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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
COMMISSION FILE NUMBER 0-28290
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AKSYS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-3890205
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
60069
TWO MARRIOTT DRIVE, LINCOLNSHIRE, IL (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 229-2020
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregated market value of voting stock held by non-affiliates of the
registrant as of January 31, 1997 at a closing sale price of $12.75 as
reported by the Nasdaq National Market was approximately $107,949,405.
As of January 31, 1997 the registrant had 13,731,669 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE USED IN CONNECTION WITH
THE SOLICITATION OF PROXIES FOR THE ANNUAL MEETING TO BE HELD ON APRIL 22,
1997 (THE "PROXY STATEMENT") ARE INCORPORATED BY REFERENCE IN PART III.
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AKSYS, LTD.
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE NO.
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PART I....................................................................... 1
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 15
Item 3. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security-Holders................ 15
Item 4A. Executive Officers of the Registrant............................... 15
PART II...................................................................... 16
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters............................................................ 16
Item 6. Selected Financial Data............................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 17
Item 8. Financial Statements and Supplementary Data........................ 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 20
PART III..................................................................... 20
Item 10. Directors and Executive Officers of the Registrant................. 20
Item 11. Executive Compensation............................................. 20
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 21
Item 13. Certain Relationships and Related Transactions..................... 21
PART IV...................................................................... 21
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................... 22
EXHIBIT INDEX................................................................ 37
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PART I
ITEM 1. BUSINESS
BACKGROUND
Aksys, Ltd. (the "Company") was founded in 1991 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, known as the Aksys PHD/tm/ Personal Hemodialysis
System (the "PHD system") which is designed to enable patients to perform
hemodialysis at alternate sites, such as the patient's home or a selfcare clinic
and to thereby improve clinical outcomes, reduce costs and enhance the patient's
quality of life. All of these characteristics have been associated with a
frequent, personalized dialysis regimen.
The Company is currently working toward satisfying the regulatory requirements
for Food and Drug Administration ("FDA") clearance in the United States. The
Company is in the process of compiling the requested data and working with the
FDA to develop a mutually agreeable scope for a clinical study planned for the
fourth quarter of 1997. The Company plans to have production systems available
and the necessary data collected for the filing of an Investigational Device
Exemption (an "IDE") with the FDA in the third quarter of 1997. While Aksys and
the FDA have not finalized the length of the trial at this time, the Company
expects the clinical trials will be approximately 90 days in length, beginning
in late 1997. Upon completion of clinical trials, the data compiled will be
submitted along with other requested data in a new 510(k) Pre-Market
Notification, which the Company expects to file in early 1998. 510(k) clearance
by the FDA is required prior to the commercialization of the PHD system.
In parallel with its U.S. regulatory efforts, the Company plans to obtain ISO
9001 certification in 1997, and to also submit final production systems for CE
mark approval (the European equivalent to 510(k) clearance) during this same
time frame. The Company is anticipating CE mark approval in 1998 for its
product launch in Europe.
Japan is also a significant market where Aksys intends to obtain regulatory
approval. Although the regulatory approval cycle in Japan is much longer than
in the U.S., the Company is currently finalizing its plans for regulatory
submission and approval and anticipates commencement of clinical studies in
1998.
There can be no assurance that the Company will be able to obtain the above-
mentioned regulatory clearances or approvals in a timely manner or at all.
THE MARKETPLACE
The Company currently competes exclusively in the market for the treatment of
ESRD patients. 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.
The Company estimates that $11 billion will be spent in the U.S. during 1997 for
the treatment of patients suffering from ESRD, of which approximately $4 billion
will be directly related to dialysis treatment. Based upon information
published by the Health Care Financing Administration ("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 200,000 at the end of 1995, representing
a compound annual growth rate of approximately 9%. In addition, according to
international patient registries compiled by the United States Renal Data System
(the "USRDS"), there were approximately 240,000 dialysis patients in Europe and
Japan in 1993. 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
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(the median age of newly diagnosed ESRD patients in the United States is 62),
(ii) the longer average life expectancy 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 encourage
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.
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, either 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.
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
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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. Recently, after conducting a study of dialysis costs and
reimbursement at the request of Congress, the Prospective Payment Assessment
Commission ("ProPAC") recommended a 2.8% increase in the ESRD composite
reimbursement rate. Any actions will not be known until the 1998 federal budget
is finalized.
In its March 1, 1996 report, ProPAC 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 1996,
HCFA announced the availability of funding for ESRD Managed Care Demonstrations
based on approval of grant applications and proposals. During October 1996, HCFA
announced the selection of four dialysis treatment centers where government
funding will be provided to conduct the ESRD Managed Care Demonstration Project.
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."
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.
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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.
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 30 months.
PREVAILING TREATMENT METHODS
Hemodialysis and peritoneal dialysis are the two prevailing methods of dialysis.
HEMODIALYSIS
HCFA estimates that as of December 31, 1995, approximately 84% (168,000) of the
ESRD dialysis patients in the United States were receiving hemodialysis.
Approximately 1% of these patients performed treatment in their homes, and all
others received 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, 1995, approximately 16% (32,000) of the
ESRD dialysis patients in the United States were receiving peritoneal dialysis,
with over 99% 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 patient's
blood. Dialysate, a blood-cleansing electrolyte solution, is infused through a
catheter into the
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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. 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 to
essentially devote three days per week to the treatment regimen.
The Company believes that these health problems are caused in part by inadequate
doses 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. 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 Company expects that Medicare will eventually change its reimbursement with
respect to ESRD patients to a managed care system in which all costs of treating
ESRD patients are subject to a cap. This would encourage 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 an ESRD managed
care approach, in which providers would be paid a capitated rate covering both
in-patient and outpatient care. This project is scheduled to begin in 1997 and
to run for three years.
Peritoneal Dialysis. Although peritoneal dialysis accounted for 16% (or 32,000)
of the dialysis patient population in 1995 according to HCFA, approximately 21%
(or 7,000) of the patients in the United States switched to outpatient in-center
hemodialysis. 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
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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.
HOME HEMODIALYSIS AS AN 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 72 patients (including
approximately 24 patients from an earlier study of daily hemodialysis conducted
by Dr. Umberto Buoncristiani, a member of its Scientific Advisory Board)
dialyzing six or seven times per week. 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 a higher quality of life.
Neither the Company nor the 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
deemed to have established the impact of daily hemodialysis on clinical
outcomes.
Despite the potential benefits of frequent hemodialysis, several barriers have
prevented it from becoming a viable treatment regimen. The most significant is
the economic implication of administering more frequent hemodialysis to patients
from the traditional three times per week dialysis. Under the current capped
Medicare reimbursement level, dialysis providers cannot afford the additional
costs that would be incurred in providing more frequent treatments in outpatient
facilities. Requiring more frequent 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 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 more frequent 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 more frequent 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.
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The Company believes that most barriers to a more frequent hemodialysis regimen
could be overcome if it were available in the patient's home, but to date no
hemodialysis device has become sufficiently available to establish home
hemodialysis as a feasible alternative therapy for the general dialysis patient
population.
PRODUCT DEVELOPMENT
THE AKSYS PHD SYSTEM
The Company is in the final stages of developing the PHD 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 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 for ease of
designed for operation by patients
operation only by at home, including
trained personnel. computerized, user-
friendly interface.
Time and Effort Difficult and time Fully automated,
consuming to setup, reducing patient
operate, clean and involvement.
maintain.
Cost of Consumables Requires frequent Integrated automatic
replacement of blood disinfection system
circuit. designed to enable safe
and effective reuse
of blood circuit.
Clinical Monitoring Patient treatment Patient monitored by,
compliance monitoring and able to communicate
and patient ability to with, clinic through real
consult with clinic time on-line monitoring
not available unless system.
treatment received in
an outpatient facility.
Storage Requirements Large volume of Substantially fewer and
consumables and smaller items consumed
dialysate consumed each with each treatment.
month.
</TABLE>
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 PHD system addresses the primary
drawbacks of both forms of peritoneal dialysis by delivering a substantially
greater dose of dialysis in significantly less time. Furthermore, by enabling
the use of frequent home hemodialysis, the PHD system overcomes other
limitations of peritoneal dialysis such as the risk of peritonitis and patient
non-compliance to the prescribed regimen.
The Company believes that the PHD system offers patients simplification and
control. The new technology of the PHD system integrates three systems into one:
delivery of dialysis, dialyzer reprocessing, and water treatment. The 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 PHD system is designed to reduce the patient's time
and effort involved in performing each hemodialysis treatment and to be operated
by the patient with minimal or no assistance. Through a touch sensitive display
screen with instructions available on a graphic video display, the 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 PHD system is designed to evaluate the performance of the artificial kidney
in removing toxins from the patient's blood prior to each treatment to ensure
that the prescribed dose of hemodialysis is achieved during the
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treatment. The 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 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 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 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.
SERVICES SUPPORTING THE PHD SYSTEM
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 PHD system. The Company expects this
service network will provide: a) delivery and installation of the 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 PHD system), b) technical service through a 24 hour call center
and through field representatives who will maintain and repair all components of
the 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)
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.
The 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 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 PHD system.
Although the Company believes that the 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 PHD system to succeed, including the
uncertainty of obtaining regulatory clearance or approval and of achieving
market acceptance and development.
OTHER PRODUCT DEVELOPMENT
During 1997, the majority of the Company's resources will be devoted to the
development of the PHD system. As the Company nears the stage of commercial
production, resources will continue to be devoted to additional features,
service and support of the PHD system. At that time, resources will also be
directed toward using the platform technology incorporated in the PHD system to
develop follow-on products.
8
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BUSINESS AND MARKETING STRATEGY
The Company believes that the 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 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 frequent home hemodialysis using the 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 2,000, 7,000,
6,000 and 69,000 dialysis patients, respectively, in 1995 according to industry
data. Although the 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, nursing homes and hospitals in an acute care setting.
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 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 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 frequent 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 frequent home hemodialysis using the 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 promote the benefits of the 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.
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.
9
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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 PHD system through
publication in clinical journals and presentation at scientific conferences of
the results of these studies.
MANUFACTURING AND SUPPLIERS
The Company does not intend to initially manufacture any component of the PHD
system or related consumables. With respect to the 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 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 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.
Certain key components of the 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 PHD system will be custom
made and packaged to the Company's specifications. The Company is currently
working with a leading manufacturer and packager of pharmaceutical products to
provide the Company's needed dialysate 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.
RESEARCH AND DEVELOPMENT
As of December 31, 1996, the Company employed a research and development staff
of 55 full time employees, most of whom are engineers and technicians. In
addition, the Company used contractors on an as needed basis to assist in its
development process. The research and development staff is composed of
specialists in the fields of mechanical engineering, electrical engineering,
software engineering, biomedical and systems engineering, chemistry and
microbiology. For the years ended December 31, 1996, 1995 and 1994, the Company
incurred total research and development expenditures of approximately
$6,515,000, $4,261,000 and $1,809,000, respectively. During 1997, research and
development expenditures are expected to increase above historical levels
reported for the year ended December 31, 1996.
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 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
10
<PAGE>
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 affected 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.
GOVERNMENT REGULATION
FOOD AND DRUG ADMINISTRATION
The PHD system is regulated as a medical device by the FDA under the Federal
Food, Drug and Cosmetic Act (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 and 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, post-
market 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).
