, these Articles of Organization or the By-Laws of the Corporation), and in addition to any affirmative vote of the holders of Preferred Stock or any other class of capital stock of the Corporation or any series of the foregoing then outstanding which is required by law or by or pursuant to these Articles of Organization, the affirmative vote of the holders of eighty percent (80%) or more of the outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with this Article 6A. 6B. CERTAIN TRANSACTIONS APPROVED BY THE BOARD OF DIRECTORS Except as otherwise provided in these Restated Articles of Organization, the Corporation may authorize, by a vote of a majority of the shares of each class of stock outstanding and entitled to vote thereon, (a) the sale, lease or exchange of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions as it deems expedient, and (b) the merger or consolidation of the Corporation or any Subsidiary with or into any other corporation, provided, however, that such sale, lease, exchange, merger or consolidation shall have been approved by a majority of the members of the Board. 6C. LIMITATION OF LIABILITY OF DIRECTORS No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that this Article 6C shall not eliminate or limit any liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 of the Massachusetts Business Corporation Law, or (iv) with respect to any transaction from which the director derived an improper personal benefit. The provisions of this Article 6C shall not eliminate or limit the liability of a director of this Corporation for any act or omission occurring prior to the date on which this Article 6C became effective, provided, however, that neither any provision of this Article 6C nor the adoption of this Article 6C shall affect the effectiveness of any predecessor provision of these Restated Articles of Organization pertaining to the elimination or limitation of the liability of a director of this Corporation for any act or omission occurring prior to the date on which this Article 6C shall adversely affect the rights and protection afforded to a director of this Corporation under this Article 6C for acts or omissions occurring prior to such amendment or repeal. 14 Continuation Sheet 6I If the Massachusetts Business Corporation Law is subsequently amended to further eliminate or limit the personal liability of directors or to authorize corporation action to further eliminate or limit such liability, then the liability of the directors of this Corporation shall, without any further action of the Board or the stockholders of this Corporation, be eliminated or limited to the fullest extent permitted by the Massachusetts Business Corporation Law as so amended. 6D. RELATED PARTY DEALINGS The Corporation may enter into contracts or transact business with one or more of its directors, officers, stockholders or employees or with any corporation, organization or other concern in which one or more of its directors, officers, stockholders or employees are directors, officers, stockholders or employees or are otherwise interested and may enter into other contracts or transactions in which one or more of its directors, officers, stockholders or employees are in any way interested. In the absence of fraud, no such contract or transaction shall be invalidated or in any way affected by the fact that such one or more of the directors, officers, stockholders or employees of the Corporation have or may have any interest which is or might be adverse to the interest of the Corporation even though the vote or action of directors, officers, stockholders or employees having such adverse interest may have been necessary to obligate the Corporation upon such contract or transaction. At any meeting of the Board (or of any duly authorized committee thereof) at which any such contract or transaction shall be authorized or ratified, any such director or directors may vote or act thereat with like force and effect as if he had not such interest, provided in such case that the nature of such interest (though not necessarily the extent or details thereof) shall be disclosed or shall have been known to the directors. A general notice that a director, officer, stockholder or employee is interested in any corporation or other concern of any kind referred to above shall be a sufficient disclosure as to the interest of such director, officer, stockholder or employee with respect to all contracts and transactions with such corporation or other concern. No person shall be disqualified from holding office as a director or an officer of the Corporation by reason of any such adverse interest, unless the Board shall determine that such adverse interest is detrimental to the Corporation. In the absence of fraud, no director, officer, stockholder or employee having such adverse interest shall be liable on account of such adverse interest to the Corporation or to any stockholder or creditor thereof or to any other person for any loss incurred by it under or by reason of such contract or transaction, nor shall any such director, officer, stockholder or employee be accountable on such ground for any gains or profits realized thereon. 6E. PLACE OF MEETINGS OF STOCKHOLDERS Meetings of stockholders of the Corporation may be held anywhere in the United States to the extent permitted by the By-Laws. 15 Continuation Sheet 6J 6F. PARTNERSHIP IN ANY BUSINESS ENTERPRISE The Corporation may be a partner in any business enterprise organized for the purpose of accomplishing any of the purposes contained in these Restated Articles of Organization. 6G. MAKING, AMENDING AND REPEALING BY-LAWS OR RESTATED ARTICLES OF ORGANIZATION The directors of the Corporation shall have the power to make, alter, amend and repeal the By-Laws of the Corporation in whole or in part, except with respect to any provision thereof which by law or these Restated Articles of Organization or such ByLaws requires action by the stockholders, who shall also have the power to make, alter, amend and repeal the By-Laws of the Corporation. Any By-Laws made by the directors under the powers conferred hereby may be altered, amended, or repealed by the directors or the stockholders. Notwithstanding the foregoing and anything contained in these Restated Articles of Organization to the contrary, (i) Articles I, II and VI and Section 9 of Article V of the By-Laws, and (ii) Article 4 with respect to the Undesignated Preferred Stock and Article 6C and this Article 6G shall not be altered, amended or repealed by the stockholders, and no provision inconsistent therewith or herewith shall be adopted by the stockholders, without the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. In addition, notwithstanding the foregoing and anything contained in these Restated Articles of Organization to the contrary, the number of authorized shares of Common Stock or the number of authorized shares of Preferred Stock set forth in Article 3 shall not be reduced or eliminated unless approved by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. 6H. REMOVAL OF DIRECTORS. Any director, or the entire Board, may be removed from office at any time, but only either (a) for cause by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, or (b) by the affirmative vote of at least three-quarters (3/4) of the directors then serving, with or without cause. A director may be removed for cause only after a reasonable notice and opportunity to be heard before the body proposing to remove him. As used in this Article 6H, "cause" shall mean only (i) conviction of a felony, (ii) declaration of unsound mind by order of a court, (iii) gross dereliction of duty, (iv) commission of an action involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Corporation. 16 *We further certify that the foregoing restated articles of organization effect no amendments to the articles of organization of the corporation as heretofore amended, except amendments to the following articles: Article 4 .............................................................................. (*If there are no such amendments state "None".) Briefly describe amendments in space below: Article 4: (1) To give affect to the reverse stock split set forth in the third paragraph of Article 4, to be effective upon the filing of these Restated Articles of Organization. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, I have hereto signed my name this 9th day of May, in the year 1996. /s/ Michael Szycher President - --------------------------------------- /s/ Michael Szycher Clerk - --------------------------------------- 3 17 THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) I hereby approve the within restated articles of organization and, the filing fee in the amount of $ having been paid, said articles are deemed to have been filed with me this day of , 19 . WILLIAM FRANCIS GALVIN Secretary of State TO BE FILLED IN BY CORPORATION PHOTOCOPY OF RESTATED ARTICLES OF ORGANIZATION TO BE SENT TO: Michael L. Fantozzi, Esquire Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA 02111 Telephone: (617) 542-6000 Copy Mailed 4 EX-8 4 FORM OF OPINION OF HALE AND DORR 1 EXHIBIT 8 DRAFT May __, 1996 PolyMedica Industries, Inc. 11 State Street Woburn, MA 01801 Re: Distribution of Stock of CardioTech International, Inc. ------------------------------------------------------- Ladies and Gentlemen: We have represented PolyMedica Industries, Inc. ("PMI") in connection with the distribution by PMI of all of the common stock of CardioTech International, Inc. ("CardioTech") to the shareholders of PMI and the registration of the CardioTech Common Stock under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 pursuant to Form 10 as originally filed with the Securities and Exchange Commission on March 19, 1996 and amended by the filing dated May __, 1996 (the "Information Statement"). In conjunction with such representation, you have requested our opinion regarding certain of the federal income tax consequences of the proposed Distribution of the CardioTech Common Stock. For purposes of this opinion letter, capitalized terms not otherwise defined shall have the meaning given such terms in the Information Statement. In rendering this opinion, we have examined and relied upon the Information Statement, including all exhibits thereto, the Intercompany Agreements, the License Agreement, the Common Stock Subscription Agreement, the Distribution Agreement, the Credit Agreement, the letter from you and CardioTech of even date herewith containing certain factual representations (the "Representation Letter"), the opinion of Cruttenden Roth, Inc. of even date herewith, and such other documents as we considered relevant to our analysis. We have assumed that all parties to documents relating to the Distribution have acted, and will act, in accordance with the terms of such documents. Moreover, we have assumed that all documents reviewed by us will continue in effect without material change and that the parties to such documents will act in accordance with their terms. In our examination, we have assumed the authenticity of original documents, the accuracy of copies and the genuineness of 2 PolyMedica Industries, Inc. May __, 1996 Page 2 signatures. We have relied upon certificates of public officials and the representations and statements of authorized representatives of PMI and CardioTech in the Representation Letter. We have not attempted to verify independently such representations and statements, but in the course of our representation, nothing has come to our attention which would cause us to question the accuracy thereof. The conclusions expressed herein represent our judgment of the proper treatment of certain aspects of the Distribution under the income tax laws of the United States, based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations issued thereunder, case law, and rulings and other pronouncements of the Internal Revenue Service (the "IRS") as in existence on the date of this letter. No assurances can be given that such law will not be amended or otherwise changed in the future. In addition, we express no opinions (and none should be inferred) regarding the tax consequences of the Distribution under the laws of any jurisdiction other than the United States. Our opinion represents our best judgment of how a court would conclude if presented with the issues addressed herein and is not binding upon either the IRS or any court. Thus, no assurances can be given that a position taken in reliance on our opinions will not be challenged by the IRS or rejected by a court. ASSUMPTIONS - ----------- Our opinions set forth are based upon the following factual assumptions: 1. The Distribution was effected in the manner and for the reasons described in the Information Statement (including all exhibits thereto). 2. There is no plan or intention by the shareholders of PMI who receive CardioTech Common Stock in the Distribution to sell, exchange, or otherwise dispose of a material number of such shares other than in the ordinary course of their investment activities. 3. There is no plan or intention by the shareholders of PMI who owned PMI Common Stock at the time of the Distribution to sell, exchange, or otherwise dispose of a material number of such shares other than in the ordinary course of their investment activities. 4. None of the CardioTech Common Stock received by the PMI shareholders in the Distribution will be received by a shareholder 3 PolyMedica Industries, Inc. May __, 1996 Page 3 in his, her or its capacity as a creditor, employee, or in any capacity other than as a shareholder of PMI. 5. Any cash payments received by the PMI shareholders in lieu of fractional shares of CardioTech Common Stock otherwise distributable in the Distribution represent the mere mechanical rounding off of fractions resulting from the Distribution and will not constitute separately bargained-for consideration. 6. All factual representations made on behalf of PMI and/or CardioTech in the Representation Letter are correct and complete in all material respects. OPINION - ------- On the basis of and subject to the representations and assumptions described above, we are of the opinion that the Distribution will qualify under Code Section 355 of the Code such that it will give rise to the tax consequences described in the Information Statement under "Tax Considerations of the Distribution." You should be aware, however, that certain of the requirements of Code Section 355 (discussed in more detail below) are subjective in nature or have a relative absence of authority addressing their application on facts similar to those presented by the Distribution. Accordingly, the IRS and/or a court could reach a different conclusion. BUSINESS PURPOSE - ---------------- In order for a distribution of the stock of a subsidiary to qualify under Code Section 355, it must be motivated by a valid business purpose. Under applicable regulations, the requisite business purpose will only exist with regard to the Distribution if the Distribution was carried out for a "real and substantial nonfederal tax" corporate (rather than stockholder) purpose that was "germane to the business" of PMI or CardioTech; there was no practical tax-free alternative to the Distribution for achieving such purpose; and the Distribution was "required by business exigencies." PMI has represented that the Distribution was undertaken primarily to provide both PMI and CardioTech with greater access to the capital markets to enable them to obtain financing necessary for their respective businesses at the lowest cost. PMI and CardioTech believe that such objective can only be achieved if CardioTech and PMI are completely separated so that investors will analyze them independently and the retention of a significant interest in CardioTech by PMI would increase the cost of capital to each of CardioTech and PMI. 4 PolyMedica Industries, Inc. May __, 1996 Page 4 In addition, PMI has represented that its Board of Directors believes that additional benefits of the Distribution include: (i) it will enable management of each company to adopt strategies and pursue objectives directly focused on its business and products; (ii) it will enhance the ability of each company to attract and motivate existing and potential key employees by providing them with equity compensation tied directly to the results of their efforts; (iii) it will eliminate PMI's expenses associated with the development of CardioTech's business; (iv) it will enable the Board of Directors of PMI to avoid conflicts in the use of limited capital resources by the two companies; and (v) it will enhance the ability of the two companies to enter into strategic alliances and joint ventures. Cruttenden Roth, Inc. has also advised PMI that the Distribution is, from a financial point of view, the best of the alternative methods considered by PMI for achieving its financial goal of providing PMI and CardioTech (in the aggregate) with greater and cheaper access to the capital necessary to finance their ongoing operations. Although similar rationales have been accepted by the IRS as sufficient to meet the business purpose requirement of Code Section 355, there can be no assurances that the IRS or the courts would accept the foregoing purposes as the primary purpose for the Distribution. In addition, the IRS or the courts could conceivably find that the business purposes for the Distribution could have been equally well achieved by some other transaction not requiring the complete distribution of all of the CardioTech stock by PMI. Because of the inherently subjective nature of the business purpose requirement of Code Section 355, there can be no certainty that such requirement will be met. ACTIVE TRADE OR BUSINESS REQUIREMENT - ------------------------------------ In order for the distribution of the stock of a subsidiary to qualify under Code Section 355, immediately following the distribution, each of the distributing corporation and the "spun-off" subsidiary must be engaged in an active trade or business that was actively conducted for the five-year period preceding the distribution. Applicable Treasury Regulations define an active trade or business as a specific group of activities which (i) are carried on for the purpose of earning income or profit and (ii) include "every operation that forms a part of, or step in, the process of earning income or profit," including, ordinarily, the collection of income. However, because applicable authority does not clearly define what constitutes an active trade or business, it is possible that the IRS could take the position that the activities of CardioTech following the 5 PolyMedica Industries, Inc. May __, 1996 Page 5 Distribution do not meet the active trade or business requirement of Code Section 355. Nevertheless, it is our opinion that CardioTech should be considered to be engaged in an active trade or business that has been carried on for at least five years prior to the Distribution. Prior to the Distribution, PMI and its subsidiaries should generally be considered to be engaged in the trade or business of the development and commercial exploitation of its proprietary polyurethanes. Although each of (i) the wound care operations, (ii) the R&D service arrangements pursuant to which PMI (or its subsidiaries) attempts to customize one or more of its polyurethanes to meet the particular needs of a customer, (iii) the bulk sale of polyurethanes to customers or (iv) the manufacture and sale of vascular grafts involve somewhat different activities, they all are premised on the common goal of generating sales of PMI's polyurethanes. As such, the Distribution should be considered a vertical division of one historic trade or business into two component parts. Such a vertical division of one trade or business is allowable under Treasury Regulation Section 1.355-3, provided that each of the distributing company and the "spun-off" subsidiary continues to be actively involved in the portion of the original business. Alternatively, even if the IRS chose to consider each of the wound care operations, contract R&D arrangements, bulk sales of products, and wound graft manufacture and sale as separate businesses, CardioTech will continue the contract R&D activities with respect to its biodurable polyurethanes following the Distribution. Since the contract R&D operations were conducted throughout the preceding five-year period, the active trade or business test of Code Section 355 should be met with respect to CardioTech even if its overall activities are divided into component parts for purposes of applying such test. DEVICE TEST - ----------- Code Section 355 requires that any distribution of the stock of a subsidiary not be "a transaction used principally as a device for the distribution of the earnings and profits" of the distributing corporation. Application of this test is uncertain because of its subjective nature. However, based upon (i) representations by PMI that the Distribution was not undertaken principally as a device for the distribution of earnings and profits, (ii) the assumption set forth above that there was no plan or intention on the part of PMI's shareholders to dispose of their stock in PMI or CardioTech following the Distribution and (iii) the fact that distributions of stock of subsidiaries by publicly traded companies are generally not 6 PolyMedica Industries, Inc. May __, 1996 Page 6 considered to be "devices" for the distribution of earnings and profits, it is our opinion that the Distribution should not be treated as such a device. However, because of the exceedingly subjective nature of the device test and the fact that the IRS may challenge the representations and assumptions upon which we rely in issuing our opinion, there can be no assurances that the IRS will not successfully assert that the Distribution was such a device. Except as expressly stated above, no opinion is given as to any other income tax consequences of the Distribution to PMI, CardioTech or the PMI shareholders. In addition, no opinion is given nor should any be implied as to the income tax consequences of any transactions undertaken in contemplation of the Distribution or otherwise. Very truly yours, HALE AND DORR EX-10.1 5 AMENDED & RESTATED COMMON STOCK SUBSCRIPTION AGMT. 1 EXHIBIT 10.1 ------------ CARDIOTECH INTERNATIONAL, INC. AMENDED AND RESTATED COMMON STOCK SUBSCRIPTION AGREEMENT This Amended and Restated Common Stock Subscription Agreement, dated as of May 9, 1996, is entered into by and between CardioTech International, Inc. a Massachusetts corporation (the "Company"), and PolyMedica Industries, Inc., a Massachusetts corporation (the "Purchaser"). 1. BACKGROUND. The Company is willing to sell to the Purchaser, and the Purchaser wishes to purchase from the Company, on the terms and subject to the conditions herein contained, 973,758 shares (after giving effect to the net 41.95 to 1 stock split effected by the Company on May 9, 1996) of the Company's Common Stock, $.01 par value per share (the "Common Stock") for an aggregate purchase price consisting of cash, assets and the forgiveness of certain amounts owed to the Purchaser with an aggregate value of $6,426,800. The Company and the Purchaser entered into a Common Stock Subscription Agreement, dated March 19, 1996, and desire to amend and restate such Agreement. 2. CERTAIN DEFINITIONS. For the purposes of this Agreement, the following terms have the following meanings, respectively: "Act" means the Securities Act of 1933, as amended from time to time. "Closing" has the meaning set forth in Section 5. "Closing Date" has the meaning set forth in Section 5. "Common Stock" has the meaning set forth in Section 1. "Company" has the meaning set forth in the introductory paragraph of this Agreement. "Purchaser" has the meaning set forth in the introductory paragraph of this Agreement. "Knowledge of the Purchaser" means the actual knowledge, without independent investigation, of Steven J. Lee, Arthur Siciliano and Eric Walters, but does not include the knowledge of any fact or matter of which Michael Szycher has actual knowledge. 2 "Knowledge of the Company" means the actual knowledge, without independent investigation, of Michael Szycher, but does not include the knowledge of any fact or matter of which Steven J. Lee, Arthur Siciliano of Eric Walters has actual knowledge. "Material Adverse Effect" means a material adverse effect on the business or financial condition of the Company. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants that: (a) The Company has been duly incorporated and is an existing business corporation under the General Laws of the Commonwealth of Massachusetts and has the corporate power and authority to engage in the business and activities presently conducted by it. (b) The shares of Common Stock to be issued at Closing pursuant to this Agreement have been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable. (c) To the Knowledge of the Company and except as would not have a Material Adverse Effect, (i) the Purchaser is the lawful owner of all of the Equipment and the Patents, free and clear of any lien or similar encumbrance and (ii) upon the First Closing, the Company will own the Equipment and the Patents free and clear of any lien or similar encumbrance. (d) To the Knowledge of the Company and except as would not have a Material Adverse Effect, the Purchaser has the right, and no consent or approval of any other party is required, to pay and transfer the Consideration to the Company. Except as would not have a Material Adverse Effect, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby and the performance by the Purchaser of the provisions of this Agreement will not, to the knowledge of the Company, conflict with or violate (i) any order, arbitration award judgement or decree specifically naming Purchaser or any of its subsidiaries and to which the Purchaser or any of its subsidiaries is bound or (ii) any provision of any agreement or instrument to which the Purchaser or its subsidiaries is a party or by which the assets of the Purchaser or its subsidiaries is bound, or result in the loss of any rights to the Patents. (e) To the Knowledge of the Company and except as would not have a Material Adverse Effect, (i) the Patents are not involved in any interference, opposition or cancellation proceedings and (ii) the Purchaser is not a licensor or licensee in respect of any of the Patents nor has it granted any rights thereto or interest therein to any other person. Amended and Restated Common Stock Subscription Agreement -2- 3 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants that: (a) The Purchaser has full power and authority to execute, deliver and perform this Agreement; and (b) This Agreement has been duly executed and delivered by the Purchaser and constitutes the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as limited by principles of equity and applicable bankruptcy, insolvency, and other laws of general applicability affecting the enforcement of creditors' rights. (c) To the Knowledge of the Purchaser and except as would not have a Material Adverse Effect, (i) the Purchaser is the lawful owner of all of the Equipment and the Patents, free and clear of any lien or similar encumbrance and (ii) upon the First Closing, the Company will own the Equipment and the Patents free and clear of any lien or similar encumbrance. (d) To the Knowledge of the Purchaser and except as would not have a Material Adverse Effect, the Purchaser has the right, and no consent or approval of any other party is required, to pay and transfer the Consideration to the Company. Except as would not have a Material Adverse Effect, the execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby and the performance by the Purchaser of the provisions of this Agreement will not, conflict with or violate (i) any provisions of the Purchaser's Articles of Incorporation or Bylaws, or (ii) to the Knowledge of Purchaser, (A) any order, arbitration award judgement or decree specifically naming Purchaser or any of its subsidiaries and to which the Purchaser or any of its subsidiaries is bound or (B) any provision of any agreement or instrument to which the Purchaser or its subsidiaries is a party or by which the assets of the Purchaser or its subsidiaries is bound, or result in the loss of any rights to the Patents. (e) To the Knowledge of the Purchaser and except as would not have a Material Adverse Effect, (i) the Patents are not involved in any interference, opposition or cancellation proceedings and (ii) the Purchaser is not a licensor or licensee in respect of any of the Patents nor has it granted any rights thereto or interest therein to any other person. Amended and Restated Common Stock Subscription Agreement -3- 4 5. PURCHASE OF COMMON STOCK. Subject to the terms and conditions herein set forth, the Company will issue and sell to the Purchaser, and the Purchaser will purchase from the Company, for investment, at the First Closing hereinafter referred to, 973,758 shares of Common Stock (subject to adjustment pursuant to Section 6 hereof) in consideration of (i) payment of cash in the amount of $3,830,000 (the "Cash"), (ii) the transfer by the Purchaser to the Company of the equipment listed on SCHEDULE I hereto (the "Equipment"), which Equipment has a fair market value of approximately $147,000, (iii) the forgiveness of net amounts due to the Purchaser from the Company in the aggregate amount of approximately $2,449,800 (the "Cancelled Amounts"), and (iv) the assignment by the Purchaser to the Company of all of the Purchaser's right, title and interest in each of the patents set forth on EXHIBIT A to the Assignment of Patents Agreement attached to this Agreement as Exhibit A (the "Patents", together with the Cash, the Equipment and the Cancelled Amounts, the "Consideration"). The sale and purchase of the shares of Common Stock pursuant to this Agreement shall take place at two closings (each, a "Closing"), the first such Closing (the "First Closing") to occur on the date hereof (the "First Closing Date"), and the second such Closing (the "Second Closing") to occur on the day after the fifth trading day after the Distribution Date (as defined below). At the First Closing, the Company will deliver certificates for the shares of Common Stock being purchased hereunder against delivery of the Consideration. At the First Closing, the Purchaser and the Company will execute the Assignment of Patents Agreement attached to this Agreement as EXHIBIT A and the Bill of Sale attached to this Agreement as EXHIBIT B. At the Second Closing, the Company shall deliver certificates representing the Additional Shares (as defined below), and such Additional Shares shall be deemed to have been paid for by delivery of the consideration at the First Closing. The Company will bear all expenses in connection with the preparation, issue and delivery of the certificates for all shares issued under this Agreement. 6. ADJUSTMENT TO NUMBER OF SHARES ISSUED; ISSUANCE OF ADDITIONAL SHARES. At such time as the Purchaser distributes the Common Stock owned by it to its stockholders (the "Distribution Date"), in the event that the average closing price of the Common Stock on its first five trading days after the Distribution Date (the "Average Trading Price") is less than $4.40 per share (subject to appropriate adjustment for stock splits, stock dividends, recapitalizations and the like subsequent to the date hereof), the Company shall issue to the Purchaser, without any further payment therefor, a number of shares of Common Stock equal to the difference between (i) the result obtained by dividing $6,426,800 by the Average Trading Price and (ii) 973,758 (subject to appropriate adjustment for stock splits, stock dividends, recapitalizations and the like subsequent to the date Amended and Restated Common Stock Subscription Agreement -4- 5 hereof), up to a maximum of 486,879 additional shares of Common Stock (subject to appropriate adjustment for stock splits, stock dividends, recapitalizations and the like subsequent to the date hereof) (the "Additional Shares"). The Company shall issue the Additional Shares, if any, to the Purchaser promptly after the fifth trading day after the Distribution Date. 7. AMENDMENT OF LICENSE AGREEMENT. All licenses to technology, whether written or oral, between the Company and the Purchaser are hereby amended and restated in their entirety in the form of License Agreement attached hereto as EXHIBIT C. 8. SURVIVAL OF REPRESENTATIONS. All covenants, agreements, representations and warranties contained in this Agreement shall survive the execution and delivery of this Agreement, any investigation at any time made by or on behalf of a party hereto, and the purchase of shares by the Purchaser under this Agreement and shall be deemed to have been made again at each Closing. 9. USE OF PROCEEDS. The proceeds received by the Company from the sale of the shares of Common Stock may be used by the Company for any purposes, without restriction. 10. REMEDIES; VENUE. In case any one or more of the covenants or agreements set forth in this Agreement shall have been breached by the party making the same, the aggrieved party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and where appropriate an action for specific performance of any such covenant or agreement. Any court proceedings relating to this agreement or any other agreement shall be brought exclusively in the courts of the Commonwealth of Massachusetts or the Federal Courts located therein and each of the Purchaser and the Company hereby agrees that any legal process issuing from any such court sent to it by mail in accordance with Section 13 shall be sufficient to subject it to the personal jurisdiction of such court. 11. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the Company, the Purchaser and their respective legal representatives, successors and permitted assigns, but shall not be assigned, delegated, transferred or otherwise disposed of, by operation of law or otherwise, by either party, which consent shall not be unreasonably withheld, PROVIDED that either party may sell, assign, transfer, delegate or otherwise dispose of its rights and obligations hereunder in connection with a merger or consolidation or the sale of all or substantially all of its assets. Amended and Restated Common Stock Subscription Agreement -5- 6 12. ENTIRE AGREEMENT. This Agreement and any Exhibits hereto or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. 13. NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is given, (ii) on the day of transmission if sent via facsimile transmission to the facsimile number given below, provided telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the business day after delivery to an overnight courier service or the Express mail service maintained by the United States Postal Service, provided receipt of delivery has been confirmed, or (iv) on the fifth day after mailing, if mailed by registered or certified mail, postage prepaid, properly addressed and return-receipt requested, in all cases to the parties as follows: PolyMedica Industries, Inc. 11 State Street Woburn, MA 01801 Attention: Chief Executive Officer Telephone: (617) 933-2020 Telecopier: (617) 938-6950 with a copy to: John K.P. Stone III, Esq. Hale and Dorr 60 State Street Boston, MA 02109 Telephone: (617) 526-6000 Telecopier: (617) 526-5000 or to: CardioTech International, Inc. 11 State Street Woburn, MA 01801 Attention: Chief Executive Officer Telephone: (617) 933-4772 Telecopier: [ ] Amended and Restated Common Stock Subscription Agreement -6- 7 with a copy to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC One Financial Center 41st Floor Boston, MA 02111-2657 Attention: Jeffrey Wiesen Telephone: (617) 542-6000 Telecopier: (617) 542-2241 14. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument but all such counterparts together shall constitute but one agreement. 15. INTERPRETATION. The Article and Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. As used in this Agreement, the term "person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. Whenever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. 16. CONSTRUCTION. Each provision of this Agreement shall be interpreted in a manner to be effective and valid to the fullest extent permissible under applicable law. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions of this Agreement which shall remain in full force and effect. 17. AMENDMENTS; WAIVERS. This Agreement may be amended or modified only in writing executed on behalf of PolyMedica and CardioTech. No waiver shall operated to waive any further or future act and no failure to object of forbearance shall operate as a waiver. 18. GOVERNING LAW. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts (excluding the conflicts of laws provisions thereof). [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] Amended and Restated Common Stock Subscription Agreement -7- 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written as an instrument under seal. CARDIOTECH INTERNATIONAL, INC. By: /s/ Michael D. Szycher --------------------------------- Name: Michael D. Szycher, Ph.D Title: Chairman and CEO POLYMEDICA INDUSTRIES, INC. By: /s/ Steven J. Lee --------------------------------- Name: Steven J. Lee Title: President and CEO Amended and Restated Common Stock Subscription Agreement -8- 9 Exhibit A --------- ASSIGNMENT OF PATENT AND RELATED INTELLECTUAL PROPERTY ASSIGNMENT OF PATENT AND RELATED INTELLECTUAL PROPERTY made this ____ day of May, 1996 (the "Assignment"), by and between PolyMedica Industries, Inc., ("Assignor"), a Massachusetts corporation, having offices at 11 State Street, Woburn, Massachusetts 01801, a Massachusetts corporation, and CardioTech International, Inc., ("Assignee"), a Massachusetts corporation, having offices at 11 State Street, Woburn, Massachusetts 01801. WITNESSETH WHEREAS, Assignor hereby agrees to convey to Assignee all of Assignor's right, title, interest and privileges in and to all patents, all patent applications listed in Exhibit A hereto and made part hereof, and any and all improvements thereon, and any and all know-how, trade secrets, designs, formulas, non-patented inventions, processes and technical information relating to, without limitation, such patents and patent applications and any and all improvements thereon (collectively, the "Intellectual Property"). NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, Assignor and Assignee agree as follows: 1. Assignor hereby assigns, sells and transfers to Assignee all of Assignor's right, title, interest and privileges in and to the Intellectual Property. 10 2. Assignor agrees to execute all instruments and to perform all acts which may be reasonably necessary to carry out the purpose of this Assignment to full effect. 3. Assignee shall indemnify and hold harmless Assignor for all costs not yet due and liabilities which may hereafter arise relating to the development of the Intellectual Property, including, without limitation, incentive payments to become due to inventors upon issuance of any patents for the Intellectual Property. 4. Assignor represents and warrants that Assignor has the right to enter into this Assignment and to grant the rights herein granted. 5. This Assignment shall bind Assignor and its successors and assigns to the extent set forth herein. 6. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts regardless of the laws that might otherwise govern under applicable principles of conflict of laws thereof. - 2 - 11 IN WITNESS WHEREOF, Assignor and Assignee hereto have caused this Assignment to be executed and delivered the day and year first above written. Sworn to before me this ______ day of May, 1996 PolyMedica Industries, Inc. ------------------------ -------------------------- Notary Public By: Steven James Lee Title: President Sworn to before me this ________ day of May, 1996 CardioTech International, Inc. ------------------------- --------------------------- Notary Public By: Michael Szycher Title: President - 3 - 12 Exhibit A to Assignment LIST OF PATENTS, TRADEMARKS, SERVICE MARKS, COPYRIGHTABLE MATERIAL, RIGHTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS TRADENAMES ---------- ChronoThane PolyBlend ChronoPrene PolyWeld HydroThane PATENTS ------- Patent Publication/ Appln. No./ Filing/ Patent No. Country Title Grant Date ----------- ------- ----- ------------ 8946337 Australia Composite Structure Abandoned 9065367 Australia Polymer Products 07/21/94 Abandoned 9100956 Denmark Composite Structure Abandoned 168359 Denmark Arterial Prosthesis 09/26/88 0596926 EPO Vascular Prosthesis 05/18/94 (non-circular tube) 0596905 EPO Vascular Prosthesis 05/18/94 (Access Graft) 495889 EPO Polymer Products 10/16/90 (CABG) 286220 EPO Methods and Apparatus 03/31/93 for Making Polymer Material 286220 Austria Methods and Apparatus 09/10/93 for Making Polymer Material - 4 - 13 286220 Belgium Methods and Apparatus 01/27/94 for Making Polymer Material 286220 France Methods and Apparatus 04/10/94 for Making Polymer Material 286220 Germany Methods and Apparatus 07/08/93 for Making Polymer Material 286220 Greece Methods and Apparatus 06/17/93 for Making Polymer Material 286220 Italy Methods and Apparatus 04/22/93 for Making Polymer Material 286220 Luxembourg Methods and Apparatus 09/08/94 for Making Polymer Material 286220 Netherlands Methods and Apparatus 05/11/93 for Making Polymer Material 286220 Spain Methods and Apparatus 04/15/93 for Making Polymer Material 286220 Switzerland Methods and Apparatus 09/01/94 for Making Polymer Material 286220 Sweden Methods and Apparatus 09/05/93 for Making Polymer Material 286220 U.K. Methods and Apparatus 12/14/94 for Making Polymer Material 63267 Ireland Arterial Prosthesis 03/16/95 2-514283 Japan Polymer Products 02/25/93 Publ. No. (CABG) 5500912 1813534 Japan Arterial Prosthesis 04/04/93 4503332 Japan Composite Structure Abandoned - 5 - 14 9201471 Norway Polymer Products 07/21/94 Abandoned 911930 Norway Composite Structure Abandoned 88710 Portugal Method and Apparatus 10/10/94 for Making Polymer Material 5011722.14 Russia Polymer Products 09/28/94 Abandoned 2204873 U.K. Method and Apparatus 08/07/91 for Making Polymer Material 5,132,066 U.S. Method of Forming a 07/21/92 Bio-Compatible Vascular Prosthesis 08/182,155 U.S. Vascular Prosthesis (non-circular tube) 08/182,156 U.S. Vascular Prosthesis (Access Graft) 08/381,297 U.S. Polymer Produc (CABG) - 6 - 15 Exhibit B --------- BILL OF SALE This Bill of Sale dated _______, 1996 is executed and delivered by PolyMedica Industries, Inc., a Massachusetts corporation (the "Seller"), to CardioTech International, Inc., a Massachusetts corporation (the "Buyer"). All capitalized words and terms used in this Bill of Sale and not defined herein shall have the respective meanings ascribed to them in the Amended and Restated Common Stock Subscription Agreement dated _______, 1996 between the Seller and the Buyer (the "Agreement"). WHEREAS, pursuant to the Agreement, the Seller has agreed to sell, transfer, convey, assign and deliver to the Buyer substantially all of the assets and business of the Seller, and the Buyer has agreed to assume certain of the liabilities of the Seller; NOW, THEREFORE, for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Seller hereby agrees as follows: 1. The Seller hereby sells, transfers, conveys, assigns and delivers to the Buyer, its successors and assigns, to have and to hold forever, all of the Equipment and the Patents (together, the "Assets"). 