<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1996
REGISTRATION NO. 333-2492
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AKSYS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3841 36-3890205
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
1113 S. MILWAUKEE AVENUE, SUITE 300
LIBERTYVILLE, ILLINOIS 60048
(847) 247-6051
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
----------------
LAWRENCE H. N. KINET
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AKSYS, LTD.
1113 S. MILWAUKEE AVENUE, SUITE 300
LIBERTYVILLE, ILLINOIS 60048
(847) 247-6051
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
MARK B. TRESNOWSKI FREDERICK W. KANNER
KIRKLAND & ELLIS DEWEY BALLANTINE
200 EAST RANDOLPH DRIVE 1301 AVENUE OF THE AMERICAS
CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10019
(312) 861-2000 (212) 259-8000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING PRICE AMOUNT OF
SECURITIES TO BE REGISTERED (1)(2) REGISTRATION FEE (3)
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01
per share.................... $7,130,000 $2,458.62
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes shares which the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457.
(3) Constitutes an additional filing fee based on an increase in the
anticipated price range of the shares offered hereby of $2.00.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
AKSYS, LTD.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K AND RULE 404
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS BY CAPTION
----------------------- ---------------------------------
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back Cover
Cover Pages of Prospectus..... Pages
3. Summary Information and Risk
Factors....................... Prospectus Summary; Business; Risk Factors
4. Use of Proceeds............... Use of Proceeds
5. Determination of Offering
Price......................... Underwriting
6. Dilution...................... Dilution
7. Selling Security Holders...... *
8. Plan of Distribution.......... Outside Front Cover Page; Underwriting
9. Description of Securities to
be Registered................. Description of Capital Stock
10. Interests of Named Experts and
Counsel....................... *
11. Information with respect to
the Registrant................
(a) Description of Business.... Prospectus Summary; Business
(b) Description of Property.... Prospectus Summary; Business--Facilities
(c) Legal Proceedings.......... Legal Matters
(d) Market Price of and
Dividends on the
Registrant's Common Equity
and Related Stockholder
Matters.................... *
(e) Financial Statements....... Index to Financial Statements
(f) Selected Financial Data.... Selected Financial Data
(g) Supplementary Financial Prospectus Summary--Summary Financial
Information................ Information
(h) Management's Discussion and
Analysis of Financial
Condition and Results of Management's Discussion and Analysis of
Operations................. Financial Condition and Results of
Operations
(i) Changes in and
Disagreements with
Accountants on Accounting Management's Discussion and Analysis of
and Financial Disclosure... Financial Condition and Results of
Operations
(j) Directors and Officers of
Registrant................. Management
(k) Compensation of Directors
and Officers............... Management
(l) Security Ownership of
Certain Beneficial Owners
and Management............. Principal Stockholders
(m) Certain Relationships and
Related Transactions....... Certain Transactions
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... *
</TABLE>
- --------
*Such item is inapplicable, or the answer thereto is in the negative, and is
omitted from the Prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 16, 1996
PROSPECTUS
3,100,000 SHARES
LOGO
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby are being sold by Aksys,
Ltd. ("Aksys" or the "Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "AKSY," subject to official notice of
issuance.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ------------------------------------------------------------------------------------------
Total (3) $ $ $
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $750,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
465,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise such option in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1996 at the offices of Smith Barney Inc., 14 Wall Street, New York,
New York 10005.
-----------
SMITH BARNEY INC.
PIPER JAFFRAY INC.
VECTOR SECURITIES INTERNATIONAL, INC.
, 1996
<PAGE>
[LOGO OF AKSYS]
THE COMPANY DOES NOT EXPECT TO HAVE COMMERCIALLY AVAILABLE PRODUCTS UNTIL
1997, AND HAS NOT YET RECEIVED ANY REQUIRED REGULATORY CLEARANCES OR APPROVALS.
THERE CAN BE NO ASSURANCE THAT SUCH CLEARANCES OR APPROVALS WILL BE GRANTED.
_______________
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. See "Risk Factors" for a discussion of certain factors to be
considered by prospective investors.
THE COMPANY
Aksys, Ltd. ("Aksys" or the "Company") was formed to provide hemodialysis
products and services for patients suffering from end stage renal disease
("ESRD"), commonly known as chronic kidney failure. The Company has developed
an automated personal hemodialysis system (the "Aksys PHD system"), which is
designed to enable patients to perform hemodialysis in a self-care setting,
such as the patient's home, on a daily basis. The Company believes that its
products and services will offer a superior alternative to currently available
kidney dialysis treatment modalities by providing better clinical outcomes,
lower overall costs and improved quality of life for dialysis patients. The
Company has submitted a 510(k) premarket notification to the United States Food
and Drug Administration ("FDA") to market the Aksys PHD system and, if
clearance is granted, the Company plans commercial launch of its products and
services during 1997. See "Business--Government Regulation." There can be no
assurance that the Company will be able to obtain regulatory clearance or
approval in a timely manner or at all.
ESRD is a slow, progressive loss of kidney function which eventually becomes
life-threatening and for most patients can be treated only through dialysis.
Based upon information published by the Health Care Financing Administration
("HCFA") of the United States Department of Health and Human Services, the
approximate number of ESRD patients in the United States requiring dialysis
treatments has grown from 66,000 at the end of 1982 to 187,000 at the end of
1994, representing a compound annual growth rate of approximately 9%. In
addition, according to international patient registries compiled by the United
States Renal Data System ("USRDS"), there were approximately 240,000 dialysis
patients in Europe and Japan in 1993. Reimbursement for dialysis treatments in
the United States in 1995 is estimated by the Company to have exceeded $3.5
billion.
The prevailing methods of kidney dialysis are hemodialysis delivered in
outpatient clinics three times per week and peritoneal dialysis performed by
patients at home through the infusion of a blood-cleansing solution into the
patient's peritoneal cavity. Both of these treatment methods have significant
limitations which have produced relatively poor clinical outcomes, an
escalation in total treatment costs and decreased quality of life for ESRD
patients. These clinical outcomes are reflected in the annual mortality rate of
dialysis patients which, in 1992 according to the National Kidney Foundation,
was 23.6% in the United States. The Company believes that these circumstances
have created significant demand for improved dialysis systems.
The Company believes that hemodialysis performed on a daily basis can
significantly improve clinical outcomes, reduce total treatment costs and
improve the quality of life of ESRD patients. Daily hemodialysis in the
clinical setting for the general dialysis population, however, is not
economically feasible under current reimbursement systems and would place even
greater burdens on patient lifestyles. The Company has developed a personal
hemodialysis system which is designed to overcome the barriers to daily
hemodialysis in a self-care setting. The Aksys PHD system (i) is designed for
operation by patients through a computerized, user-friendly interface, (ii) is
automated, requiring minimal patient involvement, (iii) includes an integrated
automatic disinfection system which is designed to enable safe and effective
reuse of several key components, (iv) enables the patient to be monitored by,
and to communicate with, a treatment clinic through a real time, on-line
monitoring system, (v) requires fewer consumables and (vi) is relatively
compact and is transportable by car, with all essential components, including
the water purification system, integrated into the machine. The Company holds
exclusive licenses to patents relating to certain features of the Aksys PHD
system.
The Company's strategy is to (i) target its marketing activities toward those
providers of dialysis services most focused on patient outcomes and total cost
of care, (ii) provide a broad range of products and services to ESRD patients
and providers for a single monthly price, (iii) use the Aksys PHD system's
built-in computer to provide outcome data to healthcare providers and others,
(iv) conduct clinical studies and implement other measures designed to document
the clinical and cost benefits it believes will result from daily hemodialysis
using the Aksys PHD system and (v) address the worldwide demand for a lower
cost, more clinically effective approach to dialysis through a phased domestic
and international market launch.
RISK FACTORS
There are a number of risks that must be overcome for the Aksys PHD system to
succeed, including uncertainty of obtaining regulatory clearance or approval
and of achieving market acceptance and development. See "Risk Factors."
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered..................... 3,100,000 shares (1)
Common Stock outstanding after the offering.... 13,220,229 shares (1)(2)
Use of proceeds................................ For research and development,
capital expenditures, clinical
studies, working capital and
other general corporate purposes
Nasdaq National Market symbol.................. "AKSY"
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating costs and
expenses:
Research and
development........... $ 598,748 $ 1,808,638 $ 4,261,230 $ 851,318 $ 1,412,506
General and
administrative........ 213,923 266,418 1,236,143 253,514 489,190
--------- ----------- ----------- ----------- -----------
Operating loss.......... (812,671) (2,075,056) (5,497,373) (1,104,832) (1,901,696)
Other income, net....... 31,582 40,174 152,710 17,676 34,373
--------- ----------- ----------- ----------- -----------
Net loss................ $(781,089) $(2,034,882) $(5,344,663) $(1,087,156) $(1,867,323)
========= =========== =========== =========== ===========
Pro forma net loss per
share (3).............. $(0.52) $(0.18)
=========== ===========
Weighted average shares
used to compute pro
forma net loss per
share (3).............. 10,322,837 10,322,837
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
AS
ACTUAL PRO FORMA (4) ADJUSTED (4)(5)
------------ ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments ................. $ 2,102,225 $ 2,102,225 $44,597,225
Working capital.................... 1,564,787 1,564,787 44,059,787
Total assets....................... 2,949,499 2,949,499 45,444,499
Long-term liabilities (6).......... 29,577 29,577 29,577
Redeemable preferred stock......... 12,406,761 -- --
Deficit accumulated during
development stage................. (10,077,885) (10,077,885) (10,077,885)
Total stockholders' equity
(deficit)......................... (10,069,271) 2,337,490 44,832,490
</TABLE>
- --------
(1) Excludes up to 465,000 shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding as of March 31,
1996. Includes 9,248,136 shares of Common Stock issuable upon conversion of
all outstanding redeemable preferred stock of the Company (the "Preferred
Stock") in connection with the consummation of this offering. Excludes
1,477,250 shares of Common Stock issuable upon the exercise of stock
options outstanding as of March 31, 1996 at a weighted average exercise
price of $0.23 per share. See "Management--1993 Stock Option Plan."
(3) Computed on the basis described in Note 1 of Notes to Financial Statements.
(4) Gives effect to the conversion of all outstanding shares of Preferred Stock
into 9,248,136 shares of Common Stock as a consequence of this offering.
See Note 5 of Notes to Financial Statements.
(5) Gives effect to the sale of the shares of Common Stock offered hereby (at
an assumed public offering price of $15.00 per share) and the receipt of
the estimated net proceeds therefrom.
(6) Consists of installment notes payable and capital lease obligations.
----------------
Unless otherwise indicated, all information in this Prospectus (i) assumes no
exercise of the Underwriters' option to purchase from the Company up to 465,000
shares of Common Stock to cover over-allotments, if any, (ii) is adjusted to
reflect the 3-for-2 stock split with respect to the Common Stock effected in
April 1996 and (iii) reflects the conversion of all outstanding shares of
Preferred Stock into 9,248,136 shares of Common Stock as a consequence of this
offering.
4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In evaluating the Company and its business, prospective
investors should carefully consider the following risk factors.
LIMITED OPERATING HISTORY; HISTORY OF SIGNIFICANT LOSSES AND ANTICIPATED
FUTURE LOSSES
The Company has a limited operating history. None of its products has been
granted any required regulatory approvals. To date, the Company has generated
no revenues and has incurred significant net losses, including net losses of
$781,000, $2.0 million, $5.3 million and $1.9 million for the years ended
December 31, 1993, 1994 and 1995 and for the three months ended March 31,
1996, respectively, resulting in an accumulated deficit of $10.1 million at
March 31, 1996. In addition, losses have been increasing and are continuing
through the date of this Prospectus. Inasmuch as the Company will continue to
have a high level of operating expenses and will be required to make
significant up-front expenditures in connection with its production and
marketing activities as well as with any development efforts, the Company
anticipates that losses will continue until such time, if ever, as the Company
is able to generate sufficient revenues to support its operations. The
Company's long-term viability, profitability and growth will depend upon
successful development and commercialization of the Aksys PHD system. The
Company will not be able to market the Aksys PHD system until such time, if
ever, that it receives required regulatory clearance or approvals. No
assurances can be given that such clearance or approvals will be received in a
timely manner or at all. Even if such clearance or approvals are obtained,
there can be no assurance that commercialization of the Aksys PHD system will
be successful. Significant challenges are often encountered in shifting from
development to commercialization of new products. The Company's prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered in establishing a new business. There can be no assurance that the
Company will have any or significant revenues or that the Company will ever
achieve profitable operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and the financial
statements appearing elsewhere in this Prospectus.
DEPENDENCE ON THE AKSYS PHD SYSTEM; UNCERTAIN RESULTS OF DAILY HEMODIALYSIS
Since its inception, the Company has devoted its efforts almost entirely to
the development of the Aksys PHD system. The Company expects to be dependent
for the foreseeable future on sales of, and services relating to, such system
for revenues. To date, the Aksys PHD system has not undergone clinical studies
or otherwise been tested on human patients. There can be no assurance that the
system will be safe or effective or that it will be cost-effective relative to
other dialysis treatment alternatives.
The Company's ability to successfully market the Aksys PHD system will
depend to a great extent on establishing the clinical benefits of daily
hemodialysis. Neither the Company nor, to the Company's knowledge, any other
person or organization has ever conducted a randomized prospective clinical
study of daily hemodialysis. There can be no assurance that daily hemodialysis
will be shown to be more clinically effective than alternative dialysis
modalities. Furthermore, there may be unexpected side effects, complications
or other safety issues associated with daily hemodialysis that may adversely
affect the market for the Company's products and services.
UNCERTAINTY OF MARKET ACCEPTANCE; DEPENDENCE ON MARKET DEVELOPMENT
The success of the Aksys PHD system is dependent on many variables,
including its safety, effectiveness and cost-effectiveness as an alternative
dialysis modality. The failure to conclusively demonstrate each of these
factors could significantly hinder market acceptance of the Aksys PHD system,
and the failure of the Aksys PHD system to achieve sustained commercial
viability or market acceptance would have a material adverse effect on the
Company. Moreover, the Company's future growth and profitability will depend
upon, among other things, market acceptance of the efficacy of daily dialysis.
This will require substantial marketing efforts and the
5
<PAGE>
expenditure of significant funds by the Company to inform physicians, other
healthcare providers and dialysis patients of the benefits of daily
hemodialysis and thus the benefits of the Aksys PHD system (assuming such
benefits exist, as to which there can be no assurance). In marketing this
system, the Company could encounter significant clinical and market resistance
(i) to using the Aksys PHD system; (ii) to home hemodialysis, which is
currently employed by only a very small percentage of patients suffering from
ESRD; and (iii) to daily hemodialysis, which to the Company's knowledge has
never been a conventional dialysis alternative. There can be no assurance that
the efforts of the Company will be successful or that the Aksys PHD system and
the Company's services will ever achieve market acceptance. In addition, the
Aksys PHD system is a personal system, designed for use by a single patient,
and requires several hours after a dialysis treatment to prepare itself for
the next treatment session. As such, it is not likely to be used in the
prevailing method of outpatient hemodialysis, which generally involves
treating patients three times per week for treatment sessions lasting between
three and four hours. In this prevailing method of hemodialysis, patients
receiving treatment on a given day are treated in shifts, with patients on
succeeding shifts using dialysis machines employed during prior shifts.
PRODUCT CLEARANCE OR APPROVAL UNCERTAIN; EXTENSIVE GOVERNMENT REGULATION
The Company's products, including the Aksys PHD system, are subject to
stringent government regulation in the United States and other countries. In
the United States, the Aksys PHD system is regulated as a medical device by
the FDA. Consequently, the Aksys PHD system requires either (i) FDA clearance
of a premarket notification under Section 510(k) of the Federal Food, Drug,
and Cosmetic Act (the "FDC Act") or (ii) filing of a premarket approval
application (a "PMA") under Section 515 of the FDC Act and FDA approval of
such application prior to commercialization in the United States. The Company
submitted a premarket notification under Section 510(k) of the FDC Act for
clearance of the Aksys PHD system with the FDA on March 5, 1996. The FDA has
twice declined to accept for filing the 510(k) application, has placed the
application on administrative hold and has requested clinical data derived
from the exact device, i.e., the Aksys PHD system. The process of trying to
obtain a 510(k) clearance is lengthy and expensive. The issuance of such
clearance remains uncertain. No assurance can be given that submission and
approval of a PMA will not be required before commercialization of the Aksys
PHD system. The PMA approval process entails considerably greater time (i.e.,
several years) and expense than does the 510(k) process. Depending on the
extent of clinical data required by the FDA, the 510(k) clearance could be
considerably delayed. There can be no assurance that the Company will be able
to obtain such clearance or approval in a timely manner or at all.
Furthermore, FDA clearance of a 510(k) or approval of a PMA is subject to
continual review, and later discovery of previously unknown problems may
result in restrictions on a product's marketing or withdrawal of the product
from the market.
Additional government regulations may be established or imposed which could
prevent or delay regulatory clearance or approval of the Company's products.
In addition, failure to comply with applicable regulatory requirements
following clearance or approval can, among other things, result in recall or
seizure of products, total or partial suspension of production and withdrawal
of existing product approvals or clearances. The FDC Act and other statutes
and regulations also govern the testing, labeling, storage, record keeping,
distribution, sale, marketing, advertising and promotion of the Company's
products. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution.
The manufacture of the Aksys PHD system must also comply or ensure
compliance with current Good Manufacturing Practices ("GMP") regulations
promulgated by the FDA. The Company may be required to expend time, resources
and effort in product manufacturing and quality control to ensure compliance
even if the Aksys PHD system is manufactured by an independent contractor as
is currently contemplated. If violations of the applicable regulations are
noted during FDA inspections of manufacturing facilities, the continued
marketing of the Company's products may be materially adversely affected. See
"Business--Government Regulation."
RISKS ASSOCIATED WITH FUTURE INTERNATIONAL OPERATIONS
The Company is establishing marketing and regulatory resources in Europe,
Japan and elsewhere outside of the United States in an effort to prepare for
marketing its products and services internationally. To the extent the
6
<PAGE>
Company generates significant sales outside the United States, it will be
subject to risks generally associated with international operations. In
particular, fluctuations in exchange rates of the United States dollar against
foreign currencies could adversely affect the Company's results of operations.
In addition, the collection cycle for the Company's international accounts
receivable might be somewhat longer than for its domestic accounts receivable.
International sales and operations may also be limited or disrupted by
government controls, export license requirements, political instability, price
controls, trade restrictions, changes in tariffs or difficulties in staffing
and managing such operations.
The Company's international operations will also be affected by the need to
obtain regulatory clearances or approvals. Requirements for the sale of
devices such as the Aksys PHD system vary widely from country to country,
ranging from no health regulations to detailed submissions such as those
required by the FDA. The Company has not obtained any regulatory clearances or
approvals to market the Aksys PHD system in any country, and there is no
assurance that any such approvals or clearances will be issued in a timely
manner or at all. Any change in existing federal, state or foreign laws or
regulations, or in the interpretation or enforcement thereof, or the
promulgation of any additional laws or regulations could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Government Regulation."
LIMITED MARKETING EXPERIENCE
The Company expects to market its products and services primarily through
its own sales force. The Company has limited experience in sales, marketing or
distribution and has no established sales force or significant marketing or
distribution resources. The Company intends to develop a marketing staff and
sales force. There can be no assurance that the Company will be able to build
such a marketing staff or sales force or that the cost of such will not be
prohibitive or that the Company's direct sales and marketing efforts will be
successful. See "Business--Sales and Marketing."
NEED TO DEVELOP DISTRIBUTION, CUSTOMER SERVICE AND TECHNICAL SUPPORT
ORGANIZATIONS
The Company's strategy involves contracting with dialysis providers to have
the Company supply to dialysis patients an Aksys PHD instrument, dialysate and
other consumables, patient training, customer service and maintenance and
other technical support. To provide these services, the Company will be
required to develop networks of employees or independent contractors in each
of the areas in which the Company intends to operate. There can be no
assurance that the Company will be able to organize these networks on a cost
effective basis, or at all. The failure to establish these networks would
materially adversely affect the Company. See "Business--The Aksys PHD System
and Technology" and "--Sales and Marketing."
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its and its licensors'
ability to obtain, assert and defend patent rights, protect trade secrets and
operate without infringing the proprietary rights of others. The Company owns
no patents but has licenses to a number of patents or patent applications for
inventions made by other parties and has filed patent applications of its own.
There can be no assurance, however, that patent applications owned by or
licensed to the Company will result in issued patents, that the Company will
be able to obtain additional licenses to patents of others or that it will be
able to develop additional patentable technology of its own. There can be no
assurance that any patents issued to the Company will provide it with
competitive advantages or that the patents or proprietary rights of others
will not have an adverse effect on the ability of the Company to do business.
Furthermore, there can be no assurance that others will not independently
develop similar products or that others will not design around or infringe
such patents or proprietary rights owned by or licensed to the Company.
Further, there can be no assurance that any patent obtained or licensed by the
Company will be held to be valid and enforceable if challenged by another
party. See "Business--Patents and Proprietary Rights."
7
<PAGE>
The licenses held by the Company relating to the Aksys PHD system can be
rendered non-exclusive or terminated by the licensor in the event that minimum
royalty payments are not made by the Company. If one or more of these licenses
is rendered non-exclusive or terminated, the Company could be materially and
adversely affected. See "Business--Patents and Proprietary Rights."
The Company is aware that numerous patents have issued relating to methods
of dialysis. In addition, such patents may have issued to the Company's
competitors or others of which the Company is not aware, and such patents may
issue in the future. There can be no assurance that such patents will not
conflict with the Company's or its licensors' patent rights. Such conflicts
could result in a rejection of the Company's or its licensors' patent
applications or the invalidation of patents, which could have a material
adverse effect on the Company's competitive position. In the event of such
conflicts, or in the event the Company believes that competitive products
infringe patents to which the Company holds rights, the Company may pursue
patent infringement litigation or interference proceedings against, or may be
required to defend against such litigation or proceedings involving, holders
of such conflicting patents or competing products. Such litigation or
proceedings may materially adversely affect the Company's competitive
position, and there can be no assurance that the Company will be successful in
any such litigation or proceeding. Litigation and other proceedings relating
to patent matters, whether initiated by the Company or a third party, can be
expensive and time consuming, regardless of whether the outcome is favorable
to the Company, and can result in the diversion of substantial financial,
managerial and other resources. An adverse outcome could subject the Company
to significant liabilities to third parties or require the Company to cease
any related development or commercialization activities. In addition, if
patents that contain dominating or conflicting claims have been or are
subsequently issued to others and such claims are ultimately determined to be
valid, the Company may be required to obtain licenses under patents or other
proprietary rights of others. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available
on terms acceptable to the Company, if at all. If the Company does not obtain
such licenses, it could encounter delays or could find that the development,
manufacture or sale of products requiring such licenses is foreclosed.
The Company relies on proprietary know-how and confidential information and
employs various methods, such as entering into confidentiality and noncompete
agreements with certain of its current employees and with third parties to
whom it has divulged proprietary information, to protect the processes,
concepts, ideas and documentation associated with its technologies. Such
methods may not afford significant protection to the Company, and there can be
no assurance that the Company will be able to protect adequately its trade
secrets or that other companies will not acquire information which the Company
considers to be proprietary. See "Management--Employment Agreements."
RISK OF MANUFACTURING SCALE-UP; SUBSTANTIAL RELIANCE ON
INDEPENDENTMANUFACTURING CONTRACTORS AND SUPPLIERS
To be successful, the Aksys PHD system must be manufactured in commercial
quantities and at acceptable cost. Production of this product, especially in
commercial quantities, will create technical as well as financial challenges
for the Company. To date, no Aksys PHD systems have been produced other than
as prototypes, and the Company intends to use a portion of the proceeds from
this offering to purchase assets to be utilized by independent contractors for
commercial-scale production of the Company's products. The Company may
encounter unexpected delays or costs in the scale-up of manufacturing
operations. Further, no assurance can be given that manufacturing or quality
control problems will not arise as the Company increases production of this
product or as additional manufacturing capacity is required in the future, or
that the Company will ultimately be able to successfully arrange for the
manufacturing of the Aksys PHD system.
The Company intends to rely on a single independent contractor to
manufacture several of the major components of the Aksys PHD system and
produce the final product. As with any independent contractor, such contractor
is not employed or otherwise controlled by the Company and is generally free
to conduct its business at its own discretion. Although this contractor and
certain of the Company's other manufacturing contractors have entered into
contracts with the Company to manufacture components of the Aksys PHD system,
such
8
<PAGE>
contracts can be terminated at any time under certain circumstances by the
Company or the contractors and can be breached at any time. Further, work
stoppages and the slowing of production at a single independent contractor
would have a material adverse effect on the Company. There are also other
risks inherent in using single sources of supply. The Company has not made
alternative arrangements for the manufacture of major components of the Aksys
PHD system and there can be no assurance that acceptable alternative
arrangements could be made on a timely basis or at all. It is likely that a
significant interruption in supply would result if the Company utilized or was
required to utilize a different manufacturing contractor for any of the major
components of the Aksys PHD system. The loss of the services of any of the
Company's independent manufacturing contractors would have a material adverse
effect on the Company. In addition, no assurance can be given that the Company
or its manufacturers will be able to obtain on a timely basis components or
other supplies necessary to manufacture or use the Aksys PHD system.
The Company may be required to expend time, resources and effort in product
manufacturing and quality control to ensure compliance with GMPs even if the
Aksys PHD system is manufactured by an independent contractor as is currently
contemplated. If violations of the applicable regulations are noted during FDA
inspections of the manufacturing facilities of an independent contractor, the
continued manufacturing of the Company's products by such independent
contractor could be suspended. See "Business--Government Regulation."
COMPETITORS WITH SUBSTANTIALLY GREATER RESOURCES
The dialysis industry is characterized by competition for financing,
executive talent, intellectual property and product sales. Most of the
Company's competitors have substantially greater financial, scientific and
technical resources, research and development capabilities, manufacturing and
marketing resources and experience than the Company and greater experience in
developing products, providing services and obtaining regulatory approvals.
The Company's competitors may succeed in developing products that are more
effective or less costly than any that may be developed by the Company or that
gain regulatory approval prior to the Company's products. The Company also
expects that the number of its competitors and potential competitors will
increase. In addition to manufacturers of conventional hemodialysis machines,
the Company is aware of at least one company that may be developing a machine
that could be used for daily home hemodialysis. There can be no assurance that
the Company will be able to compete successfully against any existing or
potential competitors. In order to compete effectively, the Company will need
to demonstrate the clinical and cost effectiveness of daily home hemodialysis
using the Aksys PHD system. The Company's ability to successfully market its
products and services could be adversely impacted by pharmacological and
technological advances in preventing the progression of ESRD in high-risk
patients such as those with diabetes and hypertension, technological
developments by others, development of new medications designed to reduce the
incidence of kidney transplant rejection and progress in using kidneys
harvested from genetically-engineered animals as a source of transplants. See
"Business--Competition."
NEED FOR FUTURE CAPITAL
The Company's capital requirements have been and will continue to be
significant. To date, the Company has been dependent primarily on the net
proceeds of private placements of its equity securities, aggregating
approximately $12.4 million. The Company is dependent upon the net proceeds of
this offering to fund its development and initial commercialization efforts as
well as its other working capital requirements. The Company currently has no
committed sources of, or other arrangements with respect to, additional
financing. There can be no assurance that the Company's existing capital
resources, together with the net proceeds from this offering and future
operating cash flows, will be sufficient to fund the Company's future
operations. The Company's capital requirements will depend on numerous
factors, including the time and expense involved in obtaining regulatory
approval for the Aksys PHD system and any other products developed by the
Company, the cost involved in protecting the proprietary rights of the
Company, the time and cost involved in manufacturing
9
<PAGE>
scale-up and in establishing marketing, distribution, patient training and
technical and patient support networks and the effectiveness of these and
other commercialization activities.
Generally, the Company intends to enter into contracts with its customers to
provide all products and services relating to the Aksys PHD system for a
single monthly price, which would include a lease payment for the Aksys PHD
system. Financing production of the Aksys PHD system in quantities necessary
for commercialization, as well as supplying the Aksys PHD systems on a
contracted lease basis, will require a significant investment in working
capital. This need for working capital is likely to increase to the extent
that demand for the Aksys PHD system increases and the Company leases
additional units. The Company would, therefore, have to rely on sources of
capital beyond cash generated from operations to finance production of the
Aksys PHD system even if the Company is successful in marketing its products
and services. The Company currently intends to finance the working capital
requirements associated with these arrangements through equipment financing
with a commercial lender. If the Company is unable to obtain such equipment
financing, it would need to seek other forms of financing, through the sale of
equity securities or otherwise, to achieve its business objectives. The
Company has not yet obtained a commitment for such equipment financing, and
there can be no assurance that the Company will be able to obtain equipment
financing or alternative financing on acceptable terms or at all. Any
inability to obtain financing when needed would have a material adverse effect
on the Company. Any necessary additional equity financing may involve
substantial dilution to the Company's then existing stockholders and debt
financing could result in the imposition of significant financial and
operational restrictions on the Company. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
POSSIBLE ADVERSE IMPACT OF REIMBURSEMENT POLICIES
A substantial portion of the cost of dialysis treatment in the United States
is currently reimbursed by the Medicare program at prescribed rates. The
amount of Medicare reimbursement for dialysis is likely to significantly
impact decisions of nephrologists, dialysis clinics and other health care
providers regarding treatment modalities. The Medicare reimbursement rate for
outpatient hemodialysis has not increased significantly since 1983. There can
be no assurance that the current limitations or requirements on Medicare
reimbursement for dialysis will not materially adversely affect the market for
the Aksys PHD system, that health administration authorities outside of the
United States will provide reimbursement at acceptable levels or at all or
that any such reimbursement will be continued at rates sufficient to enable
the Company to maintain prices at levels sufficient to realize an appropriate
return. See "Business--Reimbursement."
PRODUCT LIABILITY EXPOSURE
The Company's business exposes it to potential product liability risks which
are inherent in the production, marketing and sale of dialysis products. There
can be no assurance that the Company will be able to avoid significant product
liability exposure. The Company currently does not maintain product liability
insurance, but expects to acquire product liability insurance prior to patient
use of the Aksys PHD system. There can be no assurance that it will be able to
obtain such insurance on acceptable terms or at all or that any insurance
policy if obtained will provide adequate protection against potential claims.
Furthermore, the Company's agreements with contract manufacturers require the
Company to maintain product liability insurance, and the failure to obtain
such insurance could materially and adversely affect the Company's ability to
produce the Aksys PHD system. A successful claim brought against the Company
in excess of any insurance coverage obtained by the Company could have a
material adverse effect upon the Company. In addition, the Company has agreed
to indemnify certain of its contract manufacturers against certain liabilities
resulting from the use of the Aksys PHD system.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the services of its senior executives and
certain key scientific personnel, particularly its Chairman and Chief
Executive Officer, Lawrence H.N. Kinet, and its President and Chief Operating
Officer, Rodney S. Kenley. The Company does not maintain key-man life
insurance on its senior
10
<PAGE>
executives. In addition, the Company does not have employment agreements,
other than severance, confidentiality and non-competition agreements, with any
of its personnel. The loss of the services of any of the senior executives or
other of the Company's key employees could have a material adverse impact on
the Company. Also, the Company's ability to transition from development stage
to commercial operations will depend upon, among other things, the successful
recruiting of highly skilled managerial and marketing personnel with
experience in business activities such as those contemplated by the Company.
Competition for the type of highly skilled individuals sought by the Company
is intense. There can be no assurance that the Company will be able to retain
existing employees or that it will be able to find, attract and retain skilled
personnel on acceptable terms. See "Management."
CONTROL BY INSIDERS; POTENTIAL CONFLICTS OF INTEREST
Upon the consummation of this offering, the Company's current executive
officers and directors, together with certain of their affiliates, will
beneficially own approximately 47.8% of the Common Stock. These affiliates
include Coral Partners II, L.P. and Coral Partners IV, L.P. (together, "Coral
Partners") and Sand Hill Financial Company ("Sand Hill Financial"), which will
beneficially own approximately 33.0% and 4.6%, respectively, of the Common
Stock. In the event that such stockholders were to act in concert with respect
to the Company, they would be in a position generally to control the affairs
of the Company. In addition, Messrs. Peter H. McNerney and Larry G. Gerdes,
each a director of the Company, serve as general partner of the general
partner of Coral Partners and as general partner of Sand Hill Financial,
respectively. There can be no assurance that conflicts of interest will not
arise with respect to the foregoing directors or that such conflicts will be
resolved in a manner favorable to the Company. See "Management" and "Principal
Stockholders."
SUBSTANTIAL DILUTION
The existing stockholders of the Company acquired their shares at an average
cost substantially below the public offering price in this offering.
Consequently, investors in this offering will experience an immediate dilution
of $11.61 per share based on adjusted net tangible book value per share of
Common Stock after this offering (assuming a public offering price of $15.00
per share). In addition, at March 31, 1996, there were outstanding options to
purchase 1,477,250 shares of Common Stock at a weighted average exercise price
of $0.23 per share. To the extent that these options are exercised, there will
be further dilution to new investors. See "Dilution" and "Management."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's certificate of incorporation and bylaws
may inhibit changes in control of the Company not approved by the Company's
board of directors. These provisions include (i) a board divided into three
classes, each of which serves for a staggered three-year term, (ii) a "fair
price" provision, (iii) a prohibition on stockholder action through written
consents, (iv) a requirement that special meetings of stockholders be called
only by the board or the chief executive officer of the Company, (v) advance
notice requirements for stockholder proposals and nominations, (vi)
limitations on the ability of stockholders to amend, alter or repeal the
Company's bylaws and certificate of incorporation and (vii) the authority of
the Board of Directors to issue without stockholder approval preferred stock,
with such terms as the board may determine, as well as Common Stock. The
Company will also be afforded the protection of Section 203 of the Delaware
General Corporation Law ("Delaware Law"), which could have similar effects.
These provisions could limit the price that investors might be willing to pay
in the future for shares of Common Stock, and consequently could adversely
affect the market for the Common Stock. See "Description of Capital Stock."
SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ISSUANCE OF
AUTHORIZED SHARES
Future sales of substantial amounts of Common Stock in the public market and
the existence of a substantial number of authorized but unissued shares of
Common Stock could adversely affect market prices of the Common Stock
prevailing from time to time and could impair the Company's ability to raise
additional capital through
11
<PAGE>
the sale of its equity securities. Upon completion of this offering, the
Company will have 13,220,229 shares of Common Stock outstanding (based on the
number of shares outstanding as of March 31, 1996). The shares of Common Stock
sold in this offering will be freely tradeable by persons other than
"affiliates" of the Company, as that term is defined under the Securities Act,
without restrictions or further registration under the Securities Act. The
remaining 10,120,229 shares will become freely tradeable at various times
following this offering. See "Shares Eligible for Future Sale." In addition,
under the Company's Certificate of Incorporation, upon completion of this
offering there will be approximately 35,219,371 shares of Common Stock
(excluding shares reserved for issuance pursuant to outstanding stock options
and stock award and purchase plans) and 1,000,000 shares of Preferred Stock
available for future issuance without stockholder approval. See "Description
of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock has been determined by
negotiations between the Company and the Representatives of the Underwriters.