The Company submitted a 510(k) premarket notification for clearance of the PHD
system on March 5, 1996. The FDA notified the Company on July 17, 1996 of the
acceptance for formal review of the Company's 510(k) premarket notification
submission. Subsequently, on September 18, 1996, the FDA notified the Company of
additional data required to be submitted with regard to the PHD system. The FDA
also notified the Company of the requirement for clinical data to be included in
the 510(k) premarket notification submission. While the FDA withdrew the
Company's 510(k) filing due to the request for clinical data, the FDA also
notified the Company to resubmit the requested data, once available, in the form
of a new 510(k) premarket notification. The Company believes that a clinical
trial with a duration of 60-90 days will satisfy the FDA's requirements.
The Company is in the process of compiling the additional data requested by the
FDA on the PHD system and working with the FDA to develop a mutually agreeable
scope for a clinical study planned for the fourth quarter of 1997. The Company
anticipates compiling the clinical study data shortly thereafter and
resubmitting such data in the form of a new 510(k) premarket notification.
11
<PAGE>
The 510(k) clearance process is lengthy and uncertain and requires 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 obtain, requisite regulatory approvals or
clearances in the United States and other countries would prevent the marketing
of the 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.
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, the FDA is likely to
inspect the utilized manufacturing facilities and processes for compliance with
GMP. Even after the FDA has cleared a 510(k) submission, 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.
FOREIGN GOVERNMENT REGULATION
The Company plans to market the PHD system in several foreign markets.
Requirements pertaining to the 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 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 PHD system outside of the United States.
In parallel with U.S. regulatory efforts, the Company plans to obtain ISO 9001
certification in 1997, and also submit final production systems for CE mark
approval (the European equivalent to 510(k) clearance in the U.S.) during this
same time frame. The Company is anticipating CE mark approval in 1998 for its
product launch in Europe.
INTELLECTUAL PROPERTY
The Company owns one patent entitled "Hot Water Disinfection of Dialysis
Machines", U.S. No. 5, 591, 344, issued by the U.S. Patent and Trademark Office
(the "PTO") on January 7, 1997. The Company has received a notice of allowance
on several additional patent applications from the PTO. The Company has filed a
number of additional patent applications directed to a number of different
features of the 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
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countries for a limited period of time. The Company expects to file additional
patent applications in the United States directed to the PHD system as new
technology is developed. Additionally, the Company has obtained exclusive
licenses with respect to different features of the 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 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.
Allergan License. On March 11, 1996, the Company entered into a License
Agreement (the "Allergan License") with Allergan, Inc. for the use of a U.S.
patent entitled "Pressure Transducer Magnetically-Coupled Interface
Complementing Minimal Diaphragm Movement During Operation" issued on February
28, 1995, and its foreign counterparts (the "Allergan Patent"). The Company has
exclusive worldwide rights to the patented technology, limited to the field of
use of kidney dialysis machines and methods. The Allergan License has a duration
for as long as the Allergan Patent remains in effect and provides for royalty
payments to Allergan based on manufacturing of the PHD system, which
incorporates the patented technology. Royalty payments are to be made quarterly,
with minimum annual royalty payments beginning in 1998. If the Company fails to
pay the full minimum annual royalties, the License Agreement will terminate. If
the Company pays at least half of the minimum annual royalties but does not pay
such royalties in full, the License Agreement shall be converted to a non-
exclusive license. There can be no assurance that the Allergan Patent will
provide the Company significant exclusivity or benefits in its markets.
Furthermore, competitors may develop alternative technology that achieves the
same advantages as the Allergan Patent.
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
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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.
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.
EMPLOYEES
As of December 31, 1996, the Company had 65 full-time employees, 55 of whom were
employed in research and development capacities. The Company considers its
employee relations to be good.
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 upon
commercialization of the 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 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 PHD system.
FOREIGN AND DOMESTIC OPERATIONS
During 1996, the Company established Aksys Japan, K.K. ("AJKK"), a wholly-owned
Japanese subsidiary. AJKK had no employees as of December 31, 1996. The Company
has engaged the services of a business consultant to act on behalf of AJKK in
pursuing business partnership arrangements. The Company expects to finalize a
partnership arrangement during 1997. The balance of the Company's operations are
conducted at the headquarters located in Lincolnshire, Illinois.
14
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The primary purpose of AJKK is to establish a presence for regulatory, business
development and eventual technical and customer support as the Company
progresses through the stages of clinical studies, regulatory approval and
market launch. All efforts and decisions are directed from the Company's
headquarters in Lincolnshire, Illinois.
ITEM 2. PROPERTIES.
The Company leases approximately 41,500 square feet of office space in
Lincolnshire, Illinois to conduct its research, development and administrative
functions. All manufacturing will be contracted out to third party
subcontractors. The Company believes that its current facilities will be
adequate to accommodate all future expansion through at least 1999.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company is involved in litigation, none
of which in the opinion of the Company's management is likely to have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
There were no matters submitted for a vote of the Company's stockholders during
the fourth quarter ended December 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT.
The information under this Item is furnished pursuant to Instruction 3 to Item
401(b) of Regulation S-K. Executive Officers of the Company are elected by and
serve at the discretion of the Board of Directors.
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.
Dennis N. Cavender joined the Company in May 1996 as Vice President and Chief
Financial Officer. He was appointed Corporate Secretary in July 1996. From
April 1994 to May 1996 he served as Vice President and Chief Financial Officer
of Promega Corporation, a privately held bio-technology firm and manufacturer of
life science reagents. Prior to Promega, Mr. Cavender held various senior
financial, strategic planning and operational positions with Amdahl Corporation,
a manufacturer of mainframe computer systems (from 1981 to 1994), and Syntex
Corporation, a pharmaceutical company (from 1972 to 1981).
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Jeffrey Barrett joined the Company in September 1996 as Vice President,
Manufacturing. From 1989 to 1996, he worked in various manufacturing and
operations roles, most recently as Vice President of Operations at Haemonetics
Corporation, a publicly traded medical device manufacturer. Prior to
Haemonetics, Mr. Barrett worked in various senior manufacturing and operations
engineering roles at Calcomp, Inc., a leading manufacturer of display products.
Thomas F. Scully joined the Company in January 1996 as Vice President,
Operations. From 1971 to 1995, Mr. Scully worked at Baxter International, Inc.
in various operational roles, most recently as Vice President, Sales and
Operations of the Renal Division. In that role, Mr. Scully was involved
principally in the design, development and management of the Renal Division's
home care operations network.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the Nasdaq Stock Market under the symbol
AKSY. The following table lists the quarterly high and low prices of the Common
Stock for the period from May 17, 1996 (the date of the initial public offering)
through December 31, 1996.
<TABLE>
<CAPTION>
FISCAL FISCAL
YEAR QUARTER HIGH LOW
------ ------- ------- ------
<S> <C> <C> <C>
1996 2nd 23 1/2 10 3/4
3rd 17 3/4 8 3/4
4th 12 3/8 6 7/8
</TABLE>
There were 228 stockholders of record of the Company's Common Stock as of
January 31, 1997. The Company has not paid cash dividends to date, and
management anticipates that all future earnings will be retained for development
of the Company's business.
ITEM 6. SELECTED FINANCIAL DATA.
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
Annual Report on Form 10-K.
16
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<TABLE>
<CAPTION>
CUMULATIVE FROM
JANUARY 18,
1991
YEAR ENDED DECEMBER 31, (INCEPTION)
----------------------------------------------------------------------------- THROUGH
DECEMBER 31,
1992 1993 1994 1995 1996 1996
--------- ---------- ----------- ----------- ------------ --------------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Operating costs and expenses:
Research and development $ -- $ 598,748 $ 1,808,638 $ 4,261,230 $ 6,515,485 $ 13,184,101
Business development -- -- -- 359,530 547,767 907,297
General and administrative 36,124 213,923 266,418 876,613 2,559,441 4,032,463
--------- ---------- ----------- ----------- ------------ --------------
Operating loss (36,124) (812,671) (2,075,056) (5,497,373) (9,622,693) (18,123,861)
Other income, net 17,948 31,582 40,174 152,710 1,803,656 2,097,295
--------- ---------- ----------- ----------- ------------ --------------
Net loss $ (18,176) $ (781,089) $(2,034,882) $(5,344,663) $ (7,819,037) $(16,026,566)
========= ========== =========== =========== ============ ==============
Net loss per share(1) $ (0.52) $ $(0.63)
=========== ============
Weighted average shares
outstanding(1) 10,322,837 12,441,718
=========== ============
December 31,
-----------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ---------- ----------- ----------- ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and $ 2,943 $ 648,193 $ 1,007,015 $ 3,957,105 $ 45,649,934
short-term investments
Working capital 2,216 539,127 723,512 3,565,263 45,041,960
Total assets 26,505 845,679 1,476,892 4,693,450 50,147,510
Long-term liabilities(2) -- 22,861 84,436 35,761 19,630
Redeemable preferred stock -- 1,500,000 3,900,000 12,406,761 --
Deficit accumulated during (46,895) (827,984) (2,862,866) (8,210,562) (16,029,599)
development stage
Total stockholders' equity 25,778 (807,928) (2,845,166) (8,201,948) 48,684,094
(deficit)
</TABLE>
(1) Computed on the basis described in Note 1 of Notes to Consolidated Financial
Statements.
(2) Consists primarily of installment notes payable and capital lease
obligations.
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 PHD system, which is designed to enable
patients to perform hemodialysis at alternate sites, such as the patient's home
or a self-care clinic, on a more frequent basis. The Company has never generated
sales revenue and has incurred losses since its inception. At December 31, 1996,
the Company had a deficit accumulated during the development stage of $16.0
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 PHD system in the United
States or it is able to market the PHD system in countries other than the United
States.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through public and
private sales of its equity securities. Through December 31, 1996, the Company
had received net offering proceeds from public and private sales of equity
securities of approximately $64.6 million. Since its inception in 1991 through
December 31, 1996, the Company made $3.1 million of capital expenditures and
used $15.0 million in cash to support its operations. At December 31, 1996, the
Company had cash, cash equivalents and short-term investments of $45.6 million,
working capital of $45.0 million and long-term investments of $780,000.
The Company estimates that during 1997 it will spend approximately $16.2 million
for operations, manufacturing scale-up and commercialization of the 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 PHD system and pay for other preproduction costs of such
contractors payable by the Company, (ii) fund product testing and validation
including the purchase of preproduction PHD systems from such independent
contractors, (iii) conduct clinical studies using the PHD system, (iv) establish
and train a sales and marketing staff and (v) establish and train a customer
service and technical support staff. The Company expects to continue to incur
substantial expenses related to manufacturing scale-up and commercialization of
the PHD system and the protection of patent and other proprietary rights. The
Company believes that cash and investments as of December 31, 1996 are
sufficient to finance the Company's operations, except for working capital needs
related to production of machines, through December 31, 1998.
Generally, the Company intends to enter into contracts with its customers to
provide all products and services relating to the PHD system for a single
monthly price, which price would include a lease payment for the PHD system.
Production of the PHD system in quantities necessary for commercialization and
the supply of the 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 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 the
production of the 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 will need to seek other sources of capital (i.e.,
through the sale of additional equity securities) 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's funding needs will depend on many factors, including the timing
and costs associated with obtaining FDA clearance or approval, continued
progress in 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 or it is unable to obtain production
financing on commercially reasonable terms, 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 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.
The Company has not generated taxable income to date. At December 31, 1996, the
net operating losses available to offset future taxable income were
approximately $15.9 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.
