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EXHIBIT 8
DRAFT
May __, 1996
PolyMedica Industries, Inc.
11 State Street
Woburn, MA 01801
Re: Distribution of Stock of CardioTech International, Inc.
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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
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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
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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
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May __, 1996
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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
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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
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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.
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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
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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
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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
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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
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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