2. The Seller hereby covenants and agrees that it will, at the request of the Buyer and without further consideration, execute and deliver, and will cause its employees to execute and deliver, such other instruments of sale, transfer, conveyance and assignment, and take such other action as may reasonably be necessary to more effectively sell, transfer, convey, assign and deliver to, and vest in, the Buyer, its successors and assigns, good, clear, record and marketable title to the Assets hereby sold, transferred, conveyed, assigned and delivered, or intended so to be, and to put the Buyer in actual possession and operating control thereof, to assist the Buyer in exercising all rights with respect thereto and to carry out the purpose and intent of the Agreement. 3. The Seller does hereby irrevocably constitute and appoint the Buyer, its successors and assigns, its true and lawful attorney, with full power of substitution, in its name or otherwise, and on behalf of the Seller, or for its own use, to claim, demand, collect and receive at any time and from time to time any and all assets, properties, claims, accounts and other rights, tangible or intangible, hereby sold, transferred, conveyed, assigned and delivered, or intended so to be, and to prosecute the same at law or in equity and, upon discharge thereof, to complete, execute and deliver any and all necessary instruments of satisfaction and release. 16 4. The Seller, by its execution of this Bill of Sale, and the Buyer, by its acceptance of this Bill of Sale, each hereby acknowledges and agrees that neither the representations and warranties nor the rights and remedies of any party under the Agreement shall be deemed to be enlarged, modified or altered in any way by this instrument. 5. EXCEPT AS EXPRESSLY PROVIDED IN THE AGREEMENT, THE ASSETS ARE BEING SOLD ON AN "AS IS" BASIS WITHOUT WARRANTY OF ANY KIND, AND SELLER DISCLAIMS ALL WARRANTIES WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE ASSETS, INCLUDING ALL WARRANTIES OF TITLE AND IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL SELLER BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OR PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES ARISING UNDER THE AGREEMENT OR FROM THE SALE OF THE ASSETS. IN WITNESS WHEREOF, the Seller and the Buyer have caused this instrument to be duly executed under seal as of and on the date first above written. SELLER: POLYMEDICA INDUSTRIES, INC. By:______________________________ [Corporate Seal] Title:___________________________ ATTEST: ________________________ ACCEPTED: BUYER: CARDIOTECH INTERNATIONAL, INC. By:______________________ Title:___________________ - 2 - 17 Exhibit C --------- AMENDED AND RESTATED LICENSE AGREEMENT between POLYMEDICA INDUSTRIES, INC. as Licensor and CARDIOTECH INTERNATIONAL, INC., as Licensee 18 TABLE OF CONTENTS Article 1 - DEFINITIONS 1.1 Confidential Information 1 1.2 Effective Date 1 1.3 Licensed Technology 1 1.4 New Inventions 2 1.5 Implantable Medical Device Technology 2 1.6 Implantable Medical Devices 2 Article II - GRANT OF LICENSE 2.1 Practice of Licensed Technology 2 2.2 Quality Controls 3 2.3 Transfer of Information 3 2.4 No Rights by Implication 3 2.5 No Warranty 3 2.6 Representations and Warranties 3 Article III - CONFIDENTIAL INFORMATION 3.1 Confidentiality Maintained 5 3.2 Information in Connection with Sale 5 Article IV - PROTECTION OF LICENSED TECHNOLOGY 4.1 Litigation with Third Parties 5 4.2 Use of Name in Suit 6 4.3 Notification of Suit by Licensee 6 4.4 Notification of Suit by Licensor 6 Article V - OWNERSHIP OF PROPRIETARY RIGHTS 5.1 Acknowledgment of Existing Rights 6 5.2 Rights to New Inventions 7 Article VI - TERMINATION AND EXPIRATION 6.1 Expiration; Term of Agreement 8 6.2 Bankruptcy 8 6.3 Material Breach 8 6.4 No Right of Licensor to Terminate 8 6.5 After Termination or Expiration 8 - i - 19 Article VII - NON-COMPETITION 7.1 Warranty of Non-Competition 9 Article VIII - MISCELLANEOUS 8.1 Assignments 9 8.2 Sublicense 9 8.3 Governing Law 9 8.4 Arbitration 9 8.5 Waiver 10 8.6 No Other Relationship 10 8.7 Notices 10 8.8 Entire Understanding 11 8.9 Invalidity 11 8.10 Amendments 11 8.11 Bard Access Systems, Inc. Agreement 11 8.12 Survival of Contents 11 8.13 Table of Contents and Headings 11 8.14 Exhibit 12 EXHIBIT A List of Patents, Trademarks, 13 Service Marks, Copyrightable Material, Rights, Trade Secrets and Other Proprietary Rights - ii - 20 AMENDED AND RESTATED LICENSE AGREEMENT THIS AMENDED AND RESTATED LICENSE AGREEMENT is made and entered into as of ____ day of _____, 1996 by and between PolyMedica Industries, Inc. ("Licensor"), a Massachusetts corporation having offices at 11 State Street, Woburn, Massachusetts 01801 with Telecopy No. (617) 933-7992 and CardioTech International, Inc. ("Licensee"), a Massachusetts corporation having offices at 11 State Street, Woburn, Massachusetts 01801 with Telecopy No. (617) 933-4772. WHEREAS, Licensor possesses certain intellectual property rights which Licensee is desirous of using. Licensor is willing to grant Licensee exclusive rights to use and practice such intellectual property rights in accordance with the terms and conditions hereinafter set forth. Licensor and Licensee have entered into a License Agreement, dated as of March 19, 1996, and by mutual agreement desire to amend and restate that Agreement pursuant hereto. NOW, THEREFORE, in consideration of the premises and mutual promises, terms and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows: I. DEFINITIONS As used herein, the following terms shall have the following definitions: 1.1 CONFIDENTIAL INFORMATION. "Confidential Information" shall mean that part of the Licensed Technology which is not publicly known. 1.2 EFFECTIVE DATE. "Effective Date" shall mean the date on which Licensor executes this Agreement. 1.3 LICENSED IMPLANTABLE MEDICAL DEVICE TECHNOLOGY. "Licensed Technology" shall mean any and all patents, trademarks, service marks, copyrightable material, trade secrets and other proprietary rights including without limitation all such rights listed in Exhibit A that relate to Implantable Medical Device Technology as defined herein. Exhibit A may be amended from time to time by the mutual consent of the parties hereto. If any additional United States Letters Patent or foreign patents are issued based on any of the proprietary rights listed in Exhibit A that relate to Implantable Medical Device Technology as defined herein, such patents shall be deemed to be included in Exhibit A 21 as of their date of issuance for the same purpose as the other patents listed in Exhibit A. 1.4 NEW INVENTIONS. "New Inventions" means any and all inventions, discoveries, concepts, ideas, improvements, original works of authorship, know-how, modifications to existing copyrightable works of authorship and data (whether or not patentable or subject to copyright or trade secret protection) concerning any present or prospective activities of Licensor or Licensee, which Licensor or Licensee, or their respective employees, agents or representatives formulate, make, conceive or become acquainted with during the term of this Agreement that relate to Implantable Medical Device Technology as defined herein. 1.5 "IMPLANTABLE MEDICAL DEVICE TECHNOLOGY" shall mean Implantable Medical Devices, the equipment used to fabricate such Implantable Medical Devices, methods of manufacturing and/or using Implantable Medical Devices, biostable polyurethane material that is used to fabricate such Implantable Medical Devices, and biodurable polymer materials (that are sold in bulk) that are used for medical applications. 1.6 IMPLANTABLE MEDICAL DEVICES. "Implantable Medical Devices" shall mean (i) invasively implantable medical devices which are designed to be implanted by a licensed and/or trained medical or health care professional that are wholly or partially implanted in the body of a human or animal and (ii) any product, system, component, part, or item which either: (a) embodies any of the inventions, discoveries, concepts, ideas, improvements, original works of authorship, know-how or data (whether or not patentable or subject to copyright, or trade secret protection) included in the Licensed Technology; or (b) is produced through the use of any of the inventions, discoveries, concepts, ideas, improvements, original works of authorship, know-how or data (whether or not patentable or subject to copyright or trade secret protection) included in the Licensed Technology. II. GRANT OF LICENSE Subject to all of the terms and conditions set forth in this Agreement: 2.1 PRACTICE OF LICENSED TECHNOLOGY. Licensor hereby grants to Licensee a perpetual, irrevocable, worldwide, royalty-free, exclusive right and license, except as provided in Section 6 even as to the Licensor, to use and practice the Licensed Technology and to make, use, sell, and import Implantable Medical Devices, with the unrestricted right to sublicense the Licensed Technology. Such license shall not be terminable by Licensor or any successor or assign of Licensor or any party claiming through Licensor under any circumstance or for any reason, including without limitation any breach of this Agreement or any other agreement between Licensor and Licensee. - 2 - 22 2.2 QUALITY CONTROLS. If Licensee, in its sole discretion, uses any trademarks or service marks included in the Licensed Technology on any Implantable Medical Device, Licensee agrees that such use shall be in strict compliance with the provisions of all applicable laws and regulations. Licensee also agrees to conduct any and all advertising and promotion in which such trademarks or service marks are used so as to assure the continued validity and enforceability of those trademarks and service marks. Licensor shall have the right to inspect Licensee's facilities during normal business hours, without prior advance notice, to confirm that Licensee's use of such trademarks and service marks is in compliance with this Section 2.2. 2.3 TRANSFER OF INFORMATION. As soon as practicable after the Effective Date, but in no event later than sixty (60) days after the Effective Date, Licensor shall provide to Licensee, at no cost to Licensee, any and all trade secrets and other proprietary information described in Exhibit A. 2.4 NO RIGHTS BY IMPLICATION. No rights or licenses with respect to Licensed Technology or the Implantable Medical Devices are granted or deemed granted hereunder or in connection herewith, other than those rights or licenses expressly granted in this Agreement. 2.5 NO WARRANTY. EXCEPT AS SET FORTH IN SECTION 2.6, LICENSEE ACKNOWLEDGES THAT IT RECEIVES THE LICENSED TECHNOLOGY ON AN "AS IS" BASIS. THERE IS NO WARRANTY OF LICENSOR IN THIS AGREEMENT CONCERNING THE LICENSED TECHNOLOGY OR THE IMPLANTABLE MEDICAL DEVICES, AND LICENSOR MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 2.6 REPRESENTATIONS AND WARRANTIES. (A) Licensor hereby represents and warrants that: (1) Licensor has full power and authority to execute, deliver and perform this Agreement. (2) This Agreement has been duly executed and delivered by Licensor and constitutes the valid and binding obligation of Licensor, enforceable against Licensor in accordance with its terms, except as limited by principles of equity and applicable bankruptcy, insolvency, and other laws of general applicability affecting the enforcement of creditors' rights. (3) Licensor represents and warrants that it is the owner of the entire right, title, and interest in and to Licensed Technology, except for a joint ownership interest of Thermedics, Inc., a Massachusetts corporation, having offices at 470 Wildwood Street, Woburn, MA 01888, with Licensor in and to U.S. Patent No. 5,254,662 and its related patents and applications in Australia, Canada, the EPO, and WO, as set forth in Exhibit A - 3 - 23 hereto as "Joint Patents and Patent Applications." To the best of Licensor's knowledge and except set forth in this Section 2.6 (c), the Licensed Technology is free and clear of any lien or similar encumbrance. (4) The Licensor represents and warrants that it has the right to grant the exclusive right in Section 2.1, without requiring the consent or approval of any third party to this Agreement, with regard to Licensor's entire right, title, and interest in and to the Licensed Technology. In the event that, as a result of Thermedics, Inc.'s joint ownership in the patents and patent applications set forth in Exhibit A as "Joint Patents and Patent Applications," in the written opinion of patent counsel for Licensee, the consent of Thermedics, Inc. is required by the law of a foreign country for the grant of the license set forth herein, Licensor will use its best efforts to obtain such consent. If such consent is not granted by Thermedics, Inc. in writing within sixty (60) days after the date of Licensee's request for such consent, then, at the request of Licensee, Licensor will execute and deliver to Licensee an assignment, in mutual satisfactory form, conveying to Licensee an undivided joint interest in and to Licensor's joint ownership of the right, title and interest in and to the specific patent or patent application of the "Joint Patents and Patent Applications" in Exhibit A for which Thermedics, Inc. did not grant its consent. If such an assignment is granted, the result will be that the specific patent or patent application of the "Joint Patents and Patent Applications" in Exhibit A will be jointly owned by Licensor, Licensee and Thermedics, Inc. in the foreign country at issue. (5) Licensor represents and warrants that the execution and delivery of this Agreement is not inconsistent with any prior agreements or instruments regarding Licensed Technology to which the Licensor is bound. (B) Licensee hereby represents and warrants that: (1) Licensee has full power and authority to execute, deliver and perform this Agreement. (2) This Agreement has been duly executed and delivered by Licensee and constitutes the valid and binding obligation of Licensee, and its successors and assigns, enforceable against Licensee, and its successors and assigns, in accordance with its terms, except as limited by principles of equity and applicable bankruptcy, insolvency, and other laws of general applicability affecting the enforcement of creditors' rights. (3) Licensee represents and warrants that the execution and delivery of this Agreement is not inconsistent with any prior agreements or instruments regarding Licensed Technology to which the Licensee is bound. - 4 - 24 III. CONFIDENTIAL INFORMATION 3.1 CONFIDENTIALITY MAINTAINED. Licensee acknowledges that Licensor will provide Licensee with Confidential Information in the transfer of information pursuant to Section 2.3. All disclosures which have utility for purposes other than Implantable Medical Devices made to Licensee, its agents and employees shall be held in strict confidence by Licensee, its agents and employees. Licensee shall disclose all such Confidential Information that relates to information other than information relating to Implantable Medical Devices only to those of its agents and employees to whom it is necessary in exercising its rights and carrying out its duties under this Agreement. Licensee shall not use the Confidential Information except for the purposes of exercising its rights and carrying out its duties hereunder, including, without limitation, its right to grant sublicenses. The provisions of Section 3.1 shall also apply to any consultants, subcontractors or sublicensees that Licensee may engage in connection with the exercise of its rights or the carrying out of its duties under this Agreement. 3.2 INFORMATION IN CONNECTION WITH SALE. Licensor hereby grants to Licensee the right during the term of this Agreement to sell and distribute in connection with each sale of an Implantable Medical Device that part of the Licensed Technology necessary (in the sole and absolute judgement of Licensee) for such purchaser to use and operate such Implantable Medical Device, even if such information includes Confidential Information. IV. PROTECTION OF LICENSED TECHNOLOGY 4.1 LITIGATION WITH THIRD PARTIES. (a) Licensee shall have the right, but not the obligation, to take any and all actions in its own name, legal or otherwise, which are necessary to: (i) terminate infringements of any proprietary right which is part of the Licensed Technology; or (ii) terminate any attempted passing-off by imitation of any Implantable Medical Device. Licensee shall bear all the expenses of all actions which it initiates pursuant to Section 4.1(a). Any recoveries or settlement fees received from suits or settlements involving an action initiated pursuant to this section 4.1(a) or agreed to shall be paid to Licensee for its own use and benefit. (b) If Licensee does not bring an action, legal or otherwise, which Licensor, believes, in its reasonable judgment, is necessary to protect Licensor's rights related to the underlying Licensed Technology, Licensor, at its sole discretion, may take any and all actions, legal or otherwise, which are necessary to: (i) terminate infringements of any proprietary right which is part of the licensed Technology; or (ii) terminate any attempted passing off by imitation of any Implantable Medical Device. Licensor shall bear all the expenses of all actions which it initiates pursuant to this Section 4.1(b). Any recoveries or - 5 - 25 settlement fees received from suits or settlements involving an action initiated pursuant to this Section 4.1(b) or agreed to shall be paid to Licensor for its own use and benefit. (c) Licensor may agree to any settlement of any such action brought under Section 4.1(b), at its own discretion, without the prior consent of Licensee so long as such settlement does not grant any rights relating to Implantable Medical Devices to Licensed Technology and does not impose any obligation on Licensee. (d) Licensor shall have the right to take any and all actions in its own name, legal or otherwise, which are necessary to protect the exclusive rights licensed to it by Licensee under Section 5.2(a) relating to Licensee's New Inventions against infringement through the manufacture, use, sale or import by third parties of products which are not Implantable Medical Devices. 4.2 USE OF NAME IN SUIT. When, in the reasonable judgment of Licensor, it is necessary to use Licensee's name to prosecute or defend an action pursuant to Section 4.1 hereof, Licensee agrees to allow Licensor to so use its name; and when, in the judgment of Licensee, it is necessary to use Licensor's name to prosecute or defend an action pursuant to Section 4.1 hereof, Licensor agrees to allow Licensee to use its name. 4.3 NOTIFICATION OF SUIT BY LICENSEE. Licensee shall notify Licensor in writing of the initiation of any actions by third parties against the Licensee or Licensee's initiation of any actions against any third party under Section 4.1(a). Such notice shall be given promptly after Licensee acquires such knowledge. 4.4 NOTIFICATION OF SUIT BY LICENSOR. Licensor shall notify Licensee in writing of the initiation of any actions by third parties against the Licensor or Licensor's initiation of any actions against any third party under Section 4.1(b) and/or relating to the Licensor's exclusive rights licensed to it by Licensee under Section 5.2(a) relating to Licensee's New Inventions. Such notice shall be given promptly after Licensor acquires such knowledge. V. OWNERSHIP OF PROPRIETARY RIGHTS 5.1 ACKNOWLEDGMENT OF EXISTING RIGHTS. (a) Licensee hereby acknowledges that each and every part of the Licensed Technology on the Effective Date and any addition to the Licensed Technology by Licensor during the term of this Agreement is either: (i) the property of Licensor; or (ii) has been used by Licensee pursuant to a grant of rights to Licensor by the owner of such rights to use such rights. (b) Licensee agrees for itself and its successors and assigns, upon request of Licensor, to at all times do such acts - 6 - 26 and to execute and deliver promptly to Licensor such papers, instruments and documents, at Licensor's expense, as from time to time may be necessary or useful in Licensor's opinion to prove, apply for, secure, maintain, reissue, extend or defend Licensor's world-wide rights in the rights described in Section 5.1(a) above. Without limiting the foregoing, Licensee shall enter into such user agreements with Licensor as necessary to secure Licensor's ownership rights described in Section 5.1(a), in forms mutually agreed upon by Licensor and Licensee. (c) Licensee warrants and represents to Licensor that Licensee, and to Licensee's knowledge the employees, agents, or representatives that it hires or employs, are not subject to any agreement inconsistent with this Agreement regarding the rights described in Section 5.1(a) above. 5.2 RIGHTS TO NEW INVENTIONS. (a) For all New Inventions that relate to Implantable Medical Device Technology as defined herein and which have utility for products which are not Implantable Medical Devices that are formulated, made or conceived by Licensee, its employees, agents and representatives, solely or jointly with others, during the term of this Agreement, with respect to which Licensee acquires any patents, trademarks, service marks, copyrightable material, trade secrets or any other proprietary rights which Licensee has the right to license to others, any and all such rights of Licensee shall be owned by Licensee and Licensee shall grant Licensor a perpetual, irrevocable, world-wide, royalty-free, exclusive right and license, exclusive of Implantable Medical Device Technology as defined herein, even as to Licensee, during the term of this Agreement, to use and practice such New Inventions and to make, use and sell products which are not Implantable Medical Devices with the right to sublicense such New Invention solely for such purpose. Such exclusive license to Licensor for Licensee's New Inventions is in consideration of the royalty-free license granted to Licensee pursuant to Section 2.1 above. Licensee shall take no actions to defeat Licensor's rights under Section 5.2(a). (b) Licensee shall inform Licensor fully of each of Licensee's New Inventions which have utility for products which are not Implantable Medical Devices by a written report, setting forth in detail the procedures employed and results achieved. Such report shall be given to Licensor within ninety days after the formulation, making or conception of such New Inventions. Licensee shall also provide Licensor with an annual report identifying all such New Inventions of Licensee formulated, made or conceived during the twelve (12) month period covered by that report. (c) For all New Inventions that relate to Implantable Medical Device Technology as defined herein, that are formulated, made or conceived by Licensor, its employees, agents and representatives, solely or jointly with others, during the term of - 7 - 27 this Agreement with respect to which Licensor acquires any patents, trademarks, service marks, copyrightable material, trade secrets or any other proprietary rights, it shall be deemed to be part of the Licensed Technology and Licensee shall have a right to use such rights, title and interest pursuant to Section 2.1 hereof without paying any royalty or any other consideration to Licensor. Licensor shall take no actions to defeat Licensee's rights under Section 5.2(c). (d) Licensor shall inform Licensee fully of each of Licensor's New Inventions which have utility for products which are Implantable Medical Devices by a written report, setting forth in detail the procedures employed and results achieved. Such report shall be given to Licensee within ninety days after the formulation, making or conception of such New Inventions. Licensor shall also provide Licensee with an annual report identifying all such New Inventions of Licensor formulated, made or conceived during the twelve (12) month period covered by that report. VI. TERMINATION AND EXPIRATION 6.1 EXPIRATION: TERM OF AGREEMENT. Unless it is terminated by mutual agreement, this Agreement shall continue in full force and effect perpetually. The term of this Agreement shall be from the Effective Date to the date of termination or expiration of this Agreement, as the case may be. 6.2 BANKRUPTCY. If Licensee, voluntarily or involuntary, is subject to bankruptcy under Chapter 7 of the Bankruptcy code, the purchaser, assignee, or other entity who obtains in any way any rights of Licensee under this Agreement shall have no right to bring any action against any third party pursuant to Section 4.1(a) hereof. 6.3 MATERIAL BREACH. Upon the occurrence of a curable material breach or default as to any obligation hereunder by Licensee and the failure of Licensee to promptly pursue (within ninety (90) days after receiving written notice thereof from Licensor) a reasonable remedy designed to cure (in the reasonable judgment of Licensor) such curable material breach or default, Licensee agrees to pay Licensor $1,000.00 per day after the 90 day period has expired until the curable material breach or default is cured. 6.4 NO RIGHT OF LICENSOR TO TERMINATE. In the event of a material breach of any of the provisions hereof by Licensee, Licensor may seek to recover monetary damages against Licensee in accordance with Section 8.4 hereof. Licensor shall not have the right to unilaterally terminate this Agreement. Licensor's sole remedy shall be the recovery of monetary damages. 6.5 AFTER TERMINATION OR EXPIRATION. The parties hereto agree that, once this Agreement is terminated or expires, Licensee shall immediately cease any use or practice of the Licensed - 8 - 28 Technology. Licensee shall, at its expense, return to Licensor all Confidential Information as soon as practicable after the date of such termination or expiration, including, but not limited to, original documents, drawings, computer diskettes, models, samples, notes, reports, notebooks, letters, manuals, prints, memoranda and any copies thereof, which have been received by Licensee. All such Confidential Information shall be owned by Licensor during the term of this Agreement and thereafter. VII. NON-COMPETITION 7.1 WARRANTY OF NON-COMPETITION. Licensee agrees that it will not directly or knowingly indirectly compete with PMI in the following areas for a period of five calendar years from the Effective Date of this Agreement: (1) Prescription or over-the-counter Wound Dressing Business. (2) Cosmetic Business, including but not limited to, active ingredients and finished cosmetic products. VIII. MISCELLANEOUS 8.1 ASSIGNMENTS. This Agreement and any and all of the rights and obligations of either party hereunder shall not be assigned, delegated, sold, transferred or otherwise disposed of, by operation of law or otherwise, without the prior written consent of the other party, which consent shall not be unreasonably withheld, provided that either party may sell, assign, transfer, delegate or otherwise dispose of its rights and obligations hereunder in connection with its merger or consolidation or the sale of all or substantially all of its assets. This Agreement shall be binding upon, and inure to the benefit of, Licensor and Licensee and their respective successors and assigns, to the extent such assignments are in accordance with Section 8.1. 8.2 SUBLICENSE. Licensee shall have the right to sublicense the Licensed Technology to a third party under this Agreement as long as the third party agrees to be bound by the terms of this Agreement to the same extent as the Licensee, and any sublicensing agreement made with such third party by Licensee shall expressly incorporate by reference the terms of this Agreement. 8.3 GOVERNING LAW. This Agreement shall be governed, interpreted and construed in accordance with the laws of the Commonwealth of Massachusetts. 8.4 ARBITRATION. (a) Any dispute, controversy or claim arising out of or relating to this Agreement or to a breach thereof, including its interpretation or performance, shall be finally resolved by arbitration. The arbitration shall be conducted in accordance with - 9 - 29 the rules of the American Arbitration Association, which shall administer the arbitration and act as appointing authority. The arbitration, including the rendering of the award, shall take place in Boston, Massachusetts and shall be the exclusive forum for resolving such dispute, controversy or claim. For the purposes of this arbitration, the provisions of this Agreement and all rights and obligations thereunder shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. The decision of the arbitrators shall be final and binding upon the parties hereto, and the expense of the arbitration shall be paid as the arbitrators determine. The decision of the arbitrators shall be executory, and judgment thereon may be entered by any court of competent jurisdiction. Notwithstanding this, judgment upon the award of the arbitration may be entered in any court where the arbitration takes place or any court having jurisdiction thereof, and application may be made to any court for a judicial acceptance of the award or order of enforcement. (b) Notwithstanding anything contained in Section 8.4(a) above to the contrary, each party shall have the right to institute judicial proceedings against the other party or anyone acting by, through or under such other party in order to enforce the instituting party's rights hereunder through reformation of contract, specific performance, injunction or similar equitable relief. 8.5 WAIVER. A waiver of any breach or any provision of this Agreement shall not be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. 8.6 NO OTHER RELATIONSHIP. Nothing herein contained shall be deemed to create an agency, joint venture or partnership relationship between the parties hereto. Neither party shall have any power to enter into any contracts or commitments in the name of, or on behalf of, the other party, or to bind the other party in any respect whatsoever except as specified in this Agreement. 8.7 NOTICES. Each notice required or permitted to be sent under this Agreement shall be given by telecopy transmission or by registered or recorded delivery letter to the parties at the addresses and telecopy numbers indicated above. Either party may change its address and/or telecopy number, for purposes of this Agreement, by giving the other party written notice of its new address and/or telecopy number. Any notice if given or made by registered or recorded delivery letter shall be deemed to have been received on the earlier of the date actually received and the date five (5) days after the same was posted (and in proving such it shall be sufficient to prove that the envelope containing the same was properly addressed and posted as aforesaid) and if given or made by telecopy transmission shall be deemed to have been received at the time of dispatch, unless such date of deemed receipt is not a day on which banks are open for business in Boston, Massachusetts in which case the date of deemed receipt - 10 - 30 shall be the next succeeding day on which banks are open in Boston, Massachusetts. 8.8 ENTIRE UNDERSTANDING. This Agreement embodies the entire understanding between the parties relating to the subject matter hereof, whether written or oral, and there are no prior representations, warranties or agreements between the parties not contained in this Agreement. 8.9 INVALIDITY. If any provision of this Agreement is declared invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court. 8.10 AMENDMENTS. Any amendment or modification of any provision of this Agreement must be in writing, dated and signed by both parties hereto. 8.11 BARD ACCESS SYSTEMS, INC. AGREEMENT. (a) Licensor hereby assigns all of its rights, interests, and duties under the Development, Supply and License Agreement (the "Bard Agreement"), dated November 11, 1992, between Bard Access Systems, Inc. having offices at 5425 West Amelia Earhart Drive, Salt Lake City, Utah 84116 ("Bard"), and Licensor to Licensee, and Licensee agrees to assume all of Licensor's rights, interests, and duties under the Bard Agreement between Bard and Licensor. (b) Licensor shall be liable for any obligations, claims, or liabilities relating to, or arising out of, the Bard Agreement and incurred prior to the Effective Date and hereby agrees to indemnify and hold harmless Licensee from and against any such obligations, claims, or liabilities. Licensee shall be liable for any obligations, claims, or liabilities relating to, or arising out of, the Bard Agreement and incurred on and after the Effective Date and hereby agrees to indemnify and hold harmless Licensor from and against any such obligations, claims, or liabilities. Licensor acknowledges that Bard must consent to the foregoing assignment and that representatives of Licensee will contact Bard to obtain such consent and negotiate appropriate amendments to the Bard Agreement to reflect this assignment. 8.12 SURVIVAL OF CONTENTS. Notwithstanding anything else in this Agreement to the contrary, the parties agree that Sections 2.2, 2.4, 2.5, 2.6, 3.1, 4.1, 4.2, 4.3, 5.1, 6.5, 7.1, 8.1, 8.2, 8.3, 8.5, 8.6, 8.7, 8.8 and 8.10 shall survive the termination or expiration of this Agreement to the extent required hereby for the full observation and performance by either or both of the parties hereto. 8.13 TABLE OF CONTENTS AND HEADINGS. Any table of contents accompanying this Agreement and any headings contained herein are - 11 - 31 for directory purposes only, do not constitute a part of this Agreement, and shall not be employed in interpreting this Agreement. 8.14 EXHIBIT. The exhibit referred to in this Agreement is attached hereto and incorporated herein by this reference. IN WITNESS WHEREOF, the parties hereto have signed this Agreement. POLYMEDICA INDUSTRIES, INC., as Licensor By___________________________ Name: Steven James Lee Title: President Date Licensor Executed this Agreement:_________________ CARDIOTECH INTERNATIONAL, INC., as Licensee By_____________________________ Name: Michael Szycher Title: President - 12 - 32 Exhibit A to License Agreement LIST OF PATENTS, TRADEMARKS, SERVICE MARKS, COPYRIGHTABLE MATERIAL, RIGHTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS TRADEMARKS ---------- Trademark Intl. Class Registration No. --------- ----------- ---------------- CHRONOFILM 17 1,691,545 CHRONOFLEX 17 1,762,851 PATENTS ------- Publication/ Patent Appln. No./ Filing/ Patent No. Country Title Issue Date ---------- ------- ----- ---------- 5,118,779 U.S. Hydrophilic Polyurethane 06/02/92 Elastomers JOINT PATENTS AND PATENT APPLICATIONS ------------------------------------- Publication/ Patent Appln. No./ Filing/ Patent No. Country Title Issue Date 9186454 Australia Biostable Polyurethane 03/30/92 Products 2091564 Canada Biostable Polyurethane 03/13/92 Products 548256 EPO Biostable Polyurethane 07/07/93 Products 5,254,662 U.S. Biostable Polyurethane 10/19/93 Products - 13 - 33 9204390 WO Biostable Polyurethane 03/19/92 Products Together with all divisions, continuations, continuations-in-part, substitutions, reissues, extensions, reexaminations and foreign equivalents of the foregoing. - 14 - 34 Other ----- All trade secrets, know-how, copyrightable material, or other proprietary rights that relate to the above-listed patents or patent applications, or generally to the Licensed Technology, that will be necessary to practice the Licensed Technology, including the above-listed patents or patent applications. - 15 - 35 Schedule I ---------- EQUIPMENT ASSET NO DESCRIPTION -------- ----------- 00172-00 LABCONCO 4'W/OBLOWER 00174-00 2 DR MANUAL SAFETY CABINET 00197-00 POLAR WINDING MACHINE 00178-00 FREEZER & DRILL PRESS 00177-00 CONVECTION OVEN 00178-00 LAB OVEN 00200-00 PLATFORM SCALE - 1,000 LB. 00181-00 HYDRA LIFT CARRIER 00183-00 BREATH EASY HALF MASK 00184-00 SAHARA ELECTRIC HOT BOX 00202-00 RAMCO GRANULATOR 00203-00 2 BLENDERS 00185-00 MELT INDEXER 00187-00 ELECTRONIC BLENDER METER MIX 00188-00 GUILLOTINE 00225-00 KN200 EXTRUDER 00251-00 HOPPER DRYER T.D.S. 00252-00 UNDER WATER PELLETIZER 00245-00 WIRE NEW EQUIP/PELLLET&EXTRUDR 00266-00 HOMOGENIZER MIXER 00281-00 LAB PRESS TOTAL FOR WOBURN 36 TEMPORARY PR.07 (UNNUMBERED OFFICE AND OTHER INCIDENTAL EQUIPMENT) ------------------------------------------------- Literature Stand ex Convatec (12/95) Wooden 2-door low cabinet W980-H720-D540 mm ex Convatec (12/95) S/S Sink ex Convatec Blue Racking, 6 foot ex Newtec EPSON LX 1050 Printer ex Newtec EPSON LQ-550 Printer ex Newtec Hewlett Packard DeskJet Plus Printer ex Newtec Star Printer ex Newtec Olivetti 286 Computer ex Newtec Zenith Portable 286 Computer ex Newtec MANUFACTURER NUMBER DESCRIPTION MODEL NUMBER (DATE ACQUIRED) ------ ----------- ----- ------ --------------- PGI 00351 Filtromat Organic Scavenger OS1 615 Elga (including resin column, (11/88) control panel, control valves and storage tanks) PGI 00352 Elgamat Automatic 2 bed Duo Junior 1179 Elga De-ioniser (including (11/88) resin columns, control panel, circulation pump, filters conductivity meter and storage tank) PGI 00353 Water Disinfection Unit Hanovia 3221 Elga (U.V.) (including U.V. 105 (11/88) tube and casing, and indicator panel) PGI 00354 Solvent Transfer Vessel SM 17532 T 367 Sartorius (stainless steel) 20 litre (1987) (9/88) PGI 00355 Polymer Dissolution Vessel - - Icam (stainless steel) 25 litre (10/88) - 2 - 37 PGI 00356 Polymer Mix Mixing Vessel - - Icam (stainless steel) 10 litre (10/88) PGI 00357 Mixer Model A 14297 Greaves PGI 00358 Mixer (associated with GM-B M-23262 Greaves item PGI 00356) (8/88) PGI 00359 Mixer (associated with ST-C M-23621 Greaves item PGI 00355) (8/88) PGI 00360 Vacuum Pump Speedivac 28513 Edwards 2 (9/88) PGI 00361 Brookfield Viscometer RVID A 11313 BDH/Brookfield (with small sample adaptor) (10/88) PGI 00362 Water Bath/Circulator W6/KDTD 118816025 Grant (11/88) PGI 00363 Visual Inspection Bench - - J. Barber Light Box (1/89) PGI 00364 Wall Thickness Gauge FMT.1.4D 14-007 Hampden ______ Equipment (1/89) PGI 00365 Pre-heating Water Tank - - C.L.J. Fabrication (12/88) PGI 00366 Processing Rig (including - - In-house extrusion tank, secondary tank, extrusion die drive, mandrel rotation motor, mandrel yolk drive, Jacktuator and control panel) PGI 00367 Hot Air Oven A9VC 91K217 PGI 00368 Analytical Balance FR 300 6200898 Salter PGI 00369 Drying Cabinet SSS 1807 LEEC (9/88) PGI 00370 pH Meter SMP 1 - Bibby (9/88) PGI 00371 Electronic Balance Ex-8000A 1700642 Salter (9/88) - 3 - 38 PGI 00372 Pressure Regulator 230/N10 - Murex (10/88) PGI 00373 Nitrogen Gas Filter Nupro - Manchester Housing (Stainless SS-4TF - valve Steel) (9/88) PGI 00374 Desiccant Housing for 304L-HDF4 - Manchester Nitrogen Gas -150CC Valve (Stainless Steel) (11/88) PGI 00375 Measurement Block - - In-house (3/89) PGI 00376 Taper Gauge 4.5 mm - In-house (3/89) PGI 00377 Desiccator - - Metlab (9/88) PGI 00378 De-gassing Vessel - - Butler-Impact (Stainless Steel) (8/88) PGI 00379 Air Filter Housing Maxisart - Sartorius (small) (9/88) PGI 00380 Clean Room Chair PGI 00381 Clean Room Chair PGI 00382 Clean Room Chair PGI 00383 Clean Room Chair PGI 00384 Washing Rig. (including - - In-House Washing Tank, Overflow Tank, Header Tank, Re-Circulation Pump and Control Panel) PGI 00385 Drying Oven T9V 89C204 Genlab. (Incubator) (4/89) PGI 00386 ESCO Mixer (10 litre) ELIO 310 E. Schweizer with controller Parts & Co. 1 and 2 (7/89) PGI 00387 U.V. Irradiation Chamber 104 3633 Hanovia (7/89) - 4 - 39 PGI 00388 Filter Housing - - Total Filtration (7/89) PGI 00389 Packaging Machine SH 9-13B Nelipak (8/89) PGI 00390 Environmental Air System NSA Air E000116164 Cleaners 34391 PGI 00391 Environmental Air System NSA Air E00029807 Cleaners 06591 PGI 00392 Digimatic Caliper 500 - 321 7108194 Mitutoyo (1/90) PGI 00393 Bore Gauge Set 154 - 901 - Mitutoyo (0.125 - 0.5 inch) (1/90) PGI 00394 Ultrasonic Bath PULS 55 2919 J Kerry PGI 00395 Vacuum Cleaner Nilfisk 0417506 Nilfisk (dedicated for Clean