18
<PAGE>
NOTE ON FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-K and in the future filings made by the
Company with the Securities and Exchange Commission and in the Company's written
and oral statements made by or with the approval of an officer of the Company
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. The words "believes," "expects," "estimates,"
"anticipates," and "will be," and similar words or expressions, identify
forward-looking statements made by or on behalf of the Company. These forward-
looking statements reflect the Company's views as of the date they are made with
respect to future events and financial performance, but are subject to many
uncertainties and factors which may cause the actual results of the Company to
be materially different from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties and factors include,
but are not limited to, (i) whether and when the Company will obtain clearance
from the FDA of a 510(k) premarket notification, and equivalent regulatory
clearances for Europe and Japan, and what additional clinical and other data the
Company might have to obtain in connection with seeking such clearances; (ii)
the Company's need to achieve manufacturing scale-up in a timely manner with its
primary manufacturing contractor, SeaMED Corporation, and its need to provide
for the efficient manufacturing of sufficient quantities of its products, (iii)
the Company's need to develop the marketing, distribution, customer service and
technical support and other functions critical to the success of the Company's
business plan, (iv) the uncertainty regarding the effectiveness and ultimate
market acceptance of the PHD system, the Company's primary product in
development, (v) the need to further establish the clinical benefits of daily
hemodialysis, (vi) the capital requirements necessary to fund the development
and commercialization of the Company's products and services and effectively
compete with its competitors, many of whom have substantially greater resources,
(vii) the potential adverse impact of possible changes to Medicare reimbursement
policies and rates and (viii) the Company's dependence on key personnel
(particularly Messrs. Kinet and Kenley) and on patents and proprietary
information. The Company does not undertake any obligation to update or revise
any forward-looking statement made by it or on its behalf, whether as a result
of new information, future events, or otherwise.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Research and development expenses were $6.5 million for the year ended December
31, 1996 compared to $4.3 million for the year ended December 31, 1995, an
increase of $2.2 million. The increase was primarily due to hiring additional
research and development personnel, making prototypes of the PHD system and pre-
production tooling and otherwise preparing for manufacturing scale-up.
Business development expenses increased $0.2 million from $0.4 million in 1995
to $0.6 million in 1996. The increase is due to business development expenses
in Japan and Europe.
General and administrative expenses were $2.6 million for the year ended
December 31, 1996 compared to $0.9 million for the year ended December 31, 1995,
an increase of $1.7 million. The increase was primarily due to hiring additional
management personnel, consolidating facilities into one location and developing
necessary infrastructure to support the future growth of the Company.
Net interest income was $1.8 million for the year ended December 31, 1996
compared to $153,000 for the year ended December 31, 1995, an increase of $1.6
million. The increase in net interest income was due to interest earned on the
investment of the net proceeds from the Company's initial public offering in May
1996.
As a result of the foregoing, the Company's net loss was $7.8 million for the
year ended December 31, 1996, an increase of $2.5 million from the $5.3 million
net loss for the year ended December 31, 1995.
19
<PAGE>
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 PHD system and
otherwise preparing for manufacturing scale-up.
Business development expenses were $360,000 for the year ended December 31, 1995
as the Company commenced market research and business development consulting
fees for Europe and Japan.
General and administrative expenses were $877,000 for the year ended December
31, 1995 compared to $266,000 for the year ended December 31, 1994, an increase
of $611,000. The increase was primarily due to hiring additional management
personnel and consultants to support the Company's continued development of the
PHD system and 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data are listed under
Item 14 in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the Directors of the Company is set forth in the
Proxy Statement under the heading "Election of Directors," which information is
incorporated herein by reference. Information regarding the executive officers
of the Company is included as Item 4A of Part 1 of this Form 10-K as permitted
by Instruction 3 to Item 401 (b) of Regulation S-K. Information required by
Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading
"Compliance with Section 16 (a) of the Securities Exchange Act of 1934," which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the Proxy
Statement under the heading "Compensation of Executive Officers," which
information is incorporated herein by reference.
20
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Beneficial
Ownership of Common Stock," which information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions is
set forth in the Proxy Statement under the heading "Election of Directors --
Compensation Committee Interlocks and Insider Participation" and "Election of
Directors -- Certain Relationships and Related Transactions," which information
is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements
1. The financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by the Independent Auditors'
report are filed as part of this report (see page 22).
2. Financial Statement Schedules.
None
3. Exhibits.
The exhibits contained in the Index to Exhibits are filed as part of
this report (see page 37).
(b) Reports on Form 8-K
On November 8, 1996, the Company filed a Form 8-K disclosing adoption of a
stockholder rights plan. There were no financial statements filed in
conjunction with such 8-K.
21
<PAGE>
AKSYS, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Report........................ 23
Consolidated Balance Sheets......................... 24
Consolidated Statements of Operations............... 25
Consolidated Statements of Stockholders' Equity..... 26
Consolidated Statements of Cash Flows............... 27
Notes to Consolidated Financial Statements.......... 28-35
22
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Aksys, Ltd.:
We have audited the accompanying consolidated balance sheets of Aksys, Ltd. and
Subsidiary (a development stage enterprise) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996 and for the period from January 18, 1991 (inception) through December 31,
1996. These consolidated financial statements are the responsibility of Aksys,
Ltd.'s management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aksys, Ltd. and
Subsidiary (a development stage enterprise) as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996 and for the period from January
18, 1991 (inception) through December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 24, 1997
23
<PAGE>
<TABLE>
<CAPTION>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Balance Sheets
December 31, 1996 and 1995
- -----------------------------------------------------------------------------
ASSETS 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,900,059 570,621
Short-term investments 34,749,875 3,386,484
Interest receivable 698,124 8,502
Prepaid expenses 81,075 6,213
Other current assets 56,613 46,319
- -----------------------------------------------------------------------------
Total current assets 46,485,746 4,018,139
Long-term investments 780,000 --
Property and equipment, net 2,737,620 603,382
Other assets 144,144 71,929
- -----------------------------------------------------------------------------
$ 50,147,510 4,693,450
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------
Current liabilities:
Accounts payable 1,141,829 316,400
Accrued liabilities 269,918 89,745
Current maturities of note payable -- 15,206
Current maturities of lease obligation 32,039 31,525
- -----------------------------------------------------------------------------
Total current liabilities 1,443,786 452,876
Note payable, less current maturities - 909
Lease obligation, less current maturities - 34,852
Other long-term liabilities 19,630 -
- -----------------------------------------------------------------------------
Total liabilities 1,463,416 488,637
- -----------------------------------------------------------------------------
Redeemable preferred stock - 12,406,761
- -----------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.01 per share,
1,000,000 shares authorized, 0 shares
issued and outstanding in 1996 and 1995 - -
Common stock, par value $.01 per share,
50,000,000 shares authorized, 13,708,555
and 861,457 shares issued and outstanding
in 1996 and 1995, respectively 137,086 8,614
Additional paid-in capital 64,573,686 -
Foreign currency translation adjustment 2,921 -
Deficit accumulated during development stage (16,029,599) (8,210,562)
- -----------------------------------------------------------------------------
Total stockholders' equity (deficit) 48,684,094 (8,201,948)
Commitments
- -----------------------------------------------------------------------------
$ 50,147,510 4,693,450
- -----------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994 and for the period
from January 18, 1991 (inception) through December 31, 1996
- ---------------------------------------------------------------------------------------------------------
Cumulative from
January 18, 1991
(inception)
through
1996 1995 1994 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research and development expenses $ 6,515,485 4,261,230 1,808,638 13,184,101
Business development expenses 547,767 359,530 - 907,297
General and administrative expenses 2,559,441 876,613 266,418 4,032,463
- --------------------------------------------------------------------------------------------------------
Operating loss (9,622,693) (5,497,373) (2,075,056) (18,123,861)
- --------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 1,811,585 163,613 44,933 2,053,002
Interest expense (7,929) (10,903) (4,759) (23,591)
Other income - - - 67,884
- --------------------------------------------------------------------------------------------------------
1,803,656 152,710 40,174 2,097,295
- --------------------------------------------------------------------------------------------------------
Net loss $ (7,819,037) (5,344,663) (2,034,882) (16,026,566)
- --------------------------------------------------------------------------------------------------------
Net loss per share (pro forma in 1995) $ (0.63) (0.52)
===========================
Weighted average shares outstanding 12,441,718 10,322,837
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994 and for
the period from January 18, 1991 (inception)
through December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit
Foreign accumulated
Common stock Additional currency during Total
----------------- paid-in translation development stockholders'
Shares Amount capital adjustment stage equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 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)
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net 3,565,000 35,650 52,189,375 - - 52,225,025
Conversion of redeemable preferred
stock 9,248,119 92,482 12,314,279 - - 12,406,761
Exercise of stock options 27,693 277 4,092 - - 4,369
Issuance of common stock for
services received 6,286 63 65,940 - - 66,003
Foreign currency translation
adjustment - - - 2,921 - 2,921
Net loss - - - - (7,819,037) (7,819,037)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 13,708,555 $137,086 64,573,686 2,921 (16,029,599) 48,684,094
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994 and for
the period from January 18, 1991 (inception)
through December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative from
January 18, 1991
(inception) through
1996 1995 1994 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,819,037) (5,344,663) (2,034,882) (16,026,566)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 347,323 149,776 75,042 582,365
Compensation expense related to stock options - - 3,240 3,240
Issuance of stock in exchange for services
rendered 66,003 - - 66,003
Changes in assets and liabilities:
Interest receivable (689,622) (6,685) 1,760 (698,124)
Prepaid expenses (74,862) 4,747 (2,178) (81,075)
Other current assets (10,294) (4,977) (32,021) (56,613)
Accounts payable 825,429 80,750 228,720 1,141,829
Accrued and other liabilities 202,724 36,798 (59,438) 292,469
Other (107,487) (58,282) (8,020) (188,620)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (7,259,823) (5,142,536) (1,827,777) (14,965,092)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (47,849,574) (8,810,484) (3,097,360) (59,913,588)
Proceeds from sale of investments 15,692,509 5,821,360 2,856,170 24,370,039
Purchases of property and equipment (2,432,615) (351,047) (203,453) (3,138,719)
Organizational costs incurred - - - (19,595)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,589,680) (3,340,171) (444,643) (38,701,863)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 52,229,394 333 - 52,302,400
Proceeds from issuance of preferred stock - 8,494,309 2,394,404 12,336,096
Proceeds from issuance of note payable - - 7,500 41,792
Repayment of notes payable (16,115) (13,825) (11,852) (41,792)
Repayment of lease obligation (34,338) (37,144) - (71,482)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 52,178,941 8,443,673 2,390,052 64,567,014
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,329,438 (39,034) 117,632 10,900,059
Cash and cash equivalents at beginning of period 570,621 609,655 492,023 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $10,900,059 570,621 609,655 10,900,059
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Capital lease obligation incurred to
acquire equipment - - 103,521 103,521
Conversion of redeemable preferred stock $12,406,761 - - 12,406,761
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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
and preparation for regulatory approval and commercial manufacturing. 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 EQUIVALENTS AND INVESTMENTS
Cash equivalents are comprised of certain highly liquid investments
with maturities of less than three months when purchased. In addition
to cash equivalents, the Company has investments in debt securities
that are classified as short-term (mature in more than 91 days but no
more than one year) or long-term (maturities beyond one year but no
more than 18 months). Such investments are classified as held-to-
maturity, as the Company has the ability and intent to hold such until
maturity. Investments held-to-maturity are carried at amortized cost,
adjusted for the amortization or accretion of discounts or premiums
without recognition of gains or losses that are deemed to be
temporary. Discounts and premiums are amortized or accreted over the
life of the related instrument as an adjustment to yield using the
straight-line method, which approximates the effective interest
method. Interest income is recognized when earned. At December 31,
1996, long-term investments consist of certificates of deposit to
secure a letter of credit for the required security deposit on the
Company's leased facilities. Fair value approximates carrying value
for all investments.