For a description of the factors considered in determining the initial public
offering price, see "Underwriting." The market price of the Company's
securities following this offering may be highly volatile as has been the case
with the securities of other start-up companies. Factors such as the Company's
financial results, regulatory approval delay or denial, introduction of new
products by the Company or its competitors, government and private
reimbursement policies relating to dialysis and various factors affecting the
dialysis industry generally, may have a significant impact on the market price
of the Common Stock. In particular, the market price of the Common Stock could
be materially adversely affected by reports by official or unofficial health
or medical authorities or the general media regarding the potential benefits
or detriments of the Aksys PHD system or of similar products distributed by
other companies or of daily dialysis, regardless of whether such reports are
scientifically supported and regardless of whether the Company's operating
results are likely to be affected by such reports. Additionally, in recent
years, the stock market has experienced a high level of price and volume
volatility and market prices for the stock of many companies (particularly of
small and emerging growth companies) have experienced wide price fluctuations
which have not necessarily been related to the operating performance of such
companies. These broad market fluctuations could have a material adverse
effect on the market price of the Common Stock.
ABSENCE OF DIVIDENDS
The Company has never paid any dividends on its capital stock and does not
expect to pay any dividends on its capital stock for the foreseeable future.
See "Dividend Policy."
12
<PAGE>
THE COMPANY
The Company was incorporated in 1991 in the State of Illinois and
reincorporated in 1993 in the State of Delaware. Unless otherwise stated in
this Prospectus or unless the context otherwise requires, references to the
"Company" include its predecessor. The Company's principal executive offices
are located at 1113 S. Milwaukee Avenue, Suite 300, Libertyville, Illinois
60048 and its telephone number is (847) 247-6051.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting underwriting discounts and commissions and
estimated expenses payable by the Company in connection with this offering,
are estimated to be approximately $42.5 million ($49.0 million if the
Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $15.00 per share.
The Company intends to use approximately $37.5 million of the net proceeds
it receives from this offering for manufacturing scale-up and
commercialization of the Aksys PHD system consisting of (i) approximately $7.5
million for the purchase of molds, tooling and other assets to be used by
independent contractors to produce the Aksys PHD system and other
preproduction costs of such contractors payable by the Company, (ii)
approximately $10.0 million for product testing and validation including the
purchase of preproduction Aksys PHD systems from such independent contractors,
(iii) approximately $5.6 million for establishing and training staff for
sales, marketing, customer service and technical support, (iv) approximately
$9.0 million for inventory buildup, (v) approximately $2.9 million for
establishing administrative and financial infrastructure and (vi)
approximately $2.5 million for marketing and promotional expenses. The Company
also intends to spend approximately $2.5 million of the net proceeds for
clinical studies, approximately $500,000 to relocate to new facilities and the
approximately $2.0 million remainder of the net proceeds for working capital
and general corporate purposes. While the Company believes that the proceeds
of this offering will be sufficient for such purposes, there can be no
assurance that the proceeds of this offering will be sufficient for the
Company to commercialize the Aksys PHD system.
The actual amount of the net proceeds of this offering expended for each
purpose may vary significantly depending upon many factors, including the
status of the development of the Aksys PHD system, the time and costs involved
in obtaining regulatory approvals, the costs involved in filing, prosecuting
and enforcing patent claims, and competing technological and market
developments. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds of the offering in short-term,
interest bearing securities of investment grade or in short-term bank
deposits. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, the pro forma capitalization of the Company at such date giving
effect to the conversion of all outstanding shares of Preferred Stock into
9,248,136 shares of Common Stock and such pro forma capitalization as adjusted
to give effect to the sale of the shares of Common Stock offered hereby (at an
assumed public offering price of $15.00 per share) and the receipt of the net
proceeds therefrom. This table should be read in conjunction with the more
detailed financial data and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Long-term debt (excluding current
maturities)(1)...................... $ 29,577 $ 29,577 $ 29,577
------------ ------------ ------------
Redeemable preferred stock, Series A,
B, C and D, par value $.01 per
share; 6,165,424 shares authorized;
6,165,424 shares issued and
outstanding, actual; and no shares
issued or outstanding, pro forma and
as adjusted......................... 12,406,761 -- --
------------ ------------ ------------
Stockholders' equity(2):
Preferred Stock, par value $.01 per
share; 1,000,000 shares authorized;
none issued or outstanding......... -- -- --
Common Stock, par value $.01 per
share; 50,000,000 shares
authorized; 861,457 shares issued
and outstanding, actual; 10,109,593
shares issued and outstanding, pro
forma; and 13,209,593 shares issued
and outstanding, as adjusted (3)... 8,614 101,096 132,096
Additional paid-in capital.......... -- 12,314,279 54,778,279
Deficit accumulated during
development stage.................. (10,077,885) (10,077,885) (10,077,885)
------------ ------------ ------------
Total stockholders' equity
(deficit)......................... (10,069,271) 2,337,490 44,832,490
------------ ------------ ------------
Total capitalization............. $ 2,367,067 $ 2,367,067 $ 44,862,067
============ ============ ============
</TABLE>
- --------
(1) Consists of installment notes payable and capital lease obligations.
(2) Gives effect to an amendment to the Company's certificate of incorporation
effective April 1996.
(3) Excludes 1,477,250 shares of Common Stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $.23 per share
at March 31, 1996. See "Management--1993 Stock Option Plan." Also excludes
10,636 shares of Common Stock issued subsequent to March 31, 1996.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain all future earnings, if any, to fund the
development, commercialization and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements from time to time and such other
factors as the Board of Directors deems relevant. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996 was
$2,337,490, or $0.23 per share of Common Stock. Pro forma net tangible book
value per share is determined by dividing the net tangible book value (total
tangible assets less total liabilities) of the Company by the number of shares
of Common Stock outstanding, giving pro forma effect to the conversion of all
outstanding shares of Preferred Stock into 9,248,136 shares of Common Stock.
Without taking into account any changes in the pro forma net tangible book
value of the Company, other than to give effect to the sale of the shares of
Common Stock offered hereby (assuming a public offering price of $15.00 per
share) and receipt of the net proceeds therefrom, the adjusted pro forma net
tangible book value of the Company at March 31, 1996 would have been
$44,832,490, or $3.39 per share. This represents an immediate dilution in net
tangible book value of $11.61 per share to new investors purchasing shares in
the offering and an immediate increase in net tangible book value of $3.16 per
share to existing stockholders. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $15.00
Pro forma net tangible book value per share at March 31,
1996........................................................ $ .23
Increase per share attributable to new investors (1)......... 3.16
-----
Pro forma net tangible book value after the offering........... 3.39
------
Dilution to new investors (2).................................. $11.61
======
</TABLE>
--------
(1)After deduction of underwriting discounts and commissions and estimated
offering expenses.
(2) Determined by subtracting the adjusted pro forma net tangible book
value per share after the offering from the amount of cash paid by a
new investor for a share of Common Stock.
The following table sets forth on a pro forma basis as of March 31, 1996
(giving pro forma effect to the conversion of all outstanding shares of
Preferred Stock into 9,248,136 shares of Common Stock) the number of shares of
Common Stock purchased from the Company, the total consideration paid (based
upon, in the case of new investors, an assumed public offering price of $15.00
per share and before deduction of estimated underwriting discounts and
commissions and offering expenses) and the average price per share paid by
existing stockholders and by new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 10,109,593 76.5% $12,479,767 21.2% $ 1.23
New investors.......... 3,100,000 23.5 46,500,000 78.8 15.00
---------- ----- ----------- -----
Total................ 13,209,593 100.0% $58,979,767 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of outstanding options and excludes
10,636 shares of Common Stock issued subsequent to March 31, 1996. At March
31, 1996, there were outstanding options to purchase 1,477,250 shares of
Common Stock at a weighted average exercise price of $0.23 per share. To the
extent that any of these options or additional options granted after March 31,
1996 are exercised, there will be further dilution to new investors. See
"Management--1993 Stock Option Plan" and Note 6 of Notes to Financial
Statements.
15
<PAGE>
SELECTED FINANCIAL DATA
The following statement of operations data for each of the years ended
December 31, 1993, 1994 and 1995 and for the period January 18, 1991
(inception) through December 31, 1995 and the balance sheet data at December
31, 1994 and 1995 are derived from the financial statements of the Company,
which have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, and are included elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1991 and 1992, and for the
three months ended March 31, 1995 and 1996 and the balance sheet data at
December 31, 1991, 1992 and 1993 and at March 31, 1996 are derived from
unaudited financial statements and are not, with the exception of the March
31, 1995 and 1996 data, included herein; however, in the opinion of management
such unaudited data include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the information included
therein. The financial data for the Company should be read in conjunction with
the Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. Operating results for the three months ended March 31,
1996 are not necessarily indicative of results that may be expected for the
full year.
<TABLE>
<CAPTION>
CUMULATIVE FROM
THREE MONTHS ENDED JANUARY 18, 1991
YEAR ENDED DECEMBER 31, MARCH 31, (INCEPTION)
-------------------------------------------------------- ------------------------ THROUGH
1991(1) 1992 1993 1994 1995 1995 1996 MARCH 31, 1996
--------- -------- --------- ----------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Operating costs and
expenses:
Research and
development....... $ -- $ -- $ 598,748 $ 1,808,638 $ 4,261,230 $ 851,318 $ 1,412,506 $ 8,081,122
General and
administrative.... 79,944 36,124 213,923 266,418 1,236,143 253,514 489,190 2,321,742
--------- -------- --------- ----------- ----------- ----------- ----------- ------------
Operating loss...... (79,944) (36,124) (812,671) (2,075,056) (5,497,373) (1,104,832) (1,901,696) (10,402,864)
Other income, net... 51,225 17,948 31,582 40,174 152,710 17,676 34,373 328,012
--------- -------- --------- ----------- ----------- ----------- ----------- ------------
Net loss............ $ (28,719) $(18,176) $(781,089) $(2,034,882) $(5,344,663) $(1,087,156) $(1,867,323) $(10,074,852)
========= ======== ========= =========== =========== =========== =========== ============
Pro forma net loss
per share (2)...... $ (0.52) $ (0.18)
=========== ===========
Weighted average
shares used to
compute pro forma
net loss per share
(2)................ 10,322,837 10,322,837
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
-------- -------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 1,182 $ 2,943 $ 648,193 $ 1,007,015 $ 3,957,105 $ 2,102,225
Working capital
(deficit).............. (20,340) 2,216 539,127 723,512 3,565,263 1,564,787
Total assets............ 27,533 26,505 845,679 1,476,892 4,693,450 2,949,499
Long-term liabilities
(3).................... -- -- 22,861 84,436 35,761 29,577
Redeemable preferred
stock.................. -- -- 1,500,000 3,900,000 12,406,761 12,406,761
Deficit accumulated
during development
stage.................. (28,719) (46,895) (827,984) (2,862,866) (8,210,562) (10,077,885)
Total stockholders'
equity (deficit)....... 5,371 25,778 (807,928) (2,845,166) (8,201,948) (10,069,271)
</TABLE>
- --------
(1) Represents period from January 18, 1991 (date of inception) through
December 31, 1991.
(2) Computed on the basis described in Note 1 of Notes to Financial
Statements.
(3) Consists of installment notes payable and capital lease obligations.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
Since its inception in January 1991, the Company has been engaged in the
development of hemodialysis products and services for patients suffering from
ESRD. The Company has developed the Aksys PHD system, which is designed to
enable patients to perform hemodialysis in a self-care setting, such as the
patient's home, on a daily basis. The Company has never generated sales
revenue and has incurred losses since inception. At March 31, 1996, the
Company had a deficit accumulated during the development stage of $10.2
million. The Company expects to incur additional losses in the foreseeable
future at least until such time, if ever, that it obtains necessary regulatory
clearances or approvals from the FDA to market the Aksys PHD system in the
United States or it is able to market the Aksys PHD system in countries other
than the United States.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Research and development expenses were $1.4 million for the three months
ended March 31, 1996 compared to $851,000 for the three months ended March 31,
1995, an increase of $561,000. The increase was primarily due to additions in
research and development personnel, expenses associated with the PHD
instrument manufacturing transition, and additional expenses for testing and
validation.
General and administrative expenses were $489,000 for the three months ended
March 31, 1996 compared to $254,000 for the three months ended March 31, 1995,
an increase of $235,000. The increase was primarily due to hiring of
additional management personnel and consultants to support the Company's
product and business development, and expenses related to the filing of
patents and trademarks.
Net interest income for the three months ended March 31, 1996 was $34,000
compared to $18,000 for the three months ended March 31, 1995. The increase in
net interest income was primarily due to the investment of funds generated
from the sale of the Series D Redeemable Preferred Stock of the Company in
September 1995 in short-term securities.
As a result of the foregoing, the Company's net loss was $1.9 million for
the three months ended March 31, 1996 compared to $1.1 million for the three
months ended March 31, 1995, an increase of $800,000. Research and development
expenses were approximately 76% and 78% of net losses for the three months
ended March 31, 1996 and March 31, 1995, respectively.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Research and development expenses were $4.3 million for the year ended
December 31, 1995 compared to $1.8 million for the year ended December 31,
1994, an increase of $2.5 million. The increase was primarily due to hiring
additional research and development personnel, making prototypes of the Aksys
PHD system and expenses incurred in preparation of manufacturing scale-up.
General and administrative expenses were $1.2 million for the year ended
December 31, 1995 compared to $266,000 for the year ended December 31, 1994,
an increase of $970,000. The increase was primarily due to hiring additional
management personnel and consultants to support the Company's continued
development of the Aksys PHD system and expenses related to the filing of
patent applications.
Net interest income was $153,000 for the year ended December 31, 1995
compared to $40,000 for the year ended December 31, 1994, an increase of
$113,000. The increase in net interest income was primarily due to the
17
<PAGE>
investment in short-term securities of funds generated from the sale of Series
C Redeemable Preferred Stock in March 1995 and Series D Redeemable Preferred
Stock in September 1995.
As a result of the foregoing, the Company's net loss was $5.3 million for
the year ended December 31, 1995, an increase of $3.3 million from the $2.0
million net loss for the year ended December 31, 1994. Research and
development expenses were approximately 80% and 89% of net losses for the
years ended December 31, 1995 and 1994, respectively.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Research and development expenses were $1.8 million for the year ended
December 31, 1994 compared to $599,000 for the year ended December 31, 1993,
an increase of $1.2 million. The increase was primarily due to hiring
additional research and development personnel.
General and administrative expenses were $266,000 for the year ended
December 31, 1994 compared to $214,000 for the year ended December 31, 1993,
an increase of $52,000. The increase was primarily due to hiring additional
management personnel to support the Company's continued development of the
Aksys PHD system and the relocation of the Company to a new facility.
Net interest income was $40,000 for the year ended December 31, 1994
compared to $32,000 for the year ended December 31, 1993, an increase of
$8,000. The increase in net interest income was primarily due to the
investment of short-term securities of funds generated from the sale of Series
B Redeemable Preferred Stock in April 1994.
As a result of the foregoing, the net loss was $2.0 million for the year
ended December 31, 1994, an increase of $1.2 million from the $781,000 net
loss for the year ended December 31, 1993. Research and development expenses
were approximately 89% and 77% of net losses for the years ended December 31,
1994 and 1993, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through private
sales of its equity securities. Through March 31, 1996, the Company had
received net offering proceeds from private sales of equity securities of
approximately $12.4 million. Since its inception in 1991 through March 31,
1996, the Company made $800,000 of capital expenditures and used $9.5 million
in cash to support its operations. At March 31, 1996, the Company had cash,
cash equivalents and short-term investments of $2.1 million and working
capital of $1.5 million.
At March 31, 1996, the Company had a deficit accumulated during the
development stage of $10.1 million. The Company expects to incur additional
losses in the foreseeable future at least until such time, if ever, that it
obtains necessary regulatory clearances or approvals from the FDA to market
the Aksys PHD system in the United States or it is able to market the Aksys
PHD system in countries other than the United States.
The Company estimates that during 1996 it will spend approximately $11.5
million for manufacturing scale-up and commercialization of the Aksys PHD
system. The Company expects that substantially all of this amount will be used
to (i) purchase molds, tooling and other assets to be used by independent
contractors to produce the Aksys PHD system and pay for other preproduction
costs of such contractors payable by the Company, (ii) product testing and
validation including the purchase of preproduction Aksys PHD systems from such
independent contractors, (iii) establishing and training a sales and marketing
staff and (iv) establishing and training a customer service and technical
support staff. The Company also estimates that during 1996 it will spend
approximately $100,000 for clinical studies using the Aksys PHD system and
approximately $500,000 to relocate to new facilities. See "Use of Proceeds,"
"Business--Business Strategy" and "Manufacturing and Suppliers." The Company
expects to continue to incur substantial expenses related to manufacturing
scale-up and commercialization of the Aksys PHD system, protection of patent
and other proprietary rights and facility expansion. While the Company
believes that the proceeds of this offering will be sufficient for such
purposes,
18
<PAGE>
there can be no assurance that the proceeds of this offering will be
sufficient for the Company to commercialize the Aksys PHD system.
Generally, the Company intends to enter into contracts with its customers to
provide all products and services relating to the Aksys PHD system for a
single monthly price, which would include a lease payment for the Aksys PHD
system. Financing production of the Aksys PHD system in quantities necessary
for commercialization, as well as supplying the Aksys PHD systems on a
contracted lease basis, will require a significant investment in working
capital. This need for working capital is likely to increase to the extent
that demand for the Aksys PHD system increases and the Company leases
additional units. The Company would, therefore, have to rely on sources of
capital beyond cash generated from operations to finance production of the
Aksys PHD system even if the Company is successful in marketing its products
and services. The Company currently intends to finance the working capital
requirements associated with these arrangements through equipment financing
with a commercial lender, although the Company has not yet obtained a
commitment for such equipment financing. If the Company is unable to obtain
such equipment financing, it would need to seek other forms of financing,
through the sale of equity securities or otherwise, to achieve its business
objectives. There can be no assurance that the Company will be able to obtain
equipment financing or alternative financing on acceptable terms or at all.
The Company expects to use the proceeds of this offering to fund its
development and initial commercialization efforts as well as its other working
capital requirements. The Company anticipates, based on its currently proposed
plans and assumptions relating to its operations (including assumptions
regarding the timing and costs associated with obtaining FDA approval for, and
the production and marketing of, the Aksys PHD system), that the net proceeds
of this offering will be sufficient to satisfy the Company's contemplated
funding requirements through 1997, assuming it is able to obtain the equipment
financing described above. If it is not able to obtain adequate equipment
financing, it will need to obtain other financing prior to the second half of
1997 if it is to achieve market launch as currently contemplated.
The Company's funding needs will depend on many factors, including the
timing and costs associated with obtaining FDA clearance or approval,
continued progress in the research and development, clinical studies,
manufacturing scale-up, the cost involved in filing and enforcing patent
claims and the status of competitive products. In the event that the Company's
plans change, its assumptions change or prove inaccurate, it is unable to
obtain production financing or to obtain such financing on commercially
reasonable terms or if the proceeds of this offering, together with other
capital resources, otherwise prove to be insufficient to fund operations, the
Company could be required to seek additional financing sooner than currently
anticipated. In addition, in the future the Company will require substantial
additional financing to fund full-scale production and marketing of the Aksys
PHD system and related services. The Company has no current arrangements with
respect to sources of additional financing. There can be no assurance that FDA
clearance or approval will be obtained in a timely manner or at all or that
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all. See "Risk Factors--Product Clearance
or Approval Uncertain; Extensive Government Regulation" and "--Need for Future
Capital" and "Use of Proceeds."
The Company has not generated taxable income to date. At March 31, 1996, the
net operating losses available to offset future taxable income were
approximately $10.0 million. Because the Company has experienced ownership
changes, future utilization of the carryforwards may be limited in any one
fiscal year pursuant to Internal Revenue Code regulations. The carryforwards
expire at various dates beginning in 2008. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce federal income tax liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS
In accordance with Statement of Financial Accounting Standards No. 123, the
Company will continue to measure compensation cost for stock options using the
intrinsic value-based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The disclosure requirements of
Statement No. 123 will be incorporated into the December 31, 1996 financial
statements.
19
<PAGE>
BUSINESS
GENERAL
The Company was formed to provide hemodialysis products and services for
patients suffering from end stage renal disease, commonly known as chronic
kidney failure. The Company has developed an automated personal hemodialysis
system which is designed to enable patients to perform hemodialysis in a self-
care setting, such as the patient's home, on a daily basis. The Company
believes that its products and services will provide a superior alternative to
currently available kidney dialysis treatment modalities by providing better
clinical outcomes, lower overall costs and improved quality of life for
dialysis patients. The Company has submitted a 510(k) premarket notification
to the FDA to market the Aksys PHD system and, if clearance is granted, the
Company plans commercial launch of its products and services during 1997. See
"Business--Government Regulation." There can be no assurance that the Company
will be able to obtain regulatory clearance or approval in a timely manner or
at all.
INDUSTRY OVERVIEW
End Stage Renal Disease
A healthy human kidney continuously removes waste products and excess water
from the blood. ESRD is a slow, progressive loss of kidney function caused by
inherited disorders, prolonged medical conditions such as diabetes and
hypertension or the long-term use of certain medications. ESRD is irreversible
and lethal if untreated. Life can be sustained only through either
transplantation or dialysis. Transplantation is severely limited due to the
shortage of suitable donors, the incidence of organ transplant rejection and
the age and health of many ESRD patients. The vast majority of patients,
therefore, must rely on dialysis for the remainder of their lives.
Based upon information published by HCFA, the approximate number of ESRD
patients in the United States requiring dialysis treatments has grown from
66,000 at the end of 1982 to 187,000 at the end of 1994, representing a
compound annual growth rate of approximately 9%. In addition, according to
international patient registries compiled by the USRDS, there were
approximately 240,000 dialysis patients in Europe and Japan in 1993.
Reimbursement for dialysis treatments in the United States in 1995 is
estimated by the Company to have exceeded $3.5 billion. The Company believes
that the sustained growth in the ESRD population, especially in the United
States, has been caused by (i) the aging of the population (the median age of
newly diagnosed ESRD patients in the United States is 62), (ii) the greater
longevity of patients with diabetes and hypertension, two patient groups at
high risk for ESRD, and (iii) the relatively more rapid growth in the general
population of certain ethnic subsets that have a higher incidence of ESRD.
Given the expense of kidney dialysis treatments and the lack of effective
alternative therapies, in 1972 Congress enacted legislation providing for
Medicare funding for all eligible patients with ESRD regardless of age or
financial circumstances. Under this program, Medicare is responsible for
payment of 80% of the rate set by HCFA for reimbursement of outpatient
dialysis. Although this program brought dialysis to virtually all patients in
need of treatment, the cost of funding the program grew rapidly, quickly
exceeding original expectations. In an effort to hold down these costs,
Congress has capped the Medicare reimbursement rate for outpatient dialysis
since 1983 at approximately $20,000 per patient per year. The costs of
operating dialysis centers, however, such as capital, labor and facility
overhead, have continued to rise. These circumstances incentivize dialysis
providers to seek ways of reducing dialysis costs. For example, certain
dialysis providers may be shortening dialysis treatments, reusing medical
equipment and supplies intended for a single use and shifting the
responsibilities of doctors and nurses to employees with less training.
20
<PAGE>
Prevailing Treatment Methods
Hemodialysis and peritoneal dialysis are the two prevailing methods of
dialysis.
Hemodialysis. HCFA estimates that as of December 31, 1994, approximately 83%
of the ESRD dialysis patients in the United States were receiving
hemodialysis. Approximately 2% of these patients perform treatment in their
homes, and all others receive treatment at outpatient facilities. Outpatient
hemodialysis requires that a patient travel to a dialysis clinic three times
per week for dialysis sessions lasting three to four hours. In each session,
the patient's blood is cleansed by circulation through an artificial kidney
controlled by a dialysis machine.
Home hemodialysis was common practice prior to Medicare funding, with
approximately 42% of the 11,000 United States dialysis patients on home
hemodialysis in 1973. Although the initial motivation for performing home
treatment for many patients was to reduce the cost of hospital-based dialysis,
clinicians report that many of these patients found significant advantages in
quality of life when treating themselves at home. As Medicare funding became
available, however, the vast majority of patients began receiving treatment in
outpatient facilities, and hemodialysis machines became more complex and
sophisticated as they evolved for use in clinics. The dialysis machines
currently used in these centers are predominantly operated by trained
personnel and require significant manual preparation and cleaning in
connection with each treatment session.
Peritoneal Dialysis. HCFA estimates that as of December 31, 1994,
approximately 17% of the ESRD dialysis patients in the United States were
receiving peritoneal dialysis, with over 98% performing such treatment in
their homes. There are two principal forms of peritoneal dialysis, and all
forms use the patient's peritoneum, a large membrane rich in blood vessels
that surrounds many of the body's internal organs, as a filter to eliminate
toxins and excess fluids from the patients's blood. Dialysate, a blood-
cleansing electrolyte solution, is infused through a catheter into the
patient's peritoneal cavity. Once this fluid absorbs the toxins and excess
water that are filtered from the blood through the peritoneum, it is drained
from the peritoneal cavity through a catheter. In the most common form of
peritoneal dialysis, Continuous Ambulatory Peritoneal Dialysis ("CAPD"), the
process of exchanging dialysate into and out of the patient's peritoneal
cavity occurs four times daily, seven days per week. The other form,
Continuous Cycling Peritoneal Dialysis ("CCPD"), uses an instrument to
automatically perform exchanges of solution through the peritoneal cavity
overnight, while the patient sleeps. Both forms require strict aseptic
technique.
Limitations of Prevailing Treatment Methods
Hemodialysis. Outpatient hemodialysis has produced relatively poor clinical
outcomes, high total treatment costs and low quality of life for dialysis
patients. These clinical outcomes are reflected in the mortality rates of
dialysis patients which, according to the National Kidney Foundation, in 1992
were 23.6% in the United States as compared to 11.0% in France and 9.7% in
Japan. Although mortality rates are influenced by many factors, including the
relative risk of death determined by considering age, overall health and other
variables, a study published in 1994 indicates that, even after adjusting for
relative risk of death, the mortality rate in the United States was twice that
of Japan. While the exact cause of this difference in mortality rates has not
been established, the USRDS has determined that mortality in patients is
highly correlated to the dose of dialysis delivered to patients. In general,
the dose of dialysis depends on the performance of the artificial kidney,
patient size and the duration of treatment.
Patients receiving outpatient hemodialysis experience a number of chronic
and acute health problems. The chronic problems include hypertension, anemia
(low red blood cell count), malnutrition, fluid and electrolyte imbalance,
calcium deficiency, insomnia, sexual impotency, decreased mental acuity and
lower energy levels. The acute problems include headaches, nausea, hypotension
and asthenia (a general lack of strength and vitality), which are associated
with thrice weekly dialysis sessions. In addition, a general feeling of ill
health tends to increase between dialysis treatments as a result of toxins,
sodium and water building up in the patient's blood. These side effects have a
significant impact on (i) clinical outcomes, with the leading cause of death
among ESRD patients being cardiovascular disease, which many clinicians
believe is caused in large part by oscillations in toxins, sodium and body
fluid levels, (ii) total patient costs, resulting from the frequent need to
hospitalize ESRD patients as well as the need to treat anemia and hypertension
with medication and (iii) patient quality of life, with patients having to not
only suffer through these chronic and acute health problems, but also
essentially to devote three days per week to the treatment regimen.
21
<PAGE>
The Company believes that these health problems are caused in part by
inadequate dose of dialysis. The amount of toxins removed from the blood during
dialysis is widely accepted to be determined by a formula indicating that
hemodialysis is most efficient in the earlier stages of therapy. The efficiency
of dialysis in removing toxins over time is predicted by this formula which is
shown below in simplified form for purposes of illustration.
LOGO
Thus, simply increasing the duration of a treatment session is not the most
efficient way to improve the dose of hemodialysis. Rather, the efficiency of
hemodialysis and the delivered dose can be improved with more frequent dialysis
sessions of shorter duration. For example, one informal study by Dr. Umberto
Buoncristiani, a member of the Company's Scientific Advisory Board, has
indicated that six sessions lasting two hours are able to remove over 40% more
urea than three sessions lasting four hours using common dialysis parameters.
More frequent sessions also decrease the severe oscillations in toxin and
hydration levels associated with the prevailing thrice weekly dialysis regimen
and should result in fewer side effects.
The clinical outcomes of conventional dialysis have contributed to the
significant patient treatment cost to Medicare. According to HCFA, total
treatment costs per dialysis patient paid by Medicare have risen from $33,400
in 1988 to $44,400 in 1991. Based on historical growth rates provided by HCFA,
the cost per dialysis patient paid by Medicare in 1995 is estimated by the
Company to be approximately $58,000. The cost of hospitalization on a fee for
service basis represents the most significant component of this increase. While
reimbursement for outpatient hemodialysis treatment (the "composite rate") has
been capped since 1983, reimbursement for the associated cost of care due to
chronic and acute health problems and other complications continues to be
reimbursed on a fee for service basis. Under this reimbursement scheme,
providers have an incentive to reduce the cost of outpatient dialysis rather
than the total cost of treating dialysis patients. The following chart
illustrates the growth in annual cost per patient paid by Medicare:
LOGO
22
<PAGE>
The Company expects that Medicare will eventually change its reimbursement
with respect to ESRD patients to a managed care system where all costs of
treating ESRD patients are subject to a cap. This would incentivize providers
to focus on clinical outcomes in order to reduce the total cost of care.
Congress has mandated a demonstration project to evaluate the benefits of a
managed care approach, in which providers would be paid a capitated rate
covering both in-patient and outpatient care, for this patient population.
This project is scheduled to begin in 1997 and to run for three years.
Peritoneal Dialysis. Although peritoneal dialysis accounted for 17% of the
dialysis patient population in 1994, according to HCFA, approximately 18% of
the home dialysis patients in the United States switched to outpatient
dialysis. The Company believes that most of these patients switched from
peritoneal dialysis to outpatient hemodialysis because of the following
limitations presented by CAPD, the most common form of peritoneal dialysis:
(i) due to the limited efficiency of using the peritoneal membrane as a filter
for toxin removal, patients must have a relatively low body weight or have
some residual kidney function to achieve adequate levels of dialysis (once
residual kidney function is lost, which is eventually the case in most
patients, CAPD is no longer a viable treatment for a majority of the
population); (ii) CAPD demands considerable responsibility and time to perform
the required four exchanges of solution each day, which often causes patient
"burnout" and non-compliance with the prescribed regimen; (iii) peritoneal
dialysis demands that patients follow strict aseptic techniques when changing
dialysate bags because the failure to do so often leads to peritonitis, an
infection of the peritoneum; and (iv) the supplies used in peritoneal dialysis
require considerable storage space given the quantity of dialysate (up to 30
large boxes per month) used in this treatment.
The Company believes that most new peritoneal dialysis patients choose CCPD,
in part, in an attempt to improve clinical outcomes. Although CCPD addresses
some of the limitations imposed by CAPD, it continues to present a risk of
infection of the peritoneum and in many cases requires some residual kidney
function to achieve adequate levels of dialysis. Moreover, because CCPD must
often be supplemented with peritoneal dialysis performed by the patients
during the day using the CAPD method, patient "burnout" also occurs.
Daily Hemodialysis Alternative
The Company believes that increasing the frequency of hemodialysis
treatments while decreasing the length of each treatment session can
significantly improve clinical outcomes and patient quality of life while
reducing the total cost of managing ESRD patients. The Company has compiled
data on 52 patients dialyzing six or seven times per week, which included
approximately 24 patients from an earlier study of daily hemodialysis
conducted by Dr. Umberto Buoncristiani, a member of its Scientific Advisory
Board. The data obtained from these retrospective studies indicates that the
patients involved, when dialyzing six or seven times per week, experienced
normalization of blood pressure, decreased incidence of anemia, improved
appetite and decreased mortality. In addition, according to Dr. Buoncristiani,
most of the ESRD patients who performed hemodialysis on a daily basis in his
study reported that daily hemodialysis gave them a more positive attitude
toward treatment and higher quality of life. Neither the Company nor the Aksys
PHD system was involved in the treatments received by patients in these
studies and the Company did not fund these studies. Moreover, patient
selection for these studies was not randomized; the Company gathered the data
on a retrospective basis from providers that it knew were treating patients
with a daily hemodialysis regimen. Consequently there can be no assurance that
the patient populations in these studies are representative of the general
ESRD patient population. As a result, these studies should not be considered
as definitively establishing the impact of daily hemodialysis on clinical
outcomes.
Despite the potential benefits of daily hemodialysis, several barriers have
prevented it from becoming a viable treatment regimen. The most significant is
the economic implication of administering hemodialysis to patients every day.
Under the current capped Medicare reimbursement level, dialysis providers
cannot afford the additional costs that would be incurred in providing daily
treatments in outpatient facilities. Requiring daily visits to a dialysis
treatment facility would also place additional burdens on a patient's
lifestyle.
There is also a perception that vascular access complications arising from
inserting the needles into the patient's blood access site may increase with
daily treatment sessions. These complications are common in the
23
<PAGE>
clinical setting already and account for a significant portion of the cost of
treating patients. The Company believes, however, that vascular access
complications should not increase with daily hemodialysis sessions in a home
or self-care setting and such complications may in fact decrease. There are a
number of approaches to vascular access that may enhance daily treatments,
including (i) the use of "single needle" vascular access devices which reduce
the number of punctures by half, (ii) the use of central venous catheters
which eliminate the need to use needles at all, and (iii) the practice of
inserting needles in the same site each day, which has been demonstrated to
have several benefits according to publications by Dr. Zbylut J. Twardowski, a
leading dialysis researcher and the Chairman of the Company's Scientific
Advisory Board.
The Company believes that most barriers to daily hemodialysis could be
overcome if it were available in the patient's home, but to date no
hemodialysis machine has become widely available that would make daily home
hemodialysis a feasible alternative therapy for the general dialysis patient
population.