GS 80/GST (3/89) Room use only - fitted with HEPA exhaust filter) PGI 00396 Thermometer (0-120 C) STPTC 68965 Metlab Standard (11/90) PGI 00397 Heat Sealer HM3000 CD 30CD/1583 Hulme-Marti (3/91) PGI 00398 Digital Thermometer TemPen - J. Bibby (TP150) (4/89) PGI 00399 Set of Brass Weights - - Salter (9/88) PGI 00400 pH and Conductivity AG84000 10346 C.S.I. Meter (3/91) PGI 00401 Astra Pac Senator Pouch Sealer PGI 00402 N0800 Overhead Projector PGI 00403 2-drawer brown/cream filing cabinet PGI 00404 2-drawer brown/cream filing cabinet - 5 - 40 PGI 00405 4-drawer brown/cream filing cabinet PGI 00406 4-drawer brown/cream filing cabinet PGI 00407 4-drawer brown/cream filing cabinet PGI 00408 4-drawer brown/cream filing cabinet PGI 00409 4-drawer brown/cream filing cabinet PGI 00410 4-drawer brown/cream filing cabinet PGI 00411 Brown/cream metal cabinet 1010 x 920 x 460 mm PGI 00412 Brown/cream metal cabinet 1020 x 920 x 460 mm PGI 00413 Brown/cream metal cabinet 900 x 600 x 500 mm PGI 00414 Brown/cream metal cabinet 900 x 600 x 500 mm PGI 00415 Grey metal cabinet 920 x 700 x 480 mm PGI 00416 Grey metal cabinet 900 x 700 x 480 mm PGI 00417 Grey metal cabinet 900 x 700 x 480 mm PGI 00418 Tall metal cabinet PGI 00419 Metal Desk/Work Bench PGI 00420 Exhibition Stand PGI 00421 Magnifying Lamp PGI 00422 Flip Chart Holder PGI 00423 Sieve (250 microns) PGI 00424 Sieve (250 microns) - 6 - 41 PGI 00425 Sieve (850 microns) PGI 00426 1 m/39" Steel Rule PGI 00427 Graft Inspection Lamp and Probes PGI 00428 Pentium/60/540/8 00009034 50990076 ESCOM PCI Mini Tower (3/95) PGI 00429 14" Monitor NI MPRII EM1448LR 59A505134-2 ESCOM BEIGE (03/95) PGI 00430 Pentium/60/540/8 00009034 50990063 ESCOM PCI Mini Tower (3/95) PGI 00431 14" Monitor NI MPRII EM1448LR 95A505086-2 ESCOM BEIGE (3/95) PGI 00432 Pentium/60/540/8 00009034 50990068 ESCOM PCI Mini Tower (3/95) PGI 00433 14" Monitor NI MPRII EM1448LR 95A407505-3 ESCOM BEIGE (3/95) PGI 00434 White Incubator Heraeus ex Convatec (12/95) PGI 00435 Metal 2-door filing cabinet ex Convatec (12/95) PGI 00436 Metal 2-door filing cabinet ex Convatec (12/95) PGI 00437 Yellow Metal Chemical ex Convatec (12/95) Storage PGI 00438 Shredder 160 Auto Typewriter Rexel Exchange PGI 00439 4-drawer brown/beige ex Convatec (12/95) filing cabinet - 7 - EX-10.2 6 FORM OF TAX MATTERS 1 EXHIBIT 10.2 TAX MATTERS AGREEMENT THIS TAX MATTERS AGREEMENT (the "Agreement") is made as of May __, 1996, by and among PolyMedica Industries, Inc., a Massachusetts corporation ("Parent" and, together with its subsidiaries existing immediately following the Distribution, the "Parent Group"), and CardioTech International, Inc., a Massachusetts corporation and a 91.7%-owned subsidiary of Parent ("CardioTech" and, together with its subsidiaries existing immediately following the Distribution, the "CardioTech Group"). WHEREAS, Parent and CardioTech have entered into the Distribution Agreement (as defined below) providing for the distribution of all of the CardioTech stock owned by Parent to Parent's shareholders in accordance with the Distribution Agreement; and WHEREAS, Parent and CardioTech desire to set forth their agreement regarding the allocation between the Parent Group and the CardioTech Group of all responsibilities, liabilities and benefits affecting Taxes (as defined below) paid or payable by either of them for all taxable periods. NOW, THEREFORE, in consideration of their mutual promises, the parties hereby agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined shall have the meanings given them in the Distribution Agreement. As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate" of any person means any person, corporation, partnership or other entity directly or indirectly controlling, controlled by or under common control with such person. (b) "CardioTech" has the meaning set forth in the preamble hereto. (c) "CardioTech-Caused Taxes" means any liability for Taxes, including interest and penalties, incurred by the Parent Group or the CardioTech Group arising from or attributable to any of the transactions that are directly related to the Distribution (including, without limitation, the contribution and/or licensing of technology to CardioTech by Parent, the recapitalization of CardioTech and the Distribution itself) failing to qualify under Code Sections 351, 355 or 368 (or any comparable provisions of state law), but only if such failure (i) was caused by an act that 2 occurred after the Distribution and in which CardioTech participated or (ii) was otherwise attributable to one or more of the representations contained in Section 8 hereof failing to be true. For purposes of this definition, if any failure to so qualify occurs and CardioTech has participated in a Post- Distribution Act, such failure shall be deemed to have been caused by CardioTech's participation in the Post-Distribution Act unless established to the contrary by clear and convincing evidence that the Post-Distribution Act did not cause the failure to qualify under Code Sections 351, 355 or 368. CardioTech-Caused Taxes shall include any increase in Taxes of the Parent Group or the CardioTech Group for any period to the extent such increase in Taxes would not have occurred but for the transactions directly related to the Distribution failing to qualify under Sections 351, 355 or 368 of the Code (or comparable provisions of state law). Thus, for example, if the failure of any of the transactions to so qualify results in additional income being realized by the Parent Group in its 1996 taxable year, but such income is substantially offset by operating losses or net operating loss carryovers, CardioTech-Caused Taxes will include (to the extent the other requirements of this definition are met) any increase in Taxes realized by any member of the Parent Group in subsequent years to the extent such increase in Taxes would not have been realized had the loss or loss carryovers not been used in 1996. (d) "CardioTech Group" has the meaning set forth in the preamble hereto. (e) "Code" means the Internal Revenue Code of 1986, as amended or, as the context may require, the Internal Revenue Code applicable to the taxable year in question. (f) "Distribution" has the meaning set forth in the Distribution Agreement. (g) "Distribution Agreement" means the Plan and Agreement of Distribution dated May __, 1996 between Parent and CardioTech providing for the Distribution. (h) "Distribution Date" has the meaning set forth in the Distribution Agreement. (i) "Final Determination" shall mean the final resolution of liability for any Tax for a taxable period, (i) by Internal Revenue Service Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by comparable form under the laws of other jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves (whether by its terms or by operation of law) the -2- 3 right of the taxpayer to file a claim for refund and/or the right of the taxing authority to assert a further deficiency shall not constitute a Final Determination; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreements under the laws of other jurisdictions; (iv) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the Tax imposing jurisdiction; or (v) by any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the parties. (j) "Post-Distribution Act" means any event or transaction (or the execution of an agreement, letter of intent or option providing for a transaction) in which CardioTech participates and in which any of the following occurs: (i) CardioTech transfers a material portion of its assets (other than a transfer of assets in the ordinary course of business) within one year following the Distribution Date; (ii) CardioTech merges with another corporation within one year following the Distribution Date; (iii) Within two years of following the Distribution Date CardioTech discontinues a material portion of its historic business activities including (A) its contract research and development activities relating to the use of CardioTech's polymer-based biomaterials in medical devices and (B) its bulk sale of ChronoFlex pursuant to contract research and development arrangements, supply agreements or otherwise; (iv) Within one year following the Distribution Date CardioTech Common Stock distributed in the Distribution is converted into (or redeemed or exchanged for) any other stock, any security, any property or cash; and (v) An issuance (or series of issuances) of stock in CardioTech within 6 months of the Distribution in an amount sufficient that such issuance would have prevented Parent from having "control" (within the meaning of Code Section 368(c)) of CardioTech had such issuance (or issuances) occurred immediately prior to the Distribution. -3- 4 (k) "Post-Distribution Taxes" means any and all liability for Taxes of the CardioTech Group or the Parent Group, as appropriate, other than for Pre-Distribution Taxes. (l) "Pre-Distribution Taxes" means any and all Taxes of the Parent Group or the CardioTech Group for all periods that ended on or prior to the Distribution Date. For purposes of computing the amount of Pre-Distribution Taxes in the case of a Tax period that begins before and ends after the Distribution Date, the amount of Taxes considered to have accrued with respect to the portion of the Tax period that ended on the Distribution Date shall be determined as follows: (i) In the case of any ad valorem, personal property and real property Taxes, an amount of such Tax for the entire Tax period multiplied by a fraction the numerator of which is the number of days in the portion of the Tax period ended on the Distribution Date and the denominator of which is the number of days in the entire Tax period; (ii) In the case of any Tax other than ad valorem, personal property and real property Taxes, the amount that would be payable if the relevant Tax period ended on the Distribution Date; and (iii) In the case of any withholding Tax, the amount of Taxes required to be held which relates to any payment by any member of the Parent Group or the CardioTech Group on or before the Distribution Date. Any credits relating to a Tax period that begins before and ends after the Distribution Date shall be taken into account as though the relevant Tax period ended on the Distribution Date. (m) "Returns" means all returns, reports and information statements (including all exhibits and schedules thereto) required to be filed with a Taxing Authority with respect to any Taxes. (n) "Taxes" means any income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, environmental excise, severance, stamp, transfer, recording occupation, premium, property, value added, windfall profit tax, custom duty, or other tax of any kind whatsoever, together with any interest and any penalty, addition to tax or additional amount imposed by any governmental authority (a "Taxing Authority") responsible for the imposition of any such tax (domestic or foreign). -4- 5 2. Operative Provisions. (a) Parent shall indemnify CardioTech against and be responsible for all Post-Distribution Taxes attributable to any member of the Parent Group and all Pre-Distribution Taxes other than CardioTech-Caused Taxes. (b) CardioTech shall indemnify Parent against and shall be responsible for all Post-Distribution Taxes attributable to any member of the CardioTech Group and all CardioTech-Caused Taxes. (c) With respect to the tax year of the Parent Consolidated Group that includes the Distribution Date and the tax year of CardioTech that commences immediately following the Distribution Date, the Parent Consolidated Group shall claim on its federal income tax returns the benefit of (i) the graduated tax rates of Code Section 11, (ii) the $25,000 bracket amount in Code Section 38, (iii) the $40,000 exemption amount and the $150,000 bracket amount in Section 55, and (iv) the $2,000,000 bracket amount in Section 59A and CardioTech shall claim none of such benefits. 3. Returns; Refunds; Contest Provisions. (a) Parent shall have the obligation and the sole right and full discretion to control (i) the preparation of all Returns with respect to Pre-Distribution Taxes (including CardioTech- Caused Taxes) and (ii) the defense, settlement or compromise of any audit, examination, investigation suit, action or other proceeding relating to Pre-Distribution Taxes (including CardioTech-Caused Taxes) and shall be entitled to all refunds of Pre-Distribution Taxes other than CardioTech-Caused Taxes paid or reimbursed by CardioTech pursuant to this Agreement. Notwithstanding the foregoing, in the event that Parent decides to abandon the defense of, or settle or compromise any claim relating to, any CardioTech-Caused Taxes, Parent shall notify CardioTech of such decision and CardioTech shall have ten days to notify Parent that it assumes all liability with respect to the CardioTech-Caused Taxes under dispute and wishes to assume the defense of such audit or other proceedings at its own expense. In the event that Parent timely receives such notice from CardioTech, it shall use all reasonable efforts to cooperate so as to facilitate CardioTech's handling of such proceedings. (b) Except as otherwise provided for herein, CardioTech shall have the obligation and the sole right and full discretion to control (i) the preparation of all Returns with respect to Post-Distribution Taxes attributable to any member of the CardioTech Group and (ii) the defense, settlement or compromise of -5- 6 any audit, examination, investigation suit, action or other proceeding relating to Post-Distribution Taxes attributable to any member of the CardioTech Group. CardioTech shall have the right to all refunds of Post-Distribution Taxes attributable to any member of the CardioTech Group and of CardioTech-Caused Taxes paid (directly or indirectly) by any member of the CardioTech Group. (c) Except as otherwise provided for herein, Parent shall have the obligation and the sole right and full discretion to control (i) the preparation of all Returns with respect to Post-Distribution Taxes attributable to any member of the Parent Group and (ii) the defense, settlement or compromise of any audit, examination, investigation suit, action or other proceeding relating to Post-Distribution Taxes attributable to any member of the Parent Group. Parent shall have the right to all refunds of Post-Distribution Taxes attributable to any member of the Parent Group and of CardioTech-Caused Taxes paid (directly or indirectly) by any member of the Parent Group. 4. Windfalls. (a) Parent shall promptly pay to CardioTech the amount of any incremental Tax savings generated by (i) a deduction, credit or exclusion that (A) is actually realized by the Parent Group with respect to Pre-Distribution Taxes and (B) relates to or is based on an item that is the basis for a similar deduction, credit or exclusion taken on a Return with respect to Post-Distribution Taxes of the CardioTech Group that is denied, disallowed, forfeited, or accelerated until prior to the Distribution Date or (ii) a reduction in the amount of any gross income or revenue that (A) is actually realized by the Parent Group with respect to Pre-Distribution Taxes and (B) relates to, or is based on, a similar item of gross income or revenue that the CardioTech Group is required to include on a Return or otherwise required to include in its computation of taxable income as a result of an audit, other administrative proceeding or otherwise. Parent shall use reasonable best efforts to realize any such incremental tax savings that may potentially be available. (b) CardioTech shall promptly pay to Parent the amount of any incremental Tax savings generated by (i) a deduction, credit or exclusion that (A) is actually realized by the CardioTech Group with respect to its Post-Distribution Taxes and (B) relates to or is based on an item that is the basis for a similar deduction, credit or exclusion taken on a Return with respect to Pre-Distribution Taxes other than CardioTech-Caused Taxes that is denied, disallowed, forfeited, or deferred until after the Distribution Date or (ii) a reduction in the amount of any gross income or revenue that (A) is actually realized by the -6- 7 CardioTech Group with respect to Post-Distribution Taxes and (B) relates to, or is based on, a similar item of gross income or revenue that the Parent Group is required to include on a Return or otherwise required to include in its computation of taxable income as a result of an audit, other administrative proceeding or otherwise. CardioTech shall use reasonable best efforts to realize any such incremental tax savings that may potentially be available. 5. Agency. CardioTech irrevocably designates Parent (and shall cause each member of the CardioTech Group to irrevocably designate Parent) as its agent and attorney in fact (and shall execute any necessary powers of attorney) for the purpose of taking any and all actions necessary or incidental to the filing of federal income tax returns and state unitary or combined Returns for (i) any period during which any member of the CardioTech Group or any predecessor qualified to file a consolidated, combined, unitary or similar Return with any member of the Parent Group and (ii) any period ending on or before the Distribution Date. Parent shall keep CardioTech reasonably informed of, and shall reasonably consult with CardioTech with respect to, all actions to be taken on behalf of any member of the CardioTech Group. Parent and CardioTech will each furnish the other any and all information which the other may reasonably request in order to carry out the provisions of this Agreement to determine the amount of any Tax liability. 6. Consistent Reporting. (a) With respect to all taxable periods ending on or prior to December 31, 2000, CardioTech, each member of the CardioTech Group and any future Affiliates thereof shall file federal income tax and state income tax Returns in a manner consistent with the Returns filed (or to be filed) in respect to Pre-Distribution Taxes and in a manner consistent with the form of the transactions contemplated by the Distribution Agreement (the "Form") including that the Distribution qualifies under Section 355 of the Code. (b) To the extent there is an inconsistency or an apparent inconsistency amongst the Returns relating to Pre-Distribution Taxes (including after taking into account Returns to be filed after the Distribution Date) and/or the Form, CardioTech shall file Returns with respect to Post-Distribution Taxes in the manner directed by Parent. -7- 8 (c) Parent and CardioTech agree to contest any proposed adjustment by any Taxing Authority that is, in the sole judgement of Parent, inconsistent with the provisions of this Section 6. 7. Covenants of CardioTech and Parent Relating to Actions After the Distribution Date. (a) CardioTech shall, and shall cause each member of the CardioTech Group to refrain from participating in any Post-Distribution Act without the prior written consent of Parent. (b) CardioTech and Parent shall cooperate (and shall cause each of their Affiliates to cooperate) fully at such time and to the extent reasonably requested by the other party in connection with the preparation and filing of any Return or the conduct of any audit, dispute, proceeding, suit or action in respect of Taxes or other Tax matters. Such cooperation shall include, without limitation, (i) the retention and provision on demand of books, records, documentation or other information relating to any Return until the expiration of the applicable statute of limitation (giving effect to any extension, waiver, or mitigation thereof) plus two years; (ii) the execution of any document that may be necessary or reasonably helpful in connection with the filing of any Return by any member of the Parent Group or the CardioTech Group or in connection with any audit, examination, investigation suit, action or other proceeding; and (iii) the use of the parties' reasonable best efforts to obtain any documentation from a governmental authority or a third party that may be necessary or helpful in connection with the foregoing. 8. CardioTech Representations. CardioTech hereby represents and warrants to the Parent and each member of the Parent Group that the statements contained in this Section 8 are true and correct in all material respects on the date hereof: (a) To the best of CardioTech's knowledge and belief, no part of its stock being distributed in the Distribution will be received by a shareholder of Parent in such shareholder's capacity as a creditor, employee or in any capacity other than that of a shareholder of Parent. (b) To the best of CardioTech's knowledge and belief, immediately following the Distribution, no person, group of related persons, or persons who acted in concert pursuant to a prearranged plan or arrangement will own 50% or greater of the stock of Parent or CardioTech as a result of purchases of stock within five years of the Distribution Date. -8- 9 (c) CardioTech has no plan or intention to liquidate CardioTech, to merge it with another corporation or to sell or otherwise dispose of the assets of CardioTech subsequent to the Distribution except in the ordinary course of business. (d) To the best of CardioTech's knowledge and belief, no plan or intention exists by the shareholders of Parent to sell, exchange, transfer by gift, or otherwise dispose of any of their stock in Parent or CardioTech subsequent to the Distribution. (e) Following the Distribution, each of Parent and CardioTech will operate as independent corporations except that certain administrative and other common activities of the two corporations will be undertaken by common personnel in accordance with the Ancillary Agreements and certain property will be [subleased] from Parent to CardioTech in accordance with the Ancillary Agreements. Payments made in connection with all continuing transactions between, and services provided for, each of Parent and CardioTech will be for fair market value based on terms and conditions arrived at by the Party's bargaining at arm's length. (f) CardioTech has no plan involving the issuance or transfer of equity interests in CardioTech following the Distribution other than a general expectation that an equity offering may occur at an undefined point in the future. (g) CardioTech has no plan or intention for the transfer, cessation or other change in the business of CardioTech following the Distribution. (h) CardioTech has not made, and is not subject to, any binding commitment and is not otherwise obligated or committed to undertake an offering of CardioTech stock following the Distribution, other than CardioTech's obligation to register 245,438 shares of CardioTech stock, as adjusted, on behalf of John Hancock Mutual Life Insurance Company ("Hancock"), pursuant to the terms and conditions of a Letter Agreement from CardioTech and PMI to Hancock dated May 1996. 9. Payments. All payments to be made hereunder shall be made in immediately available funds. Unless otherwise provided herein, any payment not made when due hereunder shall bear interest from the due date at any annual rate equal to the prime rate (as determined by the First National Bank of Boston (or successor organization)) plus 2%, compounded and adjusted monthly. For purposes of this Agreement, the following payments shall be due at the following times: (a) Payments due under Section 2 hereof shall be paid within 10 days of the receipt of notice from the party entitled to the payment indicating the occurrence of the later of (i) a Final Determination relating to the item or items giving rise to the Tax -9- 10 for which indemnification is made and (ii) actual payment of the Tax giving rise to the claim for indemnification. (b) In the case of any refunds of Taxes received by a party other than the party entitled to such refunds pursuant to Section 3 hereof, the recipient of the refund shall pay the amount of such refund to the other party within five days of the receipt of such refund. (c) Amounts payable pursuant to Section 4 hereof shall be paid within five days of the later to occur of (i) a Final Determination relating to the Tax item that gave rise to the windfall benefit and (ii) the actual receipt of the windfall benefit. 10. Resolution of Certain Disputes. Disagreements between Parent and the CardioTech shall be resolved as quickly as possible and if not resolved within thirty days shall be referred to binding arbitration conducted by a mutually agreeable accounting firm as soon as practicable. A dispute shall be deemed to exist to the extent one party does not affirmatively agree with the position held by the other party. The parties shall be required to use their best efforts to resolve any dispute as quickly as possible. The costs and fees of such arbitrator shall be divided equally except to the extent a party's position is unreasonable (as determined by the arbitrator) in which case such party shall bear all expenses (including without limitation such fees) allocable to such position and the dispute relating thereto. 11. Costs and Expenses. Except as expressly set forth in this Agreement, each party shall bear its own costs and expenses incurred pursuant to this Agreement regardless of the beneficiary of the items or services relating to such costs and expenses. 12. Termination and Survival. Notwithstanding anything in this Agreement to the contrary, this Agreement shall remain in effect and its provisions shall survive for the full period of all applicable statutes of limitation relating to the assessment of Taxes (giving effect to any extension, waiver or mitigation thereof) plus two years. 13. Amendments; Limitation on Waivers. (a) Any provision of this Agreement may be amended if, and only if, such amendment is in writing and signed by Parent and CardioTech. (b) The provisions of this Agreement may be waived only if the waiver is in writing and signed by the party making the -10- 11 waiver. No delay or omission in exercising any right under this Agreement will operate as a waiver of the right on any further occasion. No waiver of any particular provision of the Agreement will be treated as a waiver of any other provision, and no waiver of any rights will be deemed a continuing waiver of the same right with respect to subsequent occurrences that give rise to it. All rights given by this Agreement are cumulative to other rights provided for in this Agreement and to any other rights available under applicable law. 14. Governing Law and Interpretation. This Agreement shall be governed by, interpreted and enforced in accordance with the laws of the Commonwealth of Massachusetts (regardless of the laws that might be applicable under principles of conflict of law). 15. Confidentiality. Each party shall hold and shall cause its consultants and advisors to hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of its counsel, by other requirements of law, all information (other than any such information relating solely to the business or affairs of such party) concerning the other parties hereto furnished it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (a) previously known by the party to which it was furnished, (b) in the public domain through no fault of such party, or (c) later lawfully acquired from other sources by the party to which it was furnished), and each party shall not release or disclose such information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who shall be advised of the provisions of this Section 15. Each party shall be deemed to have satisfied its obligation to hold confidential information concerning or supplied by the other party if it exercises the same care as it takes to preserve confidentiality for its own similar information. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 17. Assignments and Third Party Benefit. This Agreement and the terms and provisions hereof shall be binding upon and shall inure to the benefit of, the parties and their respective successors and assigns. 18. Severability. If any term, provision, condition or covenant of this Agreement, or the application thereof to any party or circumstance shall be held by a court of competent -11- 12 jurisdiction to be invalid, unenforceable or void, the remainder of this instrument, or the application of such term, provision, condition or covenant to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 19. Merger of Prior Agreements. (a) This Agreement contains all of the terms and provisions and constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior written, oral or implied understandings, representations and agreements of the parties relating to the subject matter of this Agreement. Without limiting the foregoing, the parties acknowledge and agree that in the event of any conflict or inconsistency between the provisions of this Agreement and the provisions of the Distribution Agreement, the provisions of this Agreement shall control and to such extent shall be deemed to supersede such conflicting provisions under the Distribution Agreement. (b) The parties acknowledge that pursuant hereto any and all existing tax sharing agreements or arrangements binding or benefiting CardioTech shall be terminated as of the close of business on the Distribution Date, and that after the Distribution Date this Agreement shall constitute the sole tax sharing agreement among Parent and CardioTech. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. POLYMEDICA INDUSTRIES, INC. By: -------------------------------------- Title: ----------------------------------- CARDIOTECH INTERNATIONAL, INC. By: -------------------------------------- Title: ----------------------------------- -12- EX-10.3 7 FORM OF FACILITIES AND SERVICES AGREEMENT 1 EXHIBIT 10.3 FACILITIES AND SERVICES AGREEMENT This Agreement is made as of May __, 1996 by and between PolyMedica Industries, Inc., a Massachusetts corporation ("PMI"), and CardioTech International, Inc., a Massachusetts corporation ("CardioTech"). BACKGROUND PMI intends to spin-off its implantable device and premium polymer biomaterials business (the "Business"), currently conducted by CardioTech and certain other subsidiaries of PMI, by consolidating the Business into CardioTech and distributing all of the stock of CardioTech owned by it to the stockholders of PMI as a dividend. After distribution of that dividend, PMI and CardioTech will be separate and independent corporations. PMI and CardioTech recognize that it is advisable for PMI to continue providing office, laboratory and manufacturing space as well as certain administrative, processing and other services to CardioTech until CardioTech has had a reasonable opportunity to evaluate its continued need for such facilities services and to investigate other sources for facilities or services. This Agreement is entered into pursuant to the separate Plan and Agreement of Distribution between the parties ("Distribution Agreement"). This Agreement shall become effective as of the Effective Date, as defined in the Distribution Agreement. The parties agree as follows: SECTION 1. LEASE OF FACILITIES. PMI hereby agrees to provide approximately 5,400 square feet of space at the PMI facility located at 11 State Street, Woburn, Massachusetts (the "Woburn Facility") and 2,500 square feet of space at the PMI facility located at Tarvin, Cheshire CH3 8JF in the United Kingdom (the "Tarvin Facility") for a term of one year from the Effective Date. Rent for the Woburn Facility and the Tarvin Facility is included in the aggregate monthly payment indicated on SCHEDULE 1. The space in the United Kingdom shall be in the area currently occupied by CardioTech. The space to be initially occupied by CardioTech at the Woburn Facility is shaded in grey on Exhibit A attached hereto. PolyMedica may decrease, alter or modify the space occupied by CardioTech at the Woburn Facility, provided that prior thereto CardioTech is provided with substantially similar accommodations at the Woburn Facility and further provided that the areas occupied by equipment and indicated as such on Exhibit A, shall not be moved. The parties hereto agree that they shall cooperate with each other in good faith in order to accommodate each others' needs. 2 The parties hereto acknowledge that the lease with respect to the United Kingdom facility requires that the landlord of such facility consent to the arrangement set forth in this Section 1 with respect to the United Kingdom facility and shall use commerically reasonable efforts to obtain such consent. SECTION 2. PERFORMANCE OF SERVICES BY PMI. Beginning on the Effective Date, PMI will provide, or cause one or more of its subsidiaries or divisions to provide, to CardioTech and its subsidiaries on an "as needed" basis (as determined by CardioTech or its subsidiaries and once determined subject to the last paragraph of this section and the provisions of Section 7) the following services: (a) Administrative Services of the nature currently provided by PMI's financial and human resources personnel, as described generally in the attached SCHEDULE 1; and (b) Such other services as may be agreed upon between PMI and CardioTech from time to time and described generally in the attached SCHEDULE 2 which may be amended from time to time upon the written consent of both parties. PMI will use (and will cause its subsidiaries to use) reasonable efforts in providing the scheduled services to CardioTech and will perform such services with the same degree of care, skill and prudence customarily exercised for its own operations. To the extent possible, such services will be substantially identical in nature and quality to the services currently provided or otherwise made available by PMI to its wholly-owned subsidiaries and their respective operating divisions. PMI has the right to supplement, modify, substitute or otherwise alter such services from time to time in a reasonable manner consistent with supplements, modifications, substitutions or alterations made with respect to similar services provided or otherwise made available by PMI to its wholly-owned subsidiaries and their respective operating divisions. In providing such services, PMI will not be responsible for the accuracy, completeness or timeliness of any advice or service or any return, report, filing or other document which it provides, prepares or assists in preparing, except to the extent that any inaccuracy, incompleteness or untimeliness arises from PMI's gross negligence or willful misconduct. PMI and CardioTech will cooperate in planning the scope and timing of services provided by PMI under this Agreement in order to minimize or eliminate interference with the conduct of PMI's business activities. If such interference is unavoidable, PMI will apportion the available services in a fair and reasonable manner. -2- 3 SECTION 3. PAYMENT FOR SERVICES; EXPENSES REIMBURSEMENT. (a) As compensation for the scheduled services, CardioTech will pay a fee as specified or determined in accordance with the applicable Schedule. (b) PMI will periodically, but not less frequently than monthly, submit to CardioTech for payment statements of amounts due for services under this Agreement. The statements will specify the nature of the services provided, the identity of the department or individuals performing such services, the applicable Schedule pursuant to which such service was provided and any other supporting detail which CardioTech reasonably requests. CardioTech will pay the amounts due within forty-five (45) days after CardioTech's receipt of each statement. -3- 4 SECTION 4. INDEPENDENCE. All employees and representatives of PMI providing the scheduled services to CardioTech will be deemed for purposes of all compensation and employee benefits to be employees or representatives of PMI and not employees or representatives of CardioTech. In performing such services, such employees and representatives will be under the direction, control and supervision of PMI (and not of CardioTech) and PMI will have the sole right to exercise all authority with respect to the employment (including termination of employment), assignment and compensation of such employees and representatives. SECTION 5. NON-EXCLUSIVITY. Nothing in this Agreement precludes CardioTech from obtaining the scheduled services, in whole or in part, from its own employees or from providers other than PMI; provided that CardioTech may only cease payments for a scheduled service if it complies with Section 7 hereof. SECTION 6. CONFIDENTIALITY. PMI agrees to hold, and to use its best efforts to cause its employees and representatives to hold, in confidence all confidential information concerning CardioTech, furnished to or obtained by PMI after the Effective Date in the course of providing the scheduled services, in a manner consistent with PMI's standard policies with respect to the preservation and disclosure of confidential information concerning PMI and its subsidiaries and operating units. SECTION 7. TERMINATION. Unless otherwise provided in an attached Schedule applicable to a particular group of services, or as hereafter provided, this Agreement will continue in effect until the first anniversary of the Effective Date. Either PMI or CardioTech may terminate this Agreement by written notice delivered to the other party at least thirty (30) days prior to the non-breaching party's stated effective date of termination in the event of a material breach of this Agreement by the other party if the breach remains uncured at the end of the 30-day notice period. CardioTech alone, without cause and for no reason or any reason, may terminate this Agreement, or any attached Schedule in whole or in part prior to the first anniversary of the Effective Date, by written notice delivered to PMI at least ninety (90) days prior to the proposed effective date of termination except that with respect to scheduled services noted in such Schedules as available to, and payable by, CardioTech on an "As Used Basis", PMI may also terminate such service by written notice delivered to CardioTech at least thirty (30) days prior to the proposed effective date of termination although no notice shall be required for CardioTech's non-use of the service. Upon termination, CardioTech will reimburse PMI for all out-of-pocket expenses (other than PMI's internal time costs) reasonably incurred by PMI related to the performance of the terminated service(s), to the extent that such expenses were not fully -4- 5 reimbursed before the termination date. Upon termination, PMI will reimburse CardioTech for the portion of all fees for services paid by CardioTech but attributable to the period after termination re-prorated on a daily basis. SECTION 8. MISCELLANEOUS. 8.1 Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts. 8.2 Construction. Each provision of this Agreement shall be interpreted in a manner to be effective and valid to the fullest extent permissible under applicable law. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions of this Agreement which shall remain in full force and effect. 8.3 Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement (including any questions of fraud or questions concerning the validity and enforceability of this Agreement or any of the rights herein conveyed), shall be determined and settled by arbitration in Boston, Massachusetts, pursuant to the rules then in effect of the American Arbitration Association as modified by this paragraph. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in any court having competent jurisdiction. The party submitting such dispute shall give written notice to that effect to the other party, stating the dispute to be arbitrated and the name and address of a person designated to act as arbitrator on its behalf. Within fifteen (15) days after such notice, the other party shall give written notice to the first party stating the name and address of a person designated to act as substitute on its behalf. In the event that the second party shall fail to notify the first party of its designation of an arbitrator within the time specified, then the first party shall request the American Arbitration Association to appoint a second arbitrator. The two arbitrators so chosen shall meet within fifteen (15) days after the second arbitrator has been appointed to appoint a third arbitrator. If the two arbitrators are unable to agree on the appointment of a third arbitrator within such fifteen (15) day period, either party may request the American Arbitration Association to appoint a third arbitrator. Each arbitrator appointed hereunder shall be independent of the parties and either party may disqualify an arbitrator who is or is affiliated with a supplier, customer or competitor of either party without the consent of the other party. Each arbitrator shall be reasonably knowledgeable regarding the area or areas in dispute. All costs and expenses, including attorney's fees, of all parties incurred in any dispute which is determined and/or settled by arbitration pursuant to this paragraph shall be borne by the party determined to be liable in respect of such dispute; provided, however, that if complete liability is not assessed against only -5- 6 one party, the parties shall share the total costs in proportion to their respective amounts of liability so determined. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Each party, and the arbitrators, shall use their best efforts, subject to reasonable prosecution of the arbitration, court order and disclosure required under securities laws, to keep the subject matter of the arbitration and confidential information of each party confidential, and the arbitrators are authorized to impose such protective orders as they may deem appropriate for such purpose. Either prior to or as part of any award, the arbitrators shall be authorized to grant injunctive relief or other equitable remedies, including granting security for a prospective or final award, but the arbitrators shall have no authority to award punitive damages or other penalties. 