(b) PRINCIPLES OF CONSOLIDATION
On April 18, 1996 the Company established a subsidiary in Tokyo,
Japan. The consolidated financial statements include the accounts of
the Company and the wholly-owned subsidiary. All material intercompany
transactions and balances have been eliminated in consolidation.
(c) 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.
(d) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when incurred.
28
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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
Net loss per share is based on the weighted average number of shares
outstanding with common equivalent shares from stock options excluded
from the computation because their effect is antidilutive. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83,
options for common stock granted by the Company during the twelve
months immediately preceding the initial public offering of the
Company's common stock (using the treasury stock method and proposed
public offering price) have been included in the calculation of common
shares as if they were outstanding for all periods presented. The net
loss per share for the year ended December 31, 1995 has been presented
on a pro forma basis in lieu of historical net loss per share as such
historical information is not meaningful due to the mandatory
conversion of redeemable preferred stock in connection with the public
offering.
(g) RECLASSIFICATIONS
Certain prior year expenses have been reclassified to conform to the
1996 presentation.
(2) SHORT-TERM INVESTMENTS
Investments consisted of the following at December 31:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
----------------------- ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency Bonds $24,440,427 24,690,548 2,786,484 2,788,261
Commercial Paper 5,285,810 5,460,920 600,000 600,000
Corporate Bonds 3,992,171 4,001,570 -- --
International Bonds 1,031,467 1,034,350 -- --
- --------------------------------------------------------------------------------
$34,749,875 35,187,388 3,386,484 3,388,261
================================================================================
</TABLE>
29
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(3) PROPERTY AND EQUIPMENT
Property and equipment are summarized at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Estimated
Useful Life 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures 7 years $ 910,615 197,600
Leasehold improvements 10 years 1,133,204 19,386
Equipment 3-7 years 1,169,686 592,639
- -------------------------------------------------------------------------------------
3,213,505 809,625
Less accumulated depreciation and amortization (475,885) (206,243)
- -------------------------------------------------------------------------------------
$2,737,620 603,382
- -------------------------------------------------------------------------------------
</TABLE>
(4) NOTES PAYABLE
Notes payable at December 31 include the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1996 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, 1995)
plus 1.5%, and is payable in monthly
installments beginning January 31, 1994 until
December 31, 1996 $ -- 12,383
Interest accrues at 8% and is payable in monthly
installments beginning May 1994 until April 1997 -- 3,732
- -------------------------------------------------------------------------------------
16,115
Less current portion -- (15,206)
- -------------------------------------------------------------------------------------
$ -- 909
- -------------------------------------------------------------------------------------
Interest paid for the year ended December 31, 1996, 1995 and 1994 was $706, $2,684 and
$12,906, respectively.
</TABLE>
30
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
(5) Redeemable Preferred Stock
Redeemable preferred stock consisted of the following:
================================================================================
Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------
Balance at December 31, 1995 6,165,424 12,406,761
Conversion of redeemable preferred
stock into common stock (6,165,424) (12,406,761)
- --------------------------------------------------------------------------------
Balance at December 31, 1996 -- $ --
</TABLE>
================================================================================
During May 1996, all outstanding preferred stock was converted share-for-
share into common stock, after giving effect to the April 23, 1996 3-for-2
stock split, resulting in the issuance of 9,248,119 shares of common stock.
(6) Stockholders' Equity (Deficit)
On April 23, 1996, the Company effected a 3-for-2 stock split of its common
stock. All references in the consolidated financial statements to share and
per share data have been adjusted to reflect this split. 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. Upon adoption of the
stockholder rights plan during October 1996, the Company designated 50,000
shares as Junior Participating Preferred Stock, Series A (the "Series A
Shares"). No Series A Shares will be issued until the occurrence of a
triggering event, as defined in the stockholder rights plan.
On May 16, 1996, the Company completed an initial public offering of its
common stock in which 3,565,000 shares were sold by the Company resulting
in net proceeds of approximately $52.2 million. Upon the closing of the
offering, 6,165,424 shares of redeemable preferred stock (representing all
issued and outstanding shares of preferred stock) were automatically
converted into 9,248,119 shares of common stock. All shares of redeemable
preferred stock were canceled upon the conversion to common stock.
31
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(7) 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. Also,
during March 1996, the Company established the 1996 Stock Awards Plan
(together with the 1993 Stock Option Plan, the "Stock Plans") to provide
incentive awards to directors, employees and other key individuals in the
form of stock options, SARs, restricted stock and performance grants. The
Stock Plans provide 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 not to exceed 10 years. At the time the 1996 Stock
Awards Plan was established, the 1993 Stock Option Plan was terminated,
except with respect to options then outstanding. At December 31, 1996,
2,326,771 shares of common stock are reserved for issuance under the Stock
Plans, including 611,214 shares available for future grants under the 1996
Stock Awards Plan. The per share weighted-average fair value of stock
options granted during 1996 and 1995 was $3.08 and $0.06 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1996 expected dividend yield 0%, expected
volatility of 15%, risk-free interest rate of 6.0%, and an expected life of
5 years; 1995 expected dividend yield 0%, expected volatility of 15%, risk-
free interest rate of 6.25%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Stock Plans
and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date of its stock
options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
================================================================================
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net loss as reported $7,819,037 5,344,663
Pro forma net loss 8,052,159 5,349,746
Loss per share as reported 0.63 0.52
Pro forma loss per share 0.65 0.52
</TABLE>
================================================================================
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting period of 4 years and compensation cost for options
granted prior to January 1, 1995 is not considered.
32
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted-average
shares exercise price
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1993 422,250 $ 0.1067
Granted 793,175 0.1638
Canceled (16,500) 0.1067
- --------------------------------------------------------------------------------
Balance at December 31, 1994 1,198,925 0.1445
Granted 315,450 0.2203
Exercised (3,125) 0.1067
Canceled (64,000) 0.1067
- --------------------------------------------------------------------------------
Balance at December 31, 1995 1,447,250 0.1627
Granted 296,000 10.7855
Exercised (27,693) 0.1578
- --------------------------------------------------------------------------------
Balance at December 31, 1996 1,715,557 $ 1.9957
================================================================================
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.1067 - $16.00 and
5.6 years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was
1,032,745 and 513,069, respectively, and the weighted-average exercise
price of those options was $0.4398 and $0.1285, respectively.
(8) Stockholder Rights Plan
On October 28, 1996 the Company adopted a stockholder rights plan and
declared a dividend to be made to stockholders of record on November 8,
1996 of one preferred share purchase right on each outstanding share of the
Company's common stock. The stockholder rights plan was adopted to preserve
for the stockholders of the Company the long-term value of the Company in
the event of a takeover or the purchase of a significant block of the
Company's common stock and to protect the Company and its stockholders
against coercive takeover tactics. Prior to the time the rights become
exercisable, the rights will be evidenced by the certificates representing
shares of common stock of the Company and will be transferable only in
connection with the transfer of shares of common stock. If a person
acquires 15% of the Company's common stock (the rights will then be
exercisable), each right will entitle the holder thereof to purchase for an
exercise price of $85.00 (subject to adjustment), shares of the Company's
common stock having a market value of twice such exercise price, valued as
of the date of occurrence of such triggering event, subject to the right of
the Company to exchange the rights for common stock of the Company on a
one-for-one basis. The Company will be entitled to redeem the rights at
$0.01 per right at any time before public disclosure that a 15% position
has been acquired. The rights will expire on October 28, 2006, unless
previously redeemed or exercised.
(9) 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, 1996, the Company has a net
operating loss and research and development credit carryforwards for
Federal income tax purposes of approximately $15,874,000 and $359,000,
respectively. These carryforwards expire between 2008 and 2011. 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.
33
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The net deferred tax assets are summarized at December 31 as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 6,556,000 3,161,000
Research and development credit carryforwards 359,000 276,000
Other 12,000 27,000
- --------------------------------------------------------------------------------
6,927,000 3,464,000
Deferred tax liability depreciation 87,000 35,000
- --------------------------------------------------------------------------------
6,840,000 3,429,000
Less valuation allowance (6,840,000) (3,429,000)
- --------------------------------------------------------------------------------
Net deferred taxes $ -- --
================================================================================
</TABLE>
(10) 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 years ended December 31, 1996 and 1995 was $12,372
and $3,151, respectively.
(11) Employee Stock Purchase Plan
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 15% discount to
market, based on eligible payroll deductions. Market price is calculated as
the lower of the average bid and ask price on the first day of the plan
year and the last day of the plan year. A total of 200,000 shares of common
stock are reserved for issuance under the Stock Purchase Plan. Total shares
to be issued in January 1997 based on 1996 payroll withholding was 3,650.
(12) Commitments
Leases
During September 1996, the Company entered into a new lease agreement,
accounted for as an operating lease, for its offices and laboratory
research facilities. The term of the lease is ten years; however, the
Company may exercise its option to terminate the lease in 2003 by giving
written notice to the landlord and paying a termination fee of
approximately $350,000. Included in both research and development expenses
and general and administrative expenses for the years ended December 31,
1996, 1995 and 1994 were $332,423, $108,996 and $56,241, respectively, for
rent expense under operating leases for the Company's offices and
laboratory research facilities. The Company has commitments for future
minimum rent payments under the lease agreement as follows:
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
1997 $ 338,750
1998 350,617
1999 373,085
2000 384,290
2001 395,772
Thereafter 2,008,877
================================================================================
</TABLE>
34
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 1994 the Company entered into a capital lease for computer-
aided engineering equipment and software (equipment). At December 31, 1996
and 1995 the gross amount of equipment recorded under this capital lease
was $109,566 and related accumulated depreciation was $109,566 and $33,018,
respectively.
Depreciation of assets held under capital lease is included in depreciation
and amortization. Future minimum capital lease payments as of December 31,
1996 are:
================================================================================
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Year ending December 31, 1997 $ 36,798
- --------------------------------------------------------------------------------
Total minimum lease payments 36,798
Less amount representing interest 4,759
- --------------------------------------------------------------------------------
Present value of minimum lease payments 32,039
Less current maturities of lease obligation 32,039
- --------------------------------------------------------------------------------
Lease obligation, less current maturities $ --
</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 agreements are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1997 $ 45,000
1998 75,000
1999 95,000
2000 125,000
2001 155,000
2002 185,000
2003 215,000
2004 255,000
All subsequent years 255,000
================================================================================
</TABLE>
Total royalty payments for the years ended December 31, 1996, 1995 and 1994
were $35,000, $5,000, and $5,000, respectively.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
February, 1997.
AKSYS, LTD.
By /s/ Dennis N. Cavender
-----------------------------
Dennis N. Cavender
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on this 28th day of February, 1997.