THE AKSYS SOLUTION
Aksys has developed an automated personal hemodialysis system. By addressing
the many drawbacks of conventional hemodialysis systems, which have prevented
the widespread use of home hemodialysis, the Company believes its products and
services can be instrumental in improving clinical outcomes, decreasing the
total treatment costs and improving quality of life for dialysis patients. The
following chart describes how the Aksys PHD system addresses the drawbacks
presented when ESRD patients use conventional systems for home hemodialysis:
<TABLE>
<CAPTION>
DRAWBACK CONVENTIONAL HOME SYSTEMS AKSYS PHD SYSTEM
- ------------------------------------------------------------------------------------
<S> <C> <C>
Complexity Complicated equipment designed Designed for operation by
for operation only by trained patients at home through
personnel. computerized, user-friendly
interface.
- ------------------------------------------------------------------------------------
Time and Effort Difficult and time consuming Fully automated, requiring
to setup, operate, clean and minimal patient involvement.
maintain.
- ------------------------------------------------------------------------------------
Cost of Consumables Requires frequent replacement Integrated automatic
of blood circuit. disinfection system designed
to enable safe and effective
reuse of blood circuit.
- ------------------------------------------------------------------------------------
Clinical Monitoring Patient treatment compliance Patient monitored by, and able
monitoring and patient ability to communicate with, clinic
to consult with clinic not through real time on-line
available unless treatment monitoring system.
received in an outpatient
facility.
- ------------------------------------------------------------------------------------
Partner Involvement Partner required to operate Designed to be operated solely
machine and assist patient. by patient in most cases.
- ------------------------------------------------------------------------------------
Storage Large volume of consumables Substantially fewer and
Requirements and dialysate consumed each smaller items consumed with
month. each treatment.
- ------------------------------------------------------------------------------------
Transportability Equipment not easily Designed to be easily
transportable. Water transportable. All essential
purification separate from components, including water
dialysis machine. Patient must purification system, are
arrange to visit local clinic integrated in machine and
when traveling. separable into three modules.
</TABLE>
24
<PAGE>
Although the most common form of peritoneal dialysis, CAPD, does not require
a dialysis machine, as discussed above, peritoneal dialysis has inherent
limitations. The Company believes that the Aksys PHD system addresses the
primary drawback of both forms of peritoneal dialysis by delivering a
substantially greater dose of dialysis in significantly less time.
Furthermore, by enabling the use of daily hemodialysis, the Aksys PHD system
overcomes other limitations of peritoneal dialysis such as the risk of
peritonitis and patient non-compliance to the prescribed regimen.
The Aksys PHD system is intended to reduce total treatment costs for ESRD
patients, including hospitalization costs. There is no reliable way at this
time, however, to quantify the potential savings in total treatment costs. The
Company expects that the Aksys PHD system will be priced at a cost comparable
to that of competing dialysis treatment modalities. Thus, the Company expects
there to be little or no reduction in dialysis cost (as opposed to total
treatment costs) associated with the Aksys PHD system.
Although the Company believes that the Aksys PHD system provides a solution
to many of the problems presented by conventional dialysis modalities, there
are a number of risks that must be overcome for the Aksys PHD system to
succeed, including the uncertainty of obtaining regulatory clearance or
approval and of achieving market acceptance and development. See "Risk
Factors."
BUSINESS STRATEGY
The Company believes that the Aksys PHD system offers the potential for
better clinical outcomes, lower total treatment costs and improved quality of
life for dialysis patients. The relatively poor patient outcomes resulting
from current dialysis treatment methods and the increasing total cost of
treating ESRD patients have created significant demand for improved dialysis
systems. Through the Aksys PHD system, the Company intends to capitalize on
this demand by pursuing the following strategies.
Target Specific Market Segments. The Company intends to market its products
and services directly to those providers of dialysis services most focused on
patient outcomes and total cost of care. This strategy is designed to achieve
access to the key patient segments which the Company believes will be
especially receptive to daily home hemodialysis using the Aksys PHD system,
including: (i) dialysis patients currently receiving conventional home
hemodialysis, (ii) dialysis patients who drop out of home peritoneal dialysis,
(iii) ESRD patients currently enrolled in a managed care program, such as a
health maintenance organization and (iv) ESRD patients who are just beginning
dialysis treatment. In the United States, these segments accounted for
approximately 2,300, 5,500, 6,000 and 65,000 dialysis patients, respectively,
in 1994 according to industry data. Although the Aksys PHD system has been
designed primarily for home use, the Company believes it will also be an
attractive alternative dialysis device for self-care clinics and nursing
homes.
Provide a Broad Range of Dialysis Products and Services. The Company intends
to provide a broad range of products and services for hemodialysis patients
and providers. In addition to the delivery, installation and maintenance of
the Aksys PHD system, the Company intends to provide training, technical
support and delivery of all required consumables. The Company intends to enter
into contracts with its customers to provide the instrument and all
consumables and services for a single monthly price.
Capture and Provide Outcome Data. The Aksys PHD system has a built-in
computer capable of recording specific medical data regarding dialysis
treatment and patient health and compliance. Outcome data can be furnished on-
line to the healthcare provider responsible for treating the patient and will
aid the provider in assessing the effectiveness of the patient's dialysis
treatment prescription as well as promote the potential clinical and cost
benefits of daily home hemodialysis. Outcome data should become increasingly
important if, as the Company believes, HCFA moves towards a reimbursement
system that capitates total ESRD patient cost.
Implement Programs to Demonstrate Clinical Benefits and Cost-Effectiveness.
The Company intends to complement its marketing by conducting clinical studies
and implementing other measures designed to document the clinical and cost
benefits it believes will result from daily home hemodialysis using the Aksys
PHD system. Among the programs the Company intends to sponsor is a
comprehensive randomized prospective study to evaluate and document the
clinical and economic implications of daily home hemodialysis. In
collaboration with members of the Company's Scientific Advisory Board and
other leading nephrologists, the Company intends to
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promote the benefits of the Aksys PHD system through publication in clinical
journals and presentations at scientific conferences of the results of these
studies.
Phased Domestic and International Market Launch. The Company believes that
there is worldwide demand for a lower cost, more clinically effective approach
to dialysis. In addition to pursuing market launch in the United States, the
Company is establishing marketing and regulatory resources in Europe, Japan
and elsewhere. According to international patient registries compiled by the
USRDS, there were more than 107,000 dialysis patients in Europe and more than
134,000 dialysis patients in Japan, both as of December 31, 1993.
THE AKSYS PHD SYSTEM AND TECHNOLOGY
Aksys PHD System
The Aksys PHD system is a fully-automated personal dialysis instrument
designed to enable patients to perform hemodialysis in a self-care setting,
such as the patient's home, on a frequent or daily basis. The Aksys PHD system
is designed to minimize the patient's time and effort involved in performing
each hemodialysis treatment and to be operated by the patient without the need
for partner assistance. Through a touch sensitive display screen with
instructions available on a graphic video display, the Aksys PHD system is
designed to be less intimidating and easier to use than current hemodialysis
systems. The system can be separated into three modules to facilitate
transportability.
The Aksys PHD system is designed to evaluate prior to each treatment the
performance of the artificial kidney in removing toxins from the patient's
blood to ensure that the prescribed dose of hemodialysis is achieved during
the treatment. The Aksys PHD system also automatically evaluates the water
treatment filters and indicates whether a replacement is required and verifies
that all critical safety systems, sensors and alarms are operating correctly.
To begin a treatment session on the Aksys PHD system, the patient would
connect the blood tubing to the vascular access device and attach an
integrated blood pressure cuff. A user-friendly, touch-sensitive monitor
prompts the patient through the treatment and displays procedure and patient-
specific information for review. The Aksys PHD system is designed to monitor
during the treatment a variety of vital statistics, including the patient's
blood pressure and blood flow rate, the amount of water removed from the
patient, the length of the treatment session and other key parameters. The
treatment can be suspended at any time by the patient. If the patient's blood
pressure drops below normal levels during the treatment, the system prompts
the patient to take appropriate action. Data from a hemodialysis treatment is
displayed for viewing by the patient and can be communicated by modem to the
dialysis provider or other healthcare personnel as the treatment occurs (so
that treatment progress can be monitored) or at pre-determined intervals (as a
summary of several treatments).
At the end of a treatment session, the patient reconnects the blood tubing
to the system and inserts two small bottles of dialysate in the system to
replace those consumed during the treatment. The Aksys PHD system then
automatically flushes and disinfects all fluid pathways, performs a self-
diagnostic test to determine whether the disinfection was adequate and readies
itself without further patient involvement for the next treatment session.
Aksys Technology
The design of the Aksys PHD system incorporates numerous features that the
Company believes enable the system to be used safely, effectively and
conveniently by the patient in the home as well as in other self-care
settings. Several of these features are proprietary to the Company. See "--
Patents and Proprietary Rights."
Conventional dialysis machines utilize an external extracorporeal circuit,
which consists of two blood tubing sets, an artificial kidney and a vascular
access device such as a needle or catheter. The extracorporeal circuits used
by these machines are typically discarded at the end of each treatment and
consequently must be manually assembled, installed and primed prior to each
use and rinsed out, disassembled and discarded after each use. Also, the
instrument and water purification system need to be disinfected periodically,
which usually involves the use of chemical disinfectants that must be properly
stored, mixed for use and discarded after use. The Aksys
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PHD system's extracorporeal circuit, in contrast, is internal, is cleaned and
disinfected automatically and does not need to be handled by the patient
between uses. Since the instrument is disinfected using hot water, there are
no chemicals to purchase, store, mix or discard. The Company has filed a
patent application, as well as holds an exclusive license, with respect to
certain technology relating to cleaning and disinfecting a hemodialysis
machine.
Conventional dialysis machines used in clinics obtain dialysate-quality
water from a central water purification system. These systems typically are
large, require significant upkeep and have special plumbing requirements. The
Aksys PHD system utilizes an integrated water purification and filtration
system that requires minimal plumbing modifications and is self-contained in
the instrument, making the system transportable. In addition, whereas dialysis
machines used at home today generally require the assistance of a partner for
set-up, cleaning and maintenance of the machine and to monitor the patient
during treatment to intervene in the event of an adverse reaction, the Aksys
PHD system is designed to be used with no partner involvement. Patients can be
monitored in real time by trained professionals in a dialysis clinic or other
remote location.
As a way of further automating the treatments, the Aksys PHD system is
designed to automatically mix water purified through the Company's water
purification and filtration system with powdered dialysate to create the fluid
used in the treatment. The system employs a proprietary coupling feature to
connect the dialysate bottle to the instrument and microchip technology
designed to ensure that the dialysate mixture prescribed for the patient is
the one actually administered. These features eliminate the need for manual
mixing or storage of large quantities of pre-hydrated dialysate and minimize
the potential for errors in dialysate preparation.
In order to determine the amount of toxins that an artificial kidney is
removing from the blood, it is necessary to measure the urea transport rate
characteristics of the artificial kidney prior to a treatment session.
Outpatient dialysis centers typically perform this function manually through
an indirect method that can be inaccurate. The Aksys PHD system employs a
method of directly measuring the transfer rate of the artificial kidney that
the Company believes is more accurate and reliable than the method now used.
This method, to which the Company holds an exclusive license, requires no
patient involvement.
The Aksys PHD system has also been designed to be ergonomically suitable for
use by an unassisted patient in a self-care setting. Conventional hemodialysis
machines are designed to be used by professionals who are standing in front of
the machine. The Aksys PHD system is designed for use by patients seated in a
reclining chair next to the machine. The extracorporeal circuit can be rotated
for accessibility from either side of the instrument, which allows the patient
to change positions relative to the instrument to accommodate changes in
access site (for example, from the left arm to the right arm). The system is
operated through a flat panel graphic display with a touch-sensitive overlay.
This format allows the patient to operate the machine easily by touching high
contrast icons presented on the screen.
Through integration of the foregoing Aksys technology, the Company has
developed a hemodialysis machine that it believes will be easy to use on a
daily basis. Unlike conventional hemodialysis machines, the Aksys PHD system
requires minimal patient involvement in the otherwise labor intensive aspects
of hemodialysis, does not require the patient to store, handle or dispose of
chemicals or large bottles of dialysate, can be used with little if any
partner involvement or modification in existing plumbing and can be
transported with the patient for vacation, business or other travel
activities. In addition to safety and lifestyle advantages, the Company
believes these features can lead to improved patient compliance, further
improving outcomes.
Other Products and Services
To fully service hemodialysis patients, the Company intends to develop a
service network to provide support for patients and dialysis providers in all
aspects relating to the use and maintenance of the Aksys PHD system. The
Company expects this service network will provide (a) delivery and
installation of the Aksys PHD system (including arranging for any minor
changes to plumbing and electrical circuits in the patient's home, or other
self-care setting, that will be necessary for operation of the Aksys PHD
system), (b) technical service through a 24 hour call center and through field
representatives who will maintain and repair all components of the Aksys PHD
system, (c) delivery of consumables used in dialysis such as the artificial
kidney and arterial and venous blood tubing (which are replaced periodically),
water purification components and dialysate concentrate, (d)
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delivery of ancillary supplies such as dressings, tape, antiseptics, drugs and
syringes, and (e) customer service representatives who will interface with the
dialysis provider to address the status of, and any necessary changes in, the
patient's treatment made by the dialysis provider. The Company believes that
by providing all of the products and services necessary to perform
hemodialysis at home as well as in other self-care settings and nursing homes,
the Company can establish and maintain loyalty with patients and dialysis
providers.
MANUFACTURING AND SUPPLIERS
The Company does not intend to initially manufacture any component of the
Aksys PHD system or related consumables. With respect to the Aksys PHD system,
the Company has contracted with SeaMED Corporation ("SeaMED"), a contract
manufacturer of medical devices, to assemble and produce the dialysis machine.
The Company has entered into an agreement with SeaMED that remains in effect
for three years after delivery of the first production model of the Aksys PHD
system, subject to earlier termination under specified circumstances. SeaMED
has specialized in the custom manufacturing of medical instrumentation for
more than 15 years and is certified to ISO requirements for manufacture of
such products. ISO Certification is an internationally recognized standard of
quality manufacturing. The Company intends to use a portion of the proceeds
from this offering to purchase assets to be utilized by SeaMed for commercial-
scale production of the Company's products. The Company intends to identify
additional manufacturing locations in the future, whether or not owned by
SeaMED, to avoid having to rely on a single location. There can be no
assurances that the Company will be able to do so on terms acceptable to it.
The manufacturing of the Company's products is subject to GMP and other
requirements prescribed by regulatory agencies. There can be no assurance that
SeaMED or any other manufacturer of the Company's products will continue to
comply with applicable regulatory requirements or that SeaMED or any such
manufacturer will be able to supply the Company with such products in
sufficient quantity or at all. See "Risk Factors--Risk of Manufacturing Scale-
Up; Substantial Reliance on Independent Manufacturing Contractors and
Suppliers."
Certain key components of the Aksys PHD system, such as the dialyzer, are
available from other manufacturers. The blood circuit, however, is custom made
to the Company's specifications by a single supplier. The Company has entered
into a contract with Texas Medical Products, Inc. to supply this product.
Similarly, the dialysate chemicals supplied to patients using the Aksys PHD
system will be custom made and packaged to the Company's specifications. The
Company believes that a number of suppliers exist for these chemicals. There
can be no assurances, however, that any of the key components of the Company's
products will be available on terms acceptable to the Company or at all.
SALES AND MARKETING
The Company intends to operate with a relatively small direct sales force to
market its products and services, primarily to healthcare providers such as
hospitals, dialysis clinics, managed care organizations and nephrology
physician groups. The Company intends to distribute and provide technical
support for the PHD system through third parties. There can be no assurance,
however, that the Company will be able to establish internal marketing,
distribution and sales activities or arrange for third parties to perform such
functions on acceptable terms, if at all. See "Risk Factors--Limited Marketing
Experience" and "--Need to Develop Distribution, Customer Service and
Technical Support Organizations."
The Company intends to complement its marketing efforts by sponsoring a
comprehensive prospective study to evaluate and document the clinical and
economic implications of daily home hemodialysis. In collaboration with
members of the Company's Scientific Advisory Board and other leading
nephrologists, the Company also intends to promote the benefits of the Aksys
PHD system through publication in clinical journals and presentation at
scientific conferences.
COMPETITION
The Company expects to compete in the kidney dialysis market with suppliers
of hemodialysis and peritoneal dialysis devices, supplies and services. The
Company does not intend to compete with providers of
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dialysis services such as the national dialysis providers or managed care
companies. Rather, it intends to market its products and services to these
providers and to work with them to make home hemodialysis a viable alternative
to currently available treatment methods.
The Company's primary competitors in supplying dialysis equipment, supplies
and services are expected to be Baxter International, Inc., Fresenius USA,
Inc. and CGH Medical, Inc. (Cobe, Gambro, Hospal). These companies and most of
the Company's other competitors have substantially greater financial,
scientific and technical resources, research and development capabilities,
marketing and manufacturing resources and experience than the Company and
greater experience in developing products, providing services and obtaining
regulatory approvals. In addition, the Company is aware of at least one other
company that may be developing a machine that could be used for daily home
hemodialysis.
The Company's ability to successfully market its products and services could
be adversely impacted by pharmacological and technological advances in
preventing the progression of ESRD in high-risk patients such as those with
diabetes and hypertension, technological developments by others in the area of
dialysis, the development of new medications designed to reduce the incidence
of kidney transplant rejection and progress in using kidneys harvested from
genetically-engineered animals as a source of transplants. There can be no
assurance that competitive pressures or technological advancements will not
have a material adverse effect on the Company.
The Company believes that competition in the market for kidney dialysis
equipment, supplies and services is based primarily on clinical outcomes,
price, product performance, cost-effectiveness, reliability and technological
innovation and that such competition in the home hemodialysis market will be
based on such factors as well as on products being relatively easy to use,
transport and maintain. Certain kidney dialysis equipment manufacturers and
service providers currently own and operate, or may in the future acquire,
dialysis treatment facilities and other providers. As a result, the Company's
ability to sell its products and services to such providers may be adversely
affected.
PATENTS AND PROPRIETARY RIGHTS
The Company owns no patents but has filed patent applications directed to a
number of different features of the Aksys PHD system in the United States, and
in several other countries that have significant hemodialysis markets. The
Company has also filed a Patent Cooperation Treaty ("PCT") patent application
that permits it to file patent applications in additional PCT-member countries
for a limited period of time. The Company expects to file additional patent
applications in the United States directed to the Aksys PHD system as new
technology is developed. Additionally, the Company has obtained exclusive
licenses with respect to different features of the Aksys PHD system.
TWARDOWSKI LICENSE. On April 1, 1993, the Company entered into a License
Agreement (the "Twardowski License") with Dr. Zbylut Twardowski, a member of
the Company's Scientific Advisory Board, granting to the Company a worldwide
exclusive license which relates to the patent issued on August 9, 1994
entitled "Artificial Kidney for Frequent (Daily) Hemodialysis" which expires
August 9, 2011 (the "Twardowski Patent"). The Twardowski Patent relates to an
artificial kidney intended to provide frequent (daily) home hemodialysis. The
Twardowski License has a duration for as long as the Twardowski Patent remains
in effect. The Twardowski License provides for royalties based on the revenue
received by the Company from the sale or lease of the licensed product.
Beginning in 1996, the Twardowski License requires certain minimum semiannual
royalty payments. If the Company fails to make any such minimum royalty
payment, Twardowski has the option to convert the Twardowski License to a non-
exclusive license. There can be no assurance that the Twardowski Patent will
provide the Company significant exclusivity or benefit in its markets.
Furthermore, competitors may develop alternative technology that achieves the
same advantages as the Twardowski Patent.
BOAG LICENSE. On April 1, 1993, the Company also entered into a License
Agreement (the "Boag License") with Cynthia P. Walters for the use of a patent
entitled "Dialyzer Reuse System" issued on
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September 22, 1987, which expires September 22, 2004 (the "Boag Patent"). The
Boag License is exclusive subject to the rights of Servall Corp. to market its
HR3000 product, a device for facilitating reuse of consumables with
conventional hemodialysis machines. The Boag Patent relates to a dialysis
reuse system for cleaning, sterilizing and testing a hemodialysis machine and
its associated dialyzer and blood tubing set. The Boag License has a duration
for as long as the Boag Patent remains in effect. The Boag License provides
for royalties based on the revenue received by the Company from the sale or
lease of the licensed product with a minimum semiannual royalty payment.
Commencing with the third semiannual period after the first licensed product
is sold, if the Company pays no more than the minimum semiannual royalty
payment for two consecutive semiannual periods, the licensor has the right to
convert the Boag License to a non-exclusive license. Also, commencing with the
first semiannual period occurring five years after the first licensed product
is sold, if the Company pays no more than the minimum semiannual royalty
payment for two consecutive semiannual periods, the licensor has the right to
terminate the Boag License. In the event of infringement of the patent by
third parties, the Company's right to enforce the patent is subject to the
licensor's superior right to bring suit on its own and to recover all damages
without accounting to the Company. There can be no assurance that the Boag
Patent will provide the Company significant exclusivity or benefit in its
markets. Furthermore, competitors may develop alternative technology that
achieves the same advantages as the Boag Patent.
None of the Company's own patent applications have issued as patents. There
can be no assurance that any of the Company's pending patent applications will
be approved by the patent offices in the various countries in which they were
filed. In addition, there can be no assurance that the Company will develop
additional proprietary products or processes that are patentable or that any
patents that may issue to or be licensed by the Company will provide the
Company with competitive advantages. There can be no assurance that the
Company's patent applications or patents that may issue to or be licensed by
the Company will not be challenged by any third parties or that the patents of
others will not prevent the commercialization of products incorporating the
Company's technologies. Furthermore, there can be no assurance that others
will not or have not independently developed similar products, duplicated and
designed any of the Company's products or design around the patents that may
issue to or be licensed by the Company. Any of the foregoing results could
have a material adverse effect on the Company.
The commercial success of the Company will depend, in part, on its ability
to avoid infringing patents issued to others. The field of dialysis includes a
significant number of patents that have issued to third parties. The Company
may receive from third parties, including potential or actual competitors,
notices claiming that it is infringing third party patents or other
proprietary rights. If the Company were determined to be infringing any third-
party patent, the Company could be required to pay substantial damages, alter
its products or processes, obtain licenses or cease certain activities. In
addition, if patents are issued to others which contain claims that compete or
conflict with the licensed patents or patent applications of the Company and
such competing or conflicting claims are ultimately determined to be valid,
the Company may be required to pay damages, to obtain licenses to these
patents, to develop or obtain alternative technology or to cease using such
technology. If the Company is required to obtain any licenses, there can be no
assurance that the Company will be able to do so on commercially favorable
terms, if at all. The Company's failure to obtain a license to any technology
that it may require to commercialize its products could have a material
adverse impact on the Company's business, operating results and financial
condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third-party
proprietary rights. There can be no assurance that any effort in litigation to
enforce the patents that may be issued to the Company or licensed by the
Company will result in the patent being ruled valid, enforceable and
infringed. If third parties have issued patents or prepare and file patent
applications in the United States that claim technology also claimed by the
Company in either its licensed patents or pending application, the Company may
have to participate in interference proceedings declared by the United States
Patent and Trademark Office to determine priority of invention, which could
result in substantial costs to and diversion of effort by the Company, even if
the eventual outcome is favorable to the Company. Any such litigation or
interference
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proceeding, regardless of outcome, could be expensive and time consuming and
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology and, consequently, could have a material adverse
effect on the Company's business, operating results and financial condition.
In addition to patent licenses and applications for patents, the Company
possesses trade secrets, copyrights, proprietary know-how and unpatented
technological advances. The Company seeks to protect these assets, in part, by
confidentiality agreements with its business partners, consultants and vendors
and non-competition agreements with its officers and employees. There can be
no assurance that these agreements will not be breached, that the Company will
have adequate remedies for any breach or that the Company's trade secrets and
proprietary know-how will not otherwise become known or be independently
developed by others.
GOVERNMENT REGULATION
Food and Drug Administration
The Aksys PHD system is regulated as a medical device by the FDA under the
FDC Act. Pursuant to the FDC Act, the FDA regulates the manufacture and
distribution of medical devices in the United States. Noncompliance with
applicable requirements can result, among other things, in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, denial or withdrawal of premarket clearance or approval of
devices, recommendations by the FDA that the Company not be allowed to enter
into government contracts and criminal prosecution. The FDA also has authority
to require repair, replacement or refund of the cost of any device illegally
manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably ensure their safety and effectiveness. Class I devices
are subject to general controls (e.g., labeling and adherence to GMPs). Class
II devices are subject to general and special controls (e.g., performance
standards, postmarket surveillance and patient registries). Class III devices
are those which must receive premarket approval by the FDA to ensure their
safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices or new devices which have been found not to be
substantially equivalent to legally marketed devices).
Before a new medical device (including the Aksys PHD system) can be
introduced to the market, the manufacturer generally must obtain either FDA
clearance of a premarket notification under Section 510(k) or FDA approval of
a PMA under Section 515. A Section 510(k) clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or to a
Class III medical device for which the FDA has not called for PMAs. The FDA
has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past and may request clinical data to support
premarket clearance. The FDA may also refuse to accept the 510(k) notification
for filing pending the submission of additional information. It generally
takes from four to 12 months from the date the 510(k) application is accepted
for filing to obtain Section 510(k) premarket clearance, but it may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device or that additional information is
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or request for additional data, can
delay the market introduction of new products that fall into this category.
Such a determination or request regarding the Aksys PHD system could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the FDA may clear a device for some
procedures but not others or for certain classes of patients and not others.
For any devices cleared through the Section 510(k) process, modifications or
enhancements that could significantly affect the safety or effectiveness of
the device or that constitute a major change to the intended use of the device
will require a new Section 510(k) submission. There can be no assurance that
the Company will obtain Section 510(k) clearance in a timely manner, or at
all, for the Aksys PHD system or for any other device or that a PMA approval
will not be required for any such device.
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A PMA must be filed if a proposed medical device is not substantially
equivalent to a legally marketed Class I or Class II device. In addition, a
PMA is required for all Class III devices unless with respect to such Class
III device the FDA has not called for PMA approval. A PMA must be supported by
valid scientific evidence, which typically includes extensive data, including
preclinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. The PMA must contain the results of clinical
trials, the results of all relevant bench tests, laboratory and animal
studies, a complete description of the device and its components and a
detailed description of the methods, facilities and controls used to
manufacture the device. In addition, the submission must include the proposed
labeling, advertising literature and training materials (if required). Upon
receipt of a PMA, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the
FDA determines that the PMA is sufficiently complete to permit a substantive
review, the FDA will accept the PMA for filing. The FDA review of a PMA
generally takes one to three years from the date the PMA is accepted for
filing but may take significantly longer. The review time is often
significantly extended by the FDA asking for more information, including
additional clinical trials or clarification of information already provided in
the submission. A number of devices for which PMA approval has been sought by
other companies have never been approved for marketing. Toward the end of the
PMA process, the FDA generally will conduct an inspection of the
manufacturer's facilities (or the manufacturing facilities of an independent
contractor) to ensure that the facilities are in compliance with applicable
GMP requirements. If the FDA's evaluation of both the PMA and the
manufacturing facilities are favorable, the FDA will issue either an approval
letter or an approvable letter, which usually contains a number of conditions
which must be met in order to obtain final approval of the PMA. When and if
the conditions have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter, authorizing commercial distribution of the
device for certain indications. If the FDA's evaluation of the PMA or
manufacturer's facilities are not favorable, the FDA will deny approval of the
PMA or issue a "not approvable letter." Furthermore, the FDA may approve a
device for some procedures but not others or for certain classes of patients
and not others. Modifications to a device that is the subject of an approved
PMA, its labeling or manufacturing process may require approval by the FDA of
PMA supplements or new PMAs. Supplements to a PMA often require the submission
of the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required in connection with a
510(k) premarket notification or a PMA and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor
of the device) will have to file an Investigational Device Exemption ("IDE")
application prior to commencing human clinical trials. The IDE application
must be supported by data, typically including the results of animal and
laboratory testing. If the IDE application is approved, human clinical trials
may begin at a specific number of investigational sites with a specific number
of patients, as specified in the IDE. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study
provided such compensation does not exceed recovery of the costs of
manufacture, research, development and handling. An IDE supplement must be
submitted to the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of subjects.
The Company submitted a 510(k) premarket notification for clearance of the
Aksys PHD system on March 5, 1996. The FDA has twice declined to accept for
filing the 510(k) application, has placed the application on administrative
hold and has requested clinical data derived from the exact device, i.e., the
Aksys PHD system. Any clinical trials would require submission of an IDE.
Depending on the extent of clinical data required by the FDA, the 510(k)
clearance could be considerably delayed. The Company does not believe that
additional clinical data is necessary and that if clinical data is required
the preparation and submission of the data will not adversely affect the
Company's business plan.
The PMA approval or 510(k) clearance process are lengthy and uncertain and
require substantial commitments of the Company's financial resources and
management's time and effort. Significant unforeseen delays in either process
could occur as a result of the FDA's failure to schedule advisory review
panels, changes in established review guidelines, regulations or
administrative interpretations or determinations by the FDA that clinical data
collected is insufficient to support the safety and effectiveness of one or
more of the devices for their intended uses or that the data warrants the
continuation of clinical studies. Delays in obtaining, or failure to
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<PAGE>
obtain, requisite regulatory approvals or clearances in the United States and
other countries would prevent the marketing of the Aksys PHD system and other
devices and impair the Company's ability to generate funds from operations,
which in turn would have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Risk Factors--Product
Clearance or Approval Uncertain; Extensive Government Regulation."
The FDC Act requires that medical devices be manufactured in accordance with
the FDA's current GMP regulations. These regulations require, among other
things, that (i) the manufacturing process must be regulated and controlled by
the use of written procedures and (ii) the ability to produce devices which
meet the manufacturer's specifications be validated by extensive and detailed
testing of every aspect of the process. They also require investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Manufacturing facilities are therefore subject to FDA
inspection on a periodic basis to monitor compliance with GMP requirements. If
violations of the applicable regulations are noted during FDA inspections of
the Company's manufacturing facilities or the manufacturing facilities of its
contract manufacturers, there may be a material adverse effect on the
continued marketing of the Company's products.
Before the FDA approves a Section 510(k) submission or a PMA application,
the FDA is likely to inspect the utilized manufacturing facilities and
processees for compliance with GMP. Even after the FDA has cleared a 510(k)
submission or approved a PMA, it will periodically inspect the manufacturing
facilities and processes for compliance with GMP. In addition, in the event
that additional manufacturing sites are added or manufacturing processes are
changed, such new facilities and processes are also subject to FDA inspection
for compliance with GMP. The manufacturing facilities and processes that will
be used to manufacture the Company's products have not yet been inspected by
the FDA for compliance with GMP. There is no assurance that the facilities and
processes utilized by the Company will comply with GMP and there is a risk
that clearance or approval will, therefore, be delayed by the FDA until such
compliance is achieved.
The Company plans to market the Aksys PHD system in several foreign markets.
Requirements pertaining to the Aksys PHD system vary widely from country to
country, ranging from no health regulations to detailed submissions such as
those required by the FDA. The Company believes the extent and complexity of
regulations of medical devices such as the Aksys PHD system is increasing
worldwide. The Company anticipates that this trend will continue and that the
cost and time required to obtain approval to market in any given country will
increase, with no assurance that such approval will be obtained. The ability
to export into other countries may require compliance with ISO 9000, which is
analogous to compliance with the FDA's GMP requirements. The Company has not
obtained any regulatory approvals to market the Aksys PHD system outside of
the United States, no regulatory clearances or certifications have yet been
applied for in any country other than the United States and there is no
assurance that any such clearance or certification, if applied for, would be
issued.
See "Risk Factors--Product Clearance or Approval Uncertain; Extensive
Government Regulation" and "--Risks Associated with Future International
Operations."
REIMBURSEMENT
Demand for the Company's products and services will be influenced by
governmental and other third-party reimbursement programs because providers of
ESRD treatment are often reimbursed by Medicare, Medicaid and private
insurers.
Medicare Reimbursement
Medicare generally provides health insurance coverage for persons who are
age 65 or older and for persons who are completely disabled. Medicare also
provides coverage for other eligible patients, regardless of age, who have
been medically determined to have ESRD. For patients eligible for Medicare
based solely on ESRD (generally patients under age 65), Medicare eligibility
begins three months after the month in which the patient begins dialysis.
During this three-month waiting period, Medicaid, private insurance or the
patient is responsible for payment for dialysis services. This waiting period
is waived for individuals who participate in a self-care dialysis training
program.
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<PAGE>
For ESRD patients under age 65 who have any employer group health insurance
coverage (regardless of the size of the employer or the individual's
employment status), Medicare coverage is generally secondary to the employer
coverage during an 18-month coordination period that follows the establishment
of Medicare eligibility or entitlement based on ESRD. During the coordination
period, an employer group health plan is responsible for paying primary
benefits at the rate specified in the plan, which may be a negotiated rate or
the healthcare provider's usual and customary rate. As the secondary payer
during this coordination period, Medicare will make payments up to the
applicable composite rate for dialysis services to supplement any primary
payments by the employer group health plan if the plan covers the services but
pays only a portion of the charge for the services.
Medicare generally is the primary payer for ESRD patients after the 18-month
coordination period. Under current rules, Medicare is also the primary payer
for ESRD patients during the 18-month coordination period if, before becoming
eligible for Medicare on the basis of ESRD, the patient was already age 65 or
over (or eligible for Medicare based on disability) unless covered by an
employer group health plan (other than a "small" employer plan) because of
current employment. This rule eliminates for many dual-eligible beneficiaries
the 18-month coordination period during which the employer plan would serve as
primary payer and reimburse health care providers at a rate that the Company
believes may be higher than the Medicare composite rate. The rule regarding
entitlement to primary Medicare coverage when the patient is eligible for
Medicare on the basis of both age (or disability) and ESRD has been the
subject of frequent legislative and regulatory change in recent years and
there can be no assurance that the rule will remain unchanged in the future.
When Medicare is the primary payer, it reimburses 80% of the composite rate
set by the Medicare prospective reimbursement system for each dialysis
treatment. The beneficiary is responsible for the remaining 20%, as well as
any unmet Medicare deductible amount, although an approved Medicare supplement
insurance policy, other private health insurance or Medicaid may pay on the
beneficiary's behalf. The Medicare base composite rates for outpatient
dialysis services currently are $126 per treatment for hospitals and $122 for
independent facilities (equivalent to approximately $20,000 per year) and are
adjusted depending on regional wage differences. Reimbursement rates are
subject to periodic adjustment based on certain factors, including legislation
and executive and congressional budget reduction and control processes,
inflation and costs incurred in rendering the services, but in the past have
had little relationship to the cost of conducting business. The composite
reimbursement rate was unchanged from commencement of the program in 1972
until 1983. From 1983 through December 1990, numerous Congressional actions
resulted in net reductions of the average composite reimbursement rate from a
fixed fee of $138 per treatment in 1983 to approximately $125 per treatment.