8.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 8.5 Schedules. Schedules to this Agreement shall be deemed to be an integral part hereof, and exhibits or schedules to such Schedules shall be deemed to be an integral part thereof. 8.6 Amendments; Waivers. This Agreement may be amended or modified only in writing executed on behalf of PMI and CardioTech. No waiver shall operate to waive any further or future act and no failure to object of forbearance shall operate as a waiver. 8.7 Successors and Assigns. This Agreement and any of the rights and obligations of each party hereunder shall not be assigned, in whole or in part, without the prior written consent of the other party, which consent shall not be unreasonably withheld, provided that either party may sell, assign, transfer, delegate or otherwise dispose of its rights and obligations hereunder in connection with its merger or consolidation or the sale of substantially all of its assets. This Agreement shall be binding upon the parties and their respective successors and assigns to the extent such assignments are in accordance with this Section 11.8. SECTION 9. NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is given, (ii) on the day of transmission if sent via facsimile transmission to the facsimile number given below, provided telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the business day after delivery to an overnight courier -6- 7 service or the Express mail service maintained by the United States Postal Service, provided receipt of delivery has been confirmed, or (iv) on the fifth day after mailing, if mailed by registered or certified mail, postage prepaid, properly addressed and return-receipt requested, in all cases to the parties as follows: PolyMedica Industries, Inc. 11 State Street Woburn, MA 01801 Attention: Chief Executive Officer Telephone: (617) 933-2020 Telecopier: (617) 938-6950 with a copy to: John K.P. Stone III, Esq. Hale and Dorr 60 State Street Boston, MA 02109 Telephone: (617) 526-6000 Telecopier: (617) 526-5000 or to: CardioTech International, Inc. 11 State Street Woburn, MA 01801 Attention: Chief Executive Officer Telephone: [ ] Telecopier: [ ] with a copy to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC One Financial Center 41st Floor Boston, MA 02111-2657 Attention: Jeffrey Wiesen Telephone: (617) 542-6000 Telecopier: (617) 542-2241 SECTION 10. WAIVERS. The failure of either party to require strict performance by the other party of any provision in this Agreement will not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof. -7- 8 The parties have caused this Agreement to be signed by their authorized representatives as of the Effective Date. CARDIOTECH INTERNATIONAL, INC. POLYMEDICA INDUSTRIES, INC. By: By: ------------------------------- --------------------------------- Michael D. Szycher, Ph.D. Steven J. Lee Chairman and Chief President and Chief Executive Officer Executive Officer -8- 9 SCHEDULE 1 ADMINISTRATIVE AND OTHER SERVICES Description of Service Aggregate Monthly Fee - ---------------------- --------------------- Management services (financial, $15,000* accounting, secretarial and executive management services) Provision of space at Woburn Facility and Tarvin Facility Provision of office equipment, supplies and telephone systems at Woburn Facility and Tarvin Facility *Includes property taxes, insurance, maintenance and utilities. 10 SCHEDULE 2 OTHER SERVICES As agreed upon by the parties. 11 EXHIBIT A Space at Woburn Facility [attached is a floorplan with certain shaded areas representing the leased space equipment areas] EX-10.4 8 AMENDED & RESTATED LICENSE AGREEMENT 1 EXHIBIT 10.4 ------------ AMENDED AND RESTATED LICENSE AGREEMENT between POLYMEDICA INDUSTRIES, INC. as Licensor and CARDIOTECH INTERNATIONAL, INC., as Licensee 2 TABLE OF CONTENTS Article 1 - DEFINITIONS 1.1 Confidential Information 1 1.2 Effective Date 1 1.3 Licensed Technology 1 1.4 New Inventions 2 1.5 Implantable Medical Device Technology 2 1.6 Implantable Medical Devices 2 Article II - GRANT OF LICENSE 2.1 Practice of Licensed Technology 2 2.2 Quality Controls 3 2.3 Transfer of Information 3 2.4 No Rights by Implication 3 2.5 No Warranty 3 2.6 Representations and Warranties 3 Article III - CONFIDENTIAL INFORMATION 3.1 Confidentiality Maintained 5 3.2 Information in Connection with Sale 5 Article IV - PROTECTION OF LICENSED TECHNOLOGY 4.1 Litigation with Third Parties 5 4.2 Use of Name in Suit 6 4.3 Notification of Suit by Licensee 6 4.4 Notification of Suit by Licensor 6 Article V - OWNERSHIP OF PROPRIETARY RIGHTS 5.1 Acknowledgment of Existing Rights 6 5.2 Rights to New Inventions 7 Article VI - TERMINATION AND EXPIRATION 6.1 Expiration; Term of Agreement 8 6.2 Bankruptcy 8 6.3 Material Breach 8 6.4 No Right of Licensor to Terminate 8 6.5 After Termination or Expiration 8 3 Article VII - NON-COMPETITION 7.1 Warranty of Non-Competition 9 Article VIII - MISCELLANEOUS 8.1 Assignments 9 8.2 Sublicense 9 8.3 Governing Law 9 8.4 Arbitration 9 8.5 Waiver 10 8.6 No Other Relationship 10 8.7 Notices 10 8.8 Entire Understanding 11 8.9 Invalidity 11 8.10 Amendments 11 8.11 Bard Access Systems, Inc. Agreement 11 8.12 Survival of Contents 11 8.13 Table of Contents and Headings 11 8.14 Exhibit 12 EXHIBIT A List of Patents, Trademarks, 13 Service Marks, Copyrightable Material, Rights, Trade Secrets and Other Proprietary Rights 4 AMENDED AND RESTATED LICENSE AGREEMENT THIS AMENDED AND RESTATED LICENSE AGREEMENT is made and entered into as of the 9th day of May, 1996 by and between PolyMedica Industries, Inc. ("Licensor"), a Massachusetts corporation having offices at 11 State Street, Woburn, Massachusetts 01801 with Telecopy No. (617) 933-7992 and CardioTech International, Inc. ("Licensee"), a Massachusetts corporation having offices at 11 State Street, Woburn, Massachusetts 01801 with Telecopy No. (617) 933-4772. WHEREAS, Licensor possesses certain intellectual property rights which Licensee is desirous of using. Licensor is willing to grant Licensee exclusive rights to use and practice such intellectual property rights in accordance with the terms and conditions hereinafter set forth. Licensor and Licensee have entered into a License Agreement, dated as of March 19, 1996, and by mutual agreement desire to amend and restate that Agreement pursuant hereto. NOW, THEREFORE, in consideration of the premises and mutual promises, terms and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows: I. DEFINITIONS As used herein, the following terms shall have the following definitions: 1.1 CONFIDENTIAL INFORMATION. "Confidential Information" shall mean that part of the Licensed Technology which is not publicly known. 1.2 EFFECTIVE DATE. "Effective Date" shall mean the date on which Licensor executes this Agreement. 1.3 LICENSED IMPLANTABLE MEDICAL DEVICE TECHNOLOGY. "Licensed Technology" shall mean any and all patents, trademarks, service marks, copyrightable material, trade secrets and other proprietary rights including without limitation all such rights listed in Exhibit A that relate to Implantable Medical Device Technology as defined herein. Exhibit A may be amended from time to time by the mutual consent of the parties hereto. If any additional United States Letters Patent or foreign patents are issued based on any of the proprietary rights listed in Exhibit A that relate to Implantable Medical Device Technology as defined herein, such patents shall be deemed to be included in Exhibit A -1- 5 as of their date of issuance for the same purpose as the other patents listed in Exhibit A. 1.4 NEW INVENTIONS. "New Inventions" means any and all inventions, discoveries, concepts, ideas, improvements, original works of authorship, know-how, modifications to existing copyrightable works of authorship and data (whether or not patentable or subject to copyright or trade secret protection) concerning any present or prospective activities of Licensor or Licensee, which Licensor or Licensee, or their respective employees, agents or representatives formulate, make, conceive or become acquainted with during the term of this Agreement that relate to Implantable Medical Device Technology as defined herein. 1.5 "IMPLANTABLE MEDICAL DEVICE TECHNOLOGY" shall mean Implantable Medical Devices, the equipment used to fabricate such Implantable Medical Devices, methods of manufacturing and/or using Implantable Medical Devices, biostable polyurethane material that is used to fabricate such Implantable Medical Devices, and biodurable polymer materials (that are sold in bulk) that are used for medical applications. 1.6 IMPLANTABLE MEDICAL DEVICES. "Implantable Medical Devices" shall mean (i) invasively implantable medical devices which are designed to be implanted by a licensed and/or trained medical or health care professional that are wholly or partially implanted in the body of a human or animal and (ii) any product, system, component, part, or item which either: (a) embodies any of the inventions, discoveries, concepts, ideas, improvements, original works of authorship, know-how or data (whether or not patentable or subject to copyright, or trade secret protection) included in the Licensed Technology; or (b) is produced through the use of any of the inventions, discoveries, concepts, ideas, improvements, original works of authorship, know-how or data (whether or not patentable or subject to copyright or trade secret protection) included in the Licensed Technology. II. GRANT OF LICENSE Subject to all of the terms and conditions set forth in this Agreement: 2.1 PRACTICE OF LICENSED TECHNOLOGY. Licensor hereby grants to Licensee a perpetual, irrevocable, worldwide, royalty-free, exclusive right and license, except as provided in Section 6 even as to the Licensor, to use and practice the Licensed Technology and to make, use, sell, and import Implantable Medical Devices, with the unrestricted right to sublicense the Licensed Technology. Such license shall not be terminable by Licensor or any successor or assign of Licensor or any party claiming through Licensor under any circumstance or for any reason, including without limitation any breach of this Agreement or any other agreement between Licensor and Licensee. -2- 6 2.2 QUALITY CONTROLS. If Licensee, in its sole discretion, uses any trademarks or service marks included in the Licensed Technology on any Implantable Medical Device, Licensee agrees that such use shall be in strict compliance with the provisions of all applicable laws and regulations. Licensee also agrees to conduct any and all advertising and promotion in which such trademarks or service marks are used so as to assure the continued validity and enforceability of those trademarks and service marks. Licensor shall have the right to inspect Licensee's facilities during normal business hours, without prior advance notice, to confirm that Licensee's use of such trademarks and service marks is in compliance with this Section 2.2. 2.3 TRANSFER OF INFORMATION. As soon as practicable after the Effective Date, but in no event later than sixty (60) days after the Effective Date, Licensor shall provide to Licensee, at no cost to Licensee, any and all trade secrets and other proprietary information described in Exhibit A. 2.4 NO RIGHTS BY IMPLICATION. No rights or licenses with respect to Licensed Technology or the Implantable Medical Devices are granted or deemed granted hereunder or in connection herewith, other than those rights or licenses expressly granted in this Agreement. 2.5 NO WARRANTY. EXCEPT AS SET FORTH IN SECTION 2.6, LICENSEE ACKNOWLEDGES THAT IT RECEIVES THE LICENSED TECHNOLOGY ON AN "AS IS" BASIS. THERE IS NO WARRANTY OF LICENSOR IN THIS AGREEMENT CONCERNING THE LICENSED TECHNOLOGY OR THE IMPLANTABLE MEDICAL DEVICES, AND LICENSOR MAKES NO WARRANTY, EITHER EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 2.6 REPRESENTATIONS AND WARRANTIES. (A) Licensor hereby represents and warrants that: (1) Licensor has full power and authority to execute, deliver and perform this Agreement. (2) This Agreement has been duly executed and delivered by Licensor and constitutes the valid and binding obligation of Licensor, enforceable against Licensor in accordance with its terms, except as limited by principles of equity and applicable bankruptcy, insolvency, and other laws of general applicability affecting the enforcement of creditors' rights. (3) Licensor represents and warrants that it is the owner of the entire right, title, and interest in and to Licensed Technology, except for a joint ownership interest of Thermedics, Inc., a Massachusetts corporation, having offices at 470 Wildwood Street, Woburn, MA 01888, with Licensor in and to U.S. Patent No. 5,254,662 and its related patents and applications in Australia, Canada, the EPO, and WO, as set forth in Exhibit A -3- 7 hereto as "Joint Patents and Patent Applications." To the best of Licensor's knowledge and except set forth in this Section 2.6 (c), the Licensed Technology is free and clear of any lien or similar encumbrance. (4) The Licensor represents and warrants that it has the right to grant the exclusive right in Section 2.1, without requiring the consent or approval of any third party to this Agreement, with regard to Licensor's entire right, title, and interest in and to the Licensed Technology. In the event that, as a result of Thermedics, Inc.'s joint ownership in the patents and patent applications set forth in Exhibit A as "Joint Patents and Patent Applications," in the written opinion of patent counsel for Licensee, the consent of Thermedics, Inc. is required by the law of a foreign country for the grant of the license set forth herein, Licensor will use its best efforts to obtain such consent. If such consent is not granted by Thermedics, Inc. in writing within sixty (60) days after the date of Licensee's request for such consent, then, at the request of Licensee, Licensor will execute and deliver to Licensee an assignment, in mutual satisfactory form, conveying to Licensee an undivided joint interest in and to Licensor's joint ownership of the right, title and interest in and to the specific patent or patent application of the "Joint Patents and Patent Applications" in Exhibit A for which Thermedics, Inc. did not grant its consent. If such an assignment is granted, the result will be that the specific patent or patent application of the "Joint Patents and Patent Applications" in Exhibit A will be jointly owned by Licensor, Licensee and Thermedics, Inc. in the foreign country at issue. (5) Licensor represents and warrants that the execution and delivery of this Agreement is not inconsistent with any prior agreements or instruments regarding Licensed Technology to which the Licensor is bound. (B) Licensee hereby represents and warrants that: (1) Licensee has full power and authority to execute, deliver and perform this Agreement. (2) This Agreement has been duly executed and delivered by Licensee and constitutes the valid and binding obligation of Licensee, and its successors and assigns, enforceable against Licensee, and its successors and assigns, in accordance with its terms, except as limited by principles of equity and applicable bankruptcy, insolvency, and other laws of general applicability affecting the enforcement of creditors' rights. (3) Licensee represents and warrants that the execution and delivery of this Agreement is not inconsistent with any prior agreements or instruments regarding Licensed Technology to which the Licensee is bound. -4- 8 III. CONFIDENTIAL INFORMATION 3.1 CONFIDENTIALITY MAINTAINED. Licensee acknowledges that Licensor will provide Licensee with Confidential Information in the transfer of information pursuant to Section 2.3. All disclosures which have utility for purposes other than Implantable Medical Devices made to Licensee, its agents and employees shall be held in strict confidence by Licensee, its agents and employees. Licensee shall disclose all such Confidential Information that relates to information other than information relating to Implantable Medical Devices only to those of its agents and employees to whom it is necessary in exercising its rights and carrying out its duties under this Agreement. Licensee shall not use the Confidential Information except for the purposes of exercising its rights and carrying out its duties hereunder, including, without limitation, its right to grant sublicenses. The provisions of Section 3.1 shall also apply to any consultants, subcontractors or sublicensees that Licensee may engage in connection with the exercise of its rights or the carrying out of its duties under this Agreement. 3.2 INFORMATION IN CONNECTION WITH SALE. Licensor hereby grants to Licensee the right during the term of this Agreement to sell and distribute in connection with each sale of an Implantable Medical Device that part of the Licensed Technology necessary (in the sole and absolute judgement of Licensee) for such purchaser to use and operate such Implantable Medical Device, even if such information includes Confidential Information. IV. PROTECTION OF LICENSED TECHNOLOGY 4.1 LITIGATION WITH THIRD PARTIES. (a) Licensee shall have the right, but not the obligation, to take any and all actions in its own name, legal or otherwise, which are necessary to: (i) terminate infringements of any proprietary right which is part of the Licensed Technology; or (ii) terminate any attempted passing-off by imitation of any Implantable Medical Device. Licensee shall bear all the expenses of all actions which it initiates pursuant to Section 4.1(a). Any recoveries or settlement fees received from suits or settlements involving an action initiated pursuant to this section 4.1(a) or agreed to shall be paid to Licensee for its own use and benefit. (b) If Licensee does not bring an action, legal or otherwise, which Licensor, believes, in its reasonable judgment, is necessary to protect Licensor's rights related to the underlying Licensed Technology, Licensor, at its sole discretion, may take any and all actions, legal or otherwise, which are necessary to: (i) terminate infringements of any proprietary right which is part of the licensed Technology; or (ii) terminate any attempted passing off by imitation of any Implantable Medical Device. Licensor shall bear all the expenses of all actions which it initiates pursuant to this Section 4.1(b). Any recoveries or -5- 9 settlement fees received from suits or settlements involving an action initiated pursuant to this Section 4.1(b) or agreed to shall be paid to Licensor for its own use and benefit. (c) Licensor may agree to any settlement of any such action brought under Section 4.1(b), at its own discretion, without the prior consent of Licensee so long as such settlement does not grant any rights relating to Implantable Medical Devices to Licensed Technology and does not impose any obligation on Licensee. (d) Licensor shall have the right to take any and all actions in its own name, legal or otherwise, which are necessary to protect the exclusive rights licensed to it by Licensee under Section 5.2(a) relating to Licensee's New Inventions against infringement through the manufacture, use, sale or import by third parties of products which are not Implantable Medical Devices. 4.2 USE OF NAME IN SUIT. When, in the reasonable judgment of Licensor, it is necessary to use Licensee's name to prosecute or defend an action pursuant to Section 4.1 hereof, Licensee agrees to allow Licensor to so use its name; and when, in the judgment of Licensee, it is necessary to use Licensor's name to prosecute or defend an action pursuant to Section 4.1 hereof, Licensor agrees to allow Licensee to use its name. 4.3 NOTIFICATION OF SUIT BY LICENSEE. Licensee shall notify Licensor in writing of the initiation of any actions by third parties against the Licensee or Licensee's initiation of any actions against any third party under Section 4.1(a). Such notice shall be given promptly after Licensee acquires such knowledge. 4.4 NOTIFICATION OF SUIT BY LICENSOR. Licensor shall notify Licensee in writing of the initiation of any actions by third parties against the Licensor or Licensor's initiation of any actions against any third party under Section 4.1(b) and/or relating to the Licensor's exclusive rights licensed to it by Licensee under Section 5.2(a) relating to Licensee's New Inventions. Such notice shall be given promptly after Licensor acquires such knowledge. V. OWNERSHIP OF PROPRIETARY RIGHTS 5.1 ACKNOWLEDGMENT OF EXISTING RIGHTS. (a) Licensee hereby acknowledges that each and every part of the Licensed Technology on the Effective Date and any addition to the Licensed Technology by Licensor during the term of this Agreement is either: (i) the property of Licensor; or (ii) has been used by Licensee pursuant to a grant of rights to Licensor by the owner of such rights to use such rights. (b) Licensee agrees for itself and its successors and assigns, upon request of Licensor, to at all times do such acts -6- 10 and to execute and deliver promptly to Licensor such papers, instruments and documents, at Licensor's expense, as from time to time may be necessary or useful in Licensor's opinion to prove, apply for, secure, maintain, reissue, extend or defend Licensor's world-wide rights in the rights described in Section 5.1(a) above. Without limiting the foregoing, Licensee shall enter into such user agreements with Licensor as necessary to secure Licensor's ownership rights described in Section 5.1(a), in forms mutually agreed upon by Licensor and Licensee. (c) Licensee warrants and represents to Licensor that Licensee, and to Licensee's knowledge the employees, agents, or representatives that it hires or employs, are not subject to any agreement inconsistent with this Agreement regarding the rights described in Section 5.1(a) above. 5.2 RIGHTS TO NEW INVENTIONS. (a) For all New Inventions that relate to Implantable Medical Device Technology as defined herein and which have utility for products which are not Implantable Medical Devices that are formulated, made or conceived by Licensee, its employees, agents and representatives, solely or jointly with others, during the term of this Agreement, with respect to which Licensee acquires any patents, trademarks, service marks, copyrightable material, trade secrets or any other proprietary rights which Licensee has the right to license to others, any and all such rights of Licensee shall be owned by Licensee and Licensee shall grant Licensor a perpetual, irrevocable, world-wide, royalty-free, exclusive right and license, exclusive of Implantable Medical Device Technology as defined herein, even as to Licensee, during the term of this Agreement, to use and practice such New Inventions and to make, use and sell products which are not Implantable Medical Devices with the right to sublicense such New Invention solely for such purpose. Such exclusive license to Licensor for Licensee's New Inventions is in consideration of the royalty-free license granted to Licensee pursuant to Section 2.1 above. Licensee shall take no actions to defeat Licensor's rights under Section 5.2(a). (b) Licensee shall inform Licensor fully of each of Licensee's New Inventions which have utility for products which are not Implantable Medical Devices by a written report, setting forth in detail the procedures employed and results achieved. Such report shall be given to Licensor within ninety days after the formulation, making or conception of such New Inventions. Licensee shall also provide Licensor with an annual report identifying all such New Inventions of Licensee formulated, made or conceived during the twelve (12) month period covered by that report. (c) For all New Inventions that relate to Implantable Medical Device Technology as defined herein, that are formulated, made or conceived by Licensor, its employees, agents and representatives, solely or jointly with others, during the term of -7- 11 this Agreement with respect to which Licensor acquires any patents, trademarks, service marks, copyrightable material, trade secrets or any other proprietary rights, it shall be deemed to be part of the Licensed Technology and Licensee shall have a right to use such rights, title and interest pursuant to Section 2.1 hereof without paying any royalty or any other consideration to Licensor. Licensor shall take no actions to defeat Licensee's rights under Section 5.2(c). (d) Licensor shall inform Licensee fully of each of Licensor's New Inventions which have utility for products which are Implantable Medical Devices by a written report, setting forth in detail the procedures employed and results achieved. Such report shall be given to Licensee within ninety days after the formulation, making or conception of such New Inventions. Licensor shall also provide Licensee with an annual report identifying all such New Inventions of Licensor formulated, made or conceived during the twelve (12) month period covered by that report. VI. TERMINATION AND EXPIRATION 6.1 EXPIRATION: TERM OF AGREEMENT. Unless it is terminated by mutual agreement, this Agreement shall continue in full force and effect perpetually. The term of this Agreement shall be from the Effective Date to the date of termination or expiration of this Agreement, as the case may be. 6.2 BANKRUPTCY. If Licensee, voluntarily or involuntary, is subject to bankruptcy under Chapter 7 of the Bankruptcy code, the purchaser, assignee, or other entity who obtains in any way any rights of Licensee under this Agreement shall have no right to bring any action against any third party pursuant to Section 4.1(a) hereof. 6.3 MATERIAL BREACH. Upon the occurrence of a curable material breach or default as to any obligation hereunder by Licensee and the failure of Licensee to promptly pursue (within ninety (90) days after receiving written notice thereof from Licensor) a reasonable remedy designed to cure (in the reasonable judgment of Licensor) such curable material breach or default, Licensee agrees to pay Licensor $1,000.00 per day after the 90 day period has expired until the curable material breach or default is cured. 6.4 NO RIGHT OF LICENSOR TO TERMINATE. In the event of a material breach of any of the provisions hereof by Licensee, Licensor may seek to recover monetary damages against Licensee in accordance with Section 8.4 hereof. Licensor shall not have the right to unilaterally terminate this Agreement. Licensor's sole remedy shall be the recovery of monetary damages. 6.5 AFTER TERMINATION OR EXPIRATION. The parties hereto agree that, once this Agreement is terminated or expires, Licensee shall immediately cease any use or practice of the Licensed -8- 12 Technology. Licensee shall, at its expense, return to Licensor all Confidential Information as soon as practicable after the date of such termination or expiration, including, but not limited to, original documents, drawings, computer diskettes, models, samples, notes, reports, notebooks, letters, manuals, prints, memoranda and any copies thereof, which have been received by Licensee. All such Confidential Information shall be owned by Licensor during the term of this Agreement and thereafter. VII. NON-COMPETITION 7.1 WARRANTY OF NON-COMPETITION. Licensee agrees that it will not directly or knowingly indirectly compete with PMI in the following areas for a period of five calendar years from the Effective Date of this Agreement: (1) Prescription or over-the-counter Wound Dressing Business. (2) Cosmetic Business, including but not limited to, active ingredients and finished cosmetic products. VIII. MISCELLANEOUS 8.1 ASSIGNMENTS. This Agreement and any and all of the rights and obligations of either party hereunder shall not be assigned, delegated, sold, transferred or otherwise disposed of, by operation of law or otherwise, without the prior written consent of the other party, which consent shall not be unreasonably withheld, provided that either party may sell, assign, transfer, delegate or otherwise dispose of its rights and obligations hereunder in connection with its merger or consolidation or the sale of all or substantially all of its assets. This Agreement shall be binding upon, and inure to the benefit of, Licensor and Licensee and their respective successors and assigns, to the extent such assignments are in accordance with Section 8.1. 8.2 SUBLICENSE. Licensee shall have the right to sublicense the Licensed Technology to a third party under this Agreement as long as the third party agrees to be bound by the terms of this Agreement to the same extent as the Licensee, and any sublicensing agreement made with such third party by Licensee shall expressly incorporate by reference the terms of this Agreement. 8.3 GOVERNING LAW. This Agreement shall be governed, interpreted and construed in accordance with the laws of the Commonwealth of Massachusetts. 8.4 ARBITRATION. (a) Any dispute, controversy or claim arising out of or relating to this Agreement or to a breach thereof, including its interpretation or performance, shall be finally resolved by arbitration. The arbitration shall be conducted in accordance with -9- 13 the rules of the American Arbitration Association, which shall administer the arbitration and act as appointing authority. The arbitration, including the rendering of the award, shall take place in Boston, Massachusetts and shall be the exclusive forum for resolving such dispute, controversy or claim. For the purposes of this arbitration, the provisions of this Agreement and all rights and obligations thereunder shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. The decision of the arbitrators shall be final and binding upon the parties hereto, and the expense of the arbitration shall be paid as the arbitrators determine. The decision of the arbitrators shall be executory, and judgment thereon may be entered by any court of competent jurisdiction. Notwithstanding this, judgment upon the award of the arbitration may be entered in any court where the arbitration takes place or any court having jurisdiction thereof, and application may be made to any court for a judicial acceptance of the award or order of enforcement. (b) Notwithstanding anything contained in Section 8.4(a) above to the contrary, each party shall have the right to institute judicial proceedings against the other party or anyone acting by, through or under such other party in order to enforce the instituting party's rights hereunder through reformation of contract, specific performance, injunction or similar equitable relief. 8.5 WAIVER. A waiver of any breach or any provision of this Agreement shall not be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. 8.6 NO OTHER RELATIONSHIP. Nothing herein contained shall be deemed to create an agency, joint venture or partnership relationship between the parties hereto. Neither party shall have any power to enter into any contracts or commitments in the name of, or on behalf of, the other party, or to bind the other party in any respect whatsoever except as specified in this Agreement. 8.7 NOTICES. Each notice required or permitted to be sent under this Agreement shall be given by telecopy transmission or by registered or recorded delivery letter to the parties at the addresses and telecopy numbers indicated above. Either party may change its address and/or telecopy number, for purposes of this Agreement, by giving the other party written notice of its new address and/or telecopy number. Any notice if given or made by registered or recorded delivery letter shall be deemed to have been received on the earlier of the date actually received and the date five (5) days after the same was posted (and in proving such it shall be sufficient to prove that the envelope containing the same was properly addressed and posted as aforesaid) and if given or made by telecopy transmission shall be deemed to have been received at the time of dispatch, unless such date of deemed receipt is not a day on which banks are open for business in Boston, Massachusetts in which case the date of deemed receipt -10- 14 shall be the next succeeding day on which banks are open in Boston, Massachusetts. 8.8 ENTIRE UNDERSTANDING. This Agreement embodies the entire understanding between the parties relating to the subject matter hereof, whether written or oral, and there are no prior representations, warranties or agreements between the parties not contained in this Agreement. 8.9 INVALIDITY. If any provision of this Agreement is declared invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or uInenforceable by order of such court. 8.10 AMENDMENTS. Any amendment or modification of any provision of this Agreement must be in writing, dated and signed by both parties hereto. 8.11 BARD ACCESS SYSTEMS, INC. AGREEMENT. (a) Licensor hereby assigns all of its rights, interests, and duties under the Development, Supply and License Agreement (the "Bard Agreement"), dated November 11, 1992, between Bard Access Systems, Inc. having offices at 5425 West Amelia Earhart Drive, Salt Lake City, Utah 84116 ("Bard"), and Licensor to Licensee, and Licensee agrees to assume all of Licensor's rights, interests, and duties under the Bard Agreement between Bard and Licensor. (b) Licensor shall be liable for any obligations, claims, or liabilities relating to, or arising out of, the Bard Agreement and incurred prior to the Effective Date and hereby agrees to indemnify and hold harmless Licensee from and against any such obligations, claims, or liabilities. Licensee shall be liable for any obligations, claims, or liabilities relating to, or arising out of, the Bard Agreement and incurred on and after the Effective Date and hereby agrees to indemnify and hold harmless Licensor from and against any such obligations, claims, or liabilities. Licensor acknowledges that Bard must consent to the foregoing assignment and that representatives of Licensee will contact Bard to obtain such consent and negotiate appropriate amendments to the Bard Agreement to reflect this assignment. 8.12 SURVIVAL OF CONTENTS. Notwithstanding anything else in this Agreement to the contrary, the parties agree that Sections 2.2, 2.4, 2.5, 2.6, 3.1, 4.1, 4.2, 4.3, 5.1, 6.5, 7.1, 8.1, 8.2, 8.3, 8.5, 8.6, 8.7, 8.8 and 8.10 shall survive the termination or expiration of this Agreement to the extent required hereby for the full observation and performance by either or both of the parties hereto. 8.13 TABLE OF CONTENTS AND HEADINGS. Any table of contents accompanying this Agreement and any headings contained herein are -11- 15 for directory purposes only, do not constitute a part of this Agreement, and shall not be employed in interpreting this Agreement. 8.14 EXHIBIT. The exhibit referred to in this Agreement is attached hereto and incorporated herein by this reference. IN WITNESS WHEREOF, the parties hereto have signed this Agreement. POLYMEDICA INDUSTRIES, INC., as Licensor By /s/ Steven James Lee ------------------------------ Name: Steven James Lee Title: President Date Licensor Executed this Agreement: May 9, 1996 ----------------- CARDIOTECH INTERNATIONAL, INC., as Licensee By /s/ Michael Szycher ------------------------------ Name: Michael Szycher Title: President -12- 16 Exhibit A to License Agreement LIST OF PATENTS, TRADEMARKS, SERVICE MARKS, COPYRIGHTABLE MATERIAL, RIGHTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS TRADEMARKS ---------- Trademark Intl. Class Registration No. --------- ----------- ---------------- CHRONOFILM 17 1,691,545 CHRONOFLEX 17 1,762,851 PATENTS ------- Publication/ Patent Appln. No./ Filing/ Patent No. Country Title Issue Date ---------- ------- ----- ---------- 5,118,779 U.S. Hydrophilic Polyurethane 06/02/92 Elastomers JOINT PATENTS AND PATENT APPLICATIONS ------------------------------------- Publication/ Patent Appln. No./ Filing/ Patent No. Country Title Issue Date 9186454 Australia Biostable Polyurethane 03/30/92 Products 2091564 Canada Biostable Polyurethane 03/13/92 Products 548256 EPO Biostable Polyurethane 07/07/93 Products 5,254,662 U.S. Biostable Polyurethane 10/19/93 Products -13- 17 9204390 WO Biostable Polyurethane 03/19/92 Products Together with all divisions, continuations, continuations-in-part, substitutions, reissues, extensions, reexaminations and foreign equivalents of the foregoing. -14- 18 Other ----- All trade secrets, know-how, copyrightable material, or other proprietary rights that relate to the above-listed patents or patent applications, or generally to the Licensed Technology, that will be necessary to practice the Licensed Technology, including the above-listed patents or patent applications. -15- EX-10.5 9 FORM OF DISTRIBUTION AGENCY AGREEMENT 1 EXHIBIT 10.5 THE FIRST NATIONAL BANK OF BOSTON PROPOSED AGREEMENT TO SERVE AS DISTRIBUTION AGENT FOR THE SPIN-OFF OF CARDIO TECH INTERNATIONAL This Agreement sets forth the terms and conditions under which The First National Bank of Boston ("Bank of Boston") will serve as Distribution Agent, providing the services stated in Section C in accordance with the fees set forth in Section B to Polymedica Industries (hereinafter referred to as Polymedica). A. TERM The term of this Agreement shall be for a period of ONE (1) YEAR, commencing from the effective date of this Agreement, MAY 1, 1996. B. *FEES FOR SPIN-OFF OF CARDIO TECH BY POLYMEDICA INDUSTRIES: For the spin-off services as stated in Section C provided by Bank of Boston under this Agreement, Polymedica will be charged as follows: ================================================================================ $ 5,000.00 FLAT FEE ================================================================================ C. SPIN-OFF SERVICES Bank of Boston agrees to provide the following services to Cardio Tech in accordance with the fees set forth in Section B hereinabove. SERVICES COVERED: 1. Administrative coordination of all services related to the spin-off 2. Responding to all shareholder and broker telephone and written inquiries on Cardio Tech's behalf 3. Designation of a specialized administrative/operational task force to carry out our duties as Distribution Agent 2 POLYMEDICA INDUSTRIES Page 2 4. Preparation and/or review of all agreements and related documentation 5. Preparing and mailing of "broker split" letters regarding denominational breakdowns 6. Coordination with the Banknote Company relating to the delivery of new stock certificates 7. Performance and balancing of the spin-off calculation 8. Issuance and registration and mailing of stock certificates to include up to two (2) additional enclosures 9. Affixing restrictive legends to appropriate stock certificates, as instructed by Cardio Tech 10. Establishing the new Cardio Tech shareholder file 11. Posting of all certificate and account detail to the Cardio Tech file 12. Performing all file adjustments relating to the Cardio Tech name change 13. Preparing a spin-off journal detailing the transaction in hardcopy 14. Effecting the necessary sales resulting from fractional shares 15. Preparing and mailing checks to shareholders representing proceeds of sales from fractional shares D. ITEMS NOT COVERED - Legal review fees ($500.00 minimum / $1,000.00 maximum), if referred to outside counsel - Services required by legislation or regulatory fiat which become effective after the date of this Agreement shall not be a part of the Services Covered and shall be billed by appraisal - All out-of-pocket expenses such as telephone line charges, cost of stock certificates, Letters of Transmittal, insurance, stationery, excess material disposal, etc. will be billed as incurred. - Funds to cover postage expenses in excess of $5,000 for shareholder mailings must be received by Bank of Boston one business day prior to the scheduled mailing date. Postage expenses less than $5,000 will be billed as incurred. - Overtime charges will be assessed in the event of late delivery of material for mailings to shareholders unless the mail date is rescheduled. Receipt of material for mailing to shareholders by Bank of Boston's Mail Unit must be in accordance with Shareholder Services' Schedule of Required Material Delivery Time Frames published in November, 1990. All services not specifically covered under this Agreement will be billed in accordance with Bank of Boston's published Schedule of Fees, or by appraisal as applicable. E. PAYMENT FOR SERVICES The Fees will be calculated and rendered and payable within thirty (30) days after the effective date of this Agreement and thereafter on a monthly basis. It is agreed that out-of-pocket expenses will be rendered and payable on a monthly basis. Each billing period will, therefore, be of one-month duration. 3 POLYMEDICA INDUSTRIES Page 3 F. CONFIDENTIALITY The information contained in this Agreement is confidential and proprietary in nature. By receiving this Agreement, Polymedica agrees that none of its directors, officers, employees, or agents without the prior written consent of Bank of Boston, will divulge, furnish or make accessible to any third party, except as permitted by the next sentence, any part of this Agreement or information in connection therewith which has been or may be made available to it. In this connection, Polymedica agrees that it will limit access to the Agreement and such information to only those officers or employees with responsibilities for analyzing the Agreement and to such independent consultants hired expressly for the purpose of assisting in such analysis. In addition, Polymedica agrees that any persons to whom such information is properly disclosed shall be informed of the confidential nature of the Agreement and the information relating thereto, and shall be directed to treat the same appropriately. G. NON-ASSIGNABILITY This Agreement, and the duties, obligations and services to be provided herein, may not be assigned or otherwise transferred without the prior written consent of Cardio Tech. H. CONTRACT ACCEPTANCE In witness whereof, the parties hereto have caused this Agreement to be executed by their respective officers, hereunto duly agreed and authorized, as of the effective date of this Agreement. THE FIRST NATIONAL BANK OF BOSTON POLYMEDICA INDUSTRIES By: By: ------------------------------ ------------------------------- Title: Title: --------------------------- ----------------------------- Date: Date: ---------------------------- ----------------------------- EX-10.6 10 1996 EMPLOYEE, DIRECTOR & CONSULTANT OPTION PLAN 1 EXHIBIT 10.6 CARDIOTECH INTERNATIONAL, INC. 1996 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN 1. DEFINITIONS. Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this CardioTech International, Inc. 1996 Employee, Director and Consultant Stock Option Plan, have the following meanings: Administrator means the Board of Directors, unless it has delegated power to act on its behalf to the Committee, in which case the Administrator means the Committee. Affiliate means a corporation which, for purposes of Section 424 of the Code, is a parent or subsidiary of the Company, direct or indirect. Board of Directors means the Board of Directors of the Company. Code means the United States Internal Revenue Code of 1986, as amended. Committee means the Committee of the Board of Directors to which the Board of Directors has delegated power to act under or pursuant to the provisions of the Plan. Common Stock means shares of the Company's common stock, $.01 par value per share. Company means CardioTech International, Inc., a Massachusetts corporation. Disability or Disabled means permanent and total disability as defined in Section 22(e)(3) of the Code. Fair Market Value of a Share of Common Stock means: (1) If the Common Stock is listed on a national securities exchange or traded in the over-the-counter market and sales prices are regularly reported for the Common Stock, either (a) the average of the closing or last prices of the Common Stock on the Composite Tape or other comparable reporting system for the five (5) consecutive trading days immediately following the applicable date or (b) the closing or last price of the Common Stock on the Composite Tape or other comparable reporting system for the trading day immediately 2 preceding the applicable date, as the Administrator shall determine, except that Subparagraph (b) shall not apply to Options granted pursuant to Paragraph 6(A)(e) of the Plan; (2) If the Common Stock is not traded on a national securities exchange but is traded on the over-the-counter market, if sales prices are not regularly reported for the Common Stock for the trading days or day referred to in clause (1), and if bid and asked prices for the Common Stock are regularly reported, either (a) the average of the mean between the bid and the asked price for the Common Stock at the close of trading in the over-the-counter market for the five (5) trading days on which Common Stock was traded immediately preceding the applicable date or (b) the mean between the bid and the asked price for the Common Stock at the close of trading in the over-the-counter market for the trading day on which Common Stock was traded immediately preceding the applicable date, as the Administrator shall determine, except that Subparagraph (b) shall not apply to Options granted pursuant to Paragraph 6(A)(e) of the Plan; and (3) If the Common Stock is neither listed on a national securities exchange nor traded in the over-the-counter market, such value as the Administrator, in good faith, shall determine. ISO means an option meant to qualify as an incentive stock option under Section 422 of the Code. Key Employee means an employee of the Company or of an Affiliate (including, without limitation, an employee who is also serving as an officer or director of the Company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Options under the Plan. Non-Qualified Option means an option which is not intended to qualify as an ISO. Option means an ISO or Non-Qualified Option granted under the Plan. Option Agreement means an agreement between the Company and a Participant delivered pursuant to the Plan. Participant means a Key Employee, director or consultant to whom one or more Options are granted under the Plan. As used herein, "Participant" shall - 2 - 3 include "Participant's Survivors" where the context requires. Participant's Survivors means a deceased Participant's legal representatives and/or any person or persons who acquired the Participant's rights to an Option by will or by the laws of descent and distribution. Plan means this CardioTech International, Inc. 1996 Employee, Director and Consultant Stock Option Plan. Shares means shares of the Common Stock as to which Options have been or may be granted under the Plan or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Paragraph 3 of the Plan. The Shares issued upon exercise of Options granted under the Plan may be authorized and unissued Shares or Shares held by the Company in its treasury, or both. 2. PURPOSES OF THE PLAN. The Plan is intended to encourage ownership of Shares by Key Employees, directors and certain consultants to the Company in order to attract such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. The Plan provides for the granting of ISOs and Non-Qualified Options. 3. SHARES SUBJECT TO THE PLAN. The number of Shares subject to this Plan as to which Options may be granted from time to time shall be 1,100,000 Shares or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with Paragraph 16 of the Plan. Of such 1,100,000 Shares, only 100,000 Shares shall be eligible for grant under Paragraph 6(A)(e) hereof. If an Option ceases to be "outstanding", in whole or in part, the Shares which were subject to such Option shall be available for the granting of other Options under the Plan. Any Option shall be treated as "outstanding" until such Option is exercised in full, or terminates or expires under the provisions of the Plan, or by agreement of the parties to the pertinent Option Agreement. - 3 - 4 4. ADMINISTRATION OF THE PLAN. The Administrator of the Plan will be the Board of Directors, except to the extent the Board of Directors delegates its authority to the Committee, in which case the Committee shall be the Administrator. Following the date on which the Common Stock is registered under the Securities and Exchange Act of 1934, as amended (the "1934 Act"), the Plan is intended to comply in all respects with Rule 16b-3 or its successors, promulgated pursuant to Section 16 of the 1934 Act with respect to Participants who are subject to Section 16 of the 1934 Act, and any provision in this Plan with respect to such persons contrary to Rule 16b-3 shall be deemed null and void to the extent permissible by law and deemed appropriate by the Administrator. Subject to the provisions of the Plan, the Administrator is authorized to: a. Interpret the provisions of the Plan or of any Option or Option Agreement and to make all rules and determinations which it deems necessary or advisable for the administration of the Plan; b. Determine which employees of the Company or of an Affiliate shall be designated as Key Employees and which of the Key Employees, directors and consultants shall be granted Options; c. Determine the number of Shares for which an Option or Options shall be granted; and d. Specify the terms and conditions upon which an Option or Options may be granted; provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Section 422 of the Code of those Options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the Plan or of any Option granted under it shall be final, unless otherwise determined by the Board of Directors, if the Administrator is the Committee. 5. ELIGIBILITY FOR PARTICIPATION. The Administrator will, in its sole discretion, name the Participants in the Plan, provided, however, that each Participant must be a Key Employee, director or consultant of the Company or of an Affiliate at the time an Option is granted. Members of the Board of Directors who are not employees of the Company or of an Affiliate may receive options pursuant to Paragraph 6(A)(e) of the Plan, but only pursuant thereto. - 4 - 5 Notwithstanding any of the foregoing provisions, the Administrator may authorize the grant of an Option to a person not then an employee, director or consultant of the Company or of an Affiliate. The actual grant of such Option, however, shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the execution of the Option Agreement evidencing such Option. ISOs may be granted only to Key Employees. Non-Qualified Options may be granted to any Key Employee, director or consultant of the Company or an Affiliate. The granting of any Option to any individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of Options. 6. TERMS AND CONDITIONS OF OPTIONS. Each Option shall be set forth in writing in an Option Agreement, duly executed by the Company and, to the extent required by law or requested by the Company, by the Participant. The Administrator may provide that Options be granted subject to such conditions as the Administrator may deem appropriate, including, without limitation, subsequent approval by the shareholders of the Company of this Plan or any amendments to this Plan. The Option Agreements shall be subject to at least the following terms and conditions: A. Non-Qualified Options: Each Option intended to be a Non-Qualified Option shall be subject to the terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option: a. Option Price. Each Option Agreement shall state the option price (per share) of the Shares covered by each Option, which option price shall be determined by the Administrator but shall not be less than the par value per share of Common Stock; b. Number of Shares. Each Option Agreement shall state the number of Shares to which it pertains; c. Term of Option, Vesting. Each Option Agreement shall state the date or dates on which it first is exercisable and the date after which it may no longer be exercised, and may provide that the Option rights accrue or become exercisable in installments over a period of months or years, or upon the occurrence of certain conditions or the attainment of stated goals or events; - 5 - 6 d. Option Conditions. Exercise of any Option may be conditioned upon the Participant's execution of a Share purchase agreement in form satisfactory to the Administrator providing for certain protections for the Company and its other shareholders including requirements that: i. The Participant's or the Participant's Survivors' right to sell or transfer the Shares may be restricted; and ii. The Participant or the Participant's Survivors may be required to execute letters of investment intent and must also acknowledge that the Shares will bear legends noting any applicable restrictions. e. Directors' Options. Each director of the Company who is not an employee of the Company or any Affiliate, who is first elected or appointed to the Board of Directors after the date on which the Common Stock is registered under the 1934 Act, upon such election or appointment and upon every anniversary thereof provided that on such dates such director has been in the continued and uninterrupted service of the Company as a director since his or her election or appointment and is a director of the Company and is not an employee of the Company at such times, shall be granted a Non-Qualified Option to purchase 14,000 Shares. Any non-employee director serving in office on the date on which the Common Stock is registered under the 1934 Act, who has been a member of the Board of Directors prior to such date shall be granted on such date and upon every anniversary thereof, a Non-Qualified Option to purchase 14,000 Shares, provided that on such date such director has been in the continued and uninterrupted service of the Company as a director since his or her election or appointment and is a director of the Company and is not an employee of the Company at such time. If any non-employee director should cease to be a director and thereafter shall be elected or appointed to the Board of Directors, upon such election or appointment and upon every anniversary thereof provided that on such dates such director has been in the continued and uninterrupted service of the Company as a director since his or her election or appointment and is a director of the Company and is not an employee of the Company at such times, shall be granted a Non-Qualified Option to purchase 14,000 Shares. Each such - 6 - 7 Option shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, (ii) have a term of ten (10) years, and (iii) shall become cumulatively exercisable in four (4) equal installments of twenty-five percent (25%) each, upon completion of three (3) months of service on the Board of Directors after the date of grant, and continuing upon completion of each of the next three (3) three (3)-month periods of service thereafter (for example, if the date of grant of an Option was May 1, 1996, then the Option would vest in four (4) equal installments on August 1, 1996, November 1, 1996, February 1, 1997 and May 1, 1997). Any director entitled to receive an Option grant under this Subparagraph may elect to decline the Option. Notwithstanding the provisions of Paragraph 23 concerning amendment of the Plan, the provisions of this Subparagraph shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. The provisions of Paragraphs 10, 11, 12 and 13 below shall not apply to Options granted pursuant to this Subparagraph. Except as otherwise provided in the pertinent Option Agreement, if a director who received Options pursuant to this Subparagraph (e): i. ceases to be a member of the Board of Directors for any reason other than death or Disability, any then unexercised Options granted to such director may be exercised by the director within a period of ninety (90) days after the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of Shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option; or ii. ceases to be a member of the Board of Directors by reason of his or her death or Disability, any then unexercised Options granted to such director may be exercised by the director (or by the Participant's personal representative, or Participant's Survivors in the event of death) within a period of one hundred eighty (180) days after - 7 - 8 the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of Shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option. B. ISOs: Each Option intended to be an ISO shall be issued only to a Key Employee and be subject to at least the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Section 422 of the Code and relevant regulations and rulings of the Internal Revenue Service: a. Minimum standards. The ISO shall meet the minimum standards required of Non-Qualified Options, as described in Paragraph 6(A) above, except clauses (a) and (e) thereunder. b. Option Price. Immediately before the Option is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Section 424(d) of the Code: i. Ten percent (10%) or less of the total combined voting power of all classes of share capital of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall not be less than one hundred percent (100%) of the Fair Market Value per share of the Shares on the date of the grant of the Option. ii. More than ten percent (10%) of the total combined voting power of all classes of share capital of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall not be less than one hundred ten percent (110%) of the said Fair Market Value on the date of grant. c. Term of Option. For Participants who own i. Ten percent (10%) or less of the total combined voting power of all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than ten (10) years from the date of the grant or at such earlier time as the Option Agreement may provide. - 8 - 9 ii. More than ten percent (10%) of the total combined voting power of all classes of share capital of the Company or an Affiliate, each Option shall terminate not more than five (5) years from the date of the grant or at such earlier time as the Option Agreement may provide. d. Limitation on Yearly Exercise. The Option Agreements shall restrict the amount of Options which may be exercisable in any calendar year (under this or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed one hundred thousand dollars ($100,000), provided that this Subparagraph (d) shall have no force or effect if its inclusion in the Plan is not necessary for Options issued as ISOs to qualify as ISOs pursuant to Section 422(d) of the Code. e. Limitation on Grant of ISOs: No ISOs shall be granted after March 4, 2006. 7. EXERCISE OF OPTION AND ISSUE OF SHARES. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, together with provision for payment of the full purchase price in accordance with this Paragraph for the Shares as to which such Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such written notice shall be signed by the person exercising the Option, shall state the number of Shares with respect to which the Option is being exercised and shall contain any representation required by the Plan or the Option Agreement. Payment of the purchase price for the Shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Option, determined in good faith by the Administrator, or (c) at the discretion of the Administrator, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Administrator, in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the Administrator or - 9 - 10 (e) at the discretion of the Administrator, by any combination of (a), (b), (c) and (d) above. Notwithstanding the foregoing, the Administrator shall accept only such payment on exercise of an ISO as is permitted by Section 422 of the Code. The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant's Survivors, as the case may be). In determining what constitutes "reasonably promptly," it is expressly understood that the delivery of the Shares may be delayed by the Company in order to comply with any law or regulation which requires the Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be evidenced by an appropriate certificate or certificates for fully paid, non-assessable Shares. In lieu of permitting a Participant to obtain Common Stock pursuant to the exercise of an Option, the Company may, in its sole discretion, pay to the Participant an amount equal to the Appreciated Value multiplied by the number of shares of Common Stock that the Participant is entitled to upon the exercise of an Option (the "Appreciated Amount"). The Appreciated Amount shall be payable to the Participant within fifteen (15) days of receipt by the Company of the notice from the Participant that the Participant intends to exercise the Option. "Appreciated Value" shall mean the amount by which (i) the per share Fair Market Value on the date of exercise of the Option, exceeds (ii) the option price per share set forth in the related Option Agreement. The Administrator shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Administrator shall not accelerate the exercise date of any installment of any Option granted to any Key Employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Paragraph 19) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in Paragraph 6(A)(d). The Administrator may, in its discretion, amend any term or condition of an outstanding Option provided (i) such term or condition as amended is permitted by the Plan, (ii) any such amendment shall be made only with the consent of the Participant to whom the Option was granted, or in the event of the death of the Participant, the Participant's Survivors, if the amendment is adverse to the Participant, (iii) any such amendment of any ISO shall be made only after the Administrator, after consulting the counsel for the Company, determines whether such amendment would constitute a "modification" of any Option which is an ISO (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISO, and (iv) with respect to any Option held by any Participant who is subject to the provisions of Section 16(a) of the 1934 Act, - 10 - 11 any such amendment shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such amendment would constitute the grant of a new Option. 8. RIGHTS AS A SHAREHOLDER. No Participant to whom an Option has been granted shall have rights as a shareholder with respect to any Shares covered by such Option, except after due exercise of the Option and tender of the full purchase price for the Shares being purchased pursuant to such exercise and registration of the Shares in the Company's share register in the name of the Participant. 9. ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS. By its terms, an Option granted to a Participant shall not be transferable by the Participant other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder, provided, however, that the designation of a beneficiary of an Option by a Participant shall not be deemed a transfer prohibited by this Paragraph. Except as provided in the preceding sentence, an Option shall be exercisable, during the Participant's lifetime, only by such Participant (or by his or her legal representative) and shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of any Option or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon an Option, shall be null and void. 10. EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE". Except as otherwise provided in the pertinent Option Agreement, in the event of a termination of service (whether as an employee, director or consultant) with the Company or an Affiliate before the Participant has exercised all Options, the following rules apply: a. A Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate (for any reason other than termination "for cause", Disability, or death for which events there are special rules in Paragraphs 11, 12, and 13, respectively), may exercise any Option granted to him or her to the extent that the Option is exercisable on the date of such termination - 11 - 12 of service, but only within such term as the Administrator has designated in the pertinent Option Agreement. b. In no event may an Option Agreement provide, if the Option is intended to be an ISO, that the time for exercise be later than three (3) months after the Participant's termination of employment. c. The provisions of this Paragraph, and not the provisions of Paragraph 12 or 13, shall apply to a Participant who subsequently becomes disabled or dies after the termination of employment, director status or consultancy, provided, however, in the case of a Participant's death within three (3) months after the termination of employment, director status or consulting, the Participant's Survivors may exercise the Option within one (1) year after the date of the Participant's death, but in no event after the date of expiration of the term of the Option. d. Notwithstanding anything herein to the contrary, if subsequent to a Participant's termination of employment, termination of director status or termination of consultancy, but prior to the exercise of an Option, the Board of Directors determines that, either prior or subsequent to the Participant's termination, the Participant engaged in conduct which would constitute "cause", then such Participant shall forthwith cease to have any right to exercise any Option. e. A Participant to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Paragraph 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant's employment, director status or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide. f. Options granted under the Plan shall not be affected by any change of employment or other service within or among the Company and any Affiliates, so long as the Participant continues to be an employee, director or consultant of the Company or any Affiliate, provided, however, if a Participant's employment by either the Company or an Affiliate should cease (other than to - 12 - 13 become an employee of an Affiliate or the Company), such termination shall affect the Participant's rights under any Option granted to such Participant in accordance with the terms of the Plan and the pertinent Option Agreement. 11. EFFECT OF TERMINATION OF SERVICE "FOR CAUSE". Except as otherwise provided in the pertinent Option Agreement, the following rules apply if the Participant's service (whether as an employee, director or consultant) with the Company or an Affiliate is terminated "for cause" prior to the time that all of his or her outstanding Options have been exercised: a. All outstanding and unexercised Options as of the date the Participant is notified his or her service is terminated "for cause" will immediately be forfeited, unless the Option Agreement provides otherwise. b. For purposes of this Paragraph, "cause" shall include (and is not limited to) dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of cause will be conclusive on the Participant and the Company. c. "Cause" is not limited to events which have occurred prior to a Participant's termination of service, nor is it necessary that the Administrator's finding of "cause" occur prior to termination. If the Administrator determines, subsequent to a Participant's termination of service but prior to the exercise of an Option, that either prior or subsequent to the Participant's termination the Participant engaged in conduct which would constitute "cause", then the right to exercise any Option is forfeited. d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of "cause" for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Participant. - 13 - 14 12. EFFECT OF TERMINATION OF SERVICE FOR DISABILITY. Except as otherwise provided in the pertinent Option Agreement, a Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate by reason of Disability may exercise any Option granted to such Participant: a. To the extent exercisable but not exercised on the date of Disability; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of any additional rights as would have accrued had the Participant not become Disabled prior to the end of the accrual period which next ends following the date of Disability. The proration shall be based upon the number of days of such accrual period prior to the date of Disability. A Disabled Participant may exercise such rights only within a period of not more than one (1) year after the date that the Participant became Disabled, notwithstanding that the Participant might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not become disabled and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option. The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company. 13. EFFECT OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT. Except as otherwise provided in the pertinent Option Agreement, in the event of the death of a Participant to whom an Option has been granted while the Participant is an employee, director or consultant of the Company or of an Affiliate, such Option may be exercised by the Participant's Survivors: a. To the extent exercisable but not exercised on the date of death; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of any additional rights which would have accrued had the Participant not died prior to the end of the accrual - 14 - 15 period which next ends following the date of death. The proration shall be based upon the number of days of such accrual period prior to the Participant's death. If the Participant's Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one (1) year after the date of death of such Participant, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not died and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option. 14. PURCHASE FOR INVESTMENT. Unless the offering and sale of the Shares to be issued upon the particular exercise of an Option shall have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended (the "1933 Act"), the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled: a. The person(s) who exercise such Option shall warrant to the Company, prior to the receipt of such Shares, that such person(s) are acquiring such Shares for their own respective accounts, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person(s) acquiring such Shares shall be bound by the provisions of the following legend which shall be endorsed upon the certificate(s) evidencing their Shares issued pursuant to such exercise or such grant: "The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee, unless (1) either (a) a Registration Statement with respect to such shares shall be effective under the Securities Act of 1933, as amended, or (b) the Company shall have received an opinion of counsel satisfactory to it that an exemption from registration under such Act is then available, and (2) there shall have been compliance with all applicable state securities laws. b. The Company shall have received an opinion of its counsel that the Shares may be issued upon such particular exercise in compliance with the 1933 Act without registration thereunder. - 15 - 16 The Company may delay issuance of the Shares until completion of any action or obtaining of any consent which the Company deems necessary under any applicable law (including, without limitation, state securities or "blue sky" laws). 15. DISSOLUTION OR LIQUIDATION OF THE COMPANY. Upon the dissolution or liquidation of the Company, all Options granted under this Plan which as of such date shall not have been exercised will terminate and become null and void; provided, however, that if the rights of a Participant or a Participant's Survivors have not otherwise terminated and expired, the Participant or the Participant's Survivors will have the right immediately prior to such dissolution or liquidation to exercise any Option to the extent that the Option is exercisable as of the date immediately prior to such dissolution or liquidation. 16. ADJUSTMENTS. Upon the occurrence of any of the following events, a Participant's rights with respect to any Option granted to him or her hereunder which have not previously been exercised in full shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the Participant and the Company relating to such Option: A. Stock Dividends and Stock Splits. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of such Option shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. The number of Shares subject to options to be granted to directors pursuant to Paragraph 6(A)(e) shall also be proportionately adjusted upon the occurrence of such events. B. Consolidations or Mergers. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Administrator or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the Shares then subject to such Options either the consideration payable with respect to the outstanding shares of Common Stock in connection - 16 - 17 with the Acquisition or securities of any successor or acquiring entity; or (ii) upon written notice to the Participants, provide that all Options must be exercised (either to the extent then exercisable or, at the discretion of the Administrator, all Options being made fully exercisable for purposes of this Subparagraph), within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the Fair Market Value of the shares subject to such Options (either to the extent then exercisable or, at the discretion of the Administrator, all Options being made fully exercisable for purposes of this Subparagraph) over the exercise price thereof. C. Recapitalization or Reorganization. In the event of a recapitalization or reorganization of the Company (other than a transaction described in Subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, a Participant upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization. D. Modification of ISOs. Notwithstanding the foregoing, any adjustments made pursuant to Subparagraph A, B or C with respect to ISOs shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Administrator determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such "modification" on his or her income tax treatment with respect to the ISO. 17. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. Except as expressly provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company. - 17 - 18 18. FRACTIONAL SHARES. No fractional share shall be issued under the Plan and the person exercising such right shall receive from the Company cash in lieu of such fractional share equal to the Fair Market Value thereof. 19. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS: TERMINATION OF ISOs. The Administrator, at the written request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant's ISOs (or any portions thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the Participant is an employee of the Company or an Affiliate at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Administrator (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Administrator in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any Participant the right to have such Participant's ISO's converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes appropriate action. The Administrator, with the consent of the Participant, may also terminate any portion of any ISO that has not been exercised at the time of such termination. 20. WITHHOLDING. In the event that any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act ("F.I.C.A.") withholdings or other amounts are required by applicable law or governmental regulation to be withheld from the Option holder's salary, wages or other remuneration in connection with the exercise of an Option or a Disqualifying Disposition (as defined in Paragraph 21), the Option holder shall advance in cash to the Company, or to any Affiliate of the Company which employs or employed the Option holder, the amount of such withholdings unless a different withholding arrangement, including the use of shares of the Company's Common Stock, is authorized by the Administrator (and permitted by law), provided, however, that with respect to persons subject to Section 16 of the 1934 Act, any such withholding arrangement shall be in compliance with any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934 Act. For purposes hereof, the fair market value of - 18 - 19 the shares withheld for purposes of payroll withholding shall be determined in the manner provided in Paragraph 1 above, as of the most recent practicable date prior to the date of exercise. If the fair market value of the shares withheld is less than the amount of payroll withholdings required, the Option holder may be required to advance the difference in cash to the Company or the Affiliate employer. The Administrator in its discretion may condition the exercise of an Option for less than the then Fair Market Value on the Participant's payment of such additional withholding. 21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each Key Employee who receives an ISO must agree to notify the Company in writing immediately after the Key Employee makes a Disqualifying Disposition of any shares acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such shares before the later of (a) two years after the date the Key Employee was granted the ISO, or (b) one year after the date the Key Employee acquired shares by exercising the ISO. If the Key Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 22. TERMINATION OF THE PLAN. The Plan will terminate on March 4, 2006. The Plan may be terminated at an earlier date by vote of the shareholders of the Company; provided, however, that any such earlier termination will not affect any Options granted or Option Agreements executed prior to the effective date of such termination. 23. AMENDMENT OF THE PLAN AND AGREEMENTS. The Plan may be amended by the shareholders of the Company. The Plan may also be amended by the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding Options granted under the Plan or Options to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, to the extent necessary to ensure the qualification of the Plan under Rule 16b-3, at such time, if any, as the Company has a class of stock registered pursuant to Section 12 of the 1934 Act, and to the extent necessary to qualify the shares issuable upon exercise of any outstanding Options granted, or Options to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator - 19 - 20 which is of a scope that requires shareholder approval in order to ensure favorable federal income tax treatment for any incentive stock options or requires shareholder approval in order to ensure the compliance of the Plan with Rule 16b-3 at such time, if any, as the Company has a class of stock registered pursuant to Section 12 of the 1934 Act, shall be subject to obtaining such shareholder approval. Any modification or amendment of the Plan shall not, without the consent of a Participant, adversely affect his or her rights under an Option previously granted to him or her. With the consent of the Participant affected, the Administrator may amend outstanding Option Agreements in a manner which may be adverse to the Participant but which is not inconsistent with the Plan. In the discretion of the Administrator, outstanding Option Agreements may be amended by the Administrator in a manner which is not adverse to the Participant. 24. EMPLOYMENT OR OTHER RELATIONSHIP. Nothing in this Plan or any Option Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to be retained in employment or other service by the Company or any Affiliate for any period of time. 25. GOVERNING LAW. This Plan shall be construed and enforced in accordance with the law of The Commonwealth of Massachusetts. - 20 - EX-10.7 11 EMPLOYMENT AGREEMENT OF M. SZYCHER 1 EMPLOYMENT AGREEMENT EXHIBIT 10.7 PARTIES This Employment Agreement (this "Agreement"), dated as of the ___ day of May, 1996, is entered into by and between CardioTech International, Inc., a Massachusetts corporation having its principal place of business at 11 State Street, Woburn, Massachusetts 01801 (the "Company"), and Michael Szycher, Ph.D., an individual with an address at 2 Durham Drive, Lynnfield, Massachusetts 01940 (the "Executive"). TERMS OF AGREEMENT In consideration of this Agreement and the continued employment of the Executive by the Company, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, on a full-time basis, to act as Chief Executive Officer of the Company and to perform such acts and duties and furnish such services to the Company in connection with and related to that position as is customary for persons with similar positions in like companies, and as the Board of Directors of the Company (the "Board") shall from time to time reasonably direct. The Executive shall be an officer of the Company. The Company also agrees to use its best efforts to cause the Executive to be elected a member, and the Chairman, of the Board. The Executive hereby accepts said employment. The Executive shall use his best and most diligent efforts to promote the interests of the Company; shall discharge his duties in a highly competent manner; and shall devote his full business time and his best business judgment, skill and knowledge to the performance of his duties and responsibilities hereunder. The Executive shall report directly to the Board. Nothing contained herein shall preclude the Executive from devoting incidental and insubstantial amounts of time to activities other than the business of the Company. 2. Term of Employment. The Company agrees to employ the Executive for the period commencing on the date hereof and ending on [insert date - two years from the effective date of the Company's Form 10] (the "Employment Period"). Notwithstanding the foregoing, both the Executive and the Company shall have the right to terminate the Executive's employment under this Agreement upon thirty (30) days written notice to the other party, subject to the Company's obligation to pay severance benefits under certain circumstances as provided in Sections 3.6 and 3.7 hereof. If the Executive shall remain in the employ of the Company beyond the Employment Period, in the absence of any other express agreement between the parties, this Agreement shall 2 be deemed to continue on a month-to-month basis (the "Extended Employment Period"). 3. Compensation and Benefits; Disability. 3.1. Salary. During the Executive's employment, the Company shall pay the Executive an annualized base salary of One Hundred Fifty Thousand Dollars ($150,000) (the "Base Salary"), payable in equal installments pursuant to the Company's customary payroll policies in force at the time of payment (but in no event less frequently than monthly), less required payroll deductions and state and federal withholdings. The Base Salary may be adjusted from time to time in the sole discretion of the Board, except that the Executive, if a Director, shall not be entitled to vote thereon. The Base Salary shall be reviewed annually by the Board. 3.2. Bonus Payment. During the Employment Period, the Executive may receive, in the sole discretion of the Compensation Committee of the Board (the "Compensation Committee"), an annual bonus payment in an amount, if any, to be determined by the Compensation Committee, except that the Executive, if a member of the Compensation Committee, shall not be entitled to vote thereon. 3.3. Executive Benefits. During the Employment Period, the Executive shall receive such benefits as are customarily provided to other officers and employees of the Company, including but not limited to the following benefits: (a) Health Insurance. Non-contributory health insurance pursuant to a ________________ policy or substantially similar policy; and (b) Life Insurance. Life insurance on the life of the Executive with an Executive-directed beneficiary in the amount of [150%] of the Base Salary. 