SIGNATURE CAPACITY
--------- --------
/s/ Lawrence H.N. Kinet Chairman, Chief Executive Officer and Director
- --------------------------- (Principal Executive Officer)
Lawrence H.N. Kinet
/s/ Dennis N. Cavender Vice President and Chief Financial
- --------------------------- Officer (Principal Financial Officer and
Dennis N. Cavender Principal Accounting Officer)
/s/ Rodney S. Kenley President, Chief Operating Officer and Director
- ---------------------------
Rodney S. Kenley
/s/ Larry G. Gerdes Director
- ---------------------------
Larry G. Gerdes
/s/ Peter H. McNerney Director
- ---------------------------
Peter H. McNerney
/s/ W. Dekle Rountree, Jr. Director
- ---------------------------
W. Dekle Rountree, Jr.
/s/ Bernard R. Tresnowski Director
- ---------------------------
Bernard R. Tresnowski
36
<PAGE>
AKSYS, LTD.
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Aksys, Ltd. (2)
3.2 Amended and Restated By-Laws of Aksys, Ltd. (1)
4.1 Form of certificate representing shares of Common Stock,
$.01 par value per share (1)
4.2 Registration Agreement, dated as of April 2, 1993, among
the Company and certain stockholders of the Company (1)
4.3 Amendment No. 1 to Registration Agreement, dated as of
September 22, 1995, among the Company and certain
stockholders of the Company (1)
10.1 Aksys, Ltd. 1993 Stock Option Plan (1)
10.2 Aksys, Ltd. 1996 Stock Awards Plan (1)
10.3 Severance, Confidentiality and Noncompetition Agreement,
dated as of October 1, 1994, between the Company and
Lawrence H.N. Kinet (1)
10.4 Severance, Confidentiality and Noncompetition Agreement,
dated as of April 2, 1993, between the Company and
Rodney S. Kenley (1)
10.5 Manufacturing Agreement, dated as of November 15, 1994,
between the Company and SeaMED Corporation (1)
10.6 Manufacturing Agreement, dated as of January 23, 1996,
between the Company and Texas Medical Products, Inc. (1)
10.7 License Agreement, dated as of April 1, 1993, between the
Company and Zbylut J. Twardowski (1)
10.8 License Agreement, dated as of April 1, 1993, between the
Company and Cynthia P. Walters (1)
10.9 Form of Indemnification Agreement (1)
10.10 Severance, Confidentiality and Noncompetition Agreement,
dated as of May 28, 1996, between the Company and
Dennis N. Cavender (2)
10.11 License Agreement, dated as of March 11, 1996, between the Company
and Allergan, Inc. (2)
11 Statement regarding computation of net loss per share (2)
21 Subsidiaries of the Company (1)
23.1 Consent of KPMG Peat Marwick LLP (2)
27 Financial Data Schedule (2)
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-2492)
(2) Filed herewith
37
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
AKSYS, LTD.
(Adopted in accordance with Sections 242 and 245 of the General Corporation
Law of the State of Delaware. This Restated Certificate of Incorporation only
restates and integrates but does not further amend the certificate of
incorporation of Aksys, Ltd. as heretofore amended or supplemented and there
is no discrepancy between those provisions and the provisions of
this restated certificate)
ARTICLE I - Name
----------------
The name of the corporation is Aksys, Ltd. (hereinafter referred to as
the "Corporation").
ARTICLE II - Registered Office
------------------------------
The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, Wilmington, Delaware 19801. The name of the
registered agent of the Corporation at that address is The Corporation Trust
Company.
ARTICLE III - Purpose
---------------------
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law").
ARTICLE IV - Capital Stock
--------------------------
Part A. General.
------ -------
The maximum number of shares of stock that the Corporation is
authorized to have outstanding at any one time is 51,000,000 shares, consisting
of:
(1) 1,000,000 shares of Preferred Stock, par value $0.01 per share
(the "Preferred Stock"); and
(2) 50,000,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock").
<PAGE>
The Common Stock and the Preferred Stock are hereafter collectively
referred to as the "Stock."
Part B. Preferred Stock.
------ ---------------
Authority is hereby expressly vested in the board of directors of the
Corporation, subject to the provisions of this ARTICLE IV and to the limitations
prescribed by law, to authorize the issuance from time to time of one or more
series of Preferred Stock. The authority of the board of directors with respect
to each series shall include, but not be limited to, the determination or fixing
of the following by resolution or resolutions adopted by the affirmative vote of
a majority of the total number of the directors then in office:
(a) The designation of such series;
(b) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the relation which such dividends shall
bear to the dividends payable on any other class or classes or series of the
Corporation's capital stock and whether such dividends shall be cumulative or
non-cumulative;
(c) Whether the shares of such series shall be subject to redemption
for cash, property or rights, including securities of any other corporation, by
the Corporation or upon the happening of a specified event and, if made subject
to any such redemption, the times or events, prices, rates, adjustments and
other terms and conditions of such redemptions;
(d) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(e) Whether or not the shares of such series shall be convertible
into, or exchangeable for, at the option of either the holder or the Corporation
or upon the happening of a specified event, shares of any other class or classes
or of any other series of the same class of the Corporation's capital stock and,
if provision be made for conversion or exchange, the times or events, prices,
rates, adjustments and other terms and conditions of such conversions or
exchanges;
(f) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock;
(g) The rights of the holders of the shares of such series upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
(h) The provisions as to voting, optional and/or other special rights
and preferences, if any, including, without limitation, the right to elect one
or more directors.
-2-
<PAGE>
Part C. Common Stock.
------ ------------
Except as otherwise provided by the Delaware General Corporation Law,
by this Restated Certificate of Incorporation and subject to the rights of
holders of any series of Preferred Stock, the holders of record of Common Stock
shall share ratably in all dividends payable in cash, stock or otherwise and
other distributions, whether in respect of liquidation or dissolution (voluntary
or involuntary) or otherwise and, are subject to all the powers, rights,
privileges, preferences and priorities of any series of Preferred Stock as
provided herein or in any resolution or resolutions adopted by the board of
directors pursuant to authority expressly vested in it by the provisions of this
ARTICLE IV.
(a) The Common Stock shall not be convertible into, or exchangeable
for, shares of any other class or classes or of any other series of the same of
the Corporation's capital stock.
(b) No holder of Common Stock shall have any preemptive,
subscription, redemption, conversion or sinking fund rights with respect to the
Common Stock, or to any obligations convertible (directly or indirectly) into
stock of the Corporation whether now or hereafter authorized.
(c) Except as otherwise provided by the Delaware General Corporation
Law, by this Restated Certificate of Incorporation and subject to the rights of
holders of any series of Preferred Stock, all of the voting power of the
stockholders of the Corporation shall be vested in the holders of the Common
Stock, and each holder of Common Stock shall have one vote for each share held
by such holder on all matters voted upon by the stockholders of the Corporation.
Part D. Other Provisions.
------ ----------------
(a) Registration of Transfer. The Corporation shall keep at its
principal office a register for the registration of the Stock. Upon the
surrender of any certificate representing Stock at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (at the Corporation's expense) a new certificate or certificates in
exchange therefor representing in the aggregate the number of shares of Stock
represented by the surrendered certificate. Each such new certificate shall be
registered in such name and shall represent such number of shares of Stock as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate.
(b) Replacement. Upon receipt of evidence reasonably satisfactory to
the Corporation (an affidavit of the registered holder shall be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing shares of any class of Stock, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor, its own agreement shall be satisfactory), or, in the
case of any such mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of such class
represented by such lost,
-3-
<PAGE>
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate.
(c) Notices. Except as otherwise expressly provided hereunder, all
notices referred to herein shall be in writing and shall be delivered by
registered or certified mail, return receipt requested and postage prepaid, or
by reputable overnight courier service, charges prepaid, and shall be deemed to
have been given when so mailed or sent (i) to the Corporation, at its principal
executive offices and (ii) to any stockholder, at such holder's address as it
appears in the stock records of the Corporation (unless otherwise indicated by
any such holder ).
ARTICLE V - Existence
---------------------
The Corporation is to have perpetual existence.
ARTICLE VI - Bylaws
-------------------
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
make, alter, amend, change, add to or repeal the bylaws of the Corporation by
the affirmative vote of a majority of the total number of directors then in
office. Any alteration or repeal of the bylaws of the Corporation by the
stockholders of the Corporation shall require the affirmative vote of at least a
majority of the voting power of the then outstanding shares of capital stock of
the Corporation entitled to vote on such alteration or repeal, subject to
ARTICLE IX hereof and ARTICLE VII of the Corporation's bylaws.
ARTICLE VII - Stockholders and Directors
----------------------------------------
Part A. Stockholder Action. Election ofdirectors need not be by
written ballot unless the bylaws of the Corporation so provide. Subject to the
rights of any series of Preferred Stock, from and after the date on which the
Common Stock of the Corporation is registered pursuant to the Securities
Exchange Act of 1934, as amended (the "1934 Act"), (i) any action required or
permitted to be taken by the stockholders of the Corporation must be effected at
an annual or special meeting of stockholders of the Corporation and may not be
effected in lieu thereof by any consent in writing by such stockholders, (ii)
special meetings of stockholders of the Corporation may be called only by either
the board of directors pursuant to a resolution adopted by the affirmative vote
of the majority of the total number of directors then in office or by the chief
executive officer of the Corporation and (iii) advance notice of stockholder
nominations of persons for election to the Board of Directors of the Corporation
and of business to be brought before any annual meeting of the stockholders by
the stockholders of the Corporation shall be given in the manner provided in the
bylaws of the Corporation.
Part B. Number of Directors and Term of Office. Subject to any rights
of the holders of any series of Preferred Stock to elect additional directors
under specified circumstances,
-4-
<PAGE>
the number of directors which shall constitute the Board of Directors of the
Corporation shall be such number as shall from time to time be fixed by
resolution adopted by the affirmative vote of a majority of the total number of
directors then in office. The directors of the Corporation shall be divided
into three classes: Class I, Class II and Class III. Membership in such class
shall be as nearly equal in number as possible. The term of office of the
initial Class I directors shall expire at the annual election of directors by
the stockholders of the Corporation in 1997, the term of office of the initial
Class II directors shall expire at the annual election of directors by the
stockholders of the Corporation in 1998 and the term of office of the initial
Class III directors shall expire at the annual election of directors by the
stockholders of the Corporation in 1999, or thereafter when their respective
successors in each case are elected by the stockholders and qualified, subject
however, to prior death, resignation, retirement, disqualification or removal
from office for cause. At each succeeding annual election of directors by the
stockholders of the Corporation beginning in 1997, the directors chosen to
succeed those whose terms then expire shall be identified as being of the same
class as the directors they succeed and shall be elected for a term expiring at
the third succeeding annual election of directors by the stockholders of the
Corporation, or thereafter when their respective successors in each case are
elected by the stockholders and qualified. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case shall a decrease in the
number of directors shorten the term of any incumbent director.
Part C. Removal and Resignation. No director may be removed from
office without cause and without the affirmative vote of the holders of a
majority of the voting power of the then outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors voting
together as a single class; provided, however, that if the holders of any class
or series of capital stock are entitled by the provisions of this Restated
Certificate of Incorporation (it being understood that any references to this
Restated Certificate of Incorporation shall include any duly authorized
certificate of designation) to elect one or more directors, such director or
directors so elected may be removed without cause only by the vote of the
holders of a majority of the outstanding shares of that class or series entitled
to vote. Any director may resign at any time upon written notice to the
Corporation.