Effective January 1, 1991, Congress increased the ESRD composite reimbursement
rate, resulting in the current average rate of $126 per treatment.
Reimbursement for home dialysis can be made in two ways. A beneficiary may
choose to receive home dialysis equipment, supplies and support services
directly from a facility or to make independent arrangements for equipment,
supplies and support services. If the beneficiary chooses to use a facility,
the facility receives the composite rate. If the beneficiary chooses to make
independent arrangements, the supplier bills Medicare on an assignment basis
and payment is made at a rate not greater than the composite rate, with the
exception of CCPD. There is a monthly payment cap of $2,080 for CCPD and
approximately $1,600 for all other methods of dialysis.
The Medicare ESRD composite reimbursement rate has been the subject of a
number of reports and studies. In March 1995, after conducting a study of
dialysis costs and reimbursement at the request of Congress, the Prospective
Payment Assessment Commission ("ProPAC") recommended a 3.7% decrease be made
in the ESRD composite reimbursement rate. On March 1, 1996, however, the
ProPAC recommended that the composite rates be increased by 2.7% for hospital
facilities and 2.0% for independent facilities. Congress is not required to
implement these recommendations and could either raise or lower the
reimbursement rate.
In its March 1, 1996 report, the ProPAC also recommended that HCFA should
encourage the availability of managed care alternatives for ESRD patients.
Previously, in 1993, Congress directed HCFA to include the integration of
chronic and acute ESRD care management through expanded community care
services. In January
34
<PAGE>
1996, HCFA announced the availability of funding for ESRD Managed Care
Demonstrations based on approval of grant applications and proposals.
The Company is unable to predict what, if any, future changes may occur in
the Medicare composite reimbursement rate. or in any other reimbursement
program. Any reductions in the Medicare composite reimbursement rate or in any
other reimbursement program could have a material adverse effect on the
Company's revenues and net earnings. In addition, there have been various
legislative proposals for the reform of numerous aspects of Medicare,
including extension of the coordination period and expanded enrollment of
Medicare beneficiaries in managed care programs. See "--Potential Health Care
Legislation."
Private Reimbursement
Some ESRD patients have private insurance that covers dialysis services. As
discussed above, health care providers receive reimbursement for ESRD
treatments from the patient or private insurance during a "waiting period" up
to three months before the patient becomes eligible for Medicare. In addition,
if the private payer is an employer group health plan, it is generally
required to continue to make primary payments for dialysis services during the
18-month period following eligibility or entitlement to Medicare. In general,
employers may not reduce coverage or otherwise discriminate against ESRD
patients by taking into account the patient's eligibility or entitlement to
Medicare benefits.
The Company believes that before Medicare primary coverage is established,
private payers may reimburse dialysis expenses at rates significantly higher
than the per-treatment composite rate set by Medicare. When Medicare becomes a
patient's primary payer, private insurance often covers the per-treatment 20%
coinsurance that Medicare does not pay.
Medicaid Reimbursement
Medicaid programs are state-administered programs partially funded by the
federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance
programs for the Medicare co-insurance portion and provide certain coverages
(e.g., oral medications) that are not covered by Medicare. State regulations
generally follow Medicare reimbursement levels and coverages without any co-
insurance amounts. Certain states, however, require beneficiaries to pay a
monthly share of the cost based upon levels of income or assets.
Potential Health Care Legislation
Because the Medicare program represents a substantial portion of the federal
budget, Congress takes action in almost every legislative session to modify
the Medicare program for the purpose of reducing the amounts otherwise payable
by the program to health care providers in order to achieve deficit reduction
targets or meet other political goals. Legislation and/or regulations may be
enacted in the future that may significantly modify the Medicare ESRD program
or substantially affect reimbursement for dialysis services. For example,
recent legislative proposals have included extension of the coordination
period during which Medicare payment for ESRD would be secondary to a
patient's employer group health plan to a period as long as 36 months. The
recently-vetoed budget reconciliation bill would have extended the
coordination period to 30 months and also would have required HCFA to report
on possible expansion of the proposed MedicarePlus managed care plan to
include ESRD patients. Other current legislative proposals would extend the
Medicaid managed care pilot program to the 50 states and include ESRD
beneficiaries as eligible enrollees.
The Department of Health and Human Services is currently operating on
temporary funding. Therefore, further legislative action, including further
reform of Medicare affecting ESRD reimbursement, is quite possible. In
addition, other legislation or regulations may be enacted which could impose
additional requirements on the Company to maintain eligibility to participate
in the federal and state payment programs. Such new legislation or regulations
might have a material adverse effect on the Company's operations, revenue or
earnings.
35
<PAGE>
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential product liability risks which
are inherent in the production, marketing and sale of dialysis products. There
can be no assurance that the Company will be able to avoid significant product
liability exposure. The Company currently does not maintain product liability
insurance, but expects to acquire product liability insurance upon
commercialization of the Aksys PHD system. There can be no assurance that it
will be able to obtain such insurance on acceptable terms or at all or that
any insurance policy if obtained will provide adequate protection against
potential claims. Furthermore, the Company's agreements with contract
manufacturers require the Company to obtain product liability insurance, and
the failure to obtain such insurance could materially and adversely affect the
Company's ability to produce the Aksys PHD system. A successful claim brought
against the Company in excess of any insurance coverage maintained by the
Company could have a material adverse effect upon the Company. In addition,
the Company has agreed to indemnify certain of its contract manufacturers
against certain liabilities resulting from the sale of the Aksys PHD system.
EMPLOYEES
As of March 31, 1996, the Company employed 44 persons full time and two
persons on a contract or part-time basis, including 35 in research and
development, one in regulatory affairs, two in marketing and five in general
and administrative functions. No employees are covered by collective
bargaining agreements. The Company considers its relationship with its
employees generally to be good.
FACILITIES
The Company's facilities are located at 1113 S. Milwaukee Avenue, Suite 300,
and 1117 S. Milwaukee Avenue, Suite D12, in Libertyville, Illinois and consist
of approximately 3,500 and 7,000 square feet, respectively. The Company leases
its facilities located at 1113 S. Milwaukee Avenue, Suite 300, under a lease
which expires on October 31, 1996 and the Company has given notice that it
will vacate these premises upon the expiration of such term. The Company also
leases its facilities located at 1117 S. Milwaukee Avenue, Suite D12, and the
Company has given notice of early termination of this lease effective October
30, 1996 and has paid the requisite termination fee. The Company is in the
process of leasing new facilities to accommodate its anticipated need to
expand operations. The Company believes that such facilities will be available
on commercially reasonable terms.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and certain key employees of the Company as of
the date hereof:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Lawrence H.N. Kinet......... 48 Chairman, Chief Executive Officer and Director
Rodney S. Kenley............ 46 President, Chief Operating Officer and Director
Dawn C. Matthews............ 33 Director of Finance and Systems Development
Thomas F. Scully............ 50 Vice President, Operations
Peter H. McNerney........... 45 Director
Larry G. Gerdes............. 47 Director
W. Dekle Rountree, Jr....... 54 Director
Bernard R. Tresnowski....... 64 Director
</TABLE>
Lawrence H.N. Kinet was appointed Chairman of the Board of Directors and
Chief Executive Officer of the Company in December 1994, and served as a
director of the Company since April 1993. From July 1991 through December
1994, he served as Chairman of the Board of Directors and Chief Executive
Officer of Oculon Corporation, a pharmaceutical development company engaged in
the field of anti-cataract drugs. He was a Managing Partner of The Kensington
Group, a provider of management services to health care companies, from 1989
to 1992. From 1985 through 1988, he was President of Baxter World Trade
Corporation, the international division of Baxter International, Inc. and
corporate Group Vice President of Baxter International, Inc. Mr. Kinet is a
director of NeoRx Corporation.
Rodney S. Kenley founded the Company in January 1991 and has served as a
director since such date. Mr. Kenley has served as President and Chief
Operating Officer of the Company since October 1994 and served as President
and Chief Executive Officer of the Company from January 1991 to October 1994.
Mr. Kenley worked for over 12 years at Baxter International, Inc., where he
was involved principally in the development and product management of dialysis
therapies and products. Prior to founding the Company Mr. Kenley served from
January 1990 until January 1991 as Vice President of Electronic Drug Infusion
at Baxter International, Inc.
Dawn C. Matthews has been Director of Finance and Systems Development of the
Company since April 1991. Prior to joining the Company, Ms. Matthews was
employed at Baxter International, Inc. for five years, and served as a Senior
Principal Engineer in the Advanced Development Group, Renal Division.
Thomas F. Scully has served as Vice President, Operations of the Company
since January 1996. Mr. Scully worked for over 24 years at Baxter
International, Inc., where he was involved principally in the design,
development and management of the Renal Division's home care operations
network. Prior to joining the Company, Mr. Scully served as Vice President,
Sales and Operations of the Renal Division of Baxter International, Inc.
Peter H. McNerney has been a director of the Company since April 1993. Since
July 1992, Mr. McNerney has been a general partner of the general partner of
Coral Partners II, a venture capital fund. Mr. McNerney is also the Executive
Vice President of Coral Group, Inc., a manager of venture capital
partnerships. From 1989 through June 1992, Mr. McNerney was a Managing Partner
of The Kensington Group, a provider of management services to health care
companies. From 1975 through 1986, Mr. McNerney held various management
positions with Baxter Travenol Laboratories in the United States, Europe and
the Far East. Mr. McNerney is a director of Biomira, Inc. and Optical Sensors,
Inc.
Larry G. Gerdes has been a director of the Company since December 1993.
Since 1993, Mr. Gerdes has served as President and Chief Executive Officer as
well as director of Transcend Services, Inc., a health care
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<PAGE>
services company. Since 1991, Mr. Gerdes has served as a general partner of
Gerdes Huff Investments, which he founded at such time. Prior to 1991, Mr.
Gerdes held several executive positions with HBO & Company, a health care
information services business. Mr. Gerdes currently serves as a general
partner of Sand Hill Financial and a director of Delphi Information Systems,
Inc.
W. Dekle Rountree, Jr. has been a director of the Company since April 1993.
He has served as President and Chief Executive Officer of AcroMed Corporation,
an orthopedic spinal device company, since April 1993. Prior to this position,
Mr. Rountree was Executive Vice President and Chief Operating Officer of BOC
Health Care, which provides products and services for critical care in the
hospital and home. Mr. Rountree has headed OHMEDA, a division of BOC Health
Care, and has held multiple management positions with Baxter Travenol
Laboratories, including President of the Artificial Organs (Renal) division.
Mr. Rountree is a director of AcroMed Corporation.
Bernard R. Tresnowski has been a director of the Company since April 1996.
Mr. Tresnowski served from December 1981 to December 1994 as the President and
Chief Executive Officer of the Blue Cross and Blue Shield Association, the
national coordinating body for all Blue Cross and Blue Shield Plans. Mr.
Tresnowski has held various other leadership positions in the healthcare
industry, including President of the International Federation of Health
Service Funds, Member of the Jackson Hole Group, Principal of the Dunlop Group
of Six, Member of the Secretary of Health and Human Services Private/Public
Sector Advisory Committee on Catastrophic Illness, Co-Chairman of the
Secretary of Health and Human Services Work Group on Electronic Data
Interchange and Member of the American Medical Association National Health
Policy Steering Committee. Mr. Tresnowski retired from the Blue Cross and Blue
Shield Association in December 1994.
----------------
At present, all directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or
removal. Currently, all members of the Board of Directors are elected pursuant
to a stockholders agreement, the provisions thereof relating to composition of
the Board of Directors will terminate upon completion of the offering. See
"Certain Transactions."
Prior to the completion of this offering, the Board of Directors will be
divided into three classes, as nearly equal in number as possible, with each
director serving a three year term and one class being elected at each year's
annual meeting of stockholders. Messrs. Kenley and Gerdes will be in the class
of directors whose term expires at the 1997 annual meeting of the Company's
stockholders. Messrs. Kinet and Rountree will be in the class of directors
whose term expires at the 1998 annual meeting of the Company's stockholders.
Messrs. McNerney and Tresnowski will be in the class of directors whose term
expires at the 1999 annual meeting of the Company's stockholders. At each
annual meeting of the Company's stockholders, successors to the class of
directors whose term expires at such meeting will be elected to serve for
three year terms and until their successors are elected and qualified.
The officers of the Company are elected by, and serve at the discretion of,
the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee, which
currently consists of Messrs. McNerney, Gerdes and Rountree. The Compensation
Committee is responsible for approving (or, at the election of the
Compensation Committee, recommending to the Board) compensation arrangements
for officers and directors of the Company and reviewing benefit plans. The
Board of Directors has also established an Audit Committee, which consists of
Messrs. Tresnowski, Gerdes and Rountree. The Audit Committee is responsible
for selecting (or, at the election of the Audit Committee, recommending to the
Board) the independent auditors of the Company, evaluating the independent
auditors, reviewing the scope of the annual audit with management and the
independent auditors, consulting with management, internal auditors and the
independent auditors as to the systems of internal accounting controls and
reviewing the non-audit services performed by the independent auditors.
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<PAGE>
DIRECTOR COMPENSATION
At present, no separate cash compensation or fees are payable to directors
of the Company, other than reimbursement of expenses incurred in connection
with attending meetings. The Company expects, however, that new non-employee
directors not otherwise affiliated with Company or its stockholders will be
paid in a manner and at a level consistent with industry practice. Non-
employee directors will also receive annual stock option awards under the 1996
Stock Awards Plan. See "--1996 Stock Awards Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered in all capacities during the fiscal year ended
December 31, 1995 to the Company's executive officers. No other executive
officer received compensation in excess of $100,000 in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
OTHER
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
- --------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Lawrence H.N. Kinet........................ 1995 $250,000 -- $ 375(1)
Chief Executive Officer
Rodney S. Kenley........................... 1995 150,000 -- 1,930(2)
President and Chief Operating Officer
</TABLE>
- --------
(1) Represents amount contributed by the Company to its 401(k) plan on behalf
of Mr. Kinet.
(2) Represents payment by the Company of premiums on term life insurance and
an amount contributed by the Company to its 401(k) plan on behalf of Mr.
Kenley.
YEAR-END OPTION VALUES
The following table sets forth information with respect to (i) the number of
unexercised options held by the executive officers as of December 31, 1995 and
(ii) the value of unexercised in-the-money options (i.e., options for which
the deemed fair market value of the Common Stock exceeded the exercise price)
as of December 31, 1995. None of the executive officers exercised any option
during fiscal year 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DEC. 31, 1995 DEC. 31, 1995
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE (#) UNEXERCISABLE ($)(1)
- ---- ---------------------- --------------------
<S> <C> <C>
Lawrence H.N. Kinet................. 197,396/365,104 $166,490/$304,491
Rodney S. Kenley.................... 35,078/ 71,172 29,230/ 59,307
</TABLE>
- --------
(1) Assumes a fair market value of the Common Stock at December 31, 1995 equal
to $1.00 per share minus the per share exercise price.
1993 STOCK OPTION PLAN
In April 1993, the Board of Directors of the Company approved the Aksys,
Ltd. 1993 Stock Option Plan (the "1993 Option Plan"), which was subsequently
amended and restated in May 1993, October 1994 and September 1995. The 1993
Option Plan is intended to advance the best interests of the Company by
providing those persons who have substantial responsibility for its management
and growth with additional incentives by allowing them to acquire an ownership
interest in the Company.
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<PAGE>
As of March 31, 1996, options representing 1,477,250 shares of Common Stock
had been granted under the 1993 Option Plan. Options granted under the 1993
Option Plan are not intended to be "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The
1993 Option Plan has been terminated except with respect to options currently
outstanding thereunder.
The 1993 Option Plan is administered by a committee of the Board (the
"Committee"). Subject to the limitations of the 1993 Option Plan, the
Committee shall have the sole and complete authority to (i) select
participants, (ii) grant options to participants in such forms and amounts as
it shall determine, (iii) impose such limitations, restrictions and conditions
upon such options as it shall deem appropriate and (iv) interpret the plan and
adopt, amend and rescind administrative guidelines and other rules and
regulations relating to the plan. The Committee's determinations on matters
within its authority shall be conclusive and binding upon the participants,
the Company and all other persons.
The option exercise price per share of Common Stock shall be fixed by the
Committee at not less than 100% of the fair market value of a share of Common
Stock on the date of grant as determined by such Committee or the Board.
Option terms may not exceed ten years from the date of grant. Options are
exercisable at such time or times as the Committee shall determine.
The 1993 Option Plan generally provides that options cannot be exercised
after termination of employment, subject to certain grace periods. In
addition, no option granted under the Plan may be assigned or transferred by
the optionee other than by will or the laws of descent and distribution. All
shares issued upon exercise of options are subject to certain repurchase
rights in the event of the termination of the optionee, to rights of first
refusal, to holdback and other registration rights restrictions and to other
terms and conditions as determined by the Committee. In the event of the sale
of the Company, the options will become immediately exercisable.
See Note 6 of Notes to Financial Statements.
1996 STOCK AWARDS PLAN
On April 23, 1996, the Company adopted the Aksys, Ltd. 1996 Stock Awards
Plan (the "1996 Stock Plan"). The 1996 Stock Plan provides for the granting to
employees and other key individuals who perform services for the Company (the
"participants") the following types of incentive awards: stock options, SARs,
restricted stock, performance grants and other types of awards that the Board
of Directors or the Compensation Committee deems to be consistent with the
purposes of the 1996 Stock Plan. In addition, on the later of June 30 of each
year and the day next following each annual meeting of stockholders of the
Company, beginning in 1996, non-employee directors of the Company will
automatically be granted an option entitling such director to purchase a
number of shares of Common Stock equal to (i) 1,250 multiplied by (ii) the
number of calendar quarters in the preceding twelve months (rounded up to the
nearest whole number of calendar quarters) in which such person served as a
non-employee director. Each person upon first becoming a non-employee director
will also automatically be granted an option entitling such director to
purchase 5,000 shares of Common Stock. The exercise price of each such stock
option granted to non-employee directors will be the fair market value of a
share of Common Stock on the date of grant.
The 1996 Stock Plan will afford the Company latitude in tailoring incentive
compensation to support corporate and business objectives, and to anticipate
and respond to a changing business environment and competitive compensation
practices. Furthermore, the Board of Directors believes that the 1996 Stock
Plan will assist the Company in attracting and retaining highly-qualified non-
employee directors and employees, thereby enhancing the long-term financial
success of the Company.
An aggregate of 900,000 shares of Common Stock have been reserved for
issuance under the 1996 Stock Plan. Except for any other adjustments made by
the Board of Directors relating to a stock split or certain other changes in
the number of shares of Common Stock, or to reflect extraordinary corporate
transactions, further increases in the number of shares authorized for
issuance under the 1996 Stock Plan must be approved by the stockholders of the
Company.
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<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
On April 23, 1996, the Company adopted the Aksys, Ltd. Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan will be
administered by the Compensation Committee, which will have the authority,
subject to certain limitations, to determine eligibility for participation in
the plan and to prescribe the terms and conditions under which Common Stock
may be purchased under the Stock Purchase Plan. All employees of the Company
will be eligible to participate in the Stock Purchase Plan with certain
limited exceptions.
Participants may direct the deduction of a specified percentage from their
eligible compensation, to be used to purchase Common Stock under the Stock
Purchase Plan. At the beginning of each plan period, each Participant will be
deemed to have been granted an option to purchase, on the last day of the plan
period, Common Stock at an exercise price to be determined by the Committee,
which price shall be the lesser of (i) the fair market value of the Common
Stock as of the first day of such plan period or (ii) the fair market value of
the Common Stock as of the last day of such plan period, in each case less a
discount to market as specified by the Committee from time to time, such
discount not to exceed 15%. Such discount to market will initially be set at
15%.
The Company will not grant to any Participant any right to purchase Common
Stock if the exercise of such right would cause such participant to own five
percent or more of the combined voting power or value of all classes of the
Company's capital stock. In addition, the number of shares which may be
purchased by any participant in any plan period cannot exceed the number of
shares the fair market value of which, together with the fair market value of
shares previously purchased by such participant during such calendar year, in
the aggregate exceeds $25,000. For the preceding limitation, fair market value
is measured on the first day of the plan period.
An aggregate of 200,000 shares of Common Stock have been reserved for
issuance under the Stock Purchase Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into severance, confidentiality and noncompetition
agreements with each of Messrs. Kinet, and Kenley. The agreements provide for
a non-competition period of two years following the employee's resignation or
termination by the Company for cause or for one year following termination by
the Company without cause or due to disability. Severance payments are
provided for in the event of termination without cause or due to a disability.
Such severance payments equal the greater of $55,000 and the aggregate base
salary for the prior six months before termination in the case of Mr. Kenley
and the aggregate base salary for the prior six months before termination in
the case of Mr. Kinet. Customary ownership of intellectual property and
confidentiality provisions are also contained in these agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to 1996, the Company did not have a compensation committee of the
Board of Directors, and the principal decisions regarding compensation of
executive officers were made by the Board of Directors. Messrs. Kinet and
Kenley are directors but did not participate in any vote regarding their
respective compensation. The Board of Directors has established a compensation
committee, which currently consists of Messrs. McNerney, Gerdes and Rountree.
See "--Committees of the Board of Directors."
CERTAIN TRANSACTIONS
In connection with the initial round of private equity financing of the
Company in April 1993, certain stockholders of the Company entered into a
stockholders agreement (as amended, the "Stockholders Agreement"). The
Stockholders Agreement contains provisions relating to the composition of the
Board of Directors, restricting the transferability of the shares subject to
such agreement and granting preemptive rights in certain circumstances to the
parties thereto. The Stockholders Agreement will terminate upon completion of
this offering.
Prior to the completion of the offering, the Company expects to enter into
agreements to provide indemnification for its directors and executive officers
in addition to the indemnification provided for in the Company's Certificate
of Incorporation and By-laws.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1996 and
as adjusted to reflect the sale of the shares of Common Stock offered hereby,
with respect to the beneficial ownership of the Common Stock by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer named in the Summary Compensation Table and (iv) all
directors and executive officers of the Company as a group. Except as
indicated below, the address for each such person is c/o Aksys, Ltd., 1113 S.
Milwaukee Avenue, Suite 300, Libertyville, Illinois 60048.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED (1) THE OFFERING THE OFFERING
- ---- ------------ ------------ ------------
<S> <C> <C> <C>
Coral Partners (2)...................... 4,352,895 43.1% 33.0%
Suite 3510
60 South Sixth Street
Minneapolis, MN 55402
Sutter Hill Ventures, a California
Limited Partnership (3)................. 1,673,736 16.6 12.7
Suite A-200
755 Page Mill Road
Palo Alto, CA 94304
Sand Hill Financial Company (4)......... 607,605 6.0 4.6
Suite 3-210
3000 Sand Hill Road
Menlo Park, CA 94025
Lawrence H.N. Kinet (5)................. 521,825 4.9 3.8
Rodney S. Kenley (6).................... 748,304 7.3 5.6
Larry G. Gerdes (4)..................... 739,259 7.3 5.6
Peter H. McNerney (2)................... 4,384,553 43.4 33.2
W. Dekle Rountree, Jr. (7).............. 37,500 * *
Bernard R. Tresnowski (7)............... 5,000 * *
All directors and executive officers as
a group (8 persons) (8)................. 6,626,149 61.7 47.8
</TABLE>
- --------
*Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares of
Common Stock beneficially owned by a person and the percentage of
beneficial ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or exercisable
within 60 days are deemed outstanding for purposes of determining the
beneficial ownership of such person but are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. The
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as
indicated in the other footnotes to this table.
(2) Amounts shown represent the aggregate number of shares held by Coral
Partners II, L.P. ("Coral Partners II") and Coral Partners IV, L.P.
("Coral Partners IV"). Peter H. McNerney, a director of the Company, Yuval
Almog and Linda L. Watchmaker are general partners of the general partner
of Coral Partners II and may be deemed to have beneficial ownership of the
Common Stock held by Coral Partners II. Messrs. McNerney and Almog are
general partners of the general partner of Coral Partners IV and may be
deemed to have beneficial ownership of the Common Stock held by Coral
Partners IV. Messrs. McNerney and Almog and Ms. Watchmaker disclaim
beneficial ownership of such shares of Common Stock held by Coral
42
<PAGE>
Partners II and Coral Partners IV except to the extent of their pecuniary
interest in such shares. In addition, Messrs. McNerney and Almog and Ms.
Watchmaker beneficially own 31,658, 14,220 and 11,372 shares of Common
Stock, respectively, which are not owned by Coral Partners II or Coral
Partners IV.
(3) Paul M. Wythes, David L. Anderson, G. Leonard Baker, Jr., William H.
Younger, Jr. and Tench Coxe are general partners of the general partner of
Sutter Hill Ventures, a California Limited Partnership ("Sutter Hill
Ventures"), and may be deemed to have beneficial ownership of the Common
Stock held by Sutter Hill Ventures. Such individuals disclaim beneficial
ownership of such shares of Common Stock held by Sutter Hill Ventures
except to the extent of their pecuniary interest in such shares. The
shares owned by Sutter Hill Ventures as disclosed in the above table
include an aggregate of 608,902 shares of Common Stock beneficially owned
by such individuals which are not owned by Sutter Hill Ventures.
(4) Larry G. Gerdes, a director of the Company, and Donald L. Lucas are
general partners of Sand Hill Financial Company ("Sand Hill Financial")
and may be deemed to have beneficial ownership of the Common Stock held by
Sand Hill Financial. Messrs. Gerdes and Lucas disclaim beneficial
ownership of such shares of Common Stock held by Sand Hill Financial
except to the extent of their pecuniary interest in such shares. In
addition, Messrs. Gerdes and Lucas beneficially own 131,654 (including
29,166 shares of Common Stock which are issuable upon exercise of options
exercisable within 60 days of March 1, 1996) and 158,610 shares of Common
Stock, respectively, which are not owned by Sand Hill Financial.
(5) Includes 457,500 shares of Common Stock which are issuable upon exercise
of options exercisable within 60 days of March 1, 1996.
(6) Includes 84,979 shares of Common Stock which are issuable upon exercise of
options exercisable within 60 days of March 1, 1996.
(7) Represents shares of Common Stock which are issuable upon exercise of
options exercisable within 60 days of March 1, 1996.
(8) Includes an aggregate of 633,645 shares of Common Stock held by directors
and executive officers which are issuable upon exercise of options
exercisable within 60 days of March 1, 1996.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The total amount of authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, par value $.01 per share. Giving effect to
the Preferred Stock conversion discussed in the following paragraph, which
will automatically occur upon consummation of this offering, there would have
been 10,109,593 shares of Common Stock outstanding held by approximately 130
holders of record as of March 31, 1996. Upon completion of this offering there
will be 13,220,229 shares of Common Stock outstanding. The issued and
outstanding shares of Common Stock are, and the shares of Common Stock being
offered hereby upon payment therefor will be, validly issued, fully paid and
nonassessable. The holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available therefor at such times
and in such amounts as the Board of Directors may from time to time determine,
subject to any prior rights of the holders of any Preferred Stock that may be
outstanding. The shares of Common Stock are neither redeemable nor
convertible, and the holders thereof have no preemptive or subscription rights
to purchase any securities of the Company. Upon liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
pro rata the assets of the Company which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of Preferred Stock then outstanding. Each
outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders. Holders of Common Stock do not have
cumulative voting rights.
PREFERRED STOCK
As of March 31, 1996, there were outstanding 1,500,000 shares of Series A
Redeemable Preferred Stock, 1,600,000 shares of Series B Redeemable Preferred
Stock, 1,777,778 shares of Series C Redeemable Preferred
43
<PAGE>
Stock and 1,287,646 shares of Series D Redeemable Preferred Stock, for an
aggregate of 6,165,424 shares of Preferred Stock, issued and outstanding held
by approximately 130 holders of record. Upon the consummation of this
offering, the outstanding shares of all such series of Preferred Stock will
automatically convert into shares of Common Stock of the Company. After this
offering and the aforementioned conversion, the Board of Directors will be
authorized to issue without stockholder approval 1,000,000 shares of Preferred
Stock in one or more series and to determine and alter all rights, preferences
and privileges and qualifications, limitations and restrictions thereof,
including with respect to the rate and nature of dividends, the price and
terms and conditions on which shares may be redeemed, the amount payable in
the event of voluntary or involuntary liquidation, the terms and conditions
for conversion or exchange into any other class or series of stock, voting
rights and other terms.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Under the Company's Certificate of Incorporation, there are approximately
35,219,371 shares of Common Stock (excluding shares reserved for issuance
pursuant to outstanding stock options and stock award and purchase plans) and
1,000,000 shares of Preferred Stock available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes including future public offerings to raise additional
capital or to facilitate corporate acquisitions.
One of the effects of the existence of authorized but unissued and
unreserved Common Stock or Preferred Stock may be to enable the Board of
Directors to issue shares to persons friendly to current management which
could make more difficult or discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of the Company's management. Such additional
shares also could be used to dilute the stock ownership of persons seeking to
obtain control of the Company. In addition, the mere existence of authorized
but unissued and unreserved Common Stock or Preferred Stock may have a
depressive effect on the market price of the Common Stock.
The Company does not currently have any plans to issue additional shares of
Common Stock or Preferred Stock other than shares of Common Stock which may be
issued upon the exercise of options which have been granted or which may be
granted in the future to the Company's employees or directors.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Certificate of Incorporation provides for the Board to be divided into
three classes, as nearly equal in number as possible, serving staggered three-
year terms. Approximately one-third of the Board is elected each year. See
"Management." Under Delaware Law, directors serving on a classified board can
only be removed for cause. The provision for a classified Board could prevent
a party who acquires control of a majority of the outstanding voting stock
from obtaining control of the Board until the second annual stockholders
meeting following the date the acquiror obtains the controlling stock
interest. The classified board provision could have the effect of discouraging
a potential acquiror from making a tender offer or otherwise attempting to
obtain control of the Company and could increase the likelihood that incumbent
directors will retain their positions.
The Certificate of Incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. The Certificate of Incorporation and
the By-laws provide that, except as otherwise required by law, special
meetings of the stockholders can only be called pursuant to a resolution
adopted by a majority of the Board of Directors or the chief executive officer
of the Company. Stockholders are not permitted to call a special meeting or to
require the Board to call a special meeting.
The By-Laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of
44
<PAGE>
meeting or brought before the meeting by or at the direction of the Board or
by a stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to the
Company's Secretary timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. Although
the By-Laws do not give the Board the power to approve or disapprove
stockholder nominations of candidates for director or proposals regarding
other business to be conducted at a special or annual meeting, the By-Laws may
have the effect of precluding the conduct of certain business at a meeting if
the proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
The Certificate of Incorporation imposes limitations on the ability of
stockholders to amend, alter or repeal the Company's By-Laws and Certificate
of Incorporation.
The Certificate of Incorporation contains a "fair price" provision pursuant
to which any "business combination" (as defined therein) involving an
"interested stockholder" (as defined therein) and the Company or any
subsidiary would require approval by the affirmative vote of the holders of at
least two-thirds of the shares of voting stock of the Company. The fair price
provision of the Certificate of Incorporation provides that the two-thirds
stockholder vote is not required if the "business combination" is approved by
a majority of the continuing directors or if certain procedures and price
requirements are satisfied. Instead, the vote, if any, required by applicable
Delaware Law or by any other provision of the Certificate of Incorporation
would be necessary.
The Certificate of Incorporation limits the liability of directors to the
fullest extent permitted by Delaware Law. In addition, the Certificate of
Incorporation provides that the Company shall indemnify directors and officers
of the Company to the fullest extent permitted by such law. The Company
anticipates entering into indemnification agreements with its current
directors and executive officers prior to the consummation of this offering.
DELAWARE GENERAL CORPORATION LAW SECTION 203
The Company has elected to be governed by Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 contains certain
limitations on business combinations with interested stockholders. In
particular, Section 203 restricts certain business combinations between the
Company and an "interested stockholder" (in general, a stockholder owning 15%
or more of the Company's outstanding voting stock) or such stockholder's
affiliates or associates for a period of three years following the date on
which the stockholder becomes an interested stockholder. Generally, the
restrictions do not apply if (i) prior to an interested stockholder becoming
such, the Board of Directors approves either the business combination or the
transaction in which the stockholder becomes an interested stockholder, (ii)
upon consummation of the transaction in which such stockholder becomes an
interested stockholder, such interested stockholder owns at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding shares owned by certain employee stock ownership plans and persons
who are directors and also officers of the Company), or (iii) on or subsequent
to the date an interested stockholder becomes such, the business combination
is both approved by the Board of Directors and authorized at an annual or
special meeting of the Company's stockholders (and not by written consent) by
the affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock is First Chicago Trust
Company of New York.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices of the Common Stock.
Upon completion of this offering, the Company will have 13,220,229 shares of
Common Stock outstanding. The shares of Common Stock sold in this offering
will be freely tradeable by persons other than "affiliates" of the Company, as
that term is defined under the Securities Act, without restrictions or further
registration under the Securities Act. The remaining 10,120,229 shares (the
"Restricted Shares") are "restricted securities" as defined in Rule 144
promulgated under the Securities Act. In connection with this offering, the
Company and its officers, directors and certain existing stockholders, holding
in the aggregate approximately 9,933,348 Restricted Shares, have agreed not to
dispose of any securities of the Company for a period of 180 days from the
date of this Prospectus (other than shares sold by the Company in the offering
and issuances by the Company of certain employee stock options and shares
covered thereby) (the "Lock-Up Period"), without the prior written consent of
Smith Barney Inc. See "Underwriting." In general, pursuant to Rule 144 under
the Securities Act, a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least two years, including
persons who may be deemed "affiliates" of the Company, would be entitled to
sell within any three month period a number of shares that does not exceed the
greater of the average weekly trading volume during the four calendar weeks
preceding such sale or 1% of the then outstanding shares of Common Stock
(approximately 132,202 shares immediately after this offering). A person who
is deemed not to have been an "affiliate" of the Company at any time during
the 90 days preceding a sale by such person, and who has beneficially owned
such restricted securities for at least three years, would be entitled to sell
such restricted securities under Rule 144(k) without regard to the volume
limitations described above.
Immediately upon expiration of the Lock-Up Period, 4,573,433 Restricted
Shares will be eligible for sale pursuant to Rule 144 subject to the volume,
manner of sale and other restrictions of Rule 144 and 942,375 additional
Restricted Shares will be eligible for sale without such restrictions pursuant
to Rule 144(k). In addition, 2,666,668 and 1,931,469 Restricted Shares will
become eligible for sale in March 1997 and September 1997, respectively,
subject to the volume, manner of sale and other restrictions of Rule 144.