3.4. Vacation. The Executive may take four weeks of paid vacation during each year at such times as shall be consistent with the Company's vacation policies and (in the Board's judgment) with the Company's vacation schedule for officers and other employees. 3.5. Disability or Death. If during the Employment Period, the Executive shall (i) become ill, disabled or otherwise incapacitated so as to be unable to perform his usual duties (a) for a period in excess of one hundred twenty (120) consecutive days or (b) for more than one hundred eighty (180) days in any consecutive twelve (12) month period, or (ii) die, then the Company shall have the right to terminate this Agreement, in - 2 - 3 accordance with applicable laws, on thirty (30) days written notice to the Executive or his estate. 3.6. Severance Payment. In the event (i) the Company terminates this Agreement without Cause (i.e., other than pursuant to Section 3.5 or Section 4 hereof) at any time (including during the Extended Employment Period, or (ii) the Executive terminates his employment for Good Reason following a Change in Control of the Company, or (iii) the Company fails to renew this Agreement within two (2) years following the occurrence of a Change in Control, the Company shall pay the Executive a severance payment equal to the Executive's then current Base Salary multiplied by 2.99; such severance payment to be adjusted to the extent necessary to avoid such payment being treated as an "excess parachute payment" for purposes of Section 280G of the Internal Revenue Code of 1986. "Good Reason" shall mean, during the nine (9) month period following a Change in Control, (1) a good faith determination by the Executive that as a result of such Change in Control he is not able to discharge his duties effectively or (2) without the Executive's express written consent, the occurrence of any of the following circumstances: (a) the assignment to the Executive of any duties inconsistent (except in the nature of a promotion) with the position in the Company that he held immediately prior to the Change in Control or a substantial adverse alteration in the nature or status of his position or responsibilities or the conditions of his employment from those in effect immediately prior to the Change in Control; (b) a reduction by the Company in the Base Salary as in effect on the date of the Change in Control; (c) the Company's requiring the Executive to be based more than twenty-five (25) miles from the Company's offices at which he was principally employed immediately prior to the date of the Change in Control except for required travel on the Company's business to an extent substantially consistent with his present business travel obligations; or (d) the failure by the Company to continue in effect any material compensation or benefit plan in which the Executive participates immediately prior to the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alterative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alterative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of his participation relative to other participants, than existed at the time of the Change in Control. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. For purposes of this Agreement, a "Change in Control" shall occur or be deemed to have occurred only if any of the following - 3 - 4 events occur: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than any majority owned subsidiary thereof, the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, any trustee or other fiduciary of a trust treated for federal income tax purposes as a grantor trust of which the Company is the grantor, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities on any matter which could come before its stockholders for approval; (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 3.7. Benefits After Termination. Except as otherwise required by law, the Executive shall not be entitled to any employee benefits provided under Section 3.3 hereof after termination of the employment of the Executive, whether or not severance pay is being provided, except that if the Executive is entitled to the severance payment described in Section 3.6 of this Agreement, (i) the Company shall continue in full force and - 4 - 5 effect, at its expense, the life insurance provided for in Section 3.3(b) hereof for a period of one (1) year after termination of the Executive's employment hereunder or until the Executive becomes employed, whichever first occurs, and (ii) during the six (6) month period following the termination of the Executive's employment, the Company shall reimburse the Executive for out-of-pocket health insurance expenses incurred by the Executive pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"). If the Executive elects not to maintain health insurance pursuant to COBRA, the Company is under no obligation to reimburse the Executive for his otherwise elected coverage. The Executive shall be obligated to give the Company prompt notice of his employment. 4. Discharge for Cause. The Company may discharge the Executive and terminate his employment under this Agreement for Cause without further liability to the Company by a majority vote of the Board, except that Executive, if a Director, shall not be entitled to vote thereon. As used in this Agreement, "Cause" shall mean any or all of the following: (a) misconduct of the Executive during the course of his employment which is materially injurious to the Company and which is brought to the attention of the Executive promptly after discovery by the Company, including but not limited to, theft or embezzlement from the Company, the intentional provision of services to competitors of the Company, or improper disclosure of proprietary information, but not including any act or failure to act by the Executive that he believed in good faith to be proper conduct not adverse to his duties hereunder; (b) willful disregard or neglect by the Executive of his duties or of the Company's interests that continues after being brought to the attention of the Executive; (c) unavailability (except as provided in Section 3.5 hereof) of the Executive to substantially perform the duties provided for herein; (d) conviction of a fraud or felony or any criminal offense involving dishonesty, breach of trust or moral turpitude during the Executive's employment; (e) the Executive's breach of any of the material terms of this Agreement (including the failure of the Executive to discharge his duties in a highly competent manner) or any of the agreements executed in connection herewith as enumerated in Section 10.1 hereof. In the event the Company exercises its right to terminate the Executive's employment under this Section 4, the Executive - 5 - 6 shall not be entitled to receive any severance pay or other termination benefits, except as required by law. 5. Termination Without Cause. The Company may terminate this Agreement without Cause, without further liability to the Company except as set forth in Sections 3.6 and 3.7 hereof, by a majority vote of the Board. The Executive, if a Director, shall not be entitled to vote on the termination of this Agreement without Cause. 6. Expenses. Pursuant to the Company's customary policies in force at the time of payment, the Executive shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorized expenses properly incurred by him on the Company's behalf in the performance of his duties hereunder. 7. Additional Agreements. Upon execution of this Agreement, the Executive shall execute and deliver to the Company an Agreement Not to Compete (the "Noncompetition Agreement") and a Confidential and Proprietary Information Agreement (the "Confidential and Proprietary Information Agreement"), substantially in the forms attached hereto as Exhibits A and B. The agreements attached hereto as Exhibits A and B shall survive the expiration of or termination of this Agreement and the termination of Executive's employment with the Company for any reason. 8. Arbitration. All disputes and claims relating to this Agreement and the rights, obligations and performance of the parties hereto shall be settled by a single arbitrator sitting in Boston, Massachusetts under the applicable rules of the American Arbitration Association. 9. Notices. Any notice of communication given by any party hereto to the other party or parties shall be in writing and personally delivered, mailed by certified mail, return receipt requested, postage prepaid, or delivered by a recognized overnight carrier, to the addresses provided above. All notices shall be deemed given when actually received. Any person entitled to receive notice (or a copy thereof) may designate in writing, by notice to the others, another address to which notices to such person shall thereafter be sent. 10. Miscellaneous. 10.1. Entire Agreement. This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings between the parties with respect to such subject matter; provided, however, that nothing in this Agreement shall affect the Executive's or the Company's obligations under the Noncompetition Agreement or the Confidential and Proprietary - 6 - 7 Information Agreement each dated May ___, 1996, between the parties hereto. 10.2. Amendment; Waiver. This Agreement may not be amended, supplemented, cancelled or discharged, except by written instrument executed by the party affected thereby. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any breach of any provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provisions. 10.3. Binding Effect; Assignment. The rights and obligations of this Agreement shall bind and inure to the benefit of any successor of the Company by reorganization, merger or consolidation, or any assignee of all or substantially all of the Company's business and properties. The Executive's rights or obligations under this Agreement may not be assigned by the Executive; except that the Executive's right to compensation to the earlier of the date of death, disability pursuant to Section 3.5 hereof, or termination of actual employment, shall pass to the Executive's executor or administrator. 10.4. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 10.5. Governing Law; Interpretation. This Agreement shall be construed in accordance with and governed for all purposes by the laws and public policy of the Commonwealth of Massachusetts applicable to contracts executed and to be wholly performed within such Commonwealth. Service of process in any dispute shall be effective (a) upon the Company, if service is made on any officer of the Company other than the Executive; (b) upon the Executive, if served at the Executive's residence last known to the Company with an information copy to the Executive at any other residence, or in care of a subsequent employer of which the Company may be aware. 10.6. Further Assurances. Each of the parties agrees to execute, acknowledge, deliver and perform, or cause to be executed, acknowledged, delivered or performed, at any time, or from time to time, as the case may be, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be necessary or proper to carry out the provisions or intent of this Agreement. 10.7. Severability. If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall - 7 - 8 remain in full force and effect and shall in no way be affected, impaired or invalidated. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be determined by a court of competent jurisdiction to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting or reducing it so as to be enforceable to the extent compatible with then applicable law. EXECUTION The parties executed this Agreement as a sealed instrument as of the date first above written, whereupon it became binding in accordance with its terms. CARDIOTECH INTERNATIONAL, INC. By: -------------------------- Name: Title: EXECUTIVE ----------------------------- Michael Szycher, Ph.D. Attachments: Exhibit A: Noncompetition Agreement Exhibit B: Confidential and Proprietary Information Agreement - 8 - 9 EXHIBIT A AGREEMENT NOT TO COMPETE I recognize that CardioTech International, Inc., a Massachusetts corporation (the "Company", which term shall include its subsidiaries and affiliated entities), desires to retain me in its employ and that the Company wishes to ensure that I do not compete with the Company, as specified below, in the event my employment with the Company is terminated. In consideration of the Company's employment or continued employment of me, I agree as follows: 1. I will not, for a period of one (1) year commencing with the termination of my employment with the Company, engage (directly or indirectly) in any activities or render any services similar or reasonably related to those in which I shall have engaged or those which I shall have rendered as an employee of the Company during any part of the two-year period preceding my termination for any trade or business which directly competes with the Company in any place where the Company does or may do business in any line of business engaged in (or planned to be engaged in) by the Company, whether now existing or hereafter established, nor shall I engage in such activities nor render such services for any other person or entity engaged or about to become engaged in such activities to, for or on behalf of any such trade or business. 2. I agree that for a period of one (1) year following termination of my employment with the Company, I will not solicit or in any manner encourage employees of the Company to leave their employ. I further agree that during such period I will not offer or cause to be offered employment to any person who was employed by the Company at any time during the six (6) months prior to the termination of my employment with the Company. 3. For purposes of this Agreement, "termination of employment" shall mean voluntary termination by me or termination by the Company for "cause" (as that term is defined in an Employment Agreement of even date herewith between me and the Company). 4. I understand that nothing in this Agreement shall affect my obligations under the "Confidential and Proprietary Information Agreement" between the Company and myself of even date herewith. 5. I agree that in addition to any other rights and remedies available to the Company for any breach by me of my obligations hereunder, the Company shall be entitled to enforcement of my obligations hereunder by court injunction. 6. If any provision of this Agreement shall be declared invalid, illegal or unenforceable, then such provision shall be 10 enforceable to the extent that a court shall deem it reasonable to enforce such provision. If such provision shall be unreasonable to enforce to any extent, such provision shall be severed from this Agreement and all remaining provisions shall continue in full force and effect. This Agreement shall be governed in all respects by the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF I have executed this Agreement under seal as of the date below. Dated: ------------------------ ---------------------- Michael Szycher, Ph.D. ACCEPTED AND AGREED TO: CardioTech International, Inc. By: ---------------------------- Name: ---------------------- Title: ---------------------- - 2 - 11 EXHIBIT B FOR EMPLOYEES CONFIDENTIAL AND PROPRIETARY INFORMATION AGREEMENT In consideration of my employment by CardioTech International, Inc., a Massachusetts corporation (the "Company"), I hereby agree as follows: 1. I will make full and prompt disclosure to the Company of all inventions, improvements, modifications, discoveries, methods, data, ideas and developments (all of which are collectively termed "developments" hereinafter), whether patentable or not, made or conceived or reduced to practice or learned by me either alone or jointly with others or under my direction during the period of my employment, whether or not made or conceived during normal working hours or on the premises of the Company. I do not have any developments other than those I have already disclosed to you. 2. I agree that all developments covered by Paragraph 1 shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all patents and other rights in connection therewith. I hereby assign to the Company any rights in connection therewith. I hereby assign to the Company any rights I may have or acquire in all developments. I further agree as to all developments to assist the Company in every proper way (but at the Company's expense) to obtain and from time to time enforce patents in developments in any and all countries, and to that end I will execute all documents for use in applying for and obtaining such patents thereon and enforcing same, as the Company may desire, together with any assignments thereof to the Company or persons designated by it. My obligation to assist the Company in obtaining and enforcing patents for developments in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after such termination for time actually spent by me at the Company's request on such assistance. I understand that this Paragraph 2 does not apply to developments for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on my own time, and (a) which does not relate (1) to the business of the Company or (2) to the Company's actual or demonstrable anticipated research or development, and (b) which does not result from any work performed by me for the Company, but I agree that the Company shall have a non-exclusive royalty-free license to use such developments for all purposes. 3. I hereby represent that, to the best of my knowledge, I have no present obligation to assign to any former employer or any other person, corporation or firm, any development covered by Paragraph 2, except as I may be obligated to assign to Polymedica Industries, Inc. ("PMI") developments which I may have conceived 12 while employed by PMI and which are reduced to practice while I am employed by the Company. I represent that my performance of all the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement (either written or oral) in conflict herewith. 4. I will also assign to the Company any and all copyrights and reproduction rights to any material prepared by me in connection with my employment. 5. I understand as part of the consideration for the offer of employment extended to me by the Company and of my employment or continued employment by the Company, that I have not brought and will not bring with me to the Company or use in the performance of my responsibilities at the Company any materials or documents of a former employer which are not generally available to the public, unless I have obtained written authorization from the former employer for their possession and use. I have brought with me materials and documents of PMI related to developments transferred or licensed by it to the Company. Accordingly, this is to advise the Company that the only materials or documents of a former employer which are not generally available to the public that I have brought or will bring to the Company or have used or will use in my employment are identified on Exhibit A attached hereto, and, as to each such item, I represent that I have obtained prior to the effective date of my employment with the Company written authorization for their possession and use in my employment with the Company. 6. During the course of my employment by the Company, I may learn of the Company's confidential information or confidential information entrusted to the Company by other persons, corporations, or firms. The Company's confidential information includes matters not generally known outside the Company, such as developments relating to existing and future products and services marketed or used by the Company and data relating to the general business operations of the Company (e.g., concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.). I agree not to disclose any confidential information of the Company or of such other persons, corporations, or firms to others or to make use of it, except on the Company's behalf, whether or not such information is produced by my own efforts. Also, I may learn of developments, ways of business, etc., which in themselves are generally known, but whose use by the Company is not generally known, and I agree not to disclose to others such use, whether or no such use is due to my own efforts. - 2 - 13 7. At the time I begin my employment and during the term of my employment by the Company, I will not become employed by or act on behalf of any other person, corporation, or firm which is engaged in any business or activity similar to or competitive with that of the Company, unless such employment has been approved by the Company in writing and signed by an appropriate personnel manager of the Company. 8. In the event that my employment is transferred by the Company to a subsidiary or affiliated company (as the case may be), my employment by such company will, for the purposes of this Agreement, be considered as continued employment by the Company, unless I execute an agreement substantially similar in substance to this Agreement, in which event my employment by the Company shall be deemed to continue until the effective date of said agreement in any such company for which I become employed. 9. I hereby give the Company and its assigns permission to reasonably use photographs of me, either during or after my employment, with or without using my name, for whatever purposes it deems necessary. 10. Upon termination of my employment, unless my employment is transferred to a subsidiary or affiliated company of the Company, I agree to leave with the Company all records, drawings, notebooks, and other documents pertaining to the Company's confidential information, whether prepared by me or others, and also any equipment, tools or other devices owned by the Company, then in my possession however such items are obtained, and I agree not to reproduce any document or data relating thereto. 11. My obligations under this Agreement shall survive the termination of my employment regardless of the manner of such termination, and shall be binding upon my heirs, executors, and administrators. 12. Contemporaneously with entering the employ of the Company I have terminated employment with all past employers. 13. As a matter of record I have identified on Exhibit B attached hereto all developments relevant to the subject matter of my employment by the Company which have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company which I desire to remove from the operation of this Agreement; and I covenant that such list is complete. If there is no such list on Exhibit B, I represent that I have made no such developments at the time of signing this Agreement. 14. I agree that in addition to any other rights and remedies available to the Company for any breach by me of my obligations - 3 - 14 hereunder, the Company shall be entitled to enforcement of my obligations hereunder by court injunction. 15. If any provision of this Agreement shall be declared invalid, illegal or unenforceable, then such provision shall be enforceable to the extent that a court shall deem it reasonable to enforce such provision. If such provision shall be unreasonable to any extent, such provision shall be severed from this Agreement and all remaining provisions shall continue in full force and effect. 16. This Agreement shall be effective as of the date set forth below next to my signature. 17. This Agreement shall be governed in all respects by the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, I have executed this Agreement under seal as of the date below. Dated: By: ------------------------ --------------------------------- Michael Szycher, Ph.D. ACCEPTED AND AGREED TO: CardioTech International, Inc. By: --------------------------- Name: ---------------------- Title: --------------------- - 4 - 15 EXHIBIT A --------- Material and Documents of PMI Brought or To Be Brought To CTI by Michael Szycher 1. All formulations and GMP's relating to the synthesis of medical-grade polyurethanes (thermoplastics and solution-based). 2. Synthesis of silicone-urethane copolymers (both thermo- plastic and solution-based). 3. Synthesis of silicone diols. 4. Synthesis of fluorinated silicone diols. 5. Synthesis of carboxylic-containing polyurethane coat- ings for hirudin, heparin or other biological product immobilization. 6. All documents relating to vascular graft manufacturing, testing and qualification. Written authorization for possession and use in employ- ment with CTI not requested of nor received from PMI as all materials and documents relate to developments transferred from or licensed by PMI to CTI. 16 EXHIBIT B --------- None EX-10.8 12 FORM OF WARRANT 1 Exhibit 10.8 ------------ ================================================================================ WARRANT To Purchase Shares of Common Stock, ----- $0.01 par value, of CARDIOTECH INTERNATIONAL, INC. 1996 ----------- ---, ================================================================================ 2 TABLE OF CONTENTS Page 1. Definitions.................................................. 2 1.1. Definitions of Capitalized Terms....................... 2 1.2. Other Definitions...................................... 5 2. Exercise of Warrant.......................................... 5 2.1. Right to Exercise; Notice.............................. 5 2.2. Manner of Exercise; Issuance of Common Stock........... 5 2.3. Effectiveness of Exercise.............................. 6 2.4. Fractional Shares...................................... 6 2.5. Continued Validity..................................... 7 3. Registration, Transfer and Exchange; Legends................. 7 3.1. Maintenance of Registration Books...................... 7 3.2. Transfer and Exchange.................................. 7 3.3. Replacement............................................ 8 3.4. Ownership.............................................. 8 4. Anti-Dilution Provisions..................................... 8 4.1. Adjustment of Number of Shares Purchasable............. 8 4.2. Adjustment of Exercise Price........................... 9 4.3. Rights Offering........................................ 17 4.4. Certificates and Notices............................... 17 4.5. Adjustments for Changes in Certain Data................ 19 5. Reservation of Common Stock.................................. 19 6. Registration, Etc............................................ 19 6.1. Certain Definitions.................................... 19 6.2. Registration on Request................................ 20 6.3. Incidental Registration................................ 21 6.4. Permitted Registration................................. 22 6.5. Registration Procedures................................ 22 6.6. Indemnification........................................ 23 6.7. Restrictions on Other Agreements....................... 24 7. Various Covenants of the Company............................. 24 7.1. No Impairment or Amendment............................. 24 7.2. Availability of Information............................ 25 7.3. Anti-Dilution Provisions............................... 25 (i) 3 7.4. Indemnification........................................ 26 7.5. Certain Expenses....................................... 26 7.6. Listing on Securities Exchanges, etc................... 26 8. Miscellaneous................................................ 26 8.1. Nonwaiver.............................................. 26 8.2. Amendment.............................................. 26 8.3. Communications......................................... 26 8.4. Like Tenor............................................. 28 8.5. Remedies............................................... 28 8.6. Successors and Assigns................................. 28 8.7. Modification and Severability.......................... 28 8.8. Integration............................................ 28 8.9. Headings............................................... 28 8.10. Governing Law; Jurisdiction; Waiver of Jury Trial........................................... 28 Form of Notice of Exercise Form of Assignment (ii) 4 WARRANT To Purchase ______ Shares of Common Stock, $0.01 par value, of CARDIOTECH INTERNATIONAL, INC. Private Placement No.: ___________ No. RW __ _______ ___ , 1996 THIS IS TO CERTIFY that, for value received, ____________________________, or registered assigns, is entitled upon the due exercise hereof at any time during the Exercise Period (as hereinafter defined) to purchase ______ shares of Common Stock of CardioTech International, Inc., a Massachusetts corporation (the "Company"), at an Exercise Price of $ _____ per share (such Exercise Price and the number of shares of Common Stock purchasable hereunder being subject to adjustment as provided herein), and to exercise the other rights, powers and privileges hereinafter provided, all on the terms and subject to the conditions hereinafter set forth. This Warrant is one of the Company's Warrants to Purchase Shares of Common Stock (herein, together with any warrants issued in exchange therefor or replacement thereof, all as amended or supplemented from time to time, called the "Warrants") exercisable for ______ (subject to adjustment) shares of Common Stock of the Company issued pursuant to a certain Letter Agreement, dated May __, 1996, by and among the Company, PolyMedica Industries, Inc., a Massachusetts corporation, and the institutional investor named therein (as amended from time to time, the "Letter Agreement"). Reference is hereby made to the Letter Agreement for a description of, among other things, certain terms relating to the Warrants and the shares issuable upon exercise thereof and certain rights of the holders thereof. The holder of this Warrant is entitled to the benefits of the Letter Agreement and may enforce the agreements of the Company contained therein, all in accordance with and subject to the terms thereof, notwithstanding any payment or prepayment or redemption or acquisition by the Company of any other securities issued pursuant to the Letter Agreement. 5 1. DEFINITIONS. 1.1. DEFINITIONS OF CAPITALIZED TERMS. The terms defined in this section 1, whenever used and capitalized in this Warrant, shall, unless the context otherwise requires, have the following respective meanings: "ASSIGNMENT" shall mean the form of Assignment appearing at the end of this Warrant. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other day which shall be in Boston, Massachusetts or New York, New York a legal holiday or a day on which banking institutions therein are authorized by law to close. "CLOSING DATE" shall mean May ____, 1996. "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency from time to time administering the Securities Act and/or the Exchange Act. "COMMON STOCK" shall mean the Common Stock, $0.01 par value, of the Company as constituted on the Closing Date and any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock. "COMPANY" shall mean CardioTech International, Inc., a Massachusetts corporation, and any successor corporation. "CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares (including, without limitation, Preferred Shares) of stock or other securities which are convertible into or exchangeable for, with or without payment of additional consideration, shares of Common Stock, either immediately or upon the arrival of a specified date or the happening of a specified event. "CURRENT MARKET PRICE" of any security as of any date herein specified shall be (a) if such security is listed or admitted for trading on any national securities exchange, the last sale price of such security, regular way, or the average of the closing bid and asked prices thereof if no such sale occurred, in each case as officially reported on the principal securities exchange on which such security is listed, or (b) if not reported as described in clause (a), the average of the closing bid and asked prices of such security in the over-the-counter market as shown by the National Association of Securities Dealers, Inc. Automated Quotation System, or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, as reported by any member firm of the New York Stock Exchange selected by the Company, or (c) if not quoted as -2- 6 described in clause (b), the average of the closing bid and asked prices for such security as reported by the National Quotation Bureau Incorporated or any similar successor organization, as reported by any member firm of the New York Stock Exchange selected by the Company. If such security is quoted on a national securities or central market system in lieu of a market or quotation system described above, the closing price shall be determined in the manner set forth in clause (a) of the preceding sentence if actual transactions are reported and in the manner set forth in clause (b) of the preceding sentence if bid and asked prices are reported but actual transactions are not. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any successor federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "EXERCISE PERIOD" shall mean the period commencing on the date hereof and terminating at the close of business on January 31, 2000. "EXERCISE PRICE" shall mean the price per share of Common Stock set forth in the preamble to this Warrant, as such price may be adjusted pursuant to section 4. "FAIR VALUE" shall mean the fair value of the appropriate security, property, assets, business or entity as determined by an independent investment banking firm of recognized national standing selected by the Company and satisfactory to the holder or holders of a majority in interest of the Warrants and Warrant Shares at the time outstanding, PROVIDED that the fair value of the security, property, assets, business or entity, as the case may be, in question shall be determined without, in the case of any such securities, applying a discount for any lack of liquidity thereof, but otherwise in each case in accordance with generally accepted financial practice. Such determination shall be set forth in writing, and the Company shall, immediately following such determination, mail a copy thereof to each holder or holders of Warrants and Warrant Shares then outstanding. The determination so made shall be conclusive and binding on the Company and such holder or holders. The Company shall pay all of the expenses incurred in connection with any such determination, including, without limitation, the expenses of the independent investment banking firm engaged to make such determination. If the Company shall not have selected such investment banking firm within 10 days after the occurrence of the event giving rise to the need therefor, then the holder or holders of a majority in interest of the Warrants and Warrant Shares at the time outstanding may select such investment banking firm. -3- 7 "LETTER AGREEMENT" shall have the meaning specified in the preamble to this Warrant. "NOTICE OF EXERCISE" shall mean the form of Notice of Exercise appearing at the end of this Warrant. "OFFICERS' CERTIFICATE" shall mean a certificate signed on behalf of the Company by its President or one of its Vice Presidents and its Chief Financial Officer or its Treasurer. "OTHER SECURITIES" shall mean with reference to the exercise privilege of the holders of the Warrants, any shares (other than Common Stock) and any other securities of the Company (including, without limitation, Preferred Shares) or of any other Person which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise or partial exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock (or Other Securities) pursuant to the terms of the Warrants or otherwise. "PERSON" shall mean an individual, a corporation (including, without limitation, an association, a joint-stock company, a business trust or another similar organization), a partnership, a joint venture, a trust, an unincorporated organization or a government or any agency or political subdivision thereof. "PREFERRED SHARES", as applied to shares of any Person, shall mean shares of such Person which shall be entitled to preference or priority over any other shares of such Person in respect of either the payment of dividends or the distribution of assets upon liquidation. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "STOCK PURCHASE RIGHTS" shall mean any warrants, options or other rights to subscribe for, purchase or otherwise acquire any shares of Common Stock or any Convertible Securities, either immediately or upon the arrival of a specified date or the happening of a specified event. "WARRANT REGISTER" shall have the meaning specified in section 3.1. "WARRANT SHARES" shall mean the shares of Common Stock (and/or Other Securities) issued or issuable, as the case may be, from time to time upon exercise of the Warrants, including, -4- 8 without limitation, any shares of Common Stock (and/or Other Securities) issued or issuable with respect thereto by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation, other reorganization or otherwise. "WARRANTS" shall have the meaning specified in the preamble to this Warrant. 1.2. OTHER DEFINITIONS. The terms defined in this section 1.2, whenever used in this Warrant, shall, unless the context otherwise requires, have the following respective meanings: "CORPORATION" shall include an association, joint stock company, business trust or other similar organization. "SHARES" of any Person shall include any and all shares of capital stock of such Person of any class or other shares, interests, participations or other equivalents (however designated) in the capital of such Person. "THIS WARRANT" shall mean, and the words "HEREIN", "HEREOF", "HEREUNDER" and words of similar import shall refer to, this instrument as it may from time to time be amended or supplemented. 2. Exercise of Warrant. ------------------- 2.1. RIGHT TO EXERCISE; NOTICE. On the terms and subject to the conditions of this section 2, the holder hereof shall have the right, at its option, to exercise this Warrant in whole or in part at any time or from time to time during the Exercise Period, all as more fully specified below, PROVIDED that a partial exercise of this Warrant for less than the entire remaining amount of Warrant Shares issuable under this Warrant shall be made only for a whole number of shares. 2.2. MANNER OF EXERCISE; ISSUANCE OF COMMON STOCK. To exercise this Warrant, the holder hereof shall deliver to the Company (A) a Notice of Exercise duly executed by the holder hereof specifying the number of Warrant Shares to be purchased, (B) an amount equal to the aggregate Exercise Price for all Warrant Shares as to which this Warrant is then being exercised and (C) this Warrant. At the option of the holder hereof, payment of the Exercise Price shall be made (W) by wire transfer of funds to an account in a bank located in the United States designated by the Company for such purpose, (X) by certified or official bank check payable to the order of the Company and drawn on a member of the Boston or New York Clearing House, (Y) by -5- 9 surrender to the Company of any Warrant Shares, as provided below, or (Z) by any combination of such methods. Upon the exercise of this Warrant in whole or in part, the holder hereof may, at its option, submit to the Company written instructions from such holder to apply any specified portion of the Warrant Shares issuable upon such exercise against the cash payment required upon such exercise, in which case the Company will accept such specified portion of the Warrant Shares (at a value per Warrant Share equal to the Current Market Price of such share, if applicable, or the then Fair Value of such share, LESS, in each case, the Exercise Price then in effect), in lieu of a like amount of such cash payment. Upon receipt of the items referred to in section 2.3, the Company shall, as promptly as practicable, and in any event within five Business Days thereafter, cause to be issued and delivered to the holder hereof (or its nominee) or the transferee designated in the Notice of Exercise, a certificate or certificates representing the number of Warrant Shares specified in the Notice of Exercise (but not exceeding the maximum number of shares issuable upon exercise of this Warrant). Such certificates shall be registered in the name of the holder hereof (or its nominee) or in the name of such transferee, as the case may be. If this Warrant is exercised in part, the Company shall, at the time of delivery of such certificate or certificates, unless the Exercise Period expired prior to such exercise, issue and deliver to the holder hereof or the transferee so designated in the Notice of Exercise, a new Warrant evidencing the right of the holder hereof or such transferee to purchase at the Exercise Price then in effect the aggregate number of Warrant Shares for which this Warrant shall not have been exercised, and this Warrant shall be cancelled. 2.3. EFFECTIVENESS OF EXERCISE. Unless otherwise requested by the holder hereof, this Warrant shall be deemed to have been exercised and such certificate or certificates representing Warrant Shares shall be deemed to have been issued, and the holder or transferee so designated in the Notice of Exercise shall be deemed to have become the holder of record of such Warrant Shares for all purposes, as of the close of business on the date on which the Notice of Exercise, the Exercise Price and this Warrant shall have been received by the Company. 