Part D. Vacancies and Newly Created Directorships. Subject to any
rights of the holders of any series of Preferred Stock to fill such newly
created directorships or vacancies, any newly created directorships resulting
from any increase in the authorized number of directors and any vacancies in the
Board of Directors resulting from death, resignation, disqualification, removal
or other cause shall, unless otherwise provided by law or by resolution approved
by the affirmative vote of a majority of the total number of directors then in
office, be filled only by resolution approved by the affirmative vote of a
majority of the total number of directors then in office, and any director so
chosen shall hold office until the next election of the class for which such
director shall have been chosen, and until his successor shall have been duly
elected and qualified, unless he shall resign, die, become disqualified or be
removed for cause.
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ARTICLE VIII - General Provisions
---------------------------------
Part A. Dividends. The board of directors shall have authority from
time to time to set apart out of any assets of the Corporation otherwise
available for dividends a reserve or reserves as working capital or for any
other purpose or purposes, and to abolish or add to any such reserve or reserves
from time to time as said board may deem to be in the interest of the
Corporation; and said board shall likewise have power to determine in its
discretion, except as herein otherwise provided, what part of the assets of the
Corporation available for dividends in excess of such reserve or reserves shall
be declared in dividends and paid to the stockholders of the Corporation.
Part B. Issuance of Stock. The shares of all classes of stock of the
Corporation may be issued by the Corporation from time to time for such
consideration as from time to time may be fixed by the board of directors of the
Corporation, provided that shares of stock having a par value shall not be
issued for a consideration less than such par value, as determined by the board.
At any time, or from time to time, the Corporation may grant rights or options
to purchase from the Corporation any shares of its stock of any class or classes
to run for such period of time, for such consideration, upon such terms and
conditions, and in such form as the board of directors may determine. The board
of directors shall have authority, as provided by law, to determine that only a
part of the consideration which shall be received by the Corporation for the
shares of its stock which it shall issue from time to time, shall be capital
provided, however, that, if all the shares issued shall be shares having a par
value, the amount of the part of such consideration so determined to be capital
shall be equal to the aggregate par value of such shares. The excess, if any, at
any time, of the total net assets of the Corporation over the amount so
determined to be capital, as aforesaid, shall be surplus. All classes of stock
of the Corporation shall be and remain at all times nonassessable.
The board of directors is hereby expressly authorized, in its
discretion, in connection with the issuance of any obligations or stock of the
Corporation (but without intending hereby to limit its general power so to do in
other cases), to grant rights or options to purchase stock of the Corporation of
any class upon such terms and during such period as the board of directors shall
determine, and to cause such rights to be evidenced by such warrants or other
instruments as it may deem advisable.
Part C. Inspection of Books and Records. The board of directors shall
have power from time to time to determine to what extent and at what times and
places and under what conditions and regulations the accounts and books of the
Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware, unless and until authorized so to do by resolution of the
board of directors or of the stockholders of the Corporation.
Part D. Location of Meetings, Books and Records. Except as otherwise
provided in the bylaws, the stockholders of the Corporation and the board of
directors may hold their meetings and have an office or offices outside of the
State of Delaware and, subject to the provisions of the laws of said State, may
keep the books of the Corporation outside of said State at such places as may,
from time to time, be designated by the board of directors.
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ARTICLE IX - Amendments
-----------------------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation in the
manner now or hereinafter prescribed herein and by the laws of the State of
Delaware, and all rights conferred upon stockholders herein are granted subject
to this reservation. Notwithstanding anything contained in this Restated
Certificate of Incorporation to the contrary, Parts A, B and C of ARTICLE IV,
Parts A, C, D and E of ARTICLE VII, ARTICLE X, ARTICLE XII and this ARTICLE IX
of this Restated Certificate of Incorporation shall not be altered, amended or
repealed and no provision inconsistent therewith shall be adopted without the
affirmative vote of the holders of at least 66 2/3% of the voting power of the
then outstanding shares of capital stock of the Corporation entitled to vote on
such alteration, amendment or repeal, voting together as a single class (other
than any alteration or amendment to Part A of ARTICLE IV that increases the
authorized number of shares of Preferred Stock or Common Stock).
ARTICLE X - Liability
---------------------
Part A. Limitation of Liability.
------ -----------------------
(a) To the fullest extent permitted by the Delaware General
Corporation Law as it now exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), and except as otherwise provided in the Corporation's bylaws, no
director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages arising from a breach of fiduciary duty owed
to the Corporation or its stockholders.
(b) Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
Part B. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved (including
involvement as a witness) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding"), by reason of the
fact that he or she is or was a director or officer of the Corporation or, while
a director or officer of the Corporation, is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (an "indemnitee"), whether the basis of
such proceeding is alleged action in an official capacity as a director or
officer or in any other capacity while serving as a director or officer, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments,
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fines, excise exercise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in Part C of this ARTICLE X with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by such
indemnitee only if such proceeding (or part thereof) was authorized by the board
of directors of the Corporation. The right to indemnification conferred in this
Part B of ARTICLE X shall be a contract right and shall include the obligation
of the Corporation to pay the expenses incurred in defending any such proceeding
in advance of its final disposition (an "advance of expenses"); provided,
however, that, if and to the extent that the Delaware General Corporation Law
requires, an advance of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (a "final adjudication") that such indemnitee is not entitled to be
indemnified for such expenses under this Part B or otherwise. The Corporation
may, by action of its board of directors, provide indemnification to employees
and agents of the Corporation with the same or lesser scope and effect as the
foregoing indemnification of directors and officers.
Part C. Procedure for Indemnification. Any indemnification of a
director or officer of the Corporation or advance of expenses under Part B of
this ARTICLE X shall be made promptly, and in any event within forty-five days
(or, in the case of an advance of expenses, twenty days), upon the written
request of the director or officer. If a determination by the Corporation that
the director or officer is entitled to indemnification pursuant to this ARTICLE
X is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advance of expenses, in whole or in part, or if payment in full pursuant to such
request is not made within forty-five days (or, in the case of an advance of
expenses, twenty days), the right to indemnification or advances as granted by
this ARTICLE X shall be enforceable by the director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such action shall also be indemnified by the Corporation. It
shall be a defense to any such action (other than an action brought to enforce a
claim for the advance of expenses where the undertaking required pursuant to
Part B of this ARTICLE X, if any, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of such defense shall be on the
Corporation. Neither the failure of the Corporation (including its board of
directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its board of
directors, independent legal counsel or its stockholders) that the claimant has
not met
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such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
The procedure for indemnification of other employees and agents for whom
indemnification is provided pursuant to Part B of this ARTICLE X shall be the
same procedure set forth in this Part C for directors or officers, unless
otherwise set forth in the action of the board of directors providing
indemnification for such employee or agent.
Part D. Insurance. The Corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee or agent of the Corporation or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss asserted against him or her and incurred by him or
her in any such capacity, whether or not the Corporation would have the power to
indemnify such person against such expenses, liability or loss under the
Delaware General Corporation Law.
Part E. Service for Subsidiaries. Any person serving as a director,
officer, employee or agent of another corporation, partnership, limited
liability company, joint venture or other enterprise, at least 50% of whose
equity interests are owned by the Corporation (a "subsidiary" for this ARTICLE
X) shall be conclusively presumed to be serving in such capacity at the request
of the Corporation.
Part F. Reliance. Persons who after the date of the adoption of this
provision become or remain directors or officers of the Corporation or who,
while a director or officer of the Corporation, become or remain a director,
officer, employee or agent of a subsidiary, shall be conclusively presumed to
have relied on the rights to indemnity, advance of expenses and other rights
contained in this ARTICLE X in entering into or continuing such service. The
rights to indemnification and to the advance of expenses conferred in this
ARTICLE X shall apply to claims made against an indemnitee arising out of acts
or omissions which occurred or occur both prior and subsequent to the adoption
hereof.
Part G. Non-Exclusivity of Rights. The rights to indemnification and
to the advance of expenses conferred in this ARTICLE X shall not be exclusive of
any other right which any person may have or hereafter acquire under this
Restated Certificate of Incorporation or under any statute, by-law, agreement,
vote of stockholders or disinterested directors or otherwise.
Part H. Merger or Consolidation. For purposes of this ARTICLE X,
references to "the Corporation" shall include, in addition to the resulting
Corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent Corporation, or is or
was serving at the request of such constituent Corporation as a director,
officer, employee or agent of another Corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this ARTICLE X
with respect to the resulting or surviving Corporation as he or she would have
with respect to such constituent Corporation if its separate existence had
continued.
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ARTICLE XI - Business Combinations
----------------------------------
The Corporation expressly elects to be governed by Section 203 of the
Delaware General Corporation Law.
ARTICLE XII - Fair Price Provision
----------------------------------
Part A. Required Vote for Certain Business Combinations. In addition
to any affirmative vote required by law or by this Restated Certificate of
Incorporation, and except as otherwise expressly provided in Part B of this
ARTICLE XII:
(a) any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (i) any Interested Stockholder (as herein defined)
or (ii) any other corporation or entity (whether or not itself an Interested
Stockholder) which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of any Interested Stockholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate of any Interested Stockholder of any
assets of the Corporation or any Subsidiary having an aggregate Fair Market
Value (as hereinafter defined) of $10,000,000 or more; or
(c) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of
any Interested Stockholder in exchange for cash, securities or other property
(or a combination thereof) having an aggregate Fair Market Value of $10,000,000
or more; or
(d) the adoption of any plan or proposal for the liquidation,
dissolution or winding up of the Corporation proposed by or on behalf of any
Interested Stockholder or any Affiliate of any Interested Stockholder; or
(e) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or consolidation
of the Corporation with any of its Subsidiaries or any other transaction
(whether or not with or into or otherwise involving any Interested Stockholder)
which has the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or convertible securities
of the Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate of any Interested Stockholder;
shall require, subject to Part B of this ARTICLE XII, the affirmative vote of
the holders of at least 66 2/3% of the voting power of the then outstanding
Voting Stock (as hereinafter defined), voting together as a single class at a
duly constituted meeting of stockholders called expressly for such purpose.
Such affirmative vote shall be required notwithstanding the fact that no vote
may be require or that a lesser percentage may be specified by law.
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Part B. Definition of "Business Combination." The term "Business
Combination" as used in this ARTICLE XII shall mean any transaction which is
referred to in any one or more of clauses (a) through (e) of Part A of ARTICLE
XII; provided, however, that the term "Business Combination" shall not include
any transaction which occurs prior to the date of the closing of the initial
public offering of the Common Stock of the Corporation.
Part C. Conditions to be Satisfied. The provisions of Part A of this
ARTICLE XII shall not be applicable to any particular Business Combination, and
such Business Combination shall require only such affirmative vote, if any, as
is required by law and any other provisions of this Restated Certificate of
Incorporation, if all of the conditions specified in either of the following
Paragraphs (a) or (b) are met:
(a) The Business Combination shall have been approved by the
affirmative vote of a majority of the Continuing Directors then in office.