Outstanding options to purchase 907,537 shares of Common Stock will be
vested and exercisable effective as of the date of the offering, and the
shares issuable upon exercise thereof will be eligible for sale after the
expiration of the Lock-Up Period pursuant to Rule 144 and 701. There will also
be options outstanding as of the date of the offering with respect to an
additional 652,863 shares. The Company intends to register shares of Common
Stock reserved for issuance under the Company's 1996 Stock Awards Plan and the
Company's Employee Stock Purchase Plan.
In addition, certain existing stockholders have the right to demand
registration of their shares under the Securities Act. Such stockholders have
agreed not to exercise their registration rights until after the expiration of
the Lock-Up Period. See "Underwriting." An increase in the number of shares of
Common Stock that may become available for sale in the public market may
adversely affect the market price of the Common Stock prevailing from time to
time in the public market and could impair the Company's ability to raise
additional capital through the sale of its equity securities.
REGISTRATION RIGHTS
The Company is a party to a Registration Agreement (the "Registration
Agreement") with certain stockholders of the Company pursuant to which such
stockholders have the right to cause the Company to register shares of Common
Stock (the "registrable securities") under the Securities Act. Upon the
consummation of this offering, 10,113,943 outstanding shares of Common Stock
and all 1,472,900 shares issuable under options outstanding under the
Company's 1993 Option Plan will constitute registrable securities and
therefore will be eligible for registration pursuant to the Registration
Agreement. Under the terms of the Registration
46
<PAGE>
Agreement, the holders of a majority of the registrable securities (generally
excluding shares held by certain executive employees of the Company and shares
acquired under the 1993 Option Plan) can require at any time and from time to
time the Company, subject to certain limitations, to file a "long-form" or, if
available, a "short-form" registration statement under the Securities Act
covering all or part of the registrable securities (each, a "demand
registration"). The Company is obligated to pay all registration expenses
(other than underwriting discounts and commissions) incurred in connection
with up to two demand registrations filed on Form S-1 or any similar "long-
form" registration statement under the Securities Act and two demand
registrations on Form S-2 or S-3 or any similar "short-form" registration
statement under the Securities Act. In addition, the Registration Agreement
provides the holders of registrable securities with "piggyback" registration
rights, subject to certain limitations, whenever the Company files a
registration statement and such form can be used to register registrable
securities.
47
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc......................................................
Piper Jaffray Inc.....................................................
Vector Securities International, Inc..................................
---------
Total............................................................. 3,100,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Piper Jaffray Inc. and Vector
Securities International, Inc. are acting as Representatives, propose
initially to offer part of the shares of Common Stock directly to the public
at the public offering price set forth on the cover page hereof and part to
certain dealers at a price that represents a concession not in excess of
$ per share under the public offering price. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to other Underwriters or to certain other dealers. After the initial public
offering, the public offering price and such concessions may be changed by the
Underwriters. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
465,000 additional shares of Common Stock at the public offering price set
forth on the cover page hereof less underwriting discounts and commissions.
The Underwriters may exercise such option to purchase additional shares solely
for the purpose of covering over-allotments, if any, incurred in connection
with the sale of the shares offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The Company, its officers and directors and certain other stockholders,
holding in the aggregate substantially all of the Company's currently
outstanding equity securities, have agreed that, for a period of 180 days
after the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for, Common Stock except, in the case of the
Company, in certain limited circumstances.
48
<PAGE>
At the Company's request, the Representatives have agreed to reserve up to
232,500 shares of Common Stock for sale at the public offering price to
Company employees and other persons having certain business relationships with
the Company. The number of shares available for sale to the general public
will be reduced to the extent these persons purchase such reserved shares. Any
reserved shares not purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
has been determined by negotiations between the Company and the
Representatives of the Underwriters. The factors considered in determining the
initial public offering price were the history of, and the prospects for, the
Company's business and the industry in which it competes, an assessment of the
Company's management, its past and present operations, its past and present
earnings and the trend of such earnings, the prospects for earnings of the
Company, the present state of the Company's development, the general condition
of the securities market at the time of the offering and the market prices and
earnings of similar securities of comparable companies at the time of the
offering.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Kirkland & Ellis, Chicago, Illinois (a
partnership, which includes professional corporations). Certain legal matters
will be passed upon for the Underwriters by Dewey Ballantine, New York, New
York.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995,
and for each of the years in the three year periods ended December 31, 1995,
and for the period from January 18, 1991 (inception) through December 31, 1995
have been included herein and elsewhere in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Prospectus Summary--
The Company," "Risk Factors--Patents and Proprietary Technology" and
"Business" relating to U.S. patent and licensing matters have been reviewed
and approved by Banner & Allegretti, Chicago, Illinois, intellectual property
counsel for the Company, as experts on such matters, and are included herein
in reliance upon that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act a Registration Statement with respect
to the Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference, but such statements are complete in all
material respects for the purposes herein made. The Registration Statement may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; at its Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and at its New York Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the public reference section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto and the financial statements, notes and schedules filed as a part
thereof.
49
<PAGE>
AKSYS, LTD.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Information:
Independent Auditors' Report............................................ F-2
Balance Sheets as of December 31, 1994 and 1995......................... F-3
Statements of Operations for the years ended December 31, 1993, 1994 and
1995
and for the period from January 18, 1991 (inception) through December
31, 1995............................................................... F-4
Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995
and for the period from January 18, 1991 (inception) through December
31, 1995............................................................... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995
and for the period from January 18, 1991 (inception) through December
31, 1995............................................................... F-6
Notes to Financial Statements........................................... F-7
Interim Financial Information (unaudited):
Balance Sheets as of March 31, 1995 and 1996............................ F-13
Statements of Operations for the three months ended March 31, 1995 and
1996
and for the period from January 18, 1991 (inception) through March 31,
1996................................................................... F-14
Statements of Cash Flows for the three months ended March 31, 1995 and
1996
and for the period from January 18, 1991 (inception) through March 31,
1996................................................................... F-15
Notes to Financial Statements........................................... F-16
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Aksys, Ltd.:
We have audited the accompanying balance sheets of Aksys, Ltd. (a
development stage enterprise) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995 and for the
period from January 18, 1991 (inception) through December 31, 1995. These
financial statements are the responsibility of Aksys, Ltd.'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 of
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 financial position of Aksys, Ltd. (a development
stage enterprise) as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995 and for the period from January 18, 1991 (inception)
through December 31, 1995, in conformity with generally accepted accounting
principles.
Chicago, Illinois
February 15, 1996, except for Note 10
which is as of April 23, 1996
F-2
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
ASSETS 1994 1995
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 609,655 $ 570,621
Short-term investments............................. 397,360 3,386,484
Interest receivable................................ 1,817 8,502
Prepaid expenses................................... 10,960 6,213
Other current assets............................... 41,342 46,319
----------- -----------
Total current assets............................. 1,061,134 4,018,139
Property and equipment, net.......................... 383,730 603,382
Other assets......................................... 32,028 71,929
----------- -----------
$ 1,476,892 $ 4,693,450
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable................................... $ 235,650 $ 316,400
Accrued liabilities................................ 52,947 89,745
Current maturities of note payable................. 14,994 15,206
Current maturities of lease obligation............. 34,031 31,525
----------- -----------
Total current liabilities........................ 337,622 452,876
Note payable, less current maturities................ 14,946 909
Lease obligation, less current maturities............ 69,490 34,852
----------- -----------
Total liabilities................................ 422,058 488,637
----------- -----------
Redeemable preferred stock........................... 3,900,000 12,406,761
----------- -----------
Stockholders' equity:
Common stock, par value $.01 per share, 50,000,000
shares authorized, 858,333 and 861,457 shares
issued and outstanding in 1994 and 1995,
respectively...................................... 8,583 8,614
Additional paid-in capital......................... 9,117 --
Deficit accumulated during development stage....... (2,862,866) (8,210,562)
----------- -----------
Total stockholders' equity (deficit)............. (2,845,166) (8,201,948)
----------- -----------
Commitments.......................................... -- --
----------- -----------
$ 1,476,892 $ 4,693,450
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND FOR THE PERIOD
FROM JANUARY 18, 1991 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
CUMULATIVE FROM
JANUARY 18, 1991
(INCEPTION)
THROUGH
1993 1994 1995 DECEMBER 31, 1995
--------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Research and development
expenses............... $ 598,748 $ 1,808,638 $ 4,261,230 $ 6,668,616
General and
administrative
expenses............... 213,923 266,418 1,236,143 1,832,552
--------- ----------- ----------- -----------
Operating loss.......... (812,671) (2,075,056) (5,497,373) (8,501,168)
--------- ----------- ----------- -----------
Other income (expense):
Interest income....... 31,582 44,933 163,613 241,417
Interest expense...... -- (4,759) (10,903) (15,662)
Other income.......... -- -- -- 67,884
--------- ----------- ----------- -----------
31,582 40,174 152,710 293,639
--------- ----------- ----------- -----------
Net loss................ $(781,089) $(2,034,882) $(5,344,663) $(8,207,529)
========= =========== =========== ===========
Pro forma net loss per
share.................. $ (0.52)
===========
Weighted average shares
used to compute pro
forma net loss per
share.................. 10,322,837
===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND FOR THE PERIOD
FROM JANUARY 18, 1991 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TOTAL
---------------- PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of S-
Corporation common
stock on January 18,
1991................... 3,060 $ 34,090 $ -- $ -- $ 34,090
Net loss................ -- -- -- (28,719) (28,719)
------- -------- -------- ----------- -----------
Balance at December 31,
1991................... 3,060 34,090 -- (28,719) 5,371
------- -------- -------- ----------- -----------
Issuance of S-
Corporation common
stock.................. 938 38,583 -- -- 38,583
Net loss................ -- -- -- (18,176) (18,176)
------- -------- -------- ----------- -----------
Balance at December 31,
1992................... 3,998 72,673 -- (46,895) 25,778
------- -------- -------- ----------- -----------
Issuance of common stock
on April 2, 1993 in
exchange for net assets
in connection with
merger................. 854,335 (64,090) 64,090 -- --
Offering costs related
to issuance of
redeemable preferred
stock.................. -- -- (52,617) -- (52,617)
Net loss................ -- -- -- (781,089) (781,089)
------- -------- -------- ----------- -----------
Balance at December 31,
1993................... 858,333 8,583 11,473 (827,984) (807,928)
------- -------- -------- ----------- -----------
Offering costs related
to issuance of
redeemable preferred
stock.................. -- -- (5,596) -- (5,596)
Compensation related to
stock option plan...... -- -- 3,240 -- 3,240
Net loss................ -- -- -- (2,034,882) (2,034,882)
------- -------- -------- ----------- -----------
Balance at December 31,
1994................... 858,333 8,583 9,117 (2,862,866) (2,845,166)
------- -------- -------- ----------- -----------
Offering costs related
to issuance of
redeemable preferred
stock.................. -- -- (9,419) (3,033) (12,452)
Exercise of stock
options at $0.1067 per
share.................. 3,124 31 302 -- 333
Net loss................ -- -- -- (5,344,663) (5,344,663)
------- -------- -------- ----------- -----------
Balance at December 31,
1995................... 861,457 $ 8,614 $ -- $(8,210,562) $(8,201,948)
======= ======== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND FOR THE PERIOD
FROM JANUARY 18, 1991 (INCEPTION) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
CUMULATIVE FROM
JANUARY 18, 1991
(INCEPTION)
THROUGH
1993 1994 1995 DECEMBER 31, 1995
---------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $ (781,089) $(2,034,882) $(5,344,663) $(8,207,529)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 10,982 75,042 149,776 235,042
Compensation expense
related to stock
options............ -- 3,240 -- 3,240
Changes in assets
and liabilities:
Interest
receivable....... (3,577) 1,760 (6,685) (8,502)
Prepaid expenses.. (8,782) (2,178) 4,747 (6,213)
Other current
assets........... (9,321) (32,021) (4,977) (46,319)
Accounts payable.. 6,930 228,720 80,750 316,400
Accrued
liabilities...... 113,112 (59,438) 36,798 89,745
Other assets...... -- (8,020) (58,282) (81,133)
---------- ----------- ----------- -----------
Net cash used in
operating activities... (671,745) (1,827,777) (5,142,536) (7,705,269)
---------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchases of
investments.......... (156,170) (3,097,360) (8,810,484) (12,064,014)
Proceeds from sale of
investments.......... -- 2,856,170 5,821,360 8,677,530
Purchases of property
and equipment........ (145,085) (203,453) (351,047) (706,104)
Organizational costs
incurred............. (19,595) -- -- (19,595)
---------- ----------- ----------- -----------
Net cash used in
investing activities... (320,850) (444,643) (3,340,171) (4,112,183)
---------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds from issuance
of common stock...... -- -- 333 73,006
Proceeds from issuance
of preferred stock... 1,447,383 2,394,404 8,494,309 12,336,096
Proceeds from issuance
of note payable...... 34,292 7,500 -- 41,792
Repayment of notes
payable.............. -- (11,852) (13,825) (25,677)
Repayment of lease
obligation........... -- -- (37,144) (37,144)
---------- ----------- ----------- -----------
Net cash provided by
financing activities... 1,481,675 2,390,052 8,443,673 12,388,073
---------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 489,080 117,632 (39,034) 570,621
Cash and cash
equivalents at
beginning of period.... 2,943 492,023 609,655 --
---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 492,023 $ 609,655 $ 570,621 $ 570,621
========== =========== =========== ===========
Supplemental disclosures
of cash flow
information:
Capital lease
obligation incurred
to acquire equipment. -- 103,521 -- 103,521
========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Aksys, Ltd. (the Company) was originally incorporated in Illinois on January
18, 1991. In March 1993, the Company merged into a Delaware corporation. The
Company is considered a development stage enterprise since it is devoting
substantially all of its efforts to research and development, marketing, and
obtaining financing. No product sales have occurred. A development stage
enterprise is required to employ the same accounting principles as operating
companies.
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements of the Company follows:
(a) Cash and Cash Equivalents
At December 31, 1994 and 1995, approximately 51% and 53%, respectively, of
the Company's cash and cash equivalents were maintained with one financial
institution and consist of demand deposits and money market funds.
(b) Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, ranging
from three to seven years. Leasehold improvements are amortized over the life
of the lease. Expenditures for repairs and maintenance are charged to
operations as incurred.
(c) Short-Term Investments
Investments are classified as held-to-maturity and are approximately stated
at amortized cost.
(d) Research and Development Costs
Research and development costs are charged to expense when incurred.
(e) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(f) Computation of Pro forma Net Loss per Share
The Company has presented pro forma net loss per share for the year ended
December 31, 1995 in lieu of historical net loss per share as such historical
information is not meaningful due to the mandatory conversion of the
redeemable preferred stock in connection with this offering. The pro forma net
loss per share has been computed using the weighted average number of common
shares outstanding for each period giving effect to the
F-7
<PAGE>
AKSYS, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
conversion of all outstanding shares of convertible Preferred Stock and
inclusion of options for common stock granted by the Company during the twelve
months immediately preceding the offering date (using the treasury stock
method and the mid-point of the proposed public offering price) as if they
were outstanding for all periods presented, pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83. Other common equivalent
shares from stock options are excluded from the computation because their
effect is antidilutive.
(2) SHORT-TERM INVESTMENTS
Investments consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------------------ ---------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury bills............. $197,360 $198,173 $2,786,484 $2,788,261
Ford Credit Corporation
Commercial Paper............... -- -- 600,000 600,000
General Electric Commercial
Paper.......................... 200,000 200,864 -- --
-------- -------- ---------- ----------
$397,360 $399,037 $3,386,484 $3,388,261
======== ======== ========== ==========
</TABLE>
(3) PLANT AND EQUIPMENT
Plant and equipment are summarized at December 31 as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE 1994 1995
--------- -------- ---------
<S> <C> <C> <C>
Furniture and fixtures.................... 7 years $120,939 $ 197,600
Leasehold improvements.................... 3 years 9,098 19,386
Equipment................................. 3-7 years 329,619 592,639
-------- ---------
459,656 809,625
Less accumulated depreciation and
amortization............................. (75,926) (206,243)
-------- ---------
$383,730 $ 603,382
======== =========
</TABLE>
(4) NOTES PAYABLE
Notes payable at December 31 include the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Installment notes payable to American National Bank
of
Libertyville and secured by certain short-term
investments:
Interest accrues at prime (8.5% at December 31,
1994
and 1995) plus 1.5%, and is payable in monthly
installments beginning January 31, 1994 until
December 31, 1996............................... $ 23,814 $ 12,383
Interest accrues at 8% and is payable in monthly
installments beginning May 1994 until April
1997............................................ 6,126 3,732
-------- --------
29,940 16,115
Less current portion............................. (14,994) (15,206)
-------- --------
$ 14,946 $ 909
======== ========
</TABLE>
F-8
<PAGE>
AKSYS, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest paid for the years ended December 31, 1993, 1994, and 1995 was $0,
$2,684, and $12,906, respectively.
(5) REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consisted of the following:
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- -----------
<S> <C> <C>
Balance at December 31, 1992............................. -- --
Issuance of Series A redeemable preferred stock, par
value $.01 per share.................................... 1,500,000 $ 1,500,000
--------- -----------
Balance at December 31, 1993............................. 1,500,000 1,500,000
--------- -----------
Issuance of Series B redeemable preferred stock, par
value $.01 per share.................................... 1,600,000 2,400,000
--------- -----------
Balance at December 31, 1994............................. 3,100,000 3,900,000
Issuance of Series C redeemable preferred stock, par
value $.01 per share.................................... 1,777,778 4,000,000
Issuance of Series D redeemable preferred stock, par
value $.01 per share.................................... 1,287,646 4,506,761
--------- -----------
6,165,424 $12,406,761
========= ===========
</TABLE>
Each share of preferred stock may be converted, at the option of the holder,
into common stock based on a formula as defined in the Certificate of
Incorporation. Such formula results in the conversion on a share-for-share
basis with adjustment for stock splits. The Company may require the conversion
of all of the outstanding preferred stock at such time as it effects a public
offering from which the aggregate proceeds to the Company are at least
$10,000,000 and the price per share paid is at least 400% of the highest
conversion price immediately prior to the public offering.
At any time after December 31, 2003, at the option of the holder, all or any
portion of the preferred stock outstanding may be redeemed at a price per
share equal to the liquidation value which is an amount equal to the amount
originally paid for the shares.
F-9
<PAGE>
AKSYS, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) STOCK OPTIONS
In 1993, the Company established a nonqualified stock option plan (the 1993
Stock Option Plan) which provides for the granting of options to purchase
shares of the Company's common stock to the employees, scientific advisory
board members, other associates, and board of directors. At December 31, 1995,
1,912,500 shares of common stock have been reserved for issuance under the
1993 Stock Option Plan. The 1993 Stock Option Plan provides that the option
exercise price per share of common stock is fixed at not less than 100% of the
fair market value of a share of common stock on the date of grant. Options
vest over various periods as defined in the agreements and expire as
determined by the Board on an individual basis, but may not exceed 10 years.
In 1994 two individuals were granted options which vest upon achieving
certain milestones. These agreements were variable resulting in compensation
expense of $3,240 for the year December 31, 1994. During 1995, these
agreements were canceled and were replaced with new option grants which vest
over various periods of time.
The following table summarizes the transactions pursuant to the Company's
stock option plan:
<TABLE>
<CAPTION>
NUMBER
OF SHARES PRICE RANGE
--------- -------------
<S> <C> <C>
Outstanding at December 31, 1992...................... --
Granted in 1993..................................... 422,250 $ 0.1067
---------
Outstanding at December 31, 1993...................... 422,250 0.1067
Granted............................................. 793,175 0.1067-0.1667
Canceled............................................ (16,500) 0.1067
---------
Outstanding at December 31, 1994...................... 1,198,925 0.1067-0.1667
Granted............................................. 315,450 0.1067-0.3935
Exercised........................................... (3,125) 0.1067
Canceled............................................ (64,000) 0.1067-0.1667
---------
Outstanding at December 31, 1995...................... 1,447,250 0.1067-0.3935
=========
Exercisable at December 31, 1995...................... 513,069 0.1067-0.3935
=========
</TABLE>
F-10
<PAGE>
AKSYS, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7)INCOME TAXES
No Federal or state income taxes have been provided for in the accompanying
financial statements because of net operating losses incurred to date and the
establishment of a valuation allowance equal to the amount of the Company's
deferred tax assets. At December 31, 1995, the Company has a net operating
loss and research and development credit carryforwards for Federal income tax
purposes of approximately $8,104,000 and $276,000, respectively. These
carryforwards expire between 2008 and 2010. Changes in the Company's ownership
may cause annual limitations on the amount of loss and credit carryforwards
that can be utilized to offset income in the future.
The net deferred tax assets are summarized at December 31 as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 1,080,000 $ 3,161,000
Research and development credit carryforwards....... 119,000 276,000
Other............................................... 9,000 27,000
----------- -----------
1,208,000 3,464,000
Deferred tax liability depreciation................... 12,000 35,000
----------- -----------
1,196,000 3,429,000
Less: Valuation allowance............................. (1,196,000) (3,429,000)
----------- -----------
Net deferred taxes.................................... $ -- $ --
=========== ===========
</TABLE>
(8) EMPLOYEE SAVINGS AND RETIREMENT PLAN
In 1995 the Company instituted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all full time employees. The
401(k) Plan provides a match of up to 10% of the employees contribution. Total
expense for the year ended December 31, 1995 was $3,151.
(9) COMMITMENTS
Leases
The Company leases its offices and laboratory research facilities under two
agreements accounted for as operating leases. One of the leases is a five-year
lease which commenced November 1, 1993. This lease was amended in March 1994,
September 1994, and December 1995 for facility expansion. In January 1996 the
Company exercised its option under the lease agreement to terminate the lease
effective October 31, 1996 and paid a penalty of $38,601. The second lease is
a seventeen month lease which commenced June 1, 1995. This agreement will
expire on October 31, 1996. Included in both research and development expenses
and general and administrative expenses for the years ended December 31, 1993,
1994, and 1995 were $18,756, $56,241, and $108,996, respectively, for rent
expense under these operating leases.
The Company has commitments under these lease agreements of $105,432 for
1996. The Company is currently in the process of locating new facilities which
are expected to be leased under an operating lease.
In November 1994 the Company entered into a capital lease for computer-aided
engineering equipment and software (equipment). At December 31, 1994 and 1995
the gross amount of equipment recorded under this capital lease was $109,566
and related accumulated depreciation was $4,091 and $33,018, respectively.
F-11
<PAGE>
AKSYS, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Depreciation of assets held under capital lease is included in depreciation
and amortization. Future minimum capital lease payments as of December 31,
1995 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- -----------------------
<S> <C>
1996................................................................... $36,798
1997................................................................... 36,798
-------
Total minimum lease payments........................................... 73,596
Less amount of representing interest................................... 7,219
-------
Present value of minimum lease payments................................ 66,377
Less current maturities of lease obligation............................ 31,525
-------
Lease obligation, less current maturities.............................. $34,852
=======
</TABLE>
License Agreements
The Company has been granted licenses to use certain technology in the
development and sale of its products. Such license agreements provide for
royalty payments to be made by the Company based on net sales over the life of
any application based on the patent rights. Minimum required payments under
these agreement are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 35,000
1997............................................................. 45,000
1998............................................................. 75,000
1999............................................................. 95,000
2000............................................................. 125,000
2001............................................................. 155,000
2002............................................................. 185,000
2003............................................................. 215,000
All subsequent years............................................. 255,000
</TABLE>
Total royalty payments for the years ended December 31, 1993, 1994 and 1995
were $2,500, $5,000, and $5,000, respectively.
(10) SUBSEQUENT EVENTS
On April 23, 1996, the Company effected a 3-for-2 stock split of its common
stock. Additionally, on April 23, 1996, the Company filed a Restated
Certificate of Incorporation authorizing an increase in the number of
authorized shares of common stock to 50,000,000 shares and authorizing
1,000,000 shares of preferred stock, par value $.01 per share, for future
issuance. All references in the financial statements to share and per share
data have been adjusted to reflect this stock split.
On March 4, 1996 the Company established the 1996 Stock Awards Plan to
provide incentive awards to directors, employees and other key individuals in
the form of stock options, SARs, restricted stock and performance grants.
Total shares reserved for issuance under the 1996 Stock Awards Plan is 900,000
shares.
On March 4, 1996, the Company established the Employee Stock Purchase Plan
(the "Stock Purchase Plan") covering all employees. The Stock Purchase Plan
allows employees to purchase Company common stock at a discount to market, not
to exceed 15%, based on eligible payroll deductions. 200,000 shares of common
stock are reserved for issuance under the stock purchase plan.
F-12
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PROFORMA
ASSETS 1995 1996 1996
------ ---------- ----------- -----------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............. $ 347,632 $ 2,102,225 $ 2,102,225
Short-term investments................. 3,490,537 -- --
Prepaid expenses....................... -- 5,613 5,613
Other current assets................... 30,181 39,381 39,381
---------- ----------- -----------
Total current assets................. 3,868,350 2,147,219 2,147,219
Property and equipment, net.............. 395,830 616,300 616,300
Other assets............................. 73,604 185,980 185,980
---------- ----------- -----------
$4,337,784 $ 2,949,499 $ 2,949,499
========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable....................... $ 213,222 $ 445,803 $ 445,803
Accrued liabilities.................... 28,613 92,298 92,298
Current maturities of notes payable.... 13,898 12,170 12,170
Current maturities of lease
obligations........................... 37,737 32,161 32,161
---------- ----------- -----------
Total current liabilities............ 293,470 582,432 582,432
Notes payable, less current maturities... 11,454 459 459
Lease obligation, less current
maturities.............................. 65,182 29,118 29,118
---------- ----------- -----------
Total liabilities.................... 370,106 612,009 612,009
---------- ----------- -----------
Redeemable preferred stock............... 7,900,000 12,406,761 --
---------- ----------- -----------
Stockholders' equity:
Common stock, par value $.01 per share,
50,000,000 shares authorized, 858,233
and 861,457 shares issued and
outstanding in 1995 and 1996,
respectively.......................... 8,583 8,614 101,096
Additional paid-in capital............. 9,117 -- 12,314,279
Deficit accumulated during development
stage................................. (3,950,022) (10,077,885) (10,077,885)
---------- ----------- -----------
Total stockholders' equity (deficit). (3,932,322) (10,069,271) 2,337,490
---------- ----------- -----------
Commitments.............................. -- -- --
---------- ----------- -----------
$4,337,784 $ 2,949,499 $ 2,949,499
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM JANUARY 18, 1991 (INCEPTION) THROUGH MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE FROM
JANUARY 18, 1991
THREE MONTHS THREE MONTHS (INCEPTION)
ENDED ENDED THROUGH
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
Research and development
expenses....................... $ 851,318 $ 1,412,506 $ 8,081,122
General and administrative
expenses....................... 253,514 489,190 2,321,742
----------- ----------- ------------
Operating loss.................. (1,104,832) (1,901,696) (10,402,864)
----------- ----------- ------------
Other income (expense):
Interest income............... 20,245 35,826 277,243
Interest expense.............. (2,569) (1,453) (17,115)
Other income.................. -- -- 67,884
----------- ----------- ------------
17,676 34,373 328,012
----------- ----------- ------------
Net loss........................ $(1,087,156) $(1,867,323) $(10,074,852)
=========== =========== ============
Pro forma net loss per share.... $ (0.18)
===========
Weighted average shares used to
compute pro forma net loss per
share.......................... 10,322,837
===========
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 AND FOR THE PERIOD
FROM JANUARY 18, 1991 (INCEPTION) THROUGH MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE FROM
JANUARY 18, 1991
THREE MONTHS THREE MONTHS (INCEPTION)
ENDED ENDED THROUGH
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss...................... $(1,087,156) $(1,867,323) $(10,074,852)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 25,498 85,873 320,915
Compensation expense related
to stock options........... -- -- 3,240
Change in assets and
facilities:
Interest receivable....... 1,817 8,502 --
Prepaid expenses.......... 10,960 600 (5,613)
Other current assets...... 11,161 2,103 (44,216)
Accounts payable.......... (22,428) 129,403 445,803
Accrued liabilities....... (24,334) 2,553 92,298
Other assets.............. (43,625) (114,051) (195,184)
----------- ----------- ------------
Net cash used in operating
activities..................... (1,128,107) (1,752,340) (9,457,609)
----------- ----------- ------------
Cash flows from investing
activities:
Proceeds from sale of
investments.................. 397,360 3,386,484 12,064,014
Purchases of investments...... (3,490,537) -- (12,064,014)
Purchases of property and
equipment.................... (35,549) (93,956) (800,060)
Organizational costs incurred. -- -- (19,595)
----------- ----------- ------------
Net cash (used in) provided by
investing activities........... (3,128,726) 3,292,528 (819,655)
----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from issuance of
common stock................. -- -- 73,006
Proceeds from issuance of
preferred stock.............. 4,000,000 -- 12,336,096
Proceeds from issuance of
notes payable................ -- -- 41,792
Repayment of notes payable.... (4,588) (3,486) (29,163)
Repayment of issues
obligation................... (602) (5,098) (42,242)
----------- ----------- ------------
Net cash provided by (used in)
financing activities........... 3,994,810 (8,584) 12,379,489
----------- ----------- ------------
Net increase (decrease) in cash
and cash equivalents........... (262,023) 1,531,604 2,102,225
Cash and cash equivalents at
beginning of period............ 609,655 570,621 --
----------- ----------- ------------
Cash and cash equivalents at end
of period...................... $ 347,632 $ 2,102,225 $ 2,102,225
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
AKSYS, LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
These unaudited financial statements of Aksys, Ltd. (the "Company") have
been prepared pursuant to Securities and Exchange Commission ("SEC") rules and
regulations and should be read in conjunction with the financial statements
and notes thereto for the years ended December 31, 1993, 1994, and 1995, and
for the period from January 18, 1991 (inception) through December 31, 1995.
The accompanying financial statements reflect, in the opinion of management,
all adjustments necessary for a fair presentation of the interim financial
statements. In the opinion of management, all adjustments are of a normal and
recurring nature.
(2) PRO FORMA PRESENTATION
The proforma balance sheet for 1996 is presented giving effect to the
conversion of all outstanding shares of redeemable preferred stock into
9,248,136 shares of common stock which is expected to occur upon consummation
of the public offering.
F-16
<PAGE>
Aksys PHD/TM/ Therapy is automated:
[PHOTO]
To begin dialysis, a user-friendly, touch-sensitive monitor prompts the patient
through initial steps.
[PHOTO]
During dialysis, the patient's blood is cleaned by removing toxins and water,
in a homecare setting.
[PHOTO]
At the conclusion of dialysis, minimal time and effort is required to prepare
for the next treatment session.
The Company does not expect to have commercially available products until
1997, and has not yet received any required regulatory clearances or approvals.
There can be no assurance that such clearances or approvals will be granted.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPEC-
TUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CRE-
ATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 5
The Company................................................................ 13
Use of Proceeds............................................................ 13
Capitalization............................................................. 14
Dividend Policy............................................................ 14
Dilution................................................................... 15
Selected Financial Data.................................................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 17
Business................................................................... 20
Management................................................................. 37
Certain Transactions....................................................... 41
Principal Stockholders..................................................... 42
Description of Capital Stock............................................... 43
Shares Eligible for Future Sale............................................ 46
Underwriting............................................................... 48
Legal Matters.............................................................. 49
Experts.................................................................... 49
Additional Information..................................................... 49
Index to Financial Statements.............................................. F-1
</TABLE>
-----------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,100,000 SHARES
LOGO
COMMON STOCK
-------
PROSPECTUS
, 1996
-------
SMITH BARNEY INC.
PIPER JAFFRAY INC.
VECTOR SECURITIES INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate (except for the SEC registration and NASD
filing fees) of the fees and expenses payable by the registrant in connection
with the issuance and distribution of the Common Stock:
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $19,668.97
NASD Filing Fee............................................... 6,204
Nasdaq National Market Listing Fee............................ 50,000
Printing and Mailing Expenses................................. 200,000
Blue Sky Fees and Expenses.................................... 20,000
Legal Fees and Expenses....................................... 350,000
Accounting Fees............................................... 100,000
Miscellaneous Fees and Expenses............................... 4,127.03
----------
Total..................................................... $ 750,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits, or proceedings, whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with
the defense or settlement of such action, and the statute required court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, by-laws, disinterested director vote, stockholder vote,
agreement or otherwise. Article IX of the Registrant's By-laws requires
indemnification to the fullest extent permitted by Delaware law. In addition,
the Registrant will enter into indemnify agreements with its directors (a form
of which is filed as Exhibit 10.9 to this Registration Statement), which
obligate the Registrant to indemnify such directors to the fullest extent
permitted by the DGCL. The Registrant also intends to obtain, prior to the
effective date of this Registration Statement, officers' and directors'
liability insurance which insures against liabilities that officers and
directors of the Registrant may incur in such capacities.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for improper payment of dividends or
redemptions of shares or (iv) for any breach of a director's duty of loyalty
to the company or its stockholders. Article VI of the Registrant's Certificate
of Incorporation includes such a provision.
Reference is made to the form of Underwriting Agreement filed as Exhibit 1
to this Registration Statement which provides for indemnification of the
directors and officers of the Registrant signing this Registration Statement
and certain controlling persons of the Registrant against certain liabilities,
including those arising under the Securities Act of 1933, as amended (the
"Securities Act"), in certain instances by the Underwriters.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued the following securities without registration under
the Securities Act in the last three years:
. Issuance of 572,222 shares of Common Stock on April 2, 1993, to the four
founders of the Company, including Rodney S. Kenley and Dawn C. Matthews,
in connection with a merger of the predecessor of the Company into the
Company, in exchange for shares of such predecessor, at least two of
which founders were "accredited" investors as such term is defined in
Regulation D under the Securities Act.
. Issuance of 1,500,000 shares of Series A Preferred on April 2, 1993, for
an aggregate purchase price of $1,500,000 to approximately 47 investors
in the Company, including Coral Partners, Sutter Hill Ventures, a
California Limited Partnership and Sand Hill Financial, all of which were
"accredited" investors as such term is defined in Regulation D under the
Securities Act.
. Issuance of 1,600,000 shares of Series B Preferred on April 15, 1994, for
an aggregate purchase price of $2,400,000 to approximately 53 investors
in the Company, including Coral Partners, Sutter Hill Ventures, a
California Limited Partnership and Sand Hill Financial, at least 50 of
which were "accredited" investors as such term is defined in Regulation D
under the Securities Act.
. Issuance of 1,777,778 shares of Series C Preferred on March 7, 1995, for
an aggregate purchase price of $3,000,000 to approximately 57 investors
in the Company, including Coral Partners, Sutter Hill Ventures, a
California Limited Partnership and Sand Hill Financial, at least 53 of
which were "accredited" investors as such term is defined in Regulation D
under the Securities Act.