2.4. FRACTIONAL SHARES. The Company shall not issue fractional Warrant Shares or scrip representing fractional Warrant Shares upon any exercise of this Warrant. As to any fractional Warrant Shares which the holder hereof would otherwise be entitled to purchase from the Company upon such exercise, the -6- 10 Company shall issue one share which the holder hereof shall be entitled to purchase from the Company at a price equal to the Exercise Price calculated as of the date of the Notice of Exercise. Payment of such amount shall be made in any manner permitted under section 2.2 at the time of delivery of any certificate or certificates deliverable upon such exercise. 2.5. CONTINUED VALIDITY. A holder of Warrant Shares issued upon the exercise of this Warrant, in whole or in part, shall continue to be entitled to all rights to which the holder of this Warrant is entitled pursuant to the provisions of this Warrant, including, without limitation, the registration rights arising under section 6 of this Warrant, except such rights as by their terms apply solely to the holder of a Warrant. The Company will, at the time of any exercise of this Warrant, upon the request of the holder of the Warrant Shares issued upon the exercise hereof, acknowledge in writing, in form reasonably satisfactory to such holder, its continuing obligation to afford to such holder all rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; PROVIDED that if such holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder all such rights. 3. REGISTRATION, TRANSFER AND EXCHANGE; LEGENDS. 3.1. MAINTENANCE OF REGISTRATION BOOKS. The Company shall keep at its principal executive office (which is now located at 11 State Street, Woburn, Massachusetts 01801), or such other address (including that of the Company's transfer agent) as the Company shall notify the holder hereof in writing, a register (the "Warrant Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration, transfer and exchange of the Warrants and the Warrant Shares. The Company shall not at any time close the Warrant Register so as to result in preventing or delaying the exercise or transfer of this Warrant. 3.2. TRANSFER AND EXCHANGE. Upon surrender for registration of transfer of this Warrant at such office, the Company shall execute and deliver in the name of the designated transferee or transferees one or more new Warrants representing the right to purchase at the Exercise Price then in effect a like aggregate number of Warrant Shares. At the option of the holder hereof, this Warrant may be exchanged for other Warrants representing the right to purchase a like aggregate number of Warrant Shares upon surrender of this Warrant at such office. Whenever this Warrant is so surrendered for exchange, the Company shall execute and deliver the Warrants which the holder making the exchange is entitled to receive. Every Warrant presented or -7- 11 surrendered for registration of transfer or exchange shall be accompanied by an Assignment duly executed by the holder thereof or its attorney duly authorized in writing. All Warrants issued upon any registration of transfer or exchange of other Warrants shall be the valid obligations of the Company, evidencing the same rights, and entitled to the same benefits, as the Warrants surrendered upon such registration of transfer or exchange. 3.3. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (a) in the case of any such loss, theft or destruction upon delivery of indemnity reasonably satisfactory to the Company in form and amount or (b) in the case of any such mutilation, upon surrender of this Warrant for cancellation at the office of the Company at which the Warrant Register is kept, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant representing the right to purchase at the Exercise Price then in effect a like aggregate number of Warrant Shares. The signed statement of any institutional holder of this Warrant, in form reasonably satisfactory to the Company, certifying as to the occurrence of any loss, theft, destruction or mutilation of this Warrant shall constitute evidence satisfactory to the Company for the purpose of this section 3.3 and no indemnity shall be required as a condition to the execution and delivery by the Company of a new Warrant in lieu of this Warrant other than such institutional holder's unsecured written agreement to indemnify the Company. 3.4. OWNERSHIP. The Company and any agent of the Company may treat the Person in whose name this Warrant is registered on the Warrant Register as the owner and holder hereof for all purposes, notwithstanding any notice to the contrary, except that, if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the owner of this Warrant for all purposes, notwithstanding any notice to the contrary. This Warrant, if properly assigned, may be exercised by a new holder without first having a new Warrant issued. 4. ANTI-DILUTION PROVISIONS. 4.1. ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. Upon any adjustment of the Exercise Price as provided in section 4.2, the holder hereof shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock (calculated to the nearest 1/100th of a share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock purchasable hereunder immediately prior to such -8- 12 adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. 4.2. ADJUSTMENT OF EXERCISE PRICE. In addition to any adjustment required under the provisions of section 4.5 below, and except as otherwise provided in section 4.2(n) below, the Exercise Price shall be subject to adjustment from time to time as set forth in this section 4.2. (a) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. If and whenever the Company subsequent to the date hereof: (i) declares a dividend upon, or makes any distribution in respect of, any of its capital stock, payable in shares of Common Stock, Convertible Securities or Stock Purchase Rights, or (ii) subdivides its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (iii) combines its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then the Exercise Price shall be adjusted to that price determined by multiplying the Exercise Price in effect immediately prior to such event by a fraction (A) the numerator of which shall be the total number of outstanding shares of Common Stock immediately prior to such event, and (B) the denominator of which shall be the total number of outstanding shares of Common Stock immediately after such event, treating as outstanding all shares of Common Stock issuable upon conversions or exchanges of such Convertible Securities and exercises of such Stock Purchase Rights. (b) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. If and whenever the Company subsequent to the date hereof shall issue or sell any shares of Common Stock (except as otherwise provided in the last paragraph of this section 4.2(b)), for a consideration less than the greater of (x) the Exercise Price and (y) the Current Market Price per - - share (determined, in each case, as of the date specified in the next succeeding paragraph), the Exercise Price upon each such issuance or sale shall be adjusted to the lower of the prices calculated pursuant to the following clauses (i) and (ii) of this section 4.2(b) and shall be determined by: (i) DIVIDING (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Exercise Price in effect as of the date specified -9- 13 in the next succeeding paragraph plus (2) the aggregate consideration, if any, received by the Company upon such issue or sale, by (B) the total number of shares of Common Stock outstanding immediately after such issue or sale; and (ii) MULTIPLYING the Exercise Price in effect as of the date specified in the next succeeding paragraph by a fraction the numerator of which is (A) the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Current Market Price per share of Common Stock immediately prior to such issue or sale plus (2) the aggregate consideration, if any, received by the Company upon such issue or sale, divided by (B) the total number of shares of Common Stock outstanding immediately after such issue or sale, and the denominator of which is the Current Market Price per share of Common Stock immediately prior to such issue or sale. For purposes of this section 4.2(b), the date as of which the Exercise Price and the date as of which the Current Market Price shall be determined shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such shares of Common Stock and (ii) the date of actual issuance of such shares of Common Stock. No adjustment of the Exercise Price shall be made under this section 4.2(b) upon the issuance of any shares of Common Stock which are (i) distributed to holders of Common Stock pursuant to a stock dividend or subdivision for which an adjustment is provided under section 4.2(a) or (ii) issued pursuant to the exercise of any Stock Purchase Rights or pursuant to the conversion or exchange of any Convertible Securities to the extent that an adjustment shall previously have been made upon the issuance of such Stock Purchase Rights or Convertible Securities pursuant to sections 4.2(a), (c) or (d). (c) ISSUANCE OF STOCK PURCHASE RIGHTS. If and whenever the Company subsequent to the date hereof shall issue or sell any Stock Purchase Rights and the consideration per share for which shares of Common Stock may at any time thereafter be issuable upon exercise thereof (or, in the case of Stock Purchase Rights exercisable for the purchase of Convertible Securities, upon the subsequent conversion or exchange of such Convertible Securities) shall be less than the greater of (x) the Exercise Price and (y) the Current Market Price per share (determined, in each -10- 14 case, as of the date specified in the next succeeding paragraph), the Exercise Price upon each such issuance or sale shall be adjusted as provided in section 4.2(b) on the basis that the maximum number of shares of Common Stock ever issuable upon exercise of such Stock Purchase Rights (or upon conversion or exchange of such Convertible Securities following such exercise) shall be deemed to have been issued as of the date of the determination of the Exercise Price or the Current Market Price, as applicable, specified in the next succeeding paragraph. For the purposes of this section 4.2(c), the date as of which the Exercise Price and the date as of which the Current Market Price shall be determined shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Stock Purchase Rights and (ii) the date of actual issuance of such Stock Purchase Rights. (d) ISSUANCE OF CONVERTIBLE SECURITIES. If and whenever the Company subsequent to the date hereof shall issue or sell any Convertible Securities (except as otherwise provided in the last paragraph of this section 4.2(d)) and the consideration per share for which shares of Common Stock may at any time thereafter be issuable pursuant to the terms of such Convertible Securities shall be less than the greater of (x) the Exercise Price and (y) the Current Market Price per share (determined, in each case, as of the date specified in the next succeeding paragraph), the Exercise Price upon each such issuance or sale shall be adjusted as provided in section 4.2(b) on the basis that the maximum number of shares of Common Stock ever necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the determination of the Exercise Price or the Current Market Price, as applicable, specified in the next succeeding paragraph. For the purposes of this section 4.2(d), the date as of which the Exercise Price and the date as of which the Current Market Price shall be determined shall be the earlier of (i) the date on which the Company shall enter into a firm contract for the issuance of such Convertible Securities and (ii) the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this section 4.2(d) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any Stock Purchase Rights to the extent that an adjustment shall -11- 15 previously have been made upon the issuance of such Stock Purchase Rights pursuant to section 4.2(c). (e) MINIMUM ADJUSTMENT. If any adjustment of the Exercise Price pursuant to this section 4.2 shall result in an adjustment of less than $.0001, no such adjustment shall be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to $.0001; PROVIDED that upon any adjustment of the Exercise Price resulting from (i) the declaration of a dividend upon, or the making of any distribution in respect of, any stock of the Company payable in Common Stock, Stock Purchase Rights or Convertible Securities or (ii) the reclassification by subdivision, combination or otherwise, of the Common Stock into a greater or smaller number of shares, the foregoing figure of $.0001 per share (or such figure as last adjusted) shall be proportionately adjusted, and PROVIDED, FURTHER, that upon the exercise of this Warrant, the Company shall make all necessary adjustments (to the nearest .0001 of a cent) not theretofore made to the Exercise Price up to and including the date upon which this Warrant is exercised. (f) READJUSTMENT OF EXERCISE PRICE. Upon each change in (i) the purchase price payable for any Stock Purchase Rights or Convertible Securities referred to in section 4.2(c) or (d), (ii) the consideration, if any, payable upon exercise of such Stock Purchase Rights or upon the conversion or exchange of such Convertible Securities or (iii) the number of shares of Common Stock issuable upon the exercise of such Stock Purchase Rights or the rate at which such Convertible Securities are convertible into or exchangeable for shares of Common Stock, the Exercise Price in effect at the time of such event shall forthwith be readjusted to the Exercise Price which would have been in effect at such time had such Stock Purchase Rights or Convertible Securities provided for such changed purchase price, consideration, number of shares of Common Stock so issuable or conversion rate, as the case may be, at the time initially granted, issued or sold. On the expiration of any Stock Purchase Rights not exercised or of any right to convert or exchange under any Convertible Securities not exercised, the Exercise Price then in effect shall forthwith be increased to the Exercise Price which would have been in effect at the time of such expiration had such Stock Purchase Rights or Convertible Securities never been issued. No readjustment of the Exercise Price pursuant to this section 4.2(f) shall (i) increase the Exercise Price by an amount in excess of the adjustment originally made to the Exercise Price in respect of the issue, sale or grant of the -12- 16 applicable Stock Purchase Rights or Convertible Securities or (ii) require any adjustment to the amount paid or number of shares of Common Stock received by any Person upon any exercise of this Warrant prior to the date upon which such readjustment to the Exercise Price shall occur. (g) REORGANIZATION, RECLASSIFICATION OR RECAPITALIZATION OF COMPANY. If and whenever subsequent to the date hereof the Company shall effect (i) any reorganization or reclassification or recapitalization of the capital stock of the Company (other than in the cases referred to in section 4.2(a)), (ii) any consolidation or merger of the Company with or into another Person, (iii) the sale, transfer or other disposition of the property, assets or business of the Company as an entirety or substantially as an entirety or (iv) any other transaction (or any other event shall occur) as a result of which holders of Common Stock become entitled to receive any shares of stock or other securities and/or property (including, without limitation, cash, but excluding any cash dividend that is paid out of the earnings or surplus of the Company legally available therefor) with respect to or in exchange for the Common Stock of the Company, there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof (in lieu of or in addition to the Warrant Shares theretofore deliverable, as appropriate) the highest number of shares of stock or other securities and/or the greatest amount of property (including, without limitation, cash) to which the holder of the number of Warrant Shares which would otherwise have been deliverable upon the exercise of this Warrant or any portion thereof at the time would have been entitled upon such reorganization or reclassification or recapitalization of capital stock, consolidation, merger, sale, transfer, disposition or other transaction or upon the occurrence of such other event, and at the same aggregate Exercise Price. Prior to and as a condition of the consummation of any transaction or event described in the preceding sentence, the Company shall make equitable, written adjustments in the application of the provisions herein set forth satisfactory to the holder or holders of Warrants at the time outstanding so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares of stock or other securities or other property thereafter deliverable upon exercise of the Warrants. Any such adjustment shall be made by and set forth in a supplemental agreement of the Company and/or the successor entity, as applicable, for the benefit of and in form and substance acceptable to the holder or holders of the Warrants at the time outstanding, which agreement shall bind each such -13- 17 entity and shall be accompanied by a favorable opinion of the regular outside counsel to the Company (or such other firm as is reasonably acceptable to the holder or holders of the Warrants at the time outstanding) as to the enforceability of such agreement and as to such other matters as such holder or holders may reasonably request. (h) OTHER DILUTIVE EVENTS. If any other transaction or event (other than those explicitly referred to in this section 4.2), including, without limitation, distributions of property or assets of the Company or its affiliates to Persons other than holders of Common Stock, shall occur as to which the other provisions of this section 4 are not strictly applicable but the failure to make any adjustment to the Exercise Price or to any of the other terms of this Warrant would not fairly protect the purchase rights and other rights represented by this Warrant in accordance with the essential intent and principles hereof, then, and as a condition to the consummation of any such transaction or event, and in each such case, the Company shall appoint a firm of independent certified public accountants of recognized national standing (which may be the regular auditors of the Company), which shall give its opinion as to the adjustment, if any, on a basis consistent with the essential intent and principles established in this section 4, necessary to preserve, without dilution, the rights represented by this Warrant. The certificate of any such firm of accountants shall be conclusive evidence of the correctness of any computation made under this section 4. The Company shall pay the fees and expenses of such firm of accountants in connection with any such opinion. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the holder of this Warrant and shall make the adjustments described therein. (i) DETERMINATION OF CONSIDERATION. For purposes of this section 4, the consideration received or receivable by the Company for the issuance, sale, grant or assumption of shares of Common Stock, Stock Purchase Rights or Convertible Securities, irrespective of the accounting treatment of such consideration, shall be valued and determined as follows: (i) CASH PAYMENT. In the case of cash, the net amount received by the Company after deduction of any accrued interest or dividends, any expenses paid or incurred and any underwriting commissions or concessions paid or allowed by the Company in connection with such issue or sale. (ii) NON-CASH PAYMENT. In the case of consideration other than cash, the Fair Value thereof -14- 18 or, if less, in the case of any security, the Current Market Price of such security, if applicable (in any case as of the date immediately preceding the issuance, sale or grant in question). (iii) CERTAIN ALLOCATIONS. If shares of Common Stock, Stock Purchase Rights and/or Convertible Securities are issued or sold together with other securities or other assets of the Company for a consideration which covers more than one of the foregoing categories of securities and assets, the consideration received or receivable (computed as provided in clauses (i) and (ii) of this section 4.2 (i)) shall be allocable to such shares of Common Stock, Stock Purchase Rights and/or Convertible Securities as reasonably determined in good faith by the Board of Directors of the Company (PROVIDED such allocation is set forth in a written resolution and a certified copy thereof is furnished to the holder of this Warrant promptly (but in any event within 10 days) following its adoption). (iv) DIVIDENDS IN SECURITIES. If the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in shares of Common Stock, Convertible Securities or Stock Purchase Rights, such shares of Common Stock, Convertible Securities or Stock Purchase Rights, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (v) STOCK PURCHASE RIGHTS AND CONVERTIBLE SECURITIES. The consideration for which shares of Common Stock shall be deemed to be issued upon the issuance or sale of any Stock Purchase Rights or Convertible Securities shall be determined by dividing (A) the total consideration, if any, received by the Company as consideration for the Stock Purchase Rights or the Convertible Securities, as the case may be, plus the minimum aggregate amount of additional consideration, if any, ever payable to the Company upon the exercise of such Stock Purchase Rights or upon the conversion or exchange of such Convertible Securities, as the case may be, in each case after deducting any accrued interest or dividends, any expenses paid or incurred and any underwriting commissions or concessions paid or allowed by the Company in connection with such issue or sale; by (B) the maximum number of shares of Common Stock ever issuable upon the -15- 19 exercise of such Stock Purchase Rights or upon the conversion or exchange of such Convertible Securities. (vi) MERGER, CONSOLIDATION OR SALE OF ASSETS. If any shares of Common Stock, Convertible Securities or Stock Purchase Rights are issued in connection with any merger or consolidation of which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the Fair Value of such portion of the assets and business of the non-surviving corporation as shall be attributable to such Common Stock, Convertible Securities or Stock Purchase Rights, as the case may be. In the event of (a) any merger or consolidation of which the Company is not the surviving corporation or (b) the sale, transfer or other disposition of the property, assets or business of the Company as an entirety or substantially as an entirety for stock or other securities of any other Person, the Company shall be deemed to have issued the number of shares of its Common Stock for stock or securities of the surviving corporation or such other Person computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the Fair Value on the date of such transaction of such stock or securities of the surviving corporation or such other Person, and if any such calculation results in adjustment of the Exercise Price, the determination of the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such merger, consolidation or sale, for the purposes of section 4.2(g), shall be made after giving effect to such adjustment of the Exercise Price. (j) RECORD DATE. If the Company shall take a record of the holders of the Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Convertible Securities or Stock Purchase Rights or (ii) to subscribe for or purchase Common Stock, Convertible Securities or Stock Purchase Rights, then all references in this section 4 to the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be, shall be deemed to be references to such record date. (k) SHARES OUTSTANDING. The number of shares of Common Stock deemed to be outstanding at any given time -16- 20 shall not include shares of Common Stock held by the Company or any Subsidiary of the Company. (l) MAXIMUM EXERCISE PRICE. At no time shall the Exercise Price exceed the amount set forth in the first paragraph of the Preamble of this Warrant except as a result of an adjustment thereto pursuant to section 4.2(a)(iii) or 4.2(g). (m) APPLICATION. All subdivisions of this section 4.2 are intended to operate independently of one another. If a transaction or an event occurs that requires the application of more than one subdivision, all applicable subdivisions shall be given independent effect. (n) NO ADJUSTMENTS UNDER CERTAIN CIRCUMSTANCES. Anything herein to the contrary notwithstanding, no adjustment to the Exercise Price shall be made in the case of: (i) any issuance of shares of Common Stock (or Other Securities) upon the exercise in whole or part of any Warrant; or (ii) (A) the granting by the Company of Stock Purchase Rights to its employees and directors pursuant to its existing stock option plans and any other employee benefit plans approved by the Board of Directors of the Company and (B) the issuance of shares of Common Stock pursuant to the exercise of such Stock Purchase Rights; PROVIDED that the aggregate number of shares of Common Stock to which this clause (ii) shall apply shall not exceed 1,100,000 (such number to be appropriately adjusted for stock splits, stock dividends, combinations and similar events). 4.3. RIGHTS OFFERING. If the Company shall effect an offering of Common Stock pro rata among its stockholders, the holder hereof shall be entitled, at its option, to elect to participate in each and every such offering as if this Warrant had been exercised and such holder were, at the time of any such rights offering, then a holder of that number of Warrant Shares to which such holder is then entitled on the exercise hereof. 4.4. CERTIFICATES AND NOTICES. (a) ADJUSTMENTS TO EXERCISE PRICE. As promptly as practicable (but in any event not later than five days) after the occurrence of any event requiring any adjustment under this section 4 to the Exercise Price (or to the number or kind of securities or other property deliverable upon the -17- 21 exercise of this Warrant), the Company shall, at its expense, mail to the holder of this Warrant either (i) an Officers' Certificate or (ii) a certificate signed by a firm of independent certified public accountants of recognized national standing (which may be the regular auditors of the Company), setting forth in reasonable detail the events requiring the adjustment and the method by which such adjustment was calculated and specifying the adjusted Exercise Price and the number of shares of Common Stock purchasable upon exercise of this Warrant after giving effect to such adjustment. The certificate of any such firm of accountants shall be conclusive evidence of the correctness of any computation made under this section 4. (b) EXTRAORDINARY CORPORATE EVENTS. If and whenever the Company subsequent to the date hereof shall propose to (i) pay any dividend payable in stock to the holders of shares of Common Stock or to make any other distribution to the holders of shares of Common Stock, (ii) offer to the holders of shares of Common Stock rights to subscribe for or purchase any additional shares of any class of stock or any other rights or options or (iii) effect any reclassification of the Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock), (iv) engage in any reorganization or recapitalization or any consolidation or merger (other than a merger in which no distribution of securities or other property is to be made to holders of shares of Common Stock), (v) consummate any sale, transfer or other disposition of its property, assets and business as an entirety or substantially as an entirety, (vi) effect any other transaction which might require an adjustment to the Exercise Price (or to the number or kind of securities or other property deliverable upon the exercise of this Warrant), including, without limitation, any transaction of the kind described in section 4.2(g) or (vii) commence or effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall mail to the holder of this Warrant an Officers' Certificate giving notice of such proposed action, specifying (A) the date on which the stock transfer books of the Company shall close, or a record shall be taken, for determining the holders of Common Stock entitled to receive such stock dividends or other distribution or such rights or options, or the date on which such reclassification, reorganization, recapitalization, consolidation, merger, sale, transfer, other disposition, transaction, liquidation, dissolution or winding up shall take place or commence, as the case may be, and (B) the date as of which it is expected that holders of Common Stock of record shall be entitled to receive securities or other property deliverable upon such action, -18- 22 if any such date is to be fixed. Such Officers' Certificate shall be mailed in the case of any action covered by clause (i) or (ii) above, at least 30 days prior to the record date for determining holders of Common Stock for purposes of receiving such payment or offer, and, in any other case, at least 30 days prior to the date upon which such action takes place and 20 days prior to any record date to determine holders of Common Stock entitled to receive such securities or other property. (c) EFFECT OF FAILURE. Failure to give any certificate or notice, or any defect in any certificate or notice required under this section 4.4 shall not affect the legality or validity of the adjustment of the Exercise Price or the number of Warrant Shares purchasable upon exercise of this Warrant. 4.5. ADJUSTMENTS FOR CHANGES IN CERTAIN DATA. The Company hereby agrees that the initial aggregate number of shares of Common Stock issuable upon exercise in full of the Warrants issued on the Closing Date to the initial holder thereof is ________ and such number of shares was calculated in accordance with the terms of the Letter Agreement. If for any reason such calculation was incorrect in any respect, the Company shall forthwith reissue each Warrant with appropriate adjustments in the Exercise Price and in the number of shares issuable upon exercise hereof (together with an Officers' Certificate setting forth in reasonable detail the computation of such adjustments). 5. RESERVATION OF COMMON STOCK. The Company will at all times reserve and keep available, solely for issuance, sale and delivery upon the exercise of this Warrant, such number of shares of Common Stock equal to the number of shares of Common Stock (and/or Other Securities) issuable upon the exercise of this Warrant. All such shares of Common Stock (and/or Other Securities) shall be duly authorized and, when issued upon exercise of this Warrant, will be validly issued and fully paid and nonassessable with no liability on the part of the holders thereof. 6. REGISTRATION, ETC. 6.1. CERTAIN DEFINITIONS. As used in this section 6, the following terms have the following respective meanings: (a) "REGISTER", "REGISTERED" and "REGISTRATION" refer to a registration effected by filing a registration statement in compliance with the Securities Act to permit -19- 23 the sale and disposition of the Warrant Shares and any amendment filed or required to be filed to permit any such disposition; (b) "QUALIFICATION" or "COMPLIANCE" refer to the qualification or compliance of all Warrant Shares included in any registration pursuant to this section 6 under all applicable blue sky or other state securities laws; and (c) "REGISTRATION EXPENSES" shall mean all fees, expenses and disbursements related to any registration, qualification or compliance pursuant to this section 6, including, without limitation, all registration and filing fees, blue sky fees and expenses, printing expenses, fees and disbursement of counsel (including, without limitation, the fees, expenses and disbursements of one firm of attorneys for the holders of the Warrants and/or Warrant Shares), and expenses of any special audits incident to or required by any registration, qualification or compliance, except that Registration Expenses shall not include any underwriters' discounts or commissions attributable to any Warrant Shares registered and sold pursuant to any such registration. 6.2. REGISTRATION ON REQUEST. (a) In case the Company shall receive from one or more holders of any Warrants and/or Warrant Shares a written request or requests that the Company effect any registration, qualification and/or compliance of any Warrant Shares held by (or issuable to) such holder or holders, and specifying the intended method of sale and distribution, the Company will: (i) promptly give written notice of the proposed registration, qualification and/or compliance to each holder of any Warrants and/or Warrant Shares; and (ii) as soon as practicable, effect such registration, qualification and/or compliance (including, without limitation, the execution of an undertaking for post effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of such amount of Warrant Shares (including the exercise of any Warrants and the sale and distribution of any Warrant Shares issuable upon such exercise) as is specified in a -20- 24 written request or requests, made within 30 days after receipt of such written notice from the Company, by any holder or holders of any Warrants or Warrant Shares. (b) The obligations of the Company under this section 6.2 are subject to the following qualifications: (i) except as otherwise provided in section 6.2(b)(iii), the Company shall be obligated to effect only two registrations pursuant to this section 6.2 and section 6.2 in each of the other Warrants; PROVIDED that the Company shall not be obligated to effect any such registration unless the holders of a majority in interest of the Warrants and Warrant Shares then outstanding shall have made such request for registration; (ii) the Company shall pay all Registration Expenses related to any registration, qualification and compliance effected pursuant to this section 6.2; (iii) if, in connection with any registration of Warrant Shares pursuant to this section 6.2, the holders of Warrants and Warrant Shares requesting registration are unable (for reasons beyond the control of such holders) to include in such registration all of the Warrant Shares for which registration has been requested, then the holder or holders of the Warrants and Warrant Shares shall be entitled to an additional registration of Warrant Shares pursuant to this section 6.2; and (iv) the Company shall not be obligated to cause any registration, qualification and/or compliance pursuant to this section 6.2 to become effective prior to the first anniversary of the Closing Date. 6.3. INCIDENTAL REGISTRATION. (a) If the Company at any time or from time to time shall determine to register any of its securities (whether in connection with an offering by the Company or others) (otherwise than pursuant to a registration on a form inappropriate for an underwritten public offering or relating solely to securities to be issued in a merger, acquisition of the stock or assets of another entity or in a similar transaction), then, in each such case, the Company will: (i) furnish prompt notice thereof (which shall include a list of the jurisdictions in which the -21- 25 Company intends to register or qualify such securities under the applicable blue sky or other state securities laws) to each holder of Warrants and/or Warrant Shares; and (ii) include among the securities which it then registers or qualifies all Warrant Shares specified by any holder thereof in a written request or requests, made within 30 days after receipt of such written notice from the Company. (b) The obligations of the Company under this section 6.3 are subject to the following qualifications: (i) the Company shall pay all Registration Expenses related to any registration, qualification or compliance effected pursuant to this section 6.3; and (ii) if, in connection with any underwritten offering pursuant to this section 6.3, (A) the managing underwriter shall impose a limitation on the number or kind of securities which may be included in any such registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution and (B) such limitation is imposed pro rata with respect to all securities whose holders have an incidental (or piggyback) right to include such securities in the registration statement and as to which inclusion has been requested pursuant to such right, then the Company shall be obligated to include in such registration statement only such limited portion (which may be none) of such Warrant Shares with respect to which such holder or holders have requested inclusion hereunder as is determined in good faith by such managing underwriter. 6.4. PERMITTED REGISTRATION. If and to the extent that any holder or holders of any Warrants and/or Warrant Shares shall have, at the time of delivery of the written request referred to in section 6.3, no present intention of selling or distributing any Warrant Shares, the Company shall be obligated to effect such registration, qualification and/or compliance with respect to any Warrant Shares of such holder or holders only if and to the extent, in each case, that such registration, qualification and/or compliance are at the time permitted by the applicable statutes or rules and regulations thereunder or the practices of the governmental authority concerned. 6.5. REGISTRATION PROCEDURES. In the case of each registration, qualification and/or compliance contemplated by this section 6, the Company will keep the holder or holders of -22- 26 Warrants and/or Warrant Shares advised in writing as to the initiation of proceedings for such registration, qualification and compliance and as to the completion thereof, and will advise each such holder, upon request, of the progress of such proceedings. At the expense of the Company or of the party or parties bearing the expenses of such registration, qualification and compliance, the Company will (a) keep such registration, qualification and compliance current and effective by such action as may be necessary or appropriate, including, without limitation, the filing of post-effective amendments and supplements to any registration statement or prospectus, for such period as is necessary to permit the sale and distribution of the Warrant Shares pursuant thereto, (b) take all necessary action under any applicable blue sky or other state securities law to permit such sale and/or distribution, all as requested by such holders, and (c) furnish each holder of Warrant Shares included therein such number of registration statements, prospectuses, supplements, amendments, offering circulars and other documents incident thereto as such holder from time to time may reasonably request. 6.6. INDEMNIFICATION. The Company will indemnify, defend and hold harmless each holder of Warrant Shares included in any registration, qualification and/or compliance contemplated by this section 6 and each underwriter of such securities, and each Person, if any, who controls each such holder and underwriter within the meaning of the Securities Act (each, an "Indemnified Person"), to the fullest extent enforceable under applicable law against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, supplement, amendment, offering circular or other document related to any registration, qualification or compliance or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation (or alleged violation) of the Securities Act or other securities laws in connection with any such registration, qualification or compliance, and will reimburse each such Indemnified Person for any legal or any other expenses reasonably incurred in connection with investigating and/or defending (and/or preparing for any investigation or defense of) any such claim, loss, damage, liability, action or violation; PROVIDED that the Company will not be liable in any such case to any such Indemnified Person if, but only to the extent that, any such claim, loss, damage, liability, action, violation or expense is finally determined to arise out of or result from any untrue statement in or omission from written information furnished to the Company by an instrument duly executed by such Indemnified Person and stated to be specifically for use therein. Each such holder will, if securities held by or -23- 27 issuable to such holder are included in the securities as to which such registration, qualification and/or compliance is being effected, indemnify, defend and hold harmless the Company, each of its directors and officers who signs the related registration statement, and each Person, if any, who controls the Company within the meaning of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, supplement, amendment, offering circular or other document or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such directors, officers or Persons for any legal or any other expenses reasonably incurred in connection with investigating or defending (and/or preparing for any investigation or defense of) any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) was made in (or omitted from) such registration statement, prospectus, supplement, amendment, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such holder and stated to be specifically for use therein; PROVIDED that the liability of any such holder hereunder shall be limited to the net sales proceeds actually received by such holder as a result of the sale by it of securities in such registration. 6.7. RESTRICTIONS ON OTHER AGREEMENTS. The Company covenants that it will not grant any right relating to the registration of its securities the exercise of which interferes with or is inconsistent with (or could reasonably be expected to interfere with or be inconsistent with) the rights granted hereunder, without the prior written consent of the holders of the Warrants and the Warrant Shares. 