(b) All of the following conditions shall have been met:
(i) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of Common Stock in such
Business Combination shall be at least equal to the highest of the
following:
a. (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers fees)
paid by the Interested Stockholder for any shares of Common Stock
acquired by it (1) within the two-year period immediately prior to and
including the first public announcement of the proposal of the
Business Combination (the "Announcement Date") or (2) in the
transaction in which it became an Interested Stockholder, whichever is
higher;
b. the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Stockholder
became an Interested Stockholder (such latter date is referred to in
this ARTICLE XII as the "Determination Date"), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of shares of any other
class of outstanding Voting Stock in such Business Combination shall be at
least equal to the highest of the following (it being intended that the
requirements of this paragraph (ii) shall be required to be met with
respect to every other class of outstanding Voting Stock, whether or not
the Interested Stockholder has previously acquired any shares of a
particular class of Voting Stock):
a. (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid by the Interested Stockholder for any shares of such class of
Voting Stock acquired by it (1) within the
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two-year period immediately prior to and including the Announcement
Date or (2) in the transaction in which it became an Interested
Stockholder, whichever is higher;
b. (if applicable) the highest preferential amount per share
which the holders of shares of such class of Voting Stock are entitled
to receive from the corporation in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the corporation;
and
c. the Fair Market Value per share of such class of Voting Stock
on the Announcement Date or on the Determination Date, whichever is
higher.
(iii) The consideration to be received by holders of a particular
class of outstanding Voting Stock shall be in cash or in the same form as
the Interested Stockholder has previously paid for shares of such class of
Voting Stock. If the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration for such a class of Voting Stock shall be either cash or the
form used to acquire the largest number of shares of such class of Voting
Stock previously acquired by such Interested Stockholder.
(iv) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (a)
there shall have been (1) no failure to declare and pay at regular dates
therefor the full amount of any dividends (whether or not cumulative)
payable on any series of Preferred Stock, except as approved by the
affirmative vote of a majority of the Continuing Directors; (2) no
reduction in the annual rate of dividends paid on the Common Stock (except
as necessary to reflect any subdivision of the Common Stock), except as
approved by the affirmative vote of a majority of the Continuing Directors;
and (3) an increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has the
effect of reducing the number of outstanding shares of the Common Stock,
unless the failure so to increase such annual rate is approved by the
affirmative vote of a majority of the Continuing Directors; the beneficial
owner of any additional shares of Voting Stock except as part of the
transaction which results in such Interested Stockholder becoming an
Interested Stockholder.
(v) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a stockholder),
of any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business Combination
or otherwise, unless such transaction shall have been approved or ratified
by the affirmative vote of a majority of the Continuing Directors after
such person shall have become an Interested Stockholder.
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the 1934 Act
and the rules and
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regulations thereunder (or any subsequent provisions replacing such 1934
Act, rules and regulations) shall be mailed to public stockholders of the
Corporation at least 20 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is required
to be mailed pursuant to such 1934 Act, rules or regulations or subsequent
provisions thereof).
Part D. Certain Definitions. For the purposes of this ARTICLE XII:
(a) A "person" shall mean an individual, a Group Acting in Concert, a
corporation, a partnership, an association, a joint stock company, a trust, a
business trust, a government or political subdivision, any unincorporated
organization or any other association or entity.
(b) "Interested Stockholder" shall mean any person who or which:
(i) is the beneficial owner, directly or indirectly, of 15% or more
of the voting power of the then outstanding shares of Voting Stock;
(ii) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to and including the date in question was
the beneficial owner, directly or indirectly, of 15% or more of the voting
power of the then outstanding shares of Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock which were at any time within the
two-year period immediately prior to and including the date in question
beneficially owned by any Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act of 1933 (or any subsequent provisions replacing such Act or
the rules and regulations promulgated thereunder) and such Assignment or
succession was not approved by a majority of the Continuing Directors;
provided, however, that the term "Interested Stockholder" shall not include
(1) the Corporation; (2) any Subsidiary of the Corporation; (3) any person,
directly or indirectly, owning of the record or beneficially 100% of the
issued and outstanding capital stock of the Corporation (other than
directors' qualifying shares, if any); (4) any employee benefit plan or
compensation arrangement of the Corporation or any Subsidiary of the
Corporation; (5) any person holding shares of Voting Stock organized,
appointed or established by the Corporation or any Subsidiary for or
pursuant to the terms of any such employee benefit plan or compensation
arrangement; or (6) any Grandfathered Person unless such Grandfathered
Person becomes, after the closing of the initial public offering of shares
of Common Stock of the Corporation, the beneficial owner of more than the
Grandfathered Percentage of the Voting Stock then outstanding.
Notwithstanding the foregoing, no person shall become an "Interested
Stockholder" as the result of an acquisition of Voting Stock by the
Corporation which, by reducing the number of shares outstanding, increase
the proportionate number of shares
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beneficially owned by such person to 15% (or, if applicable, the
Grandfathered Percentage with respect to such person) or more of the voting
power of the then outstanding shares of Voting Stock; provided, however,
that if a person shall become the beneficial owner of 15% (or, if
applicable, the Grandfathered Percentage with respect to such person) or
more of the voting power of the then outstanding shares of Voting Stock by
reason of share purchases by the Corporation and shall, after such share
purchases by the Corporation, become the beneficial owner of any additional
shares of Voting Stock of the Corporation (other than any shares of Voting
Stock issued to such person as a result of a stock dividend, stock split,
reclassification, recapitalization, or other similar transaction involving
the issuance of shares of Voting Stock on a pro rata basis to all holders
of Voting Stock), then such person shall be deemed to be an "Interested
Stockholder" if immediately thereafter the voting power of the shares of
Voting Stock beneficially owned by such person equals or exceeds 15% (or in
the case of a Grandfathered Person, the Grandfathered Percentage with
respect to such person) or more of the voting power of all of the shares of
Voting Stock then outstanding.
(c) A person shall be deemed the "beneficial owner" of, and shall be
deemed to beneficially own, any Voting Stock:
(i) which such person or any of such person's Affiliates or
Associates, directly or indirectly beneficially owns (as determined
pursuant to Rule 13d-3 of the Rules and Regulations promulgated by the
Securities and Exchange Commission under the 1934 Act);
(ii) which such person or any of its Affiliates or Associates,
directly or indirectly, has or shares with respect to the Voting Stock (1)
the right to acquire, or direct the acquisition of such Voting Stock
pursuant to any agreement, arrangement, understanding or otherwise (whether
or not in writing) (other than customary arrangements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities) or upon the exercise of conversion rights, exchange
rights, warrants or options or otherwise; provided, however, that a person
shall not be deemed the "beneficial owner" of or to "beneficially own"
securities tendered pursuant to a tender or exchange offer made by or on
behalf of such person or any of such person's Affiliates or Associates
until such tendered securities are accepted for purchase or exchange, (2)
the right to vote, or to direct the voting of, such Voting Stock pursuant
to any agreement, arrangement, understanding or otherwise (whether or not
in writing) (provided that a person shall not be deemed to be the
beneficial owner of any securities if the agreement, arrangement or
understanding to vote such security arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the Rules and Regulations promulgated under the
1934 Act and is not also then reportable by such person on Schedule 13D
under the 1934 Act (or any comparable or successor report)), or (3) the
right to dispose of, or to direct the disposition of, such Voting Stock
pursuant to any agreement, arrangement, understanding or otherwise (whether
or not in writing) (other than customary arrangements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities); or
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(iii) which is beneficially owned, directly or indirectly, by any
other person (or any Affiliate or Associate thereof) with which such person
or any of such person's Affiliates or Associates has any agreement,
arrangement, understanding or otherwise (whether or not in writing) (other
than customary arrangements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy
described in clause 3(ii)(2) above) or disposing of any shares of Voting
Stock;
provided, however, that (1) no person engaged in business as an underwriter of
securities shall be deemed the beneficial owner of any securities acquired
through such person's participation as an underwriter in good faith in a firm
commitment underwriting until the expiration of 40 days after the date of such
acquisition and (2) no person who is a director or an officer of the Corporation
shall be deemed, solely as a result of his or her position as director or
officer of the Corporation, the beneficial owner of any securities of the
Corporation that are beneficially owned by any other director or officer of the
Corporation.
(d) Notwithstanding anything in the definition of beneficial owner to
the contrary, the phrase "then outstanding," when used with reference to a
person's beneficial ownership of securities of the Corporation, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such person
would be deemed to own beneficially hereunder.
(e) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the 1934 Act (or any subsequent provisions replacing the 1934 Act or the rules
and regulations promulgated thereunder); provided, however, that no person who
is a director or officer of the Corporation shall be deemed an Affiliate or an
Associate of any other director or officer of the Corporation solely as a result
of his or her position as a director or officer of the Corporation.
(f) "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph (b) of this Part D, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
(g) "Continuing Director" means (i) any member of the Board of
Directors of the Corporation who is not an Interested Stockholder or an
Affiliate or Associate of an Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder became an
Interested Stockholder, and (ii) any person who subsequently becomes a member of
the Corporation's Board of Directors who is not an Associate or Affiliate of an
Interested Stockholder and is recommended or approved by the affirmative vote of
a majority of the Continuing Directors.
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<PAGE>
(h) "Fair Market Value" means:
(i) in the case of stock, the highest closing sale price during the
30-day period immediately prior to and including the date in question of a
share of such stock on the principal United States securities exchange
registered under the 1934 Act (or any subsequent provisions replacing such
Act or the rules and regulations promulgated thereunder) on which such
stock is listed or, if such stock is not listed on any such exchange, the
highest closing bid quotation with respect to a share of such stock during
the 30-day period immediately prior to and including the date in question
on the National Association of Securities Dealers Automated Quotation
System or any comparable system then in use, or if no such quotations are
available, the fair market value on the date in question of a share of such
stock as determined by the affirmative vote of a majority of the Continuing
Directors of the Board of Directors in good faith; and
(ii) in the case of property other than cash or stock, the fair market
value of such property on the date in question as determined by an
affirmative vote of a majority of the Continuing Directors of the Board of
Directors in good faith.
(i) "Group Acting in Concert" shall mean persons seeking to combine
or pool their voting or other interests in the securities of the Corporation for
a common purpose, pursuant to any contract, understanding, relationship,
agreement or other arrangement, whether written, oral or otherwise, or any
"group of persons" as defined under Section 13(d) of the 1934 Act (or any
subsequent provisions replacing the 1934 Act or the rules and regulations
promulgated thereunder). When persons act together for any such purpose, their
group is deemed to have acquired their stock.
(j) In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used in
paragraphs (i) and (ii) of Part C of this ARTICLE XII shall include the shares
of Common Stock and/or the shares of any other class of outstanding Voting Stock
retained by the holders of such shares.
(k) "Voting Stock" shall mean the outstanding shares of capital stock
of the Corporation entitled, at the time, to vote generally in the election of
directors.
(l) "Grandfathered Percentage" shall mean, with respect to any
Grandfathered Person, the percentage of the voting power of the then outstanding
shares of Voting Stock that such Grandfathered Person beneficially owns as of
the close of business on the date of the closing of the initial public offering
of shares of Common Stock of the Corporation plus an additional five (5)
percentage points; provided, however, that in the event the underwriters
exercise their over-allotment option in connection with the initial public
offering of shares of Common Stock, the Grandfathered Percentage shall, from and
after the closing of such over-allotment option, mean, with respect to any
Grandfathered Person, the percentage of the voting power of the then outstanding
shares of Voting Stock that such Grandfathered Person beneficially owns as of
the close of business on the date of the closing of the over-allotment option
plus an additional five (5) percentage points; and provided, further, that, in
the event any Grandfathered Person shall sell, transfer or otherwise dispose of
any outstanding shares of Voting Stock after the close of business on the date
of the closing of the initial
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<PAGE>
public offering of the Corporation's Common Stock, the Grandfathered Percentage
shall, subsequent to such sale, transfer or disposition, mean, with respect to
such Grandfathered Person, the lesser of (1) the Grandfathered Percentage as in
effect immediately prior to such sale, transfer, or disposition or (2) the
percentage of the voting power of the then outstanding shares of Voting Stock
that such Grandfathered Person beneficially owns immediately following such
sale, transfer or disposition plus an additional five (5) percentage points.