. Issuance of 1,287,646 shares of Series D Preferred on September 22, 1995,
for an aggregate purchase price of $4,506,761 to approximately 80
investors in the Company, including Coral Partners, Sutter Hill Ventures,
a California Limited Partnership and Sand Hill Financial, at least 69 of
which were "accredited" investors as such term is defined in Regulation D
under the Securities Act.
The sales and issuances of securities described above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof, and pursuant to Rule 506 of Regulation D under the Securities Act
with respect to the Series A Preferred issuance, as transactions not involving
a public offering. None of the above described sales and issuances were
effected through an underwriter.
The Company adopted in April 1993 a stock option plan for its key employees,
directors, consultants and scientific advisory board members. As of March 31,
1996, options representing 1,477,250 shares of Common Stock had been granted
under such option plan. This option plan will be terminated upon completion of
the offering except with respect to options currently outstanding thereunder.
The sales and issuances of securities upon exercise of options granted under
such option plan were deemed to be exempt from registration under the
Securities Act by virtue of Section 3(b) thereof and Rule 701 promulgated
thereunder.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
<C> <S> <C>
1* Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of Aksys, Ltd.
3.2* Amended and Restated By-laws of Aksys, Ltd.
4.1* Form of certificate representing shares of Common Stock, $.01
par value per share
4.2* Registration Agreement, dated as of April 2, 1993, among the
Company and certain stockholders of the Company
4.3* Amendment No. 1 to Registration Agreement, dated as of
September 22, 1995, among the Company and certain stockholders
of the Company
4.4* Stockholders Agreement, dated as of April 2, 1993, among the
Company and certain stockholders of the Company
4.5* Amendment No. 1 to Stockholders Agreement, dated as of October
1, 1994, among the Company and certain stockholders of the
Company
4.6* Amendment No. 2 to Stockholders Agreement, dated as of
September 22, 1995, among the Company and certain stockholders
of the Company
5* Opinion and Consent of Kirkland & Ellis
10.1* Aksys, Ltd. 1993 Stock Option Plan
10.2 Aksys, Ltd. 1996 Stock Awards Plan
10.3* Severance, Confidentiality and Noncompetition Agreement, dated
as of October 1, 1994, between the Company and Lawrence H.N.
Kinet
10.4* Severance, Confidentiality and Noncompetition Agreement, dated
as of April 2, 1993, between the Company and Rodney S. Kenley
10.5*+ Manufacturing Agreement, dated as of November 15, 1994,
between the Company and SeaMed Corporation
10.6+ Manufacturing Agreement, dated as of January 23, 1996, between
the Company and Texas Medical Products, Inc.
10.7 License Agreement, dated as of April 1, 1993, between the
Company and Zbylut J. Twardowski
10.8 License Agreement, dated as of April 1, 1993, between the
Company and Cynthia P. Walters
10.9* Form of Indemnification Agreement
11* Statement regarding computation of per share earnings
21* Subsidiaries of the Company
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of Banner & Allegretti
23.3* Consent of Kirkland & Ellis (included in Exhibit 5)
24* Power of Attorney
</TABLE>
- --------
*Previously filed.
+Confidential treatment requested.
(b) None required
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-1 AND HAS DULY CAUSED THIS
AMENDMENT NO. 3 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LIBERTYVILLE, STATE OF
ILLINOIS ON THE 16TH DAY OF MAY 1996.
AKSYS, LTD.
/s/ Lawrence H.N. Kinet
By: _________________________________
Lawrence H.N. Kinet
Chairman and Chief Executive
Officer
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS ON MAY 16, 1996, IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Lawrence H.N. Kinet Chairman and Chief Executive Officer and
___________________________________________ Director
Lawrence H.N. Kinet
/s/ Rodney S. Kenley President, Chief Operating Officer and
___________________________________________ Director
Rodney S. Kenley
/s/ Dawn C. Matthews Director of Finance and Systems Development
___________________________________________ (Principal Financial and Accounting
Dawn C. Matthews Officer)
* Director
___________________________________________
Peter H. McNerney
* Director
___________________________________________
Larry G. Gerdes
* Director
___________________________________________
W. Dekle Rountree, Jr.
/s/ Bernard R. Tresnowski Director
___________________________________________
Bernard R. Tresnowski
</TABLE>
Lawrence H.N. Kinet
*By: __________________________
Lawrence H.N. Kinet
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO.
------- ----
<C> <S> <C>
1* Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of Aksys, Ltd.
3.2* Amended and Restated By-laws of Aksys, Ltd.
4.1* Form of certificate representing shares of Common Stock, $.01
par value per share
4.2* Registration Agreement, dated as of April 2, 1993, among the
Company and certain stockholders of the Company
4.3* Amendment No. 1 to Registration Agreement, dated as of
September 22, 1995, among the Company and certain
stockholders of the Company
4.4* Stockholders Agreement, dated as of April 2, 1993, among the
Company and certain stockholders of the Company
4.5* Amendment No. 1 to Stockholders Agreement, dated as of
October 1, 1994, among the Company and certain stockholders
of the Company
4.6* Amendment No. 2 to Stockholders Agreement, dated as of
September 22, 1995, among the Company and certain
stockholders of the Company
5* Opinion and Consent of Kirkland & Ellis
10.1* Aksys, Ltd. 1993 Stock Option Plan
10.2 Aksys, Ltd. 1996 Stock Awards Plan
10.3* Severance, Confidentiality and Noncompetition Agreement,
dated as of October 1, 1994, between the Company and Lawrence
H.N. Kinet
10.4* Severance, Confidentiality and Noncompetition Agreement,
dated as of April 2, 1993, between the Company and Rodney S.
Kenley
10.5*+ Manufacturing Agreement, dated as of November 15, 1994,
between the Company and SeaMed Corporation
10.6+ Manufacturing Agreement, dated as of January 23, 1996,
between the Company and Texas Medical Products, Inc.
10.7 License Agreement, dated as of April 1, 1993, between the
Company and Zbylut J. Twardowski
10.8 License Agreement, dated as of April 1, 1993, between the
Company and Cynthia P. Walters
10.9* Form of Indemnification Agreement
11* Statement regarding computation of per share earnings
21* Subsidiaries of the Company
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of Banner & Allegretti
23.3* Consent of Kirkland & Ellis (included in Exhibit 5)
24* Power of Attorney
</TABLE>
- --------
*Previously filed.
+Confidential treatment requested.
<PAGE>
Exhibit 10.2
AKSYS, LTD.
1996 STOCK AWARDS PLAN
SECTION 1. PURPOSE
The purpose of the Aksys, Ltd. 1996 Stock Awards Plan (the "Plan") is
to enable Aksys, Ltd., a Delaware corporation (the "Company"), and its
subsidiaries to attract, retain and motivate its directors and employees by
providing for or increasing the proprietary interests of such persons in the
Company. The Company believes the Plan will further identify the interests of
directors and employees with those of the Company's stockholders.
SECTION 2. PERSONS ELIGIBLE
Any officer or employee of the Company or its subsidiaries, regardless
of whether such person is also a director of the Company or its subsidiaries (an
"Employee"), shall be eligible to be considered for the grant of Employee Awards
(as defined below) under the Plan. In addition, any director of the Company who
is not an officer or employee of the Company or any of its subsidiaries (a "Non-
Employee Director") shall be eligible to receive a Director Option (as defined
below) as set forth in this Plan.
SECTION 3. EMPLOYEE AWARDS
(a) The Committee (as defined below) on behalf of the Company is
authorized under the Plan to enter into any type of arrangement with an Employee
that is consistent with the provisions of the Plan and that by its terms
involves the issuance or potential issuance of (i) shares of Common Stock, par
value $0.01 per share, of the Company (the "Common Stock") or (ii) a "Derivative
Security" as such term is defined in Rule 16a-1 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") with an exercise or
conversion right at a price related to Common Stock or with a value derived from
the value of the shares of Common Stock. The entering into of any such
arrangement is referred to herein as the grant of an "Employee Award."
(b) Employee Awards are not restricted to any specified form or
structure and may include, without limitation, sales or bonuses of stock,
restricted stock, stock options, reload stock options, stock purchase warrants,
other rights to acquire stock, securities convertible into or redeemable for
stock, stock appreciation rights, limited stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares, and an
Employee Award may consist of one or more such security or benefit.
<PAGE>
(c) Subject to the provisions of the Plan, the Committee, in its sole
and absolute discretion, shall determine all of the terms and conditions of each
Employee Award granted under the Plan, which terms and conditions may include
without limitation:
(i) a provision permitting the recipient of such Employee Award to pay
the purchase price of the Common Stock or other property issuable pursuant
to such Employee Award, or the tax withholding obligation of such Employee
with respect to the Employee Award, in whole or in part, by any one or more
of the following:
(A) the delivery of previously owned shares of Common Stock or other
property,
(B) a reduction in the amount of Common Stock or other property
otherwise issuable pursuant to such Employee Award, or
(C) the delivery of a promissory note, the terms and conditions of
which shall be determined by the Committee;
(ii) a provision conditioning or accelerating the receipt of benefits
pursuant to such Employee Award either automatically or in the discretion
of the Committee upon the occurrence of specified events, including a
change of control of the Company, an acquisition of a specified percentage
of the voting power of the Company, the dissolution or liquidation of the
Company, a sale of substantially all of the property and assets of the
Company or an event of the type described in Section 7 hereof;
(iii) provisions with respect to vesting and exercisability; or
(iv) provisions required in order for such Employee Award to qualify
as an incentive stock option under Section 422 of the Internal Revenue Code
(an "Incentive Stock Option").
(d) Notwithstanding any other provision of the Plan, no one Employee
shall be granted options or other Employee Awards with respect to more than
100,000 shares of Common Stock in any one calendar year; provided, however, that
this limitation shall not apply if it is not required in order for the
compensation attributable to Employee Awards hereunder to qualify as
performance-based compensation as described in Section 162(m) of the Internal
Revenue Code ("Performance-Based Compensation"). The limitation set forth in
this Section 3(d) shall be subject to adjustment as provided in Section 7
hereof, but only to the extent such adjustment would not affect the status of
compensation attributable to Employee Awards hereunder as Performance-Based
Compensation.
-2-
<PAGE>
SECTION 4. NON-EMPLOYEE DIRECTOR AWARDS
Options granted pursuant to this Section 4 shall be referred to as
"Director Options."
(a) Any person who first becomes a Non-Employee Director on or after
the Effective Date shall automatically be granted an option entitling such
director to purchase 5,000 shares of Common Stock on the date on which such
person first becomes a Non-Employee Director, which number of shares gives
effect to (and shall not be adjusted for) the 3-for-2 stock split of the Common
Stock that occurred on the Effective Date, but shall be subject to adjustment
pursuant to Section 7 hereof after the Effective Date. The exercise price for
each such share shall be the last reported sale price of the Common Stock on the
principal securities exchange or other trading market on which shares of the
Common Stock are then listed on the date of grant or, if the Common Stock is at
such time not traded on an exchange or market, the fair market value of a share
of Common Stock on such date as determined by the Committee.
(b) On the later of (i) June 30 of each year and (ii) the day next
following each annual meeting of stockholders of the Company (such date, the
"Determination Date"), commencing in 1996, each person who is a Non-Employee
Director on such Determination Date shall automatically be granted an option
entitling such director to purchase a number of shares of Common Stock equal to
(x) 1,250 multiplied by (y) the number of calendar quarters in the preceding
twelve months (rounded up to the nearest whole number of calendar quarters) in
which such person served as a Non-Employee Director, up to a maximum of four
quarters (as such number of shares may be adjusted pursuant to Section 7 hereof
after the Effective Date). The exercise price for each such share shall be the
last reported sale price of the Common Stock on the principal securities
exchange or other trading market on which shares of the Common Stock are then
listed on such Determination Date (or, if the Determination Date is not a
trading day on such exchange or other trading market, the last trading day
immediately preceding such date) or, if the Common Stock is not listed or quoted
on a securities exchange or other trading market, the fair market value of a
share of Common Stock on such date as determined by the Committee.
(c) Each Director Option shall vest and become exercisable
immediately upon grant.
(d) Each Director Option shall expire and not be exercisable after the
first to occur of (i) the tenth anniversary of the date of grant of such option
and (ii) three months after the optionee ceases to be a director of the Company
(12 months if the optionee ceases to be a director of the Company due to death
or to total and permanent disability as determined by the Board of Directors of
the Company (the "Board") in good faith).
(e) The provisions of this Section 4 that relate to the amount, price
and timing of Director Options shall not be amended more than once every six
months, except as permitted by Rule 16b-3(c)(2)(ii)(B) under the Exchange Act.
-3-
<PAGE>
SECTION 5. STOCK SUBJECT TO PLAN
(a) At any time, the aggregate number of shares of Common Stock issued
and issuable pursuant to all Employee Awards granted under the Plan shall not
exceed 800,000, subject to adjustment as provided in Section 7 hereof. For
purposes of this Section 5(a), the aggregate number of shares of Common Stock
issued and issuable pursuant to Employee Awards granted under the Plan shall at
any time be deemed to be equal to the sum of the number of shares of Common
Stock which have been issued pursuant to Employee Awards and which have not been
repurchased by the Company and the number of shares which are or may be issuable
at or after such time pursuant to Employee Awards.
(b) At any time, the aggregate number of shares of Common Stock issued
and issuable pursuant to all Director Options granted under the Plan shall not
exceed 100,000, subject to adjustment as provided in Section 7 hereof. For
purposes of this Section 5(b), the aggregate number of shares of Common Stock
issued and issuable pursuant to Director Options granted under the Plan shall at
any time be deemed to be equal to the sum of the number of shares of Common
Stock which have been issued pursuant to Director Options and which have not
been repurchased by the Company and the number of shares which are or may be
issuable at or after such time pursuant to Director Options.
(c) Shares of Common Stock issued pursuant to the Plan may be
authorized but unissued shares, treasury shares, reacquired shares or any
combination thereof.
SECTION 6. ADMINISTRATION
(a) The Plan shall be administered by a committee (the "Committee") of
the Board consisting of two or more directors, each of whom is a "disinterested
person" (as such term is defined in Rule 16b-3 under the Exchange Act); provided
that to the extent permitted at any time under Rule 16b-3 or any successor rule
and under Section 162(m) of the Internal Revenue Code or any successor statutory
provision, and any implementing regulations, without adversely affecting the
ability of the Plan to comply with the conditions for exemption from Section 16
of the Exchange Act provided by Rule 16b-3 and the exemption from the
limitations on the deductibility of certain executive compensation provided by
Section 162(m), the Committee may delegate the administration of the Plan in
whole or in part, on such terms and conditions, to such other person or persons
as it may determine in its discretion, which persons may be officers or
employees of the Company or third parties (each such person, an "Authorized
Delegate").
(b) Subject to the provisions of the Plan, the Committee (or its
Authorized Delegate) shall be authorized and empowered to do all things
necessary or desirable in connection with the administration of the Plan,
including the following:
(i) adopt, amend and rescind rules and regulations relating to the
Plan;
(ii) determine which persons meet the requirements of Section 2 hereof
for eligibility under the Plan (and, with respect to employees, which of
such persons, if any, shall be granted Employee Awards);
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<PAGE>
(iii) determine whether, and the extent to which adjustments are
required pursuant to Section 7 hereof;
(iv) interpret and construe the Plan and the terms and conditions of
any Employee Award or Director Option granted hereunder; and
(v) correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any Employee Award or Director Option in
the manner and to the extent the Committee deems necessary or desirable to
carry it into effect.
(c) Any decision of the Committee (or any Authorized Delegate) in the
interpretation and administration of the Plan shall lie within its sole and
absolute discretion and shall be final, conclusive and binding on all parties
concerned. The Committee may act only by a majority of its members in office,
except that the members thereof may authorize any one or more of their members
or any Authorized Delegate to execute and deliver documents or to take any other
ministerial action on behalf of the Committee with respect to Employee Awards
and Director Options made or to be made to Plan participants. No member of the
Committee or any Authorized Delegate shall be liable for anything done or
omitted to be done by such member or Authorized Delegate, by any other member of
the Committee or by any other Authorized Delegate in connection with the
performance of duties under the Plan, except for his or her own willful
misconduct or as expressly provided by statute. Determinations to be made by
the Committee under the Plan may be made by Authorized Delegates.
SECTION 7. ADJUSTMENTS
If the outstanding securities of the class then subject to the Plan
(initially, the Common Stock) are increased, decreased or exchanged for or
converted into cash, property or a different number or kind of securities, or if
cash, property or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, restructuring, reclassification, dividend
(other than a regular quarterly or annual cash dividend) or other distribution,
stock split, reverse stock split or the like, or if substantially all of the
property and assets of the Company are sold, then, unless the terms of such
transaction shall provide otherwise, the Committee shall make appropriate and
proportionate adjustments in (a) the price and number and type of shares or
other securities or cash or other property that may be acquired pursuant to
Employee Awards and Director Options theretofore granted under the Plan, (b)
the maximum number and type of shares or other securities that may be issued
pursuant to Employee Awards and Director Options thereafter granted under the
Plan, (c) to the extent permitted under Section 3(d) hereof, the maximum number
of shares of Common Stock with respect to which Employee Awards may be granted
to any Employee during any calendar year and (d) the number of shares of Common
Stock to be awarded to Non-Employee Directors pursuant to Director Options under
Section 4 hereof; provided, however, that no adjustment shall be made to the
number of shares of Common Stock that may be acquired pursuant to outstanding
Incentive Stock Options or the maximum number of shares of Common Stock with
respect to which Incentive Stock Options may be granted under the Plan to the
extent such adjustment would result in such options being treated as other than
Incentive Stock Options; and provided further that no such adjustment shall be
made to the extent the Committee determines that such adjustment would result in
the disallowance of a
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federal income tax deduction for compensation attributable to awards hereunder
by causing such compensation to be other than Performance-Based Compensation.
SECTION 8. AMENDMENT AND TERMINATION
The Board may amend (subject to Section 4(d) hereof) or terminate the
Plan at any time and in any manner; provided however, that no such amendment or
termination shall deprive a participant of an Employee Award or Director Option
previously granted under the Plan of any of his or her rights thereunder,
without the consent of such participant.
SECTION 9. EFFECTIVENESS
The Plan shall be submitted to the stockholders of the Company for
their approval and adoption in accordance with applicable law and Rule 16b-3(b)
under the Exchange Act and Section 162(m) under the Internal Revenue Code. The
Plan shall become effective on April 23, 1996 (the "Effective Date"); provided,
that the Plan shall cease to be effective and any Employee Awards and Director
Options granted hereunder shall become null and void if the Plan is not approved
by the Company's stockholders prior to or within 12 months after April 23, 1996.
SECTION 10. MISCELLANEOUS PROVISIONS
(a) Neither the Plan nor any action taken hereunder shall be construed
as giving any Employee or other person any right to continue to be employed by
the Company or any of its subsidiaries or a director the right to continue in
such capacity.
(b) Except as may be approved by the Committee where such approval
shall not adversely affect compliance of the Plan with Rule 16b-3 under the
Exchange Act, no rights and interests under the Plan may be assigned or
transferred, hypothecated or encumbered in whole or in part either directly or
by operation of law or otherwise including, but not by way of limitation,
execution, levy, garnishment, attachment, pledge, bankruptcy or in any other
manner, other than by will or the laws of descent and distribution.
(c) It is the intent of the Company that the Plan comply in all
respects with Rule 16b-3 under the Exchange Act and Section 162(m) of the
Internal Revenue Code, that any ambiguities or inconsistencies in construction
of the Plan be interpreted to give effect to such intention and that if any
provision of the Plan is found not to be in compliance with Rule 16b-3 or
Section 162(m), such provision shall be deemed null and void to the extent
required to permit the Plan to comply with Rule 16b-3 or Section 162(m), as the
case may be.
(d) The Company shall have the right to deduct from any payment made
under the Plan any federal, state, local or foreign income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Company to issue shares of Common Stock,
other securities or property or any combination thereof, upon exercise,
settlement or payment of any award under the Plan, that the recipient of an
award (or any beneficiary or person entitled to act) pay to the Company, upon
its demand, such amount as may be required by the Company for the purpose of
satisfying any liability to withhold such taxes.
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(e) By accepting any award or other benefit under the Plan, each
recipient of an award and each person claiming under or through him or her shall
be conclusively deemed to have indicated his or her acceptance and ratification
of, and consent to, any action taken under the Plan by the Company, the Board or
the Committee or its delegates.
(f) The validity, construction, interpretation, administration and
effect of the Plan, and of its rules and regulations, and rights relating to the
Plan and to awards granted under the Plan, shall be governed by the substantive
laws, but not the choice of law rules, of the State of Delaware.
* * * * *
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Exhibit 10.6
MANUFACTURING AGREEMENT
-----------------------
This Manufacturing Agreement ("Agreement") effective as of the 23rd day of
January, 1996 (the "Effective Date") is made by and between AKSYS, Ltd., a
Delaware corporation having its principal place of business at 1113 S. Milwaukee
Avenue, Suite 300, Libertyville, IL 60048 ("AKSYS"), and TEXAS MEDICAL
PRODUCTS, INC., a Texas corporation doing business as SURGIMEDICS/TMP ("TMP"),
having its principal place of business at 2828 N. Crescent Ridge Drive, The
Woodlands, Texas 77381.
WHEREAS, AKSYS is the developer of medical devices that require tubing sets
and related disposable devices (hereafter referred to individually as the "Set"
and collectively as the "Sets");
WHEREAS, AKSYS desires to utilize a subcontractor that is capable of
manufacturing and assembling the Sets; and
WHEREAS, TMP is in the business of manufacturing and assembling custom
tubing sets for third parties and possesses the expertise and facilities
necessary to manufacture and assemble the Sets for AKSYS;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. DEFINITIONS
-----------
In addition to the terms defined elsewhere in this Agreement, the following
terms shall have the meanings set forth below:
"Acceptance Specifications" shall have the meaning set forth in Section
4.7.
"AKSYS Materials" shall mean the Materials purchased by AKSYS pursuant to
Section 8.2.
"AKSYS Component P.O." shall mean any AKSYS pre-printed and numbered
purchase order delivered upon request to TMP for use by TMP in purchasing AKSYS
Materials in accordance herewith.
"AKSYS Equipment P.O." shall mean any AKSYS pre-printed and numbered
purchase order delivered upon request to TMP for use by TMP in purchasing AKSYS
Equipment in accordance herewith.
"AKSYS Finished Goods P.O." shall mean a purchase order issued by AKSYS for
Sets, pursuant to the terms hereto.
"Approved Vendors" shall mean those vendors of Materials approved and
qualified pursuant to Section 8.1. As so approved and qualified, Approved
Vendors may include TMP.
<PAGE>
"Confidential Information" shall mean the confidential and proprietary
business information of the disclosing party and shall be deemed to include:
(i) any and all information disclosed by one party to the other pursuant to this
Agreement that relates to the business affairs or operations of the disclosing
party, including, but not limited to, information concerning the disclosing
party's customers and sales information relating thereto, other than information
that is generally publicly available; (ii) any and all information relating to
product development or other research and development of the disclosing party;
and (iii) any and all information, technique, knowledge, skill, procedure, know-
how, trade secrets, formulas, inventions, technology, regulatory information,
customer data, marketing data and other information related to the Sets,
including, without limitation, the Design Specifications.
"Design Specifications" shall mean those specifications for the Sets
provided by AKSYS through the Technical Data Package.
"Domestic" shall mean the United States and Canada and their respective
territories and possessions.
"Engineering Change Order" shall mean the document used to communicate and
implement changes to the Technical Data Package or Design Specifications.
"Engineering Change Request" or "ECR" shall mean the document used by TMP
to communicate the estimated NRE and the effect on the recurring costs of a
proposed Engineering Change Order.
"Equipment" shall mean those fixtures, production equipment, computer
software, computer hardware, assembly aids, operating and maintenance manuals,
operating procedures, validation protocols, data and reports, schematics, wiring
diagrams, drawings, and etc., that will be required by TMP or its suppliers for
TMP to fulfill its obligations under this Agreement.
"FDA" shall mean the United States Food and Drug Administration.
"FDA Regulations" shall mean the United States Food, Drug and Cosmetic Act,
as amended, and any regulation, ruling, guideline or notice promulgated pursuant
thereto by the FDA.
"Foreign Regulations" shall mean any law, statute, regulation, ruling,
guideline or notice adopted or promulgated by any foreign governmental entity
concerning the design, manufacture, sterilization, sale and marketing of medical
devices.
"GMPs" shall mean the current Good Manufacturing Practices under the FDA
Regulations.
"Labeling" shall mean all labels and other written, printed or graphic
matter including bar codes (1) upon any Set or any of its containers or
wrappers, corrugate cases and pallets and/or (2) accompanying such Set including
pamphlets, booklets, brochures, and instructions.
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"Materials" shall mean the raw materials, components, packaging materials,
labeling materials, or other materials to be used in the manufacture and
assembly of the Sets, as specified in the Design Specifications.
"Non-Recurring Effort" or "NRE" shall mean the non-recurring labor and
expense to be expended by TMP in developing and building the Equipment or
processes necessary to manufacture and assemble the Sets as estimated and set
forth in Exhibit B. The parties agree that the Exhibit B attached hereto may be
incomplete as of the date of execution of this Agreement and that additional
items and estimated amounts may be added to the Exhibit B from time to time by
the mutual consent of the parties. Any such amended Exhibit B shall be
incorporated herein and shall be deemed to replace and supersede the Exhibit B
then attached hereto.
"Pre-Production Phase" shall mean the period of time commencing with at the
execution of this Agreement and ending upon the receipt by AKSYS at a designated
location of the first production released saleable product.
"Requested Delivery Forecast" shall have the meaning set forth in Section
10.1.
"Set Purchase Price" shall have the meaning set forth in Section 12.3.
"Technical Data Package" shall mean the materials used to communicate all
the information about the Sets that is necessary for manufacture and will
include, but not be limited to, component specifications, raw material
specifications, process assembly and manufacturing specifications, bill of
material, vendor lists, equipment specifications, testing specifications,
packaging specifications, labeling, and shipping requirements.
"Tests Systems" means the collection of procedures, validation protocols,
data and reports, software, equipment, supplies and other assorted documentation
required to implement Set production. These tests, including cleaning and
validation testing, will be fully documented by TMP, as required by the GMPs.
"TMP Materials" shall mean the Materials purchased by TMP pursuant to
Section 8.8.
"UCC/EAN" shall mean Uniform Code Council/European Article Number and
standards for bar coding.
2. SPECIFICATIONS AND OWNERSHIP OF INTELLECTUAL PROPERTY
-----------------------------------------------------
2.1 Upon receipt of the Technical Data Package, or any portion
thereof, TMP shall maintain the Technical Data Package as part of its device
master record for the Sets.
2.2 All Confidential Information, including but not limited to the
Design Specifications, submitted by AKSYS as part of the Technical Data Package,
shall remain the sole and exclusive property of AKSYS. AKSYS hereby grants to
TMP a license to manufacture and
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assemble the Sets in accordance with the Technical Data Package, including the
Design Specifications, pursuant to the terms of this Agreement.
2.3 No rights are granted hereunder by either party to the other to
utilize any Confidential Information, patents, trade secrets, business
information, copyrights, trademarks, trade name, or other proprietary rights,
except as may be required to manufacture, assemble, use, test and supply the
Sets for AKSYS pursuant to the terms of this Agreement.
2.4 The right, title and interest in and to any discoveries,
improvements, inventions and trade secrets made or developed in the performance
of this Agreement by TMP personnel relating to or derived from the Design
Specifications shall be the sole and exclusive property of AKSYS, subject to any
relevant license granted herein to TMP, and AKSYS shall retain any and all
rights to file any patent applications thereon.
2.5 The right, title and interest in and to any discoveries,
improvements, inventions and trade secrets made or developed in the performance
of this Agreement by TMP personnel relating to or involving solely the
manufacturing, assembly, packaging or sterilization processes employed generally
by TMP in connection with its manufacturing operations shall be jointly owned by
TMP and AKSYS, and each shall grant to the other a perpetual, royalty-free
license to any such discoveries, improvements, inventions and trade secrets.
3. MILESTONES
----------
The parties agree that the timely completion of the specific milestones set
forth in Exhibit A is essential for the successful production of the Sets. Each
party hereby assumes its respective responsibility for completing the milestones
in a timely manner. Agreement of both parties is required for the completion of
a milestone.
4. PRE-PRODUCTION PHASE
--------------------
During the Pre-Production Phase, the following shall occur:
4.1 TMP will review the Technical Design Package and Design
Specifications to ensure that TMP's manufacturing practices for assembling the
Sets pursuant to the Technical Design Package and Design Specifications will
comply with the GMPs.
4.2 TMP will designate a manager for the Pre-Production Phase, who
will serve as TMP's primary contact person for this phase.
4.3 AKSYS will designate a manager for the Pre-Production Phase, who
will serve as AKSYS' primary contact person for this phase.
4.4 TMP will complete the Non-Recurring Effort, subject to the
provisions of Section 15.2.
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4.5 AKSYS, with TMP's assistance, will select, qualify and approve
the Approved Vendors for the AKSYS Materials. TMP, with AKSYS' assistance, will
select, qualify and approve the Approved Vendors for the TMP Materials.
4.6 AKSYS, with TMP's assistance, will develop packaging
specifications.
4.7 AKSYS, with TMP's assistance, will develop the acceptance test
requirements for the Sets ("Acceptance Specifications"). In accordance with the
Acceptance Specifications, TMP shall develop the acceptance test systems. Any
Equipment required by the acceptance test systems shall be purchased pursuant to
the provisions of Section 6.
4.8 Once the Pre-Production Phase is complete, each of the parties
will designate a production team leader for the production of the Sets, who will
serve as such party's primary contact person during the production of the Sets.
5. ENGINEERING CHANGE ORDERS
-------------------------
5.1 Changes to the Technical Data Package and the Design
Specifications will only be effective when made in accordance with the
provisions of this Agreement. All changes to the Technical Data Package and the
Design Specifications must be made using an Engineering Change Order.
5.2 Engineering Change Orders may be generated by either TMP or
AKSYS, but may not be implemented by TMP without the written authorization of
AKSYS.
5.3 Any Engineering Change Order generated by either AKSYS or TMP
that is to be implemented by TMP will not be implemented until TMP has submitted
to AKSYS for AKSYS' review and approval an ECR that includes an estimate of the
NRE and attendant costs, the recurring costs, and the impact on the Set Purchase
Price that will result from such Engineering Change Request. If the ECR is
approved in writing by AKSYS, Exhibit B shall be deemed amended to reflect such
ECR, TMP will implement the Engineering Change Request and invoice AKSYS for the
actual NRE costs pursuant to Section 15.1. All Engineering Change Orders shall
be maintained as part of TMP's device master record for the Sets and will form
the basis for an engineering change notice within TMP's manufacturing process.
At its sole discretion, AKSYS may waive any of the above requirements for review
of estimates of the NRE and attendant costs, recurring costs and the impact on
the Set Purchase Price resulting from an ECR; provided, however, that in the
event AKSYS waives any such requirement, TMP shall be entitled to invoice AKSYS
for such actual NRE costs pursuant to Section 15.1 as if Exhibit B had been
amended by AKSYS' waiver thereof.
5.4 During the Pre-Production Phase and thereafter during the term of
this Agreement, within 10 days after the end of any month in which NRE costs are
incurred, TMP will deliver to AKSYS a report of such actual NRE costs, together
with an estimate of anticipated NRE costs for the current month, if any.
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6. EQUIPMENT AND TOOLING
---------------------
6.1 During the Pre-Production Phase and thereafter during the term of
this Agreement as necessary, TMP will obtain recommendations and written cost
estimates for any Equipment required to manufacture the Sets hereunder, and will
submit the recommendations and estimates to AKSYS for its review and approval.
Upon receipt of AKSYS' written authorization to purchase the Equipment, TMP
shall order, on behalf of AKSYS and using an AKSYS Equipment P.O., such
authorized Equipment. AKSYS shall pay for such equipment in accordance with the
AKSYS Equipment P.O.
6.2 Any Equipment ordered in accordance with Section 6.1 shall be
paid for by AKSYS and shall become the property of AKSYS upon payment in full of
the purchase price specified in the applicable AKSYS Equipment P.O. Upon payment
in full of the purchase price, any Equipment purchased pursuant hereto shall be
referred to herein as the "AKSYS Equipment". All AKSYS Equipment, whether in the
possession of TMP or third party suppliers to TMP, will be identified and
labeled as belonging solely to AKSYS and will be maintained by the party in
physical possession of the Equipment at the point of use for a period not to
exceed the reasonable expected life of said Equipment. The party in physical
possession of the Equipment will be responsible for maintaining general
liability insurance coverage for said Equipment. Upon termination of this
Agreement, all AKSYS Equipment, equipment drawings and/or data bases, software
programs, operation and repair manuals, copies of original purchase orders,
operating procedures, maintenance records, electrical schematics, spare parts,
cleaning procedures, calibration records, process capability studies and
validation protocols, records and reports applicable to each piece of AKSYS
Equipment will be returned to AKSYS, at AKSYS' expense.
6.3 During the Pre-Production Phase and thereafter during the term of
this Agreement as necessary, TMP and its third party suppliers will perform
acceptance procedures which may include installation qualification and
documentation, performance qualification and documentation, and process
validation, each as deemed appropriate by both AKSYS and TMP.
6.4 Final approval of Equipment design is the responsibility of
AKSYS. Overall management of Equipment procurement activity, including vendor
selection and performance, shall be TMP's responsibility.
6.5 AKSYS will develop specifications for any custom tooling
necessary for the manufacture and assembly of the Sets. AKSYS will contract
directly with any third parties necessary to build such custom tooling, and will
qualify and approve all custom tooling prior to releasing such custom tooling to
TMP. Any custom tooling developed and built by AKSYS pursuant to this Section
6.5 shall be considered AKSYS Equipment for all purposes of this Agreement.
7. QUALITY INSPECTIONS AND DOCUMENTATION
-------------------------------------
During the term hereof, AKSYS shall have the right to inspect at reasonable
times, during normal business hours and on reasonable prior notice, the
operations and facilities of TMP wherein
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the Sets are being manufactured, assembled, tested, labeled and stored for
shipping. TMP shall make available for AKSYS' review during any such inspection
the drawings, assembly instructions, standard operating procedures, regulatory
compliance control system and materials management system used in the
manufacture and assembly of the Sets. AKSYS shall have the right, but no
obligation, to validate TMP's manufacturing processes of the Sets.
8. MATERIALS QUALIFICATION AND PURCHASING
--------------------------------------
8.1 During the Pre-Production Phase and thereafter during the term of
this Agreement as necessary, AKSYS, with TMP's assistance, will select, qualify
and approve the Approved Vendors for the AKSYS Materials; and TMP, with AKSYS'
assistance, will select, qualify and approve the Approved Vendors for the TMP
Materials.