7. VARIOUS COVENANTS OF THE COMPANY. 7.1. NO IMPAIRMENT OR AMENDMENT. The Company shall not by any action including, without limitation, amending its charter, any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate to protect the rights of the holder hereof against impairment. Without limiting the generality of -24- 28 the foregoing, the Company (a) will not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly issue fully paid and nonassessable Warrant Shares, (c) will obtain and maintain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction as may be necessary to enable the Company to perform its obligations under this Warrant, (d) will not issue any capital stock or enter into any agreement, the terms of which would have the effect, directly or indirectly, of preventing the Company from honoring its obligations hereunder and (e) will not redeem, other than pro rata, any shares of the Common Stock. So long as any Warrants or Warrant Shares are outstanding, the Company will acknowledge in writing, in form satisfactory to any holder of any such security, the continued validity of the Company's obligations hereunder. 7.2. AVAILABILITY OF INFORMATION. The Company will take such action as any holder of any Warrants or Warrant Shares may reasonably request, all to the extent required from time to time to facilitate any sale or disposition by any such holder of any such securities without registration under the Securities Act and/or any applicable state securities laws within the limitation of the exemptions provided by any rule or regulation thereunder, including, without limitation, Rule 144A under the Securities Act. In addition, the Company will cooperate with each holder of any Warrants or Warrant Shares in supplying such information as may be necessary for such holder or holders to complete and file any information reporting forms presently or hereafter required by any regulatory authority, including, without limitation, the Commission, as a condition to the transfer of any such securities or to the availability of an exemption from the Securities Act and/or any applicable state securities law for the sale or other disposition of any Warrant or any Warrant Shares. The Company will file all reports required to be filed by it under the Securities Act and the Exchange Act and all rules and regulations adopted by the Commission thereunder (or, if the Company is not required to file such reports, it will, upon the request of any holder of any Warrants or Warrant Shares, make publicly available other information so long as necessary to permit sales of such securities pursuant to Rule 144 or any other similar rule or regulation under the Securities Act). 7.3. ANTI-DILUTION PROVISIONS. If the Company issues any Stock Purchase Rights or Convertible Securities or other securities containing provisions protecting the holder or holders thereof against dilution in any manner more favorable to such holder or holders thereof than those set forth in this Warrant, such provisions (or any more favorable portion thereof) shall be -25- 29 deemed to be incorporated herein as if fully set forth in this Warrant and, to the extent inconsistent with any provision of this Warrant, shall be deemed to be substituted therefor. 7.4. INDEMNIFICATION. The Company shall indemnify, save and hold harmless the holder of this Warrant and the holder of any Warrant Shares from and against any and all liability, loss, cost, damage, reasonable attorneys' and accountants' fees and expenses, court costs and all other out-of-pocket expenses incurred by such holder in connection with interpreting, preserving, exercising and/or enforcing any of the terms hereof. 7.5. CERTAIN EXPENSES. The Company shall pay all expenses in connection with, and all taxes (other than stock transfer taxes) and other governmental charges that may be imposed in respect of, the issue, sale and delivery of this Warrant and any Warrant Shares. 7.6. LISTING ON SECURITIES EXCHANGES, ETC. At all times following the exercise of this Warrant, the Company will maintain the listing of all Warrant Shares on each securities exchange or market or trading system on which the Common Stock (or Other Securities) is then or at any time thereafter listed or traded. 8. MISCELLANEOUS. 8.1. NONWAIVER. No course of dealing or any delay or failure to exercise any right, power or remedy hereunder on the part of the holder of this Warrant or of any Warrant Shares shall operate as a waiver of or otherwise prejudice such holder's rights, powers or remedies. 8.2. AMENDMENT. Any term, covenant, agreement or condition of the Warrants may, with the consent of the Company, be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), only by one or more substantially concurrent written instruments signed by the holder or holders of a majority in interest of the Warrants and the Warrant Shares then outstanding. 8.3. COMMUNICATIONS. All communications provided for herein shall be delivered, mailed or sent by facsimile transmission addressed as follows: (a) If to the Company, at: -26- 30 CardioTech International, Inc. 11 State Street Woburn, Massachusetts 01801 Attention: President and Chief Executive Officer Telecopier No.: (617) ____________ with a copy (which shall not constitute notice) to: Mintz, Levin, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 Attention: Jeffrey M. Wiesen, Esq. Telecopier No.: (617) 542-2241 (b) If to the holder of any Warrant or of any Warrant Shares, to such holder at its address appearing on the Warrant Register, with a copy (which shall not constitute notice) to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, Massachusetts 02109 Attention: Frank B. Porter, Jr., Esq. Telecopy No.: (617) 248-4000 The address of the Company may be changed at any time and from time to time and shall be the most recent such address furnished in writing by the Company to the holder or holders of the Warrants and Warrant Shares. The address of any such holder for any purpose hereof may be changed at any time and from time to time and shall be the most recent such address furnished in writing by such holder to the Company. Any communication provided for herein shall become effective only upon and at the time of receipt by the Person to whom it is given, unless such communication is mailed by certified mail (return receipt requested) or reputable overnight courier, in which case it shall be deemed to have been received on (a) the fifth Business Day following the mailing thereof, or (b) the day of its acknowledged receipt, if a Business Day, or the next succeeding Business Day, whichever of (a) or (b) is earlier. Any communication provided for herein given by facsimile transmission shall become effective upon receipt of confirmation of receipt of transmission from the Person to whom the transmission was sent, PROVIDED that the original of such communication is sent on the day of such facsimile transmission to such Person by a courier guaranteeing overnight delivery. -27- 31 8.4. LIKE TENOR. All Warrants shall at all times be identical, except as to the Preamble. 8.5. REMEDIES. The Company stipulates that the remedies at law of the holder or holders of the Warrants and of Warrant Shares in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of the Warrants are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 8.6. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors and assigns of the Company, the holder or holders of this Warrant and of the Warrant Shares, to the extent provided herein, and shall be enforceable by such holder or holders. 8.7. MODIFICATION AND SEVERABILITY. If, in any action before any court or agency legally empowered to enforce any provision contained herein, any provision hereof is found to be unenforceable, then such provision shall be deemed modified to the extent necessary to make it enforceable by such court or agency. If any such provision is unenforceable as set forth in the preceding sentence, the unenforceability of such provision shall not affect the other provisions of this Warrant, but this Warrant shall be construed as if such unenforceable provision had never been contained herein. 8.8. INTEGRATION. This Warrant replaces all prior agreements, supersedes all prior negotiations and, together with the Letter Agreement, constitutes the entire agreement of the parties with respect to the transactions contemplated herein. 8.9. HEADINGS. The headings of the sections of this Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 8.10. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL. This Warrant, including the validity hereof and the rights and obligations of the Company and of the holder hereof and all amendments and supplements hereof and all waivers and consents hereunder, shall be construed in accordance with and governed by the domestic substantive laws of The Commonwealth of Massachusetts without giving effect to any choice of law or conflicts of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. The Company, to the extent that it may lawfully do so, hereby consents to service of process, and to be sued, in The -28- 32 Commonwealth of Massachusetts and consents to the jurisdiction of the courts of The Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts, as well as to the jurisdiction of all courts to which an appeal may be taken from such courts, for the purpose of any suit, action or other proceeding arising out of any of its obligations hereunder or with respect to the transactions contemplated hereby, and expressly waives any and all objections it may have as to venue in any such courts. The Company further agrees that a summons and complaint commencing an action or proceeding in any of such courts shall be properly served and shall confer personal jurisdiction if served personally or by certified mail to it at its address set forth in section 8.3 or as otherwise provided under the laws of The Commonwealth of Massachusetts. Notwithstanding the foregoing, the Company agrees that nothing contained in this section 8.10 shall preclude the institution of any such suit, action or other proceeding in any jurisdiction other than The Commonwealth of Massachusetts. The Company irrevocably waives all right to a trial by jury in any suit, action or other proceeding instituted by or against it in respect of its obligations hereunder or the transactions contemplated hereby. [The remainder of this page is left blank intentionally.] -29- 33 IN WITNESS WHEREOF, CARDIOTECH INTERNATIONAL, INC. has caused this Warrant to be executed as an instrument under seal and to be attested by its duly authorized officers as of the date first above written. CARDIOTECH INTERNATIONAL,INC. By: _____________________________ (Title) Attest: _____________________________ (Title) County of _____________________ ) Commonwealth of Massachusetts ) ss. May __, 1996 On this _____ day of May 1996, before me appeared ____________________ , ________________ of CardioTech International, Inc., to me known and known by me to be the party executing the foregoing instrument on behalf of said corporation, and [HE/SHE] acknowledged said instrument by [HIM/HER] executed to be [HIS/HER] free act and deed and the free act and deed of said corporation. _________________________________ Notary Public My commission expires:___________ -30- 34 FORM OF NOTICE OF EXERCISE (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered holder of the within Warrant irrevocably exercises the within Warrant for and purchases ______________________________ shares of Common Stock (or Other Securities) [SPECIFY] of CARDIOTECH INTERNATIONAL, INC. and herewith makes payment therefor in the amount of $___, all at the price, in the manner and on the terms and conditions specified in the within Warrant, and requests that a certificate (or____________certificates in denominations of________shares) for such shares hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b)_________, whose address is __________________________________ and, if such shares shall not include all the Warrant Shares issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of Warrant Shares not being purchased hereunder be issued in the name of and delivered to (choose one) (a) the undersigned or (b)________________ , whose address is ____________________. Dated:___________ ____, _____ [ ] By _____________________________ (Signature of Registered Holder) NOTICE: The signature on this Notice of Exercise must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. -31- 35 FORM OF ASSIGNMENT (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered holder of the within Warrant hereby sells, assigns and transfers unto _____________________, whose address is______________________, all of the rights of the undersigned under the within Warrant, with respect to _________ shares of Common Stock (or Other Securities) [SPECIFY] of CARDIOTECH INTERNATIONAL, INC. and, if such shares shall not include all the Warrant Shares issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of Warrant Shares not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint _______________ Attorney to register such transfer on the books of CARDIOTECH INTERNATIONAL, INC. maintained for the purpose, with full power of substitution in the premises. Dated: ____________ ___, _____. [ ] By ______________________________ (Signature of Registered Holder) NOTICE: The signature on this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. -32- EX-10.9 13 FORM OF LETTER AGREEMENT 1 EXHIBIT 10.9 May ___, 1996 John Hancock Mutual Life Insurance Company John Hancock Place P.O. Box 111 Boston, Massachusetts 02117 Gentlemen: Reference is made to the Warrants (as amended to date, the "Outstanding PMI Warrants"), dated January 26, 1993, issued by Polymedica Industries, Inc. ("PMI") to John Hancock Mutual Life Insurance Company (the "Holder") for the purchase of an aggregate of up to 542,417 shares of Common Stock of PMI (the "PMI Common Stock") for a per share exercise price of $6.93. Capitalized terms not defined in this letter shall have the meaning set forth in the Outstanding PMI Warrants. The Board of Directors of PMI has declared a stock dividend (the "Stock Dividend"), upon the satisfaction of certain conditions, for the purpose of making a distribution by PMI to its stockholders of all of the outstanding Common Stock of CardioTech International, Inc. ("CardioTech") held by PMI (3,490,638 shares). Stockholders of PMI of record on _____________, 1996 (the "Record Date"), will receive one (1) share of Common Stock of CardioTech ("CardioTech Common Stock") for each two and twenty-one one hundredth (2.21) shares of PMI Common Stock held by them on that date. Prior to delivery of the CardioTech Warrants (as defined below), up to 486,879 additional shares of CardioTech Common Stock (the "Adjustment Shares") may also be distributed to the stockholders of record of PMI. In such event, the aggregate number of shares of CardioTech Common Stock issuable upon exercise of the CardioTech Warrants shall be increased by an amount equal to the Adjustment Shares multiplied by a fraction, the numerator of which is 245,438, and the denominator of which is 245,438 plus the number of shares of CardioTech Common Stock outstanding on the Distribution Date (as defined below), (but no adjustment shall be made to the aggregate exercise price payable upon the exercise of the CardioTech Warrants). Pursuant to section 4.2(g) of the Outstanding PMI Warrants, CardioTech agrees to issue to the Holder warrants in the form 2 attached hereto as Exhibit A for the purchase of an aggregate of 245,438 shares of CardioTech Common Stock (the "CardioTech Warrants"), such number of shares being subject to adjustment as provided above and in the CardioTech Warrants. PMI agrees to amend and restate the Outstanding PMI Warrants to be in the form of Exhibit B attached hereto and to provide for the issuance of an aggregate of up to 542,417 shares of PMI Common Stock (the "New PMI Warrants"), such number of shares being subject to adjustment as provided in the New PMI Warrants. The aggregate amount payable upon exercise in full of the Outstanding PMI Warrants is $3,758,949.81 (the "Aggregate Exercise Price"). The Aggregate Exercise Price shall be allocated between the CardioTech Warrants and the New PMI Warrants in the following manner. The portion of the Aggregate Exercise Price (the "CardioTech Portion") payable upon exercise in full of the CardioTech Warrants shall be equal to (a) the Aggregate Exercise Price multiplied by (b) a fraction, the numerator of which is (i) the average closing price of a share of CardioTech Common Stock on the first five trading days following the date on which the Stock Dividend is distributed (the "Distribution Date") multiplied by the number of shares of CardioTech Common Stock outstanding on the Distribution Date, divided by (ii) the average closing price of one share of PMI Common Stock on the first five trading days following the Distribution Date multiplied by the number of shares of PMI Common Stock outstanding on the Distribution Date (the "Price Ratio"), and the denominator of which is one (1) plus the Price Ratio. The portion of the Aggregate Exercise Price (the "PMI Portion") payable upon exercise in full of the New PMI Warrants shall be equal to the Aggregate Exercise Price minus the CardioTech Portion. The initial per share exercise price payable under the CardioTech Warrants shall be equal to the CardioTech Portion divided by the initial aggregate number of shares of CardioTech Common Stock issuable upon exercise in full of the CardioTech Warrants. The initial per share exercise price payable under the New PMI Warrants shall be equal to the PMI Portion divided by the initial aggregate number of shares of PMI Common Stock issuable upon exercise in full of the New PMI Warrants. The CardioTech Warrants and the New PMI Warrants will be executed and delivered to the Holder not later that May 30, 1996, together, in each case, with (a) an opinion of counsel to CardioTech, in form reasonably satisfactory to the Holder, as to the enforceability of this letter agreement and the CardioTech Warrants and as to such other matters as the Holder may reasonably request, (b) an opinion of counsel to PMI, in form reasonably satisfactory to the Holder, as to the enforceability of this letter agreement and the New PMI Warrants and as to such other matters as the Holder may reasonably request, and (c) certificates duly executed by CardioTech and by PMI as to the 2 3 calculations of the CardioTech Portion, the PMI Portion, the aggregate number of shares of CardioTech Common Stock and PMI Common Stock initially issuable pursuant to the CardioTech Warrants and the New PMI Warrants, respectively, and the respective per share exercise prices therefor, all such calculations to be reasonably satisfactory to the Holder. The Holder shall be deemed to be the record and beneficial owner of the CardioTech Warrants and the New PMI Warrants on and as of the Distribution Date, subject to the consummation of the Stock Dividend and, until the delivery of the CardioTech Warrants and the New PMI Warrants, the Outstanding PMI Warrants shall be deemed to evidence the same. From and after the date hereof and so long as the CardioTech Warrants are outstanding, CardioTech shall furnish to each holder of the CardioTech Warrants all notices, proxy statements, financial statements, reports and documents as CardioTech shall send or make available generally to its stockholders. CardioTech represents to the Holder that (i) this letter agreement and the CardioTech Warrants have been duly authorized by CardioTech and, when executed and delivered, will constitute the valid and legally binding obligations of CardioTech enforceable against CardioTech in accordance with their terms, and (ii) CardioTech has reserved 245,438 shares of CardioTech Common Stock for issuance upon exercise of the CardioTech Warrants and such shares, when issued in accordance with the terms of the CardioTech Warrants, will be validly issued and outstanding, fully paid and non-assessable and not subject to preemptive rights on the part of any other person. PMI represents to the Holder that (i) this letter agreement and the New PMI Warrants have been duly authorized by PMI and, when executed and delivered, will constitute the valid and legally binding obligations of PMI enforceable against PMI in accordance with their terms, and (ii) PMI has reserved 542,417 shares of PMI Common Stock for issuance upon exercise of the New PMI Warrants and such shares, when issued in accordance with the terms of the New PMI Warrants, will be validly issued and outstanding, fully paid and non-assessable and not subject to preemptive rights on the part of any other person. PMI ratifies and confirms the Note and Warrant Agreement and each of the other Operative Agreements to which it is a party and agrees that each such agreement, document and instrument is in full force and effect and that its obligations thereunder are its legal, valid and binding obligations enforceable against it in accordance with the terms thereof and that neither it nor any of its affiliates has any defense, whether legal or equitable, setoff or counterclaim, to the payment and performance of such obligations. 3 4 PMI and Cardiotech agree to pay all reasonable fees and disbursements incurred by the Holder in connection with this letter agreement, including, without limitation, the reasonable fees, expenses and disbursements of special counsel to the Holder. The Holder hereby (i) consents (for purposes of the Outstanding PMI Warrants and the Note and Warrant Agreement referred to below) to the Stock Dividend and the transactions contemplated thereby (as described in the Form 10 registration statement attached hereto as Exhibit C); and (ii) acknowledges that it will not have any Board Observer Rights, as set forth in Section 10 of the Note and Warrant Agreement, dated January 26, 1993, with respect to CardioTech. This letter agreement, including the validity hereof and the rights and obligations of the parties hereunder, shall be construed in accordance with and governed by the domestic substantive laws of The Commonwealth of Massachusetts without giving effect to any choice of law or conflicts of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. This letter agreement, together with the other documents referred to herein, embody the entire agreement and understanding among the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof. In case any provision in this letter agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This letter agreement may be executed in any number of counterparts and by the parties hereto on separate counterparts, but all such counterparts shall together constitute but one and the same instrument. [The remainder of this page is left blank intentionally.] 4 5 If the foregoing is in accordance with your agreement and understanding please sign this letter below. Very truly yours, CARDIOTECH INTERNATIONAL, INC. By: -------------------------- Its POLYMEDICA INDUSTRIES, INC. By: -------------------------- Its Accepted and agreed this ___ day of ___________, 1996. JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: -------------------------- Its 5 EX-14 14 MATERIAL FOREIGN PATENT 1 Exhibit 14 Europ,,isches Patentamt European Patent Office Office europ,en des brevetsUrkundeCertificateCertificat Es wird hiermit bescheinigt, dab f r die in der beigef gren Patentschrift beschriebene Erfindung ein europ,,isches Patent f r die in de Patentschrift bezeichneten Vertragsstaaten erteilt worden ist. It is hereby certified that a European patent has been granted in respect of the invention described in the annexed patent specification for the Contracting States designated in the specification. Il est certifi, qu'un brevet european a ,t, d,livr, pour l'invention d,crite dans la fascicule de brevet ci-joint, pour les Etsts contractants d,sign,s dans le fascicule de brevet.Europ,,isches Patent Nr. 0495869 European Patent No.Brevet europ,en noPatentinhaberProprietor of the PatentTitulaire du brevetPolyMedica Industries, Inc. 2 Constitution Way Woburn, MA 01801/US 2 Europ,,isches Patentamt European Patent Office Office europ,en des brevets(19) (11)EP 0 495 869 B1(12)EUROPEAN PATENT SPECIFICATION(45)Date of publication and mention of the grant of the patent: 03.01.1996 Bulletin 1996/01 (51)Int. Cl. 6 A61F2/04, A61L27/00(21) Application number: 90915513.7(86)International application number: PCT/GB90/01591(22)Date of filing: 15.10.1990 (87)International publication number: WO91/05522 (02.05.1991 Gazette 1991/10)(54)POLYMER PRODUCTS POLYMERPRODUKTE PRODUITS POLYMIERS(84)Designated Contracting States: AT BE CH DK ES FR GB IT LI LU NL SEuUNDERWOOD, Christopher, John 22 Keswick Avenue Manchester M34 3QD (GB) CHIAN, Kerm, Sin 22 Fulbrook Road Bevington Wirral L63 9HT (GB)(30)Priority: 18.10.1989 GB 8923516 u(43)Date of publication of application: 29.07.1992 Bulletin 1992/31(73)Proprietor: PolyMedica Industries, Inc., Woburn, MA 01801 (US)(74)Representative: McNeight, David Leslie et al Stockport Cheshire SK4 1BS (GB)(72) uInventors: CHARLESWORTH, David Offerton Lodge School Lane Cheshire WA16 8SD (GB) (56)References cited: EP-A-0 269 254US-A-4 605 406 US-A-4 731 073US-A-4 798 607Note: Within nine months from the publication of the mention of the grant of the European patent, any person may give notice to the European Patent Office of opposition to the European patent granted. Notice of opposition shall be filed in a written reasoned statement. It shall not be deemed to have been filed until the opposition fee has been paid. (Art. 99(1) European Patent Convention). 3 Description This invention relates to methods for making polymer products and to novel products made according to the methods. Polymer products in the form of vascular prostheses conventionally comprise a conduit having varying dimentions and mechanical characteristics which are as close as materials and manufacturing processes will allow to the vessel in the body whose function it is intended that the prosthesis should replace. US-A-4 605 406 discloses one method of fabricating prosthesis material having a conduit configuration and in particular discloses a method by which polymers are precipitated on the interior walls of tubes or other cylindrical conduits. A number of tubular prostheses may be grafted into a single vascular system. There is merit at least conceptually, in attempting to maintain as much as possible of the host vascular tissue during surgical procedures which involve vascular replacement, principally because there is less alien material introduced into the patient. Polymer products which comprise a branch and arms emanating therefrom may typically be produced by joining the arms to an independently fabricated branch region. While this procedure has the advantage that it allows the construction of relatively complex branched strucutres, disadvantages include the product lacking a relatively uniform mechanical consistency; together with a relatively time consuming and thus expensive preparative procedure. Where a vascular system branches, tubular prostheses may be grafted onto each of the arms comprised thereby. This technique suffers from the serious disadvantage in that it necessitates joins at the increased number of junctions between host and prosthetic vascular material. Consequently, the time spent by the patient under anasthetic and subject to cardiopulmonary bypass is increased which increase the likelihood of the development of pulmonary and circulatory sytem disorders, together with the raised possibility of cardiac isohaemia, neorosis and infarct. 4 Moreover, there is a finite possibility that a prosthesis will fall mechanically at the region of its attachment to host vascular material, conventionally regarded as the weakest and most sensitive region of the graft. An increased number of such attachment regions in a single vascular system synergistically increases the possibility of failure of the prosthetic vascular system as a whole. The present invention provides inter alia methods of producing vascular products, particularly in the form of prostheses, which overcome the disadvantages and deficiencies which characterise 5 prior art vascular prosthetic products. According to the present invention there is provided a method of forming a polymer product comprising a luminate vessel and a sheet attached to said luminate vessel at one end thereof so that the luminate vessel is open at that end, characterised by precipitating on to said luminate vessel a sheet of polymer from a solution comprising an organic solvent and precipitable polymer and forming an aparture in said sheet, said aperture communicating with the lumen of the vessel. The invention also includes products made according to the aforementioned methods. The polymer may comprise between 17 per cent and 30 per cent by weight of the solution comprising said polymer and solvent. The product may exhibit approximately a 20 per cent shrinkage during the manufacture thereof. The product may be formed from an existing luminate vessel, itself formed from a solution chemically similar or identical to said solution. The polymer may be biocompatible and may comprise a vascular prosthesis. The prosthesis may comprise a graft adapted for use in a part of a vascular system comprising branches therein, such as, for example, that part of the aorta from which the coronary arteries arise. Said solution may further comprise a porosifier which may be insoluble in said solution but soluble in aqueous systems. 6 The prorsifier may comprise a barbonate, such as, for example, sodium hydrogen carbonate. Said porosifier may have an average particle size of 50 to 100 microns, and may comprise between 10 and 60 per cent by weight of the solution. Said solution may further comprise a surfactant. The surfactant may be an antonic detergent, such as, for example, an alkoxy sulphite. Said surfactant may be an alkaline metal salt of dodecyl sulphate, such as sodium dodecyl sulphate. Said surfactant may comprise between 0.1 and 10 per cent by weight of said solution. The wall thickness of said product may be 0.8 to 1.5 millimetres, and if said product comprises a luminate vessel, the lumenal diameter thereof may be 3 to 30 mm. The polymer of which said product is comprised may be polyurethane. Said polyurethane may be a linear segmented poly(ether) urethane with a number average molecular weight in the region of 20 to 100 kDa. The invention will be further apparent from the following description and several figures of the accompanying drawings, which illustrate, by way of example only, methods of forming polymer products, according to the invention and polymer products made according to the methods. Of the figures: Figure 1shows a method of producing a polymer vascular prosthesis from a plurality of luminate vessels; Figure 2shows a second method of forming a polymer vascular prosthesis according to the invention, in which said prosthesis is precipitated onto the surface of a multi-tubular former; shows a polymer product in the form of a vascular prosthesis in situ comprising a region of the aorta 7 from which the coronary arteriesarise, together with a region of each of said arteries. Figures 1 and 2 illustrate methods of forming polymer products in the form of prosthetic grafts adapted for use in a region of a vascular system comprising branches therein. As shown in Figure 1, the prosthesis 10 is formed from two luminate vessels 11.12 by precipitating thereonto a sheet 13 of polymer from a solution comprising an organic solvent and precipitable polymer. Apertures 14.15 are formed in the sheet 13. 8 so that there is a fluid communication between the sheet 13 and the lumen of each vessel. In a second method of forming a vascular prosthesis, the prosthesis 20 comprises a plurality of luminate vessels 21 having a sheet 22 of polymer therearound and is formed by precipitating onto a product former 23 comprising a plurality of tubular conduits 24 a layer of polymer from a solution comprising an organic solvent and precipitable polymer. Figure 2 shows the prosthesis 20 of Figure 2 as a graft in the aorta 31 of a human heart shown partially at 41. The polymer can comprise at least 17 percent but less than 30 percent by weight of the solution comprising said polymer and solvent and the polymer can exhibit approximately a 20 percent shrinkage during the precipitation thereof. Preferably, where the product is formed from an existing luminate vessel, as shown in Figure 1, the solution from which the vessel is formed is chemically similar or identical to the solution comprising organic solvent and precipitable polymer from which solution said sheet is precipitated. Vascular prostheses necessarily should be made from biocompatible material, and the polymer of which said product is comprised is a polyurethane, characterised by being a linear segmented poly(ether)urethane with a number average molecular weight in the region of 20 to 100kDa. It is desirable that prostheses for use in the blood vascular system should have pores in their walls, preferably relatively large on the external surface, and relatively small on the luminal surface of the prosthesis. 9 Such pores enable formation of pseudointima by endothelial cells particularly, but also pericytes and other cells normally found in the vascular architecture. Such cells can present a non-thrombogenic surface to blood flowing through the prosthesis and, additionally, release factors which are ordinarily non-thrombogenic, and platelet anti-aggregators and anti-thrombogenic derivatives of arachidonic acid. Preferably, the solution from which the prosthesis is precipitated further comprises a porosifier, such as sodium hydrogen carbonate, which is insoluble therein but soluble, for example, an aqueous system. Said porosifier has an average particle size of 50 to 100 microns, and comprises between 10 and 60 percent by weight of the solution. A surfactant is added to the solution to modulate further the porosity of the walls, particularly at the precipitation surfaces. Although the surfactant can comprise between 0.1 and 10 percent by weight of said solution the preferred concentration is about 2 percent. The wall thickness of the prosthesis corresponds to the thicknesses of the vessels found in the body and which it is intended that the prosthesis should replace. Alternatively, a wall thickness of the prosthesis can be determined from an analysis of the physio-mechanical requirements that must be met by the prosthesis, with relatively little regard to the wall thickness thereof. Typically, the wall thickness of the prosthesis is 0.5 to 1.5 millimetres, and the lumenal diameter thereof is 3 to 30 mm. Although the present invention has been described in conjunction with particular embodiments, it will be appreciated by those skilled in the art that various other changes, omissions and additions thereto may be made without departing from its scope as described herein. For example, the polymer products may comprise bio-compatible sheets having pores, the sheets acting as matrices into which cells may migrate in tissue culture. Such sheets may be of use in skin grafts, for 10 example. The polymer products may be used as filters and selectively permeable membranes. Claims 1.A method of forming a polymer product (10,20) comprising a luminate vessel (11,12,21) and a sheet (13,22) attached to said luminate vessel at one end thereof so that the luminate vessel is open at that end, characterised by precipitating on to said luminate vessel a sheet of polymer 11 (13,22) from a solution comprising an organic solvent and precipitable polymer and forming an aperture (14,15) in said sheet said aperture communicating with the lumen of the vessel. 2.A method according to claim 1, in which the polymer comprises at least 17 percent but less than 30 percent by weight of the solution comprising said polymer solvent. 3.A method according to claim 1 and 2, in which during formation of said product there is approximately a 20 percent shrinkage. 4.A method according to any preceding claim, in which the polymer is bio-compatible. 5.A method according to any one of claims 1 to 4, in which the wall thickness of said sheet is 0.5 to 1.5 millmetres. 6.A method according to any one of claims 1 to 5, in which the diameter of the lumen of said vessel is 3 to 30 mm. 7.A method according to any one claims 1 to 6, in which the polymer comprises polyurethane. 8.A method according to any one of the preceding claims, in which the product comprises a vascular prosthesis. 9.A method according to claim 8, in which the prosthesis comprises a graft adapted for use in part of a vascular system comprising branches therein. 10.A method according to claim 9, in which the prosthesis comprises a graft adapted to replace that part of the aorta from which the coronary arteries exit. 12 Patentanspr_che 1.Verfahren zur Bildung aines Polymerproduktes (10,20), welches ein hohles GafaB (11,12,21) und ein an elnem Ende des hohlen Gefasses derart befestigtes Blatt (18,22) aufweist, daB des Hohle Gefass an diesem Ende offen ist, gekennzeichnet durch Niederschlagen eines Blattes aud Polymer (13.22) auf das hohie Gefass aus einer Losurtg, die ein organisches Losungsmittel und ein abscheidbares Polymer aufweist, und dursh Bilden ainer Offnung (14.15) in dem Blatt, wobel die Offnung mit dem Hohlraum des Gefasses verbunden ist. 2.Verfahren nach Anspruch 1, bel weichem das Polymer zurnindest 17 Gewichtsprozant, aber weniger ais 30 Gewichtaprazant der das Polymer-L_sungsmittel aufweisenden L_sung aufweist. 3.Verfahren nach Anspruch 1 und 2, bel welchem wahrand der Bildung des Produktes angenahart eins 20-prozantige Schrumpfung auttriff. 4.Verfahran nach jedam der vorhergenhendan Anspr_che, bei welcham das Polymer biokompatibel lst. 5.Varfahran nach einem der Anspr_che 1 bis 4, bei welchem der Wanddicke des Blattes 0.8 bia 1,5 Millimeter betragt. 6.Verfahren nach einem der Anspr_che 1 bis 5, bei welchem der Durchmesser des Hohiraums des Gefasses 3 bis 30 mm betr,,gt. 7.Verfahren nach elnem der Anspr_che 1 bis 6, bel wilchem das Ppolymer Polyurethan aufweist. 8.Verfahren nach einem der vorhargehendan Anspr_che, bel welchem das Produkt sine Gefass prothese aufweist. 9.Verfahren nach Anspruch 8, bel welchem die Prothese ain Transplantat aufweist, das fur die Verwardung in einem Teil eines Gefass systems mit Abzweigungen darin angepass 1st. 10.Verfahren nach Anspruch 9, bel welcham die Prothese ein Transplantat aufweist, des fur den Ersatz des Teils der Aorta, von dern die 13 Kranzarterlen austretan, angepass 1st. Revendications 1.Proc,d, de formation d'un produit polymSre (10,20) comprenant un vaisseau ... lumiSra (11, 12, 21) et une feuille (13,22) fix,e audit valsseau ...lumi,re ... une de ses extr,mit,s, de sorte que le vaisseau ... lumi,re est ouvert ... cette extr,mit,, caract,ns en ce qu'on pre,cipite sur ledlt vaiaseau ... lumi,re une feuille de polym,re (13, 22) ... partir d'une solution comprenant un solvant organique et un polymSre pr,cipitable et 14 qu'on forme une ouverture (14, 15) dans ladite fauille, ladite ouverture communiquant avec la lumiSre du vaisseau. 2.Proc,d, selon la revendication 1, dans lequal le polymSre comprend au moins 17% mais moins de 30% en poids de la solution comprenant ledit polymSre at ledit solvant. 3.Proc,d, selon la revendication 1 et 2, dans lequal on observe un retrait d'approximativement 20% durant la formation dudit produit. 4.Proc,d, selon l'une quelconque des revendications precedentes, dans lequel le produit est blocompatible. 5.Proc,d, selon l'une quelconque des revendications 1 ... 4, dans lequel l'epalsseur de parol de ladite fauille est comprise entre 0.5 et 1.5 mm. 6.Proc,d, selon l'une quelconque des revendications 1 ... 5, dans lequel le diamStre de la lumi,re dudit vaisseau est compris entre 3 et 30 mm. 7.Proc,d, selon l'une quelconque des revendications 1 ... 6, dans lequel le polymSre comprend du polyur,thane. 8.Proc,d, selon l'une quelconque des revendications pr,c,dantes, dans lequal le produit comprend una prothSse vasculaire. 9.Proc,d, selon la revendication 8, dans lequel la prothSse comprend un greffon con[double dagger]u pour etre utilis, dans une partie d'un syst,me vasculaire comprenant des ramifications. 10.Proc,d, selon la revendication 9, dans lequel la prothSse comprend un greffon con[double dagger]u pour remplacer la partie de l`aorte d'o-- partent les art,res coronaires. [FOLLOWING PAGE HAS THREE DIAGRAMS OF TUBULAR VASCULAR PROSTHESES, ALONE AND WITH A DIAGRAM OF A HUMAN HEART] EX-23.1 15 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this amended registration statement on Form 10/A of our report dated March 18, 1995, except as to the information presented in the second paragraph of Note E for which the date is May 9, 1996, on our audit of the consolidated financial statements of CardioTech International, Inc. as of March 31, 1994 and 1995 and for each of the three years in the period ended March 31, 1995. Coopers & Lybrand L.L.P. Boston, Massachusetts May 9, 1996 EX-23.2 16 CONSENT OF HALE AND DORR 1 EXHIBIT 23.2 CONSENT OF HALE AND DORR We hereby consent to the use of our name in the Registration Statement and in the related Information Statement and consent to the filing of the draft of our opinion as an exhibit to the Registration Statement. HALE AND DORR EX-27 17 FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1995 APR-01-1994 MAR-31-1995 504 0 0 0 0 504 57,126 (13,480) 44,150 0 0 2,831 0 0 41,319 44,150 0 407,510 0 0 1,006,450 0 0 (598,940) 0 (598,940) 0 0 0 (598,940) (0.31) (0.31)
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