8.2 Based on the Requested Delivery Forecast, TMP shall timely
prepare AKSYS Component P.O. for sufficient quantities of AKSYS Materials. Each
AKSYS Component P.O. shall provide that the AKSYS Materials be shipped directly
to TMP and that the invoices therefor be sent directly to AKSYS.
8.3 All AKSYS Materials ordered pursuant to Section 8.2 will be
shipped to TMP. On behalf of AKSYS, TMP will receive and, within 5 business days
of receipt, inspect AKSYS Materials in accordance with Acceptance
Specifications. Within five business days of proper acceptance by TMP of such
AKSYS Materials, TMP shall forward to AKSYS an acknowledgment of acceptance for
the AKSYS Materials. AKSYS shall pay the invoice amount directly in accordance
with the terms of the applicable AKSYS Component P.O.
8.4 All claims for breakage and damage whether concealed or obvious
must be made to the carrier by the receiving party within 15 days after receipt
of the shipment.
8.5 If TMP identifies AKSYS Materials that do not conform to the
Acceptance Specifications, TMP shall notify AKSYS prior to notifying the vendor
of the non-conforming AKSYS Materials. AKSYS and TMP will jointly resolve all
issues involving non-conforming Materials.
8.6 All AKSYS Materials received by TMP pursuant to an AKSYS
Component P.O. shall be the property of AKSYS and AKSYS shall be solely
responsible for the payment of the purchase price thereof. TMP shall be
responsible for identifying such Materials as AKSYS property, and providing
suitable storage therefor.
8.7 In the course of developing or cost reducing the Sets, AKSYS may
purchase from TMP preproduction Sets or special assembly for evaluation, testing
or patient trials. For the purpose of developing or cost reducing the assembly,
testing, packaging or sterilization techniques, TMP may purchase Materials from
AKSYS or the Approved Vendors. The cost of any preproduction Sets shall be the
Set Purchase Price. The cost of special sets or assemblies shall be negotiated
at the time of purchase.
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8.8 TMP shall purchase the TMP Materials on its own purchase order
and all TMP Materials shall be the property of TMP and TMP shall be solely
responsible for the payment of the purchase price thereof.
8.9 All finished Sets shall be warehoused by TMP until shipment.
8.10 TMP shall be responsible for maintaining
general liability insurance coverage on all Materials and any finished Sets
present at TMP's facilities. Subject to the provisions of Sections 12.4 and
12.5, until shipment of the finished Sets TMP shall be responsible for any loss
of Materials or finished Sets.
9. LABELING
--------
9.1 During the Pre-Production Phase, AKSYS shall deliver to TMP
specifications for the labeling of the Sets as part of the Technical Data
Package. AKSYS will be solely responsible for the drafting, designing and
approval of labeling for the Sets. Any revisions or modifications to labeling
specifications for the Sets will be implemented by means of an Engineering
Change Order pursuant to Section 5.
9.2 All first article labeling or changed label copy will be
approved by both AKSYS and TMP. All other labeling will be inspected by TMP in
accordance with specifications developed by AKSYS. TMP will store unreleased
labeling material in a properly quarantined area, segregate released labeling
from unreleased labeling, and follow other GMPs for control of labeling.
9.3 Labeling may include UCC/EAN bar coding or the equivalent on Set
package, cases and pallets.
10. FORECASTING/DELIVERY SCHEDULES
------------------------------
10.1 Prior to the completion of the Pre-Production Phase, AKSYS will
deliver to TMP the first "Requested Delivery Forecast" for saleable units of the
Sets, covering the first twelve-month production period. The first three-month
period of the forecast will be a firm production schedule commitment request and
will be accompanied by an AKSYS Finished Goods P.O. for such amount, as provided
in Section 12.1.
10.2 Once the Sets are in production, AKSYS will deliver to TMP not
later than 60 days prior to each fiscal quarter a Requested Delivery Forecast
for a rolling twelve-month period, together with an AKSYS Finished Goods P.O.
for the first quarter covered by such forecast, specifying the requested
delivery date(s) of Sets covered by such purchase order.
10.3 Within 10 business days of receipt of the Requested Delivery
Forecast and accompanying AKSYS Finished Goods P.O., TMP will submit to AKSYS a
detailed production plan, including scheduled dates for production,
sterilization and release, for Sets covered by such purchase order. TMP and
AKSYS each agree to adjust production and delivery dates, respectively, as
necessary to address customer demand for the Sets. An AKSYS Finished Goods P.O.
will not
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be deemed accepted until TMP and AKSYS have agreed upon mutually acceptable
delivery date(s) thereunder. If AKSYS submits an AKSYS Finished Goods P.O.
other than with a Requested Delivery Forecast, such purchase order shall be
subject to the provisions of this Section 10.3.
11. PRODUCTION COMMITMENT/EXCLUSIVITY
---------------------------------
11.1 During the Initial Term and any Subsequent Term, as such terms
are defined in Section 16.1, TMP will be the exclusive supplier to AKSYS of all
Sets purchased by AKSYS for domestic sales of Sets.
11.2 Depending upon TMP's certification to ISO 9002 and EN 46002 by
an approved European Union notified body, AKSYS will consider TMP as first
option in the selection of a supplier for Sets to be sold in Europe
12. ORDERS AND PRICING
------------------
12.1 AKSYS agrees to purchase and TMP agrees to sell and deliver sets
ordered by AKSYS on individual written purchase orders pursuant to sections 10.1
and 10.2.
12.2 The parties agree that purchases and sales of the Sets between
the parties shall be governed by the terms and conditions stated herein which
supersede terms and conditions whether preprinted, stamped, typed or handwritten
on order, releases, acknowledgments, or any other ordering or accepting
documents.
12.3 The "Set Purchase Price" shall be determined as set forth in
Exhibit C. The parties agree that the amounts set forth in Exhibit C shall be
effective for the first to occur of (i) 10,000 finished Sets or (ii) six months
of actual production of the Sets ("Initial Price Period"). After the Initial
Price Period, the parties agree to adjust every six months during the term of
this Agreement, if necessary, any of the amounts set forth in Exhibit C to
reflect the experience of the previous period, such adjustment to be effective
for the following six months.
12.4 Any in-process rework costs caused by or as a result of TMP's
actions or omissions during the manufacture of the Set shall be borne by TMP.
Any in-process rework costs caused by or as a result of AKSYS' actions or
omissions during the manufacture of the Set shall be borne by AKSYS.
12.5 In the event a customer of AKSYS is authorized by TMP and AKSYS
to return a Set to TMP for rework, TMP and AKSYS shall share equally the cost of
such rework, and any freight incurred in connection therewith; provided,
however, that TMP's share of the rework cost shall not exceed the amount which
TMP was paid to manufacture and assemble such Sets being reworked.
12.6 During the term hereof, AKSYS shall have the right, at its sole
cost, to review and audit at reasonable times, during normal business hours, and
on reasonable prior notice, the finance and accounting records of TMP with
respect to the Sets.
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13. STERILIZATION
-------------
13.1 AKSYS, with TMP's assistance, shall develop the specifications
for the sterilization of the Sets ("Sterility Specifications"). AKSYS and TMP
shall jointly select, qualify, and approve the sterilization vendor. TMP shall
contract directly with the sterilization vendor so approved for the
sterilization of the finished Sets; provided, that AKSYS agrees to enter into a
quarantine shipping agreement with the sterilization vendor if necessary for the
shipment of the Sets.
13.2 All released Sets, other than non-sterile samples provided at
AKSYS' request, shall be sterile and quarantined in accordance with the FDA
Regulations and Sterility Specifications. In accordance with the Sterility
Specifications, TMP shall qualify and validate the sterilization process on
finished Sets, including package seal integrity pre-and post-sterilization,
final product sterility and pyrogen testing, and release of each lot of Sets,
which shall be invoiced by TMP as a NRE pursuant to Section 15.1.
13.3 In the event TMP identifies lots or batches of Sets that do not
conform to AKSYS' Sterility Specifications, TMP shall notify AKSYS and AKSYS and
TMP shall jointly resolve all such non-conformity issues; provided, however,
that AKSYS shall have the final authority to determine any such non-conformity.
14. SHIPMENT
--------
14.1 The Set Purchase Price is F.O.B. TMP's plant, The Woodlands,
Texas.
14.2 AKSYS will pay all transportation charges for finished Sets.
AKSYS reserves the right to specify the method of shipping and carrier.
14.3 All claims for breakage and damage whether concealed or obvious
must be made to the carrier by the receiving party within 15 days after receipt
of the shipment.
15. PAYMENT OF COSTS AND PRICES
---------------------------
15.1 NRE costs will be invoiced by TMP at the rates set forth in
Exhibit B, unless otherwise adjusted in accordance with Section 15.2. AKSYS
agrees to pay NRE costs within net 30 days from the date of invoice.
15.2 In the event TMP determines beforehand that any particular NRE
will incur greater time or costs than then set forth on Exhibit B, TMP agrees to
consult with AKSYS prior to commencing such NRE. If both parties agree with
TMP's determination, Exhibit B shall be deemed to be amended to reflect such
additional NRE time or costs. In the event that AKSYS does not agree with TMP's
determination, TMP shall be authorized and obligated to expend only such time or
costs as then set forth in Exhibit B in furtherance of such NRE and any failure
to perform NRE in excess of such time and amounts shall not be deemed to be a
breach of this Agreement. In the event TMP actually incurs NRE costs in excess
of those set forth in the current Exhibit B and TMP believes that such
additional costs are for the benefit of AKSYS, TMP may submit a request for such
additional
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amounts within five business days of the end of the calendar month in which
incurred, together with any supporting documentation. Within five business days
of receipt of such request, AKSYS will inform TMP whether such additional
amounts are approved for invoicing by TMP; provided that AKSYS' refusal to
approve such additional amounts shall not be deemed to be a breach of this
Agreement.
15.3 Within three business days of actual shipment of Sets to AKSYS
or its designee, TMP will invoice AKSYS for the Set Purchase Price for such
Sets. Payment terms are net 30 days.
15.4 Any failure by AKSYS to pay any TMP invoice that is not disputed
in good faith within 30 days after written notice that the invoice is overdue
shall constitute a breach of this Agreement. In addition, AKSYS will be
responsible for all costs of collection, including reasonable attorney's fees,
together with interest at a rate of 1% a month or the maximum rate allowed by
applicable law, whichever is lower, on the past due amount.
16. TERM AND TERMINATION
--------------------
16.1 Subject to earlier termination as provided in this Agreement,
this Agreement shall be effective from the Effective Date through January 23,
1999 ("Initial Term") and shall automatically renew thereafter for subsequent
terms of one year each (each a "Subsequent Term").
16.2 Either party may, by written notice to the other, terminate this
Agreement and all orders placed hereunder at any time (a) to be effective
immediately if the other party becomes insolvent, fails to pay its debts or
perform its obligations in the ordinary course of business as they mature, or
admits in writing its insolvency or inability to pay its debts or perform its
obligations as they mature, or makes an assignment for the benefits of
creditors, or upon attempted assignment in violation of the terms of this
Agreement or upon assignment to a party to which the terminating party does not
reasonably consent, such termination in any event; or (b) to be effective no
earlier than 90 days from the receipt of such notice by the other party.
16.3 Upon issuing or receiving the termination notice, TMP shall
attempt to cancel all outstanding orders for Material; nonetheless AKSYS shall
be obligated to pay within 30 days from the termination date to TMP the Set
Purchase Price for all finished Sets (whether or not shipped), all work in
progress, the cost of any Materials ordered by TMP hereunder not subject to
cancellation, any actual cancellation costs, and any actual NRE costs. The
foregoing costs are subject to AKSYS' verification by a third party auditor
acceptable to both parties and paid for by AKSYS. Upon receipt of all amounts
owed by AKSYS, TMP shall provide reasonable assistance to AKSYS in transferring
the AKSYS Equipment, the Technical Data Package, the master device records and
device history records for the Sets, test fixtures, Materials, and any finished
inventory to a manufacturing facility selected by AKSYS.
16.4 Except as otherwise provided herein, upon termination of this
Agreement, neither AKSYS nor TMP shall be liable to the other for reimbursement
or damages on account of
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the loss of prospective profits on anticipated sales or on account of
expenditures, investments, leases or commitments in connection with the business
or goodwill of either party.
16.5 Upon termination of this Agreement, TMP shall deliver originals
and copies, as appropriate, to AKSYS of all Design Specifications, drawings, and
any property of which AKSYS is the sole owner.
16.6 Upon termination of this Agreement, all rights and licenses
granted herein shall immediately terminate, but the provision of Sections 2.5,
17, 19 and 20 shall survive termination of this Agreement.
17. CONFIDENTIALITY/EXCLUSIVITY
---------------------------
17.1 In addition to and except as otherwise provided in Section 17.2,
each party hereto agrees that during the term hereof, it shall not use for its
own benefit or advantage, or disclose to any third party, any Confidential
Information of the other without the express written consent of the other party
hereto. Each party further agrees that upon termination of this Agreement to
return all copies of any such Confidential Information to the disclosing party.
17.2 TMP will not utilize the Design Specifications, or any molds,
tools or any intellectual rights developed pursuant hereto and owned exclusively
by AKSYS to design, manufacture, assemble, sell, license, or otherwise supply
Sets for or to any other party without AKSYS' prior written consent; provided,
however, that none of the foregoing shall preclude TMP from designing,
manufacturing, assembling, selling, licensing or otherwise supplying custom
tubing sets for or to third parties in accordance with any specifications
submitted by such other third parties not in violation of any confidentiality
agreement between such third party and AKSYS.
18. REGULATORY MATTERS
------------------
18.1 AKSYS, as the sole and exclusive owner of the Design
Specifications, shall have sole responsibility and final authority for ensuring
the compliance of the Design Specifications with applicable domestic and foreign
governmental law, statutes, regulations, rulings, guidelines and notices,
including but not limited to, FDA Regulations and Foreign Regulations. Except as
otherwise required by applicable law, statute, regulation, ruling, guideline or
notice, AKSYS shall have the sole responsibility for preparing and submitting
all applications, reports, notices, or other documentation concerning the Sets
in accordance with FDA Regulations or Foreign Regulations or any applicable law,
statute, regulation, ruling, guideline or notice concerning environmental
packaging. TMP agrees to provide AKSYS with any information or documentation
within its control or responsibility hereunder needed by AKSYS to comply with
any applicable law, statute, regulation, ruling, guideline or notice concerning
environmental packaging. TMP agrees to bring to AKSYS' attention any applicable
governmental law, statute, regulation, ruling, guideline or notice that impacts
on the Design Specifications or the manufacture of the Sets, upon becoming aware
of same.
-12-
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18.2 AKSYS agrees to promptly inform TMP upon obtaining 510(k) pre-
market notification clearance from the FDA ("510(k)") for the Sets. AKSYS shall
have the sole responsibility for determining whether any change in the
manufacture, materials or design of any Set requires submission of an
application to the FDA for a new 510(k). If required, AKSYS has the sole
responsibility for submitting and obtaining clearance of any application for a
new 510(k) for the Sets, before any change in the manufacture, materials, or
design of the Sets is implemented hereunder. TMP agrees to provide AKSYS with
any information or documentation within its control or responsibility hereunder
needed by AKSYS to submit or obtain clearance of any application for a new
510(k) for the Sets. In the event AKSYS fails to obtain d 510(k) for the Sets
such failure and the consequent failure of AKSYS to perform its obligations
hereunder shall not be considered a breach of this Agreement by AKSYS.
18.3 By the end of 1996, TMP will establish and maintain
manufacturing facilities for the Sets in compliance with ISO 9002 and EN 46002
certified by an approved European Union notified body.
18.4 TMP agrees that it shall manufacture the Sets as its Woodlands
plant registered with the FDA for production of medical devices, and in
accordance with the FDA Regulations, including GMPs. AKSYS agrees to bring to
TMP 's attention any applicable governmental law, statute, regulation, ruling,
guideline or notice that impacts on the manufacture of the Sets, upon becoming
aware of the same.
18.5 If TMP discovers any defect in finished Sets, whether or not
released, TMP shall promptly notify AKSYS. AKSYS and TMP agree to provide each
other with any information received regarding occurrences of Set product
failures. AKSYS will be responsible for management of all product complaints.
TMP shall be responsible for evaluating all complaints addressed to TMP by AKSYS
and for supplying AKSYS with an analysis of such complaints in writing within 30
days of receiving such complaint. AKSYS will be responsible for filing any
Medical Device Report as required by FDA Regulations or any other report
required by Foreign Regulations including a European Vigilance Report, in
connection with any such complaint. TMP and AKSYS each will maintain product
complaint files as required by FDA Regulations.
18.6 In the event that either party believes any of the Sets should
be recalled, such party shall promptly give the other party verbal notice
thereof. Any recall of Sets from AKSYS customers will be handled by AKSYS in
accordance with AKSYS' policy. AKSYS and TMP shall discusses alternatives to any
proposed recall, but AKSYS shall have the final authority hereunder to decide
whether to recall any Sets. In the event the Sets are recalled due solely to the
negligent manufacture, assembly, packaging, or sterilization by TMP, TMP shall
reimburse AKSYS for reasonable out-of-pocket expenses of such recall including
the costs of notifying customers and shipping recalled Sets to TMP or AKSYS. In
the event the Sets are recalled for any reason other than the negligent
manufacture, assembly, packaging, or sterilization by TMP including the
negligence of any approved third party vendor supplying components or packaging
materials, TMP and AKSYS shall negotiate the percentage of the recall costs to
be borne by TMP. Notwithstanding anything herein to the contrary, TMP's share of
any such recall costs shall not exceed the amount which TMP was paid to
manufacture and assemble such Sets being recalled. AKSYS shall maintain
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complete and accurate records for such periods as may be required by applicable
law, of all Sets sold.
18.7. TMP will promptly, but in no event later than 24 hours of
receipt thereof, provide AKSYS with copies of notices or warning letters from
the FDA or other regulatory authorities, and TMP's response thereto if
available, involving TMP's facilities that may reasonably be expected to have a
material adverse effect on TMP's ability to perform hereunder and will promptly
notify AKSYS of any other event that may reasonably be expected to have a
material adverse effect on TMP's ability to perform hereunder or upon the sale
or distribution of the Sets. Other than costs associated with changes to the
Design Specifications required by the FDA or other regulatory agency, TMP will
be responsible for any and all corrective actions necessary or required by the
FDA or other regulatory agency to comply with the GMPs.
19. WARRANTY
--------
19.1. TMP warrants to AKSYS that each Set shall conform to the Design
Specifications.
19.2. OTHER THAN AS SET FORTH IN SECTION 19.19 TMP MAKES NO EXPRESS
GUARANTEES, WARRANTIES, OR REPRESENTATIONS AS TO THE SETS. TMP EXPRESSLY
DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE AND PATENT INFRINGEMENT IN RELATION TO THE SETS. IN NO EVENT SHALL TMP
BE LIABLE TO AKSYS OR ANY OF ITS CUSTOMERS WHO PURCHASE SETS FOR CONSEQUENTIAL
OR INCIDENTAL DAMAGES, IRRESPECTIVE OF WHETHER SUCH DAMAGES ARE ALLEGED TO ARISE
IN TORT, CONTRACT, LAW, EQUITY OR BY STATUTE. THE ABOVE PROVISIONS RELATING TO
THE EXCLUSION OF CONSEQUENTIAL AND INCIDENTAL DAMAGES SHALL SURVIVE AND REMAIN
IN FORCE NOTWITHSTANDING A FINDING BY A COURT OF COMPETENT JURISDICTION THAT THE
EXCLUSIVE REMEDY PROVIDED BELOW HAS FAILED OF ITS ESSENTIAL PURPOSE.
19.3. For a period of 24 months from the original date of purchase
hereunder, TMP will replace free of charge to AKSYS or its customers any Set, or
part thereof, that fails because of a manufacturing defect; provided that (i)
the defect is not caused by the fault or negligence of AKSYS or its customer,
and (ii) the Set has not been modified, altered or repaired other than with
written authorization from TMP. Any claim under this limited warranty must be
made to TMP by AKSYS within 30 calendar days of the latter of the date of
failure, the discovery of such defect, or notice to AKSYS of such defect.
19.4. A request for return authorization must be submitted to TMP
prior to the return of any Set or component thereof. The request for return
authorization may be in a form dictated by TMP, but in any instance, must
include for the Set to be returned, the lot number, the quantity, and the
specific reason for the return proposed.
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<PAGE>
19.5. Where a return of any Set or component thereof is authorized,
TMP will provide AKSYS a return authorization number for affixing to the
container of any such merchandise returned. All authorized returns must be by
the original carrier and TMP shall bear the freight charges therefor.
19.6. Notwithstanding anything contained in the foregoing to the
contrary, TMP shall not warrant Materials supplied by AKSYS or AKSYS' Approved
Vendors (excluding TMP).
20. INDEMNIFICATION
---------------
20.1. AKSYS agrees to indemnify and hold TMP, its affiliated
entities, and their respective officers, directors, shareholders, employees, and
agents harmless from and against all costs, claims, losses, damages, liability
and expenses (including, without limitation reasonable attorneys' fees and
disbursements) (a) which may be incurred on account of infringement or alleged
infringement of a patent or any other proprietary rights of third parties
arising out of or in any way connected with the Technical Data Package or Design
Specifications, or (b) which may be incurred on account of any injury to persons
or property arising out of or in any way connected with the Sets, the Design
Specifications, or any raw materials or parts supplied by AKSYS unless the same
results solely from the negligence or willful misconduct of TMP, including but
not limited to (i) any failure caused by or as a result of TMP's action or
omissions to manufacture the Set to conform to the Design Specifications, (ii)
any failure by TMP to manufacture a Set according to the GMPs that directly
causes said injury, or (iii) other manufacturing defects caused by or as a
result of TMP's action or omissions.
20.2. TMP agrees to indemnify and hold AKSYS, its affiliated
entities, and their respective officers, directors, shareholders, employees and
agents, harmless from and against all costs, claims, losses, damages, liability
and expenses (including, without limitation, reasonable attorneys' fees and
disbursements) (a) which may be incurred on account of infringement or alleged
infringement of a patent or any other proprietary rights of third parties
arising out of or in any way connected with manufacturing practices of TMP,
unless the same results from the Technical Data Package or Design
Specifications, or (b) which may be incurred on account of any injury to persons
or property solely arising out of or in any way connected with (i) any failure
caused by or as a result of TMP's action or omissions to manufacture the Set to
conform to the Design Specifications, (ii) any failure by TMP to manufacture a
Set according to the GMPs that directly causes said injury, or (iii) other
manufacturing defects caused by or as a result of TMP's action or omissions;
provided, however, that TMP's liability under this Section 20.2 shall not exceed
the amount of product liability insurance coverage TMP is required to maintain
pursuant to Section 21.1.
20.3. Each indemnified party hereunder agrees that promptly upon its
discovery of facts giving rise to a claim for indemnity under the provisions of
this Agreement, including receipt by it of notice of any demand, assertion,
claim, action or proceeding, judicial or otherwise, by any third party (such
third party actions being collectively referred to herein as the "Claim"), with
respect to any matter as to which it claims to be entitled to indemnity under
the provisions of this Agreement, it will give prompt notice thereof in writing
to the indemnifying party, together with a statement of such information
respecting any of the foregoing as it shall have. Such notice shall
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include a formal demand for indemnification under this Agreement. The
indemnifying party shall not be obligated to indemnify the indemnified party
with respect to any Claim if the indemnified party knowingly failed to notify
the indemnifying party thereof in accordance with the provisions of this
Agreement in sufficient time to permit the indemnifying party or its counsel to
defend against such matter and to make a timely response thereto including,
without limitation, any responsive motion or answer to a complaint, petition,
notice or other legal equitable or administrative process relating to the Claim,
only insofar as such knowing failure to notify the indemnifying party has
actually resulted in prejudice or damage to the indemnifying party.
20.4. The indemnifying party shall be entitled at its cost and
expense to contest and defend by all appropriate legal proceedings any Claim
with respect to which it is called upon to indemnify the indemnified party under
the provisions of this Agreement; provided, that notice of the intention so to
contest shall be delivered by the indemnifying party to the indemnified party
within 20 days from the date of receipt by the indemnifying party of notice by
the indemnified party of the assertion of the Claim. Any such contest may be
conducted in the name and on behalf of the indemnifying party or the indemnified
party as may be appropriate. Such contest shall be conducted by reputable
counsel employed by the indemnifying party, but the indemnified party shall have
the right but not the obligation to participate in such proceedings and to be
represented by counsel of its own choosing at its sole cost and expense. The
parties shall cooperate in defending any Claim and the defending party shall
have reasonable access to the books, records and personnel in the possession or
control of the other party which are pertinent to the defense. The indemnifying
party shall have full authority to determine all action to be taken with respect
to any Claim, including the settlement thereof, provided, however, that the
indemnifying party will not have the authority to subject the indemnified party
to any obligation whatsoever, other than the performance of purely ministerial
tasks or obligations not involving material expense. If the indemnifying party
does not elect to contest any such Claim, the indemnifying party shall be bound
by the result obtained with respect thereto by the indemnified party and shall
be liable for the fees and expenses of counsel employed by the indemnified party
in connection therewith.
21. INSURANCE
---------
21.1. TMP shall (i) maintain product liability insurance coverage for
the Sets in an amount of at least $3,000,000 aggregate, (ii) name AKSYS as an
additional insured under such insurance, and (iii) annually provide AKSYS a
certificate of insurance from the insurer confirming that AKSYS is an additional
named insured.
21.2. AKSYS shall (i) maintain product liability insurance coverage
for the Sets in an amount of at least $3,000,000 aggregate, (ii) name TMP as an
additional insured under such insurance, and (iii) annually provide TMP a
certificate of insurance from the insurer confirming that TMP is an additional
named insured.
22. FORCE MAJEURE
-------------
Neither party shall be considered to be in default in respect to any
obligation hereunder, if failure of performance shall be due to "Force Majeure"
as defined herein. If either party is affected
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by a Force Majeure event, such party shall within (10) days of its occurrence,
give notice to the other party stating the nature of the event, its anticipated
duration and any action being taken to avoid or minimize its effect. The
suspension of performance shall be of no greater scope and no longer duration
than is required and the non-performing party shall use reasonable efforts to
remedy its inability to perform. Force Majeure as used herein shall mean,
without limitation, explosion, flood, fire, hurricane, tornado war (whether
declared or otherwise), accident, failure of carriers, inability to obtain
material or transportation facilities, labor strike, or other labor disturbance,
sabotage, acts of God or of the public enemy, withdrawal or suspension of
licenses and consents, which are unforeseeable or unavoidable and beyond the
control and without the fault or negligence of a party.
23. INDEPENDENT CONTRACTORS
-----------------------
The parties shall maintain the relationship of independent contractors for
purposes of fulfilling their obligations under this Agreement. Nothing
contained in this Agreement shall be deemed to constitute either party the
partner of the other, nor, except as otherwise herein expressly provided, to
constitute either party the agent or legal representative of the other, nor to
create any fiduciary relationship between them. It is not the intention of the
parties to create, nor shall this Agreement be construed to create, any
commercial or other partnership. In particular, neither party accepts any
obligation to disclose any customer or market data to the other. Neither party,
nor any of its employees, shall have any authority to act for or to assume any
obligation or responsibility on behalf of the other party, except as otherwise
expressly provided herein. The rights, duties, obligations and liabilities of
the parties shall be several and not joint or collective. Each party hereto
shall be responsible only for its obligations as herein set out and the expenses
incurred in connection therewith.
24. PUBLIC ANNOUNCEMENTS
--------------------
Neither party will make any public reference to this Agreement or the
cooperation between the parties hereunder except as agreed to in advance with
the other party, or as may be required by law.
25. COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts, each of which
when so executed shall be deemed an original but all of which together shall
constitute one and the same instrument.
26. NOTICES
-------
Unless otherwise specifically provided in this Agreement, all notices and
other communications required or permitted to be given hereunder shall be in
writing and shall be (i) delivered by hand, (ii) delivered by a nationally
recognized commercial overnight delivery service, (iii) mailed postage prepaid
by first class mail or (iv) transmitted by telecopy with confirmed electronic
receipt.
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If to TMP: Texas Medical Products, Inc.
2828 N. Crescent Ridge Drive
The Woodlands, Texas 77381
Fax (713 292 1269)
Attention: Phil Ralston, President
If to AKSYS: AKSYS Ltd.
1113 S. Milwaukee Ave.
Suite 300
Libertyville, IL 60048
Fax (708 680 1873)
Attention: Rodney S. Kenley, President
or to such other address, telecopy, number or person as may be designated by
notice given in accordance with this Section 26.
Any notices given, pursuant here to shall be effective (i) in the case of
hand deliveries, when received; (ii) in the case of an overnight delivery
service, on the next business day after being placed in the possession of such
delivery service, with delivery charges prepaid; (iii) in the case of mail (3)
days after deposit in the postal system, first class mail, postage prepaid; and
(iv) in the case of telecopy notices, when electronic indication of receipt is
received.
27. ASSIGNMENT
----------
This Agreement may not be assigned by either party without the written
consent of the other party, which shall not be unreasonably withheld or delayed;
provided, however that no consent shall be required for the assignment of this
Agreement to any corporation controlling, controlled by, or under common control
with, either party. The assignor shall give the other party not less than 120
days notice of any proposed transaction that may result in assignment of the
Agreement.
28. ENTIRE AGREEMENT; HEADINGS
--------------------------
This Agreement constitutes the entire agreement between the parties hereto
relating to the subject matter hereof and supersedes all prior contracts,
negotiations, agreements and understandings between them. This Agreement may
not be amended or modified or any provisions hereof waived orally, but only by
an instrument in writing executed by a duly authorized officer of the party
against whom enforcement of any waiver, change, modification, consent or by whom
discharge is sought. No waiver of any terms or conditions of this Agreement in
one instance shall operate as a waiver of any other term or condition or as a
waiver in any other instance. The section headings contained in this Agreement
are for convenience of reference only and are not intended to be conclusive as
to the meaning or interpretation of the provisions of this Agreement.
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29. SEVERABILITY
------------
Any provision hereof which is prohibited by or unlawful or unenforceable
under, the applicable law of any jurisdiction shall be ineffective as to such
jurisdiction, without affecting any other provision of this Agreement, or shall
be deemed to be severed or modified to conform with such law, and the remaining
provisions of this Agreement shall remain in force. To the fullest extent,
however, that the provisions of such applicable law may be waived, they are
hereby waived to the end that this Agreement be deemed to be a valid and binding
agreement enforceable in accordance with its terms.
30. GOVERNING LAWS
--------------
The definitive contract shall be governed by, construed and enforced in
accordance with the internal laws of the State of Illinois, without application
of its conflict of laws provisions.
31. REPRESENTATIONS
---------------
Each party acknowledges that, in entering into this Agreement, it does not
do so on the basis of, and does not rely on, any representation,, warranty or
other provision except as expressly provided in this Agreement, and all
conditions, warranties or other terms implied by statute or common law are
hereby excluded to the fullest extent permitted by law.
32. ALTERNATIVE DISPUTE RESOLUTION
------------------------------
32.1. Negotiation. TMP and AKSYS shall attempt to resolve any controversy
or claim arising out of or relating to this Agreement, or the breach hereof
through good faith negotiation, other than with respect to claims for breach of
the confidentiality provisions of Section 17. In the event that the parties
shall fail to negotiate a resolution within 30 days of notice thereof, all such
controversies and claims shall be submitted to mediation as provided in Section
32.2 and, if necessary, to arbitration as provided in Section 32.3, prior to
commencing any suit or other proceeding or to pursuing any other remedies at law
or in equity, other than with respect to claims for breach of the
confidentiality provisions of Section 17.
32.2. Mediation. Upon written notice from either party invoking the
mediation provisions of this Section, the parties shall promptly submit the
controversy or claim to a mutually acceptable professional independent
alternative dispute resolution organization to act as a neutral party to assist
in the mediation in accordance with such reasonable procedures as may be
suggested by such neutral party. While the opinions and the suggestions of the
neutral party shall not be binding on the parties, the parties agree to give
good faith consideration to the neutral party's views. After they have received
the neutral party's views, the parties agree to negotiate in good faith for a
period of 30 days to resolve the dispute with the neutral party acting as a
mediator.
32.3. Arbitration. Any controversy or claim that cannot be resolved by
negotiation or mediation as provided in this Section 32, shall be resolved by
final and binding arbitration in a neutral location under the Commercial
Arbitration Rules of the American Arbitration Association
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("AAA") then obtaining and, to the extent applicable, the Federal Arbitration
Act. The parties agree that such arbitration shall be conducted by a single
arbitrator appointed in accordance with such rules. To the extent practicable,
the arbitration proceeding shall be concluded within 180 days of the filing of
the notice of intent to arbitrate with the AAA. The arbitrator shall have no
power to add to, subtract from or modify any of the terms or conditions of this
Agreement. The costs of arbitration (exclusive of the expense of a party in
obtaining and presenting evidence and attending the arbitration, all of which
shall be borne by such party), and of the fees and expenses of legal counsel of
the prevailing party shall be borne by the party against whom the arbitrator
renders an award. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date above first written.
AKSYS, LTD. TEXAS MEDICAL PRODUCTS, INC.
By: /s/ Rodney S. Kenley By: /s/ Phil Ralston
---------------------------- -------------------------
Title: President, COO Title: President
------------------------- ----------------------
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EXHIBIT A
MILESTONES
----------
AKSYS RESPONSIBILITY
1. Material, Component and Set Specifications; Q level release suitable for
patient use
2. Bill of Materials
3. Packaging Requirements
4. Labeling Requirements and label copy - camera ready
5. Silicon tubing source selection
6. Material, Component and Set Specifications; a level production release
7. Set and Packaging Distribution Testing
TMP RESPONSIBILITY
1. ISO 9002 certification.
2. Integration of AKSYS Documentation and Drawings into TMP system.
3. Development of assembly and testing fixturing and techniques.
4. Complete manufacturing documentation.
5. Complete packaging and sterilization cycle validation.
6. Shipping Contract with Contract Radiation Sterilization Firm.
7. Microbiological bioburden studies.
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Exhibit B
Non-Recurring Costs
-------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Engineering Time Process/Development (@$60/hr) 50 hours $3,000
Test Fixture Development 20 hours $1,200
DMR Creation 50 hours $3,000
Initial Manufacturing Follow-up 40 hours $2,400
Custom Package Development 40 hours $2,400
Radiation Sterilization Cycle Including but not limited to:
Development & Validation
Calibration of Dosimeters
Dosimeter Placement Pattern Development
Spore Strip Population Verification
Bioburden Testing
Bacteriostatis/Fungistatis
Loading Pattern Development
Cycle Validation
Dose Mapping
Dose Setting
Dwell Time Setting
Sterility Testing
Spore Strip
Product
Pyrogen Testing
Test Sample Air Shipping Costs
Assembly Fixtures Testing $1,500
Packaging Testing Outside Lab $ 600
Preproduction Sets
Total
</TABLE>
-22-
<PAGE>
Exhibit C
Set Purchase Price
------------------
Set Purchase Price = AKSYS Material Burden Cost + TMP Material Cost + Labor Cost
-----------------------------------------------------------
+ Overhead + Sterilization Cost
- --------------------------------------------------------------------------------
(*)
AKSYS Material Burden Cost = (AKSYS Material Cost) x (AKSYS Material Burden
Rate)
AKSYS Material Cost = Actual cost of AKSYS Materials purchased pursuant to
Section 8.2.
AKSYS Material Burden Rate = The AKSYS Material Burden Rate shall be fixed at
*% for the Initial Price Period. After the Initial Price Period, the AKSYS
Material Burden Rate shall be adjusted every six months as agreed by the
parties, such adjustment to be effective for the following six months.
TMP Material Cost = Standard cost of TMP Materials purchased pursuant to Section
8.8. After the Initial Price Period, the TMP Material Cost shall be adjusted
every six months during the term of the Agreement as agreed by the parties to
reflect the actual costs during the previous six-month period, such adjustment
to be effective for the following six months.
Labor Cost = (Standard Labor Rate) x (Average Time per Set)
Standard Labor Rate = TMP's projected hourly labor rate. For the Initial
Price Period the Standard Labor Rate shall be fixed at $*. After the Initial
Price Period, the Standard Labor Rate shall be adjusted every six months as
agreed by the parties to reflect TMP's projected hourly labor rate for the next
six-month period, such adjustment to be effective for the following six months.
Average Time per Set = The quotient of (i) the aggregate amount of time
actually required to manufacture and assemble the Sets in a six-month period
divided by (ii) the aggregate number of Sets manufactured and assemble in that
six-month period. For the Initial Price Period, the Average Time per Set shall
be estimated at 20 minutes and shall be adjusted monthly during the Initial
Price Period to reflect the actual time required. After the Initial Price
Period, the Average Time per Set shall be adjusted every six months during the
term of the Agreement as agreed by the parties to reflect the actual time
required to manufacture and assemble the Sets during the previous six-month
period, such adjustment to be effective for the following six months.
Overhead = (Standard Overhead Rate) x (Average Time per Set)
Standard Overhead Rate = TMP's standard hourly overhead rate. For the Initial
Price Period, the Overhead shall be fixed at $*. After the Initial Price
Period, the Overhead shall be adjusted every six months as agreed by the parties
to reflect TMP's actual overhead costs during the previous six month period,
such adjustment to be effective for the following six months.
Sterilization Cost = TMP's actual cost of sterilization for Sets during the
Initial Price Period. After the Initial Price Period, the Sterilization Cost
shall be TMP's standard cost of sterilization and shall be adjusted every six
months during the term of the Agreement as agreed by the parties to reflect the
actual costs during the previous six-month period, such adjustment to be
effective for the following six months.
-23-
* Confidential Treatment Requested
<PAGE>
Exhibit 10.7
LICENSE AGREEMENT
-----------------
WHEREAS, Zbylut J. Twardowski (LICENSOR), a citizen of the United
States, residing at 304 Devine Court, Columbia, Missouri 65203 is the owner of
United States Patent Application No. 07/748,036, filed August 21, 1991 and
entitled Artificial Kidney For Frequent (Daily) Hemodialysis; and
WHEREAS, Aksys Ltd. (LICENSEE), an Illinois corporation located at 816
Fairway, Libertyville, Illinois 60048 wishes to obtain an exclusive license to
the invention covered in the above-described patent application;
NOW, THEREFORE, in consideration of the covenants, undertakings, and
agreements herein, LICENSOR and LICENSEE agree as follows:
ARTICLE 1.
----------
Definitions
- -----------
1.1 The term "Patent Rights" shall mean the U.S. Patent Application
07/748,036, and any other U.S. or foreign patent application of which LICENSOR
is sole or joint inventor which covers the invention described in the above-
cited patent Application No. 07/748,036, including continuations, continuations-
in-part, divisions, and any letters patent or reissue patent issuing from said
applications, and also including any foreign patents covering the same invention
of LICENSOR.
1.2 The term "Licensed Products" means any product which is covered by
any of the Patent Rights or is manufactured, used, leased, or sold by LICENSEE
under conditions or circumstances which would amount to the infringement,
contributory infringement, or inducement of infringement of the Patent Rights in
any country of the world.
<PAGE>
Article 2.
----------
Grant of Rights
- ---------------
2.1 For and in consideration of the covenants under this Agreement
including the payments as provided below by LICENSEE to LICENSOR, LICENSOR
grants to LICENSEE the worldwide, exclusive right to make, have made, use and
sell Licensed Products.
2.2 This License includes the grant by LICENSOR to LICENSEE of the
right to sublicense the Patent Rights to third parties, but only under such
circumstances where sublicensees are granted a sublicense which is fully subject
to all provisions of this Agreement. LICENSEE agrees that sublicensees shall
execute a sublicense agreement which effectively binds them to the terms and
provisions of this Agreement. LICENSEE also guarantees the royalties payable to
LICENSOR by such sublicensees, which royalties will be identical to the
royalties due LICENSOR by LICENSEE.
ARTICLE 3.
----------
Duration
- --------
This Agreement and the rights granted hereunder shall become effective
as of its date and shall continue in force for as long as any application or
patent of the Patents Rights is in effect and has not expired. Any payments
that are due prior to the termination of this Agreement will be still owed to
LICENSOR by LICENSEE and its sublicensees after such termination.
ARTICLE 4.
----------
Payments to LICENSOR
- --------------------
4.1 In consideration of the covenants of this Agreement by the
LICENSOR to LICENSEE, LICENSEE agrees to pay a royalty of three percents of all
income received by
-2-
<PAGE>
LICENSEE on account of sale, rental or lease of Licensed Products, plus any
other considerations received from sublicenses, and any lump sum and other
payments received on account of said Patent Rights. However, LICENSEE may deduct
from such income any credits issued by LICENSEE for Licensed Products returned
by customers.
Payment of Royalty
- ------------------
4.2 Within thirty days after the end of each semi-annual period ending
on June 30th or December 31st, commencing with the semi-annual period during
which this Agreement becomes effective, LICENSEE shall furnish to LICENSOR a
statement certified by a responsible official of LICENSEE showing in a manner
acceptable to LICENSOR:
(i) All Licensed Products that were sold or leased during the
semi-annual period.
(ii) The total income obtained through the sale or lease of
Licensed Products.
(iii) The amount of royalty payable thereon (three percent); and
(iv) Any credits taken from the total income pursuant to Section
4.1.
If no Licensed Product has been sold or leased during the semi-annual
period, then the statement shall state that fact.
Within the same thirty day period as above, LICENSEE shall pay to
LICENSOR in United States dollars the payments due under this agreement, subject
to Section 4.03 below.
4.3 To the extent possible, LICENSEE will remit to LICENSOR payments
due from foreign sales in United States dollars, making use of the then
prevailing exchange rate for the foreign currency in question. However, if this
becomes impossible because of currency exchange restrictions or the like, or, at
the election of LICENSOR, LICENSEE shall deposit said royalties in the bank of
any foreign country as designated by LICENSOR.
-3-
<PAGE>
4.4 Overdue payments shall be subject to a late payment charge
calculated at an annual rate of two percent over the prime rate or successive
prime rates as posted at the Federal Reserve Bank in Chicago during delinquency.
If the amount of such charge exceeds the maximum permitted by law, such charge
shall be reduced to such maximum.
4.5 LICENSEE agrees that within ninety (90) days of the close of each
fiscal year, LICENSOR may, at his expense, cause an independent, Certified
Public Accountant ("Auditor") to review LICENSEE'S books and records with
respect to the operations allocated to Licensed Products, and the computation of
all payments made by LICENSEE to LICENSOR, and to report on and certify to
LICENSEE and LICENSOR whether all said payments have been determined and paid in
accordance with this Agreement. Should the Auditor report a discrepancy in
determination and payment of the payments, LICENSEE agrees to pay to LICENSOR
and/or LICENSOR agrees to refund to the other party such underpayment or
overpayment within thirty (30) days after receipt by them of the Auditor's
report.
ARTICLE 5.
----------
Minimum Royalties
- -----------------
5.1 If for the year 1996, or any subsequent year during which this
Agreement is in force, LICENSEE fails to pay LICENSOR payments under Article 4.1
applicable to such year which are at least equal to the minimum total payment
for such year indicated below, LICENSOR will have the right to convert this
Agreement into a non-exclusive license and to seek other LICENSEES for the
Patent Rights. This conversion to a non-exclusive license will be made by the
serving of written notice on LICENSEE by LICENSOR. LICENSEE will have thirty
(30) days from the receipt of such written notice to make up the payment
deficiency for any particular year in which the deficiency in payment for such
year, this License Agreement will not be converted into a non-exclusive license.
Upon conversion to a non-
-4-
<PAGE>
exclusive license, Articles 9 and 10 will be canceled. The right to sublicense
will also be canceled but present sublicensees will retain their sublicenses.
5.2 Such payments made to retain exclusivity and not made to comply
with Article 4.1 shall not be credited as payments applying to any other year.
5.3 The specific total minimum payment for each year will be as
follows:
<TABLE>
<CAPTION>
Year Minimum Total Payment
---- ---------------------
<S> <C>
1996 $30,000.00
1997 40,000.00
1998 50,000.00
1999 60,000.00
2000 80,000.00
2001 100,000.00
2002 130,000.00
2003 160,000.00
All subsequent years 200,000.00
</TABLE>
Article 6.
----------
Patent Marking
- --------------
LICENSEE will properly mark any U.S. and foreign patents of the Patent
Rights which cover Licensed Products upon such Licensed Products.
Article 7.
----------
Mutual Confidentiality
- ----------------------
7.1 When either LICENSOR or LICENSEE transmits to the other
information subject to a restriction on use or disclosure "Confidential
Information", the disclosing party will
-5-
<PAGE>
mark written material as "Confidential" and identify in writing confidential
oral information as subject to this Article.
7.2 The receiving party shall utilize the same degree of care to
prevent unauthorized use or disclosure of the disclosing party's "Confidential
Information" as it employs with respect to its own business sensitive
information of like nature. These efforts will include at a minimum maintaining
security controls over reproduction and access to Confidential Information. The
receiving party will obligate its employees and any other representatives to
controls at least as strict as are required by this Agreement, and will return
all records of Confidential Information upon request.
7.3 Information shall not be considered Confidential Information if
it:
(a) is already known by the receiving party as
evidenced by written records;
(b) is rightfully received from a third party who has not derived the
Confidential Information from the party of this Agreement seeking to retain
confidentiality; or
(c) is or becomes publicly known, or available to a third party
without restriction, without the fault of the receiving party.
7.4 Each party agrees not to use the other's confidential
information for any purpose other than for the consultation regarding the
Invention and Licensed Products. Any other use of such confidential information
shall be made only upon prior written consent of the disclosing party or
pursuant to a subsequent agreement between the parties.
ARTICLE 8.
----------
Warranties
- ----------
-6-
<PAGE>
8.1 LICENSOR warrants that LICENSOR has the full right, power, and
authority to enter into this Agreement and to grant all of the rights so granted
herein, but without warranty of the validity of any of the Patent Rights.
8.2 LICENSEE acknowledges and agrees that LICENSOR has given no
warranty, guarantee, covenant or representation that the technology licensed
under this Agreement is marketable, or has fitness for a particular purpose or
other attributes, express or implied (in law or in fact), oral or written. In
view of the fact that LICENSEE will exercise control over the engineering
design, the manufacture, the sales, and the maintenance of "Licensed Products",
LICENSEE hereby indemnifies LICENSOR against any product liability claims
resulting from the activities of LICENSEE and its sublicensees with respect to
the invention of the Patent Rights.
ARTICLE 9.
----------
Patents
- -------
9.1 LICENSEE shall have the right to file and prosecute, at its own
expense, applications for any desired United States or foreign patent of the
Patent Rights. However, LICENSEE agrees to allow LICENSOR the reasonable
opportunity to review and comment upon all patent filings and the prosecution
activities of LICENSOR prior to their taking place. LICENSOR agrees to fully
cooperate in such filings by signing necessary documents and the like.
9.2 LICENSEE shall be responsible for the payment of all maintenance
fees and annuities of patents of the Patent Rights.
ARTICLE 10.
-----------
Patent Litigation
- -----------------
-7-
<PAGE>
10.1 In the event that devices or processes infringing any of the
claims of the Patent Rights shall be sold or offered for sale by a third party
who is not a sublicensee, LICENSEE may inform LICENSOR of the facts respecting
such infringement. LICENSOR shall have sixty (60) days to institute litigation
respecting such infringement at his own expense or to otherwise resolve the
dispute. Any settlement respecting such infringement shall be approved by
LICENSEE. In any litigation instituted by LICENSOR, LICENSEE shall have the
right but not the obligation to join in such litigation by counsel of its own
choice and at its own expense. In the event that LICENSOR has not so proceeded,
LICENSEE shall have the right, but not the obligation, to sue such infringer or
infringers at the expense of LICENSEE, and LICENSOR agrees that it will permit
the use of its name as a party in whatever patent litigation LICENSEE wishes to
institute, and will execute whatever documents are necessary in connection
therewith. LICENSOR shall have the right, but not the obligation to join in any
such litigation instituted by LICENSEE through counsel of its own choice.
10.2 Either party shall be entitled to a prorated share of any
damages collected from the infringer or infringers based on the proportion of
the costs of the litigation born by such party, except that LICENSEE shall pay
LICENSOR three percent of LICENSEE'S share of the recovery, to account for the
royalty obligation of LICENSOR. All litigation shall be settled only on terms
approved by both LICENSOR and LICENSEE.
ARTICLE 11.
-----------
Termination, Default, and Succession
- ------------------------------------
11.1 LICENSEE may cancel this Agreement at any time on thirty (30)
days notice, subject to paying all royalties due and owing up through the
termination of this Agreement.
-8-
<PAGE>
11.2 Notwithstanding the agreed term of this Agreement, should
LICENSEE default in any payment due under this Agreement, and should LICENSEE
not remedy the same within thirty (30) working days after its receipt of written
notice thereof as to such default, then LICENSOR may elect to terminate this
Agreement and to pursue any and all remedies available to him, including the
remedies of specific performance and injunctive relief.
11.3 In the event of a good faith dispute as to the interpretation of
the Agreement which is believed by LICENSOR to be a default and is believed by
the LICENSEE to not be a default, the parties agree that such dispute, if it
cannot be resolved, shall, prior to termination of this Agreement, be submitted
to binding arbitration pursuant to the Illinois Uniform Arbitration Act in
Chicago, Illinois, and under the rules and procedures of the American
Arbitration Association. During the pendency of such arbitration, or appeal
thereof to the courts, the Agreement will not be terminated. The arbitrators
shall give a written finding of their decision which shall be final and binding
upon the parties if reasonable on its face, and shall be enforceable between
them in any subsequent legal action or proceedings. The parties agree to submit
to the Jurisdiction of the courts (State and Federal) sitting in Chicago,
Illinois.
11.4 In the event that either party enters into bankruptcy the other
party may terminate this Agreement forthwith.
11.5 In the event that LICENSEE:
(a) ceases to do business for any reason, or is subject to liquidation
or dissolution by operation of law, court order, or otherwise;
(b) shall make an assignment of its assets for the benefit of
creditors;
(c) shall admit its insolvency or ask for an arrangement with
creditors;
(d) suffers a receiver, trustee, or committee to take charge of any of
its property or assets under any charge or lien upon such property or assets or
for the benefit of creditors; or
-9-
<PAGE>
(e) any person acting under the order or authority of any governmental
authority or court shall take control of the assets, management or operation of
the business of LICENSEE; than this Agreement shall at the election of LICENSOR
be terminated immediately upon the happening of such event.
11.6 This Agreement shall be binding upon and inure to the heirs,
successors and assigns of the parties.
11.7 Termination of this Agreement for any reason including
expiration of the term, shall not terminate any rights or obligations to the
parties which are agreed herein to survive such termination i.e., payment
obligations.
11.8 The waiver by either party of any right hereunder or which
arises by reason of any failure or breach by the other party shall not be deemed
as a waiver of any other breach or failure by said other party, whether of a
similar nature or otherwise.
ARTICLE 12.
-----------
Grant of Security Interest
- --------------------------
LICENSEE, in consideration of the license granted to LICENSEE by
LICENSOR under this Agreement, grants to LICENSOR a security interest in all of
LICENSEE'S right, title and interest in and to the Patent Rights, to secure
performance of all obligations of LICENSEE as set out in this Agreement.
LICENSEE further agrees to execute such financing statements as LICENSOR may
reasonably request. Default in the performance of any obligations, or any
default under this Agreement, is a default under the security agreement
contained in this clause. Upon default, not timely cured, LICENSOR may declare
all obligations immediately due and payable and has the remedies of a secured
creditor available under applicable Federal or State Law.
-10-
<PAGE>
ARTICLE 13.
-----------
Force Majeure Provisions
- ------------------------
The parties hereto shall not be liable for failure of performance
hereunder if occasioned by war, whether declared or undeclared, fire, flood,
storm, interruption of transportation, embargo, accident, explosion, inability
to procure or shortage of supply of materials, equipment, or production
facilities, prohibition of import or export of the goods, governmental orders,
regulations, restrictions, priorities or rationing, currency or trade
restriction, or by strike, lockout, or other labor troubles interfering with the
production or transportation of goods or with the supply of raw materials
entering into their production or any other cause beyond the control of the
parties. Any suspension of performances by reason of this article shall be
limited to the period during which such cause or failure exists, but such
suspension shall not affect the running of the term hereof.
ARTICLE 14.
-----------
Notice
- ------
Every notice, demand, request and other communication given by a party
under this Agreement shall be in writing and shall be delivered personally to
the addressee thereof at its principal place of business, or sent certified or
express mail, return receipt requested, to the address thereof as indicated on
page 1 of this Agreement, or to such other address or to such person as a party
shall have last designated by written notice to the other. Notice shall not be
defective for failure to send copies. Any notice, request or demand or other
communication sent via certified or express mail shall be deemed to have been
received by the addressee thereof five (5) days after the date of mailing
thereof (excluding Saturday, Sunday, and legal holidays at the place of the
addressee).
-11-
<PAGE>
ARTICLE 15.
-----------
No Assignment
- -------------
LICENSEE may not assign this Agreement to a third party. However, a
change in ownership of the capital shares of LICENSEE which controls the
election of a majority of directors of LICENSEE shall not be deemed an
assignment of rights under this Agreement by LICENSEE, and is permitted.
ARTICLE 16.
-----------
Choice of Law and Arbitration
- -----------------------------
This Agreement shall be governed by the laws of the State of Illinois.
ARTICLE 17.
-----------
Merger Clause
- -------------
This Agreement constitutes the mutual understanding between LICENSOR
and LICENSEE. All prior understandings arising from negotiations are merged
into this Agreement.
IN WITNESS WHEREOF, the parties have caused this agreement to be
executed on this date.
Date: February 12, 1993 /s/ Zbylut J. Twardowski
-------------------- ------------------------
Zbylut J. Twardowski
Aksys Ltd.
Date: April 1, 1993 By /s/ Rodney S. Kenley
--------------------- ------------------------
Title:President
------------------------
-12-
<PAGE>
Exhibit 10.8
LICENSE AGREEMENT
-----------------
Whereas, Cynthia P. Walters ("Licensor"), a citizen of the United
States, residing at 303 Brighton Road, Anderson, South Carolina 29621, owns
United States Letters Patent No. 4,695,385 entitled Dialyzer Reuse System issued
on September 22, 1987 ("The Patent") and has the sole right to exclude others
from making, using or selling the invention of said patent ("The Invention");
and
Whereas, Aksys Ltd., ("Licensee"), an Illinois Corporation located at
816 Fair Way, Libertyville, Illinois 60048, is desirous of obtaining rights
arising from the Patent;
Now, therefore, in consideration of the covenants, undertakings and
agreements herein, Licensor and Licensee agree as follows:
ARTICLE ONE
-----------
Grant of Rights
---------------
1.01 Licensor grants to Licensee the exclusive right to incorporate
the Invention into an integrated assembly that also includes a system for
hemodialysis ("Licensed Product").
1.02 This grant is solely for the incorporation of the Invention into
an integrated assembly that also includes a hemodialysis system.
1.03 This grant does not give licensee any right to make, sell, or
use the Invention other than in an integrated assembly that also includes a
hemodialysis system.
1.04 The exclusivity of this grant does not pertain to the existing
product of Licensor identified as product number HR3000 as previously sold by
Colorado Medical, Inc. and currently maintained by Servall Corp.
1.05 This license includes the grant buy Licensor to Licensee of the
right to sublicense the Patent Rights to third parties, subject to consent of
Licensor. Licensor shall exercise good faith in granting or denying consent.
Licensee agrees that sublicensees shall execute a sublicense agreement which
effectively binds them to the terms and provisions of this Agreement. Licensee
also guarantees the royalties payable to Licensor by such sublicensees, which
royalties will be identical to the royalties due Licensor by Licensee.
This license is granted subject to the terms and conditions enumerated
henceforth.
<PAGE>
2
ARTICLE TWO
-----------
Duration
--------
This Agreement and the rights granted hereunder shall become effective
as of the date hereof and shall continue in force for so long as the Patent is
in effect and has not expired. Payment of royalties that have accrued prior to
the expiration of this Agreement are still owed.
Licensee's Duties
ARTICLE THREE
-------------
Royalty Fee and Minimum License Fee
-----------------------------------
3.01 Calculation of Royalty
For and in consideration of the grant of the Invention as detailed in
Article ONE by the Licensor to the Licensee under this Agreement, Licensee
agrees to pay Licensor an initiation fee of $5000 which is due and owing 60 days
following the closing of an agreement between Aksys Ltd. and independent
investors stipulating the terms and conditions under which Aksys will be
capitalized by said investors for the purpose of developing a prototype
hemodialysis system and, a continuing royalty in the amounts of one tenth of one
percent (0.1%) of the net entire revenue received by licensee from the sale or
lease of Licensed Products. For purposes of this Agreement, net revenue shall be
calculated by subtracting from the gross revenue received by Licensee from the
sale or leasing of products incorporating the Invention, any and all credits
issued by Licensee for products returned.
3.02 Payment of Royalty
(a) Within thirty (30) days after the end of each semiannual period
ending on June 30th or December 31st commencing with the semiannual period
during which this Agreement becomes effective, Licensee shall furnish to
Licensor at the address specified in Article (13) thirteen a statement certified
by a responsible official of the Licensee showing in a manner acceptable to
Licensor:
(i) All Licensed Products that were sold or leased during the
semiannual period
(ii) the proceeds obtained through the sale or lease of said
products
(iii) the amount of royalty payable thereon
(iv) all reductions of royalty and all exclusions of royalty
pursuant to section 3.01.
If no Licensed Product has been sold, leased or put into use during the
semiannual period, then the statement shall show that fact.
<PAGE>
3
(b) If the accrued royalty payment for any semiannual period as
calculated under Section 3.02(a) is less than $2500, then a minimum licensing
fee of $2500 will be paid in lieu of the accrued royalty payment.
(c) Within thirty (30) days after the end of each semiannual period
ending on June 30th or December 31st, commencing with the semiannual period
during which this Agreement becomes effective, Licensee shall pay in United
States dollars to Licensor at the address specified in Section Thirteen the
royalties or minimum license fee payable in accordance with Sections 3.01 or
3.02(b).
(d) Overdue payments hereunder shall be subject to a late payment
charge calculated at an annual rate of 2 percent (2%) over the prime rate or
successive prime rates as posted at the Federal Reserve Bank in Chicago during
delinquency. If the amount of such charge exceeds the maximum permitted by law,
such charge shall be reduced to such maximum.
(e) Licensee agrees to keep records showing the sales of the Licensed
Product disposed of under the License herein granted in sufficient detail to
enable the royalties payable hereunder by Licensee to be determined, and further
agrees to permit its books and records to be examined no more often than once
per annum to the extent necessary to verify the reports provided for in Section
3.02(a), such examination to be made at the expense of the Licensor by an
auditor appointed by Licensor who shall be acceptable to licensee, or, at the
option and expense of Licensee, by a certified public accountant appointed by
Licensor. If Licensor finds a discrepancy between the amount of royalty paid and
the amount of royalty due, the discrepancy amount will be immediately paid to
Licensor and if the amount of the discrepancy is greater than 15% of the actual
previous payment, Licensee shall be required to pay for the review charges.
(f) If no more than the minimum licensing fee as defined in Section
3.02(b) is paid for two (2) consecutive semiannual periods commencing with the
3rd semiannual period after the first Licensed Product is sold, Licensor will
have the right to convert this Agreement into a non-exclusive license and to
seek other Licensees for the patent rights. This conversion to a non-exclusive
license will be made by the serving of written notice on Licensee by Licensor.
Upon conversion to a non-exclusive license, Article 8 will be cancelled. The
right to sub-license will also be cancelled but present sub-licensees will
retain their sublicenses.
(g) Under this agreement the Licensed Product shall be considered to
be sold and royalties shall accrue when the Licensed Product is billed out,
except that upon expiration or any termination of License, all shipments made on
or prior to the day of such expiration or termination which have not been billed
out prior thereto shall be considered as sold (and therefore subject to
royalty). Royalties paid on the Licensed Product which are not accepted by the
customer shall be credited to the Licensee.
<PAGE>
4
ARTICLE FOUR
------------
Identification of Patent
------------------------
Licensee must affix proper patent identification upon Licensed
Products. Identification shall include that which is specified in 35 USC (S) 287
such as "US Patent No. 4,695,385."
ARTICLE FIVE
------------
Mutual Confidentiality
----------------------
5.01 When either Licensor or Licensee transmits to the other
information subject to a restriction on use or disclosure ("Confidential
Information"), it will mark written material as "Confidential" and identify in
writing confidential oral information as subject to Article Five of this
Agreement.
5.02 The receiving party shall utilize the same degree of care to
prevent unauthorized use or disclosure of the disclosing party's Confidential
Information as it employs with respect to its own business sensitive information
of like nature. These efforts will include at a minimum maintaining security
controls over reproduction and access to Confidential Information. The receiving
party will obligate its employees and any other representatives to controls at
least as strict as are required by this Agreement, and will return all records
of Confidential Information upon request.
5.03 Information shall not be considered Confidential Information if
it:
(a) is already known by the receiving party as evidenced by written
records,
(b) in the future is developed by the receiving party independently
or is rightfully received from a third party; or
(c) is or become publicly known or is furnished to a third party
without restriction.
5.04 Each party agrees not to use the other's confidential
information for any purpose other than for the consultation regarding the
Invention and Licensed Products. any other use of such confidential information
shall be made only upon prior written consent from an authorized representative
of the proprietor or pursuant to a subsequent agreement between the parties.
LICENSOR'S DUTIES
ARTICLE SIX
-----------
Warranties
----------
6.01 Licensor warrants that Licensor has full right, power and
authority to enter into this agreement and grant all of the rights in the Patent
herein granted.
<PAGE>
5
6.02 Licensee acknowledges and agrees that there are no warranties,
guaranties, conditions, covenants, or representations by Licensor as to
marketability, fitness for a particular purpose or other attributes, whether
express or implied (in law or in fact), oral or written.
ARTICLE SEVEN
-------------
Maintenance Fees
----------------
7.01 Licensor shall be responsible for the payment of maintenance
fees as required by the United States Patent and Trademark Office.
7.02 Licensor is currently in the process of making a late
maintenance fee payment on the patent, and expects such payment to be accepted.
However, in the event the payment is not accepted by the United States Patent
and Trademark Office, Licensor agrees to refund the initiation fee and any
royalty payments made under Article Three, and this agreement will be considered
void.
GENERAL PROVISIONS
ARTICLE EIGHT
-------------
Patent Litigation
-----------------
8.01 Licensor may sue any infringer or defend any suit against
Invention, shall have exclusive control of such suit, and bear all expenses
thereof, and shall have the right to retain any recoveries therefrom. In the
event either party is aware of any alleged or factual infringement of its
exclusive grant, as detailed in Article One, of the Invention, that party shall
notify the other of these facts. In the event that Licensor fails to commence
such a suit or suits against any such infringer within thirty (30 days after
written request by Licensee, then Licensee may sue, shall have exclusive control
of such suit and bear all expenses thereof, as permitted by law, and shall have
the right to retain any recoveries therefrom. Each party shall fully co-operate
with the other in the initiation and prosecution of such infringement suit or
suits, brought at the sole cost and expense of the party electing to commence
the suit.
8.02 Licensor shall be entitled to a royalty percentage as defined in
Section 3.01 of the net recovery awarded to Licensor pursuant to any
infringement suit initiated by Licensee under Section 8.01. Net recovery will be
calculated as gross recovery less attorney's fees and expenses.
ARTICLE NINE
------------
Termination/Defaults
--------------------
9.01 Licensee may cancel this Agreement at any time on thirty (30)
days notice, subject to paying all royalties due and owing up through the
termination of this Agreement.
9.02 Notwithstanding the agreed term of this Agreement, should either
party default in the diligent performance or the prompt payment of any
obligation or liability under this Agreement and should the party in default not
remedy the same, within ten (10) working days after its receipt of written
notice thereof as to any Payment and thirty days after its receipt of
<PAGE>
6
written notice thereof as to performance of any other obligation, then the party
not in default may elect to terminate this Agreement and to pursue any and all
remedies available to it, including the remedy of specific performance and
injunctive relief: provided, however, should the party in default of an act of
performance (other than a payment of a liability) in good faith take reasonable
measures to correct such default, including in the event of litigation, such
steps as may be necessary to protect the rights of the parties to this Agreement
from any adverse Judgement or order, then, so long as such party acts in good
faith and with due dispatch to remedy such default in performance, and does
remedy such default, the other party shall not have the right to terminate this
Agreement.
9.03 In the event that either party hereto:
(a) ceases to do business for any reason or is subject to liquidation
or dissolution by operation of law, court order or otherwise;
(b) shall make an assignment of its assets for the benefit of
creditors;
(c) shall admit its insolvency or ask for an arrangement with
creditors;
(d) suffers a receiver, trustee or committee to take charge of any of
its property or assets under any charge or lien upon such property or assets or
for the benefit of creditors or,
(e) any person acting under order or authority of any governmental
authority or court shall take control of the assets, management or operation of
the business of such party;
then this Agreement shall at the election of the other party be terminated
immediately upon happening of any such event.
9.04 Termination of this Agreement for any reason, including
expiration of the term, shall not terminate any rights or obligations of the
parties which are agreed herein to survive such termination.
9.05 The waiver by either party of any right hereunder or which
arises by reason of any failure or breach by the other party shall not be deemed
as a waiver of any other breach or failure by said other party, whether of a
similar nature or otherwise.
9.06 If no more than the minimum license fee as defined in Section
3.02(b) is paid for two (2) consecutive semi-annual periods commencing with the
first semi-annual period occurring five (5) years after the first licensed
product is sold, Licensor shall have the right to terminate this agreement.
<PAGE>
7
ARTICLE TEN
-----------
Indemnification
---------------
Licensee covenants to indemnify Licensor from all claims pertaining to
the Patent and Licensed Product.
ARTICLE ELEVEN
--------------
Sub-Contract
------------
Licensee shall have the right to contract with suppliers and sub-
contractors, for any goods, materials, equipment, components, parts or sub-
assemblies, provided that Licensee shall at all times observe and enforce the
requirements of Article Five.
ARTICLE TWELVE
--------------
Force Majeure Provisions
------------------------
The parties hereto shall not be liable for failure of performance
hereunder if occasioned by war, either declared or undeclared, fire, flood,
storm, interruption of transportation, embargo, accident, explosion, inability
to procure or shortage of supply of materials, equipment, or production
facilities, prohibition of import or export of the goods, governmental orders,
regulations, restrictions, priorities or zoning, currency or trade restrictions,
or by strike, lockout, or other labor troubles interfering with the production
or transportation of goods or with the supply of raw materials entering into
their production or any other cause beyond the control of the parties. Any
suspension of performances by reason of this Article shall be limited to the
period during which such cause or failure exists, but such suspension shall not
affect the running of the term hereof.
ARTICLE THIRTEEN
----------------
Notice
------
Every notice, demand, request and other communication given by a party
under this Agreement shall be in writing and shall be delivered personally to
the addressee thereof at its principal place of business, or sent certified or
express mail, return receipt requested, or sent by telephone facsimile, receipt
confirmed to the addressee thereof as follows:
President
Aksys Ltd.
816 Fair Way
Libertyville, IL 60048
Cynthia P. Walters
Servall Corp.
P.O. Box 66
Anderson, SC 29622
<PAGE>
8
or to such other address or to such person as a party shall have last designated
by written notice to the other, Notice shall not be defective for failure to
send copies. Any notice, request or demand or other communication sent via
certified or express mail shall be deemed to have been received by the addressee
thereof five (5) days after the date of mailing thereof (excluding Saturday,
Sunday, and legal holidays at the place of the addressee).
ARTICLE FOURTEEN
----------------
No Transfers
------------
Licensee may not assign this Agreement to a third party. However, a
change in the ownership of the capital shares of Licensee, which control the
election of a majority of directors of Licensee, or the sale of substantially
all the assets of Licensee, shall not be deemed an assignment and transfer of
rights under this Agreement by Licensee.
ARTICLE FIFTEEN
---------------
Choice of Law and Arbitration
-----------------------------
This Agreement shall be governed by the internal laws of the State of
Illinois. The parties agree that any dispute with respect to this Agreement
shall be submitted to binding arbitration pursuant to the Illinois Uniform
Arbitration Act in Chicago, Illinois, and under the rules and procedures of the
American Arbitration Association before a panel of three arbitrators, that the
arbitrators shall give a written finding of their decision which shall be final
and binding upon the parties and shall be enforceable between them in any
subsequent legal action or proceedings. The parties agree to submit to the
Jurisdiction of the Courts (State and Federal) sitting in Chicago, Illinois.
ARTICLE SIXTEEN
---------------
Merger Clause
-------------
This Agreement constitutes the mutual understanding between Licensor
and Licensee. All prior understandings arising from negotiations are merged into
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on this date.
3-10-93 /s/ Cynthia P. Walters
- ------------------ -----------------------------------
Date Cynthia P. Walters
Aksys Ltd.
4-1-93
- ------------------ By: /s/ Rodney S. Kenley
Date ---------------------------------
Title: President
-----------------------------