(m) "Grandfathered Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, is, as of the close
of business on the date of the closing of the initial public offering of shares
of Common Stock of the Corporation, the beneficial owner of 15% or more of the
voting power of the then outstanding Voting Stock at such time. Any
Grandfathered Person who becomes, after the close of business on the date of the
initial public offering of shares of Common Stock of the Corporation, the
beneficial owner of less than 15% of the voting power of the then outstanding
shares of Voting Stock shall cease to be a Grandfathered Person.
(n) The term "voting power" shall mean, with respect to each
outstanding share of capital stock of the Corporation, the number of votes which
a holder of such share shall be entitled, at the time, to vote generally in the
election of directors.
Part E. Powers of the Board of Directors. A majority of the
directors of the Corporation, unless there is an Interested Stockholder, in
which case a majority of the Continuing Directors then in office, shall have the
power to determine for the purposes of this ARTICLE XII, on the basis of
information known to them after reasonable inquiry, (i) whether a person is an
Interested Stockholder, (ii) the number or percentage of shares of Voting Stock
or other equity securities beneficially owned by any person, (iii) whether a
person is an Affiliate or Associate of, or is affiliated or associated with,
another person, (iv) whether the assets of which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $10,000,000 or more, (v)
whether the requirements of Part C of this ARTICLE XII have been met with
respect to any Business Combination and (vi) any other matters of interpretation
arising under this ARTICLE XII. The good faith determination by the affirmative
vote of a majority of the directors or, if there is an Interested Stockholder,
by the affirmative vote of a majority of the Continuing Directors then in
office, on such matters shall be conclusive and binding for all purposes of this
ARTICLE XII.
Part F. No Effect on Fiduciary Obligations of Interested
Stockholders. Nothing contained in this ARTICLE XII shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
* * * * *
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<PAGE>
Exhibit 10.10
SEVERANCE, CONFIDENTIALITY
AND NONCOMPETITION AGREEMENT
THIS AGREEMENT is made as of May 28, 1996, by and between Aksys,
Ltd., a Delaware corporation (the "Company"), and Dennis N. Cavender (the
"Executive").
WHEREAS, the Company and the Executive desire to enter into an
agreement (i) defining the relative rights of the Company and the Executive
with respect to Intellectual Property (as defined below) owned by the Company or
its customers or clients to which the Executive may have access or may
contribute as a result of the Executive's employment with the Company and (ii)
setting forth the obligation of the Executive to refrain from competing with the
Company during his employment with the Company and for a period of time
thereafter as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. Noncompetition and Severance.
(a) The Executive acknowledges and agrees with the Company that the
Executive's services to the Company are unique in nature and that the Company
would be irreparably damaged if the Executive were to provide similar services
to any person or entity competing with the Company or engaged in a similar
business. The Executive accordingly covenants and agrees with the Company that
during the period commencing with the date of this Agreement and ending on the
date set forth in Section 1(b) or 1(c) below, as the case may be (the
"Noncompetition Period"), the Executive will not, directly or indirectly, either
for himself or for any other individual, corporation, partnership, joint venture
or other entity, participate in any business (including, without limitation, any
division, group or franchise of a larger organization) anywhere in the world
which engages or which proposes to engage in the promotion, development, sale,
distribution or production of products related to artificial kidney hemodialysis
or any other business conducted by or contemplated by the Company prior to the
Executive's termination. For purposes of this Agreement, the term "participate
in" will include, without limitation, having any direct or indirect interest in
any corporation, partnership, joint venture or other entity, whether as a sole
proprietor, owner, stockholder, partner, joint venturer, creditor or otherwise,
or rendering any direct or indirect service or assistance to any individual,
corporation, partnership, joint venture and other business entity (whether as a
director, officer, manager, supervisor, employee, agent, consultant or
otherwise); provided that the term "participate in" shall not include ownership
of less than five percent of the stock of a publicly-held corporation whose
stock is traded on a national securities exchange or in the over-the-counter
market. In addition, for purposes of this Agreement, "any other business
contemplated by the Company" shall include only those businesses which have been
(i) targeted or
<PAGE>
otherwise identified by the Company's board of directors (the "Board") or
management as potential new businesses and (ii) actually pursued in any respect
by the Board or the Company's management.
(b) If the Executive's employment with the Company terminates (a
"Termination") as a result of the Executive's resignation or termination by the
Company for Cause, the Noncompetition Period shall continue until the second
anniversary of the date of the Termination.
(c) If the Executive's employment with the Company terminates as a
result of the Executive's Disability or termination by the Company without
Cause, (i) the Noncompetition Period shall continue until the first anniversary
of the date of Termination and (ii) not more than 30 days following the
Termination, the Company shall make a cash payment to the Executive in an amount
equal to the Executive's aggregate base salary for the six month period
immediately prior to the Termination.
(d) All of the Executive's rights to fringe benefits and bonuses (if
any) otherwise accruing with respect to any period including any period
commencing on or after the date of Termination shall terminate immediately upon
the close of business on the date of Termination.
(e) "Cause" means (i) the commission of a felony or a crime involving
moral turpitude or the commission of any other act involving dishonesty,
disloyalty or fraud with respect to the Company, (ii) conduct tending to bring
the Company into substantial public disgrace or disrepute, (iii) repeated
failure (after written notice of such failure) to perform duties as reasonably
directed by the Board, (iv) gross negligence or willful misconduct with respect
to the Company or (v) any other material breach of this Agreement which is not
cured within 15 days after written notice thereof to the Executive.
(f) "Disability" shall mean the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of the Executive to
carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company for a
period of at least 90 consecutive days or for shorter periods aggregating at
least 120 days (whether or not consecutive) during any twelve-month period, as
determined in the good faith judgment of the Board.
2. NONSOLICITATION. During the Noncompetition Period, the Executive
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, (ii) hire directly or through another
entity any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
any such customer, supplier, licensee or business relation and the Company.
-2-
<PAGE>
3. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION.
(a) The Executive will not disclose or use at any time, either during
his employment with the Company or thereafter, any Confidential Information (as
defined below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance of duties
assigned to the Executive by the Company. The Executive will take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential Information"
means information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix)
accounting and business methods, (x) inventions, devices, new developments,
methods and processes, whether patentable or unpatentable and whether or not
reduced to practice, (xi) customers and clients and customer or client lists,
(xii) other copyrightable works, (xiii) all technology and trade secrets, and
(xiv) all similar and related information in whatever form. Confidential
Information will not include any information that has been published in a form
generally available to the public prior to the date the Executive proposes to
disclose or use such information. Information will not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material features comprising such
information have been published in combination.
4. THE COMPANY'S OWNERSHIP OF INTELLECTUAL PROPERTY.
(a) In the event that the Executive as part of his activities on
behalf of the Company generates, authors or contributes to any invention,
design, new development, device, product, method or process (whether or not
patentable or reduced to practice or comprising Confidential Information), any
copyrightable work (whether or not comprising Confidential Information) or any
other form of Confidential Information relating directly or indirectly to the
Company's business as now or hereinafter conducted (collectively, "Intellectual
Property"), the Executive acknowledges that such Intellectual Property is the
exclusive property of the Company and hereby assigns all right, title and
interest in and to such Intellectual Property to the Company. Any copyrightable
work prepared in whole or in part by the Executive will be deemed "a work made
for hire" under Section 201(b) of the 1976 Copyright Act, and the Company will
own all of the rights comprised in the copyright therein. The Executive will
promptly and fully disclose all Intellectual Property to the Company and will
cooperate with the Company to protect the Company's interests in and rights to
such Intellectual Property (including, without limitation, providing reasonable
assistance in securing patent protection and copyright registrations and
executing all documents as
-3-
<PAGE>
reasonably requested by the Company, whether such requests occur prior to or
after termination of the Executive's employment with the Company).
(b) In accordance with Section 2872 of the Illinois Employee Patent
Act, Ill. Rev. Stat. Chap. 140, (S) 301 et seq. (1983), the Executive is hereby
advised that Section 2 of this Agreement regarding the Company's ownership of
Intellectual Property does not apply to any invention for which no equipment,
supplies, facilities or trade secret information of the Company was used and
which was developed entirely on the Executive's own time, unless (i) the
invention relates to the business of the Company or to the Company's actual or
demonstrably anticipated research or development or (ii) the invention results
from any work performed by the Executive for the Company.
5. DELIVERY OF MATERIALS UPON TERMINATION OF EMPLOYMENT. As
requested by the Company from time to time and upon the termination of the
Executive's employment with the Company for any reason, the Executive will
promptly deliver to the Company all copies and embodiments, in whatever form, of
all Confidential Information or Intellectual Property in the Executive's
possession or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information or Intellectual Property)
irrespective of the location or form of such material and, if requested by the
Company, will provide the Company with written confirmation that all such
materials have been delivered to the Company.
6. GENERAL PROVISIONS.
(a) Absence of Conflicting Agreements. The Executive hereby warrants
and covenants that his execution, delivery and performance of this Agreement do
not and will not result in a breach of the terms, conditions or provisions of
any agreement, order, judgment or decree to which the Executive is subject.
(b) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(d) Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
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<PAGE>
(e) Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(f) Successors and Assigns. Except as otherwise provided herein, this
Agreement will bind and inure to the benefit of and be enforceable by the
Company and the Executive and their respective successors and assigns; provided
that the rights and obligations of the Executive under this Agreement will not
be assignable without the prior written consent of the Company.
(g) Choice of Law. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by and construed
in accordance with the domestic laws of the State of Illinois, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Illinois or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Illinois.
(h) Remedies. Each of the parties to this Agreement will be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorneys fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that the Executive's breach of
any term or provision of this Agreement will materially and irreparably harm the
Company, that money damages will accordingly not be an adequate remedy for any
breach of the provisions of this Agreement by the Executive and that the Company
in its sole discretion and in addition to any other remedies it may have at law
or in equity may apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company and the
Executive.
(j) Expenses. The Company shall reimburse the Executive for the
reasonable fees and expenses of the Company actually paid by the Executive
arising in connection with the negotiation and execution of this Agreement and
the other agreements and documents contemplated hereby and the consummation of
the transactions contemplated by this Agreement and the other agreements and
documents contemplated hereby; provided that the Executive shall submit for
approval an expense report in accordance with the Company's normal policies.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Severance,
Confidentiality and Noncompetition Agreement on the date first written above.
AKSYS, LTD.
By____________________________
Its___________________________
______________________________
Dennis N. Cavender
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<PAGE>
Exhibit 10.11
PATENT LICENSE
Parties
This Agreement with its appendices, exhibits and schedules, (the
"Agreement") is made as of March 11, 1996 (the "Execution Date") between
ALLERGAN, 8301 Mars Drive, Waco, Texas 76712 and ALLERGAN, INC., having a
principal place of business at 2525 Dupont Drive, Irvine, California 92715
(hereinafter collective "LICENSOR"), and AKSYS, LTD., a Delaware corporation,
having a principal place of business at 1113 S. Milwaukee Avenue, Suite 300,
Libertyville, Illinois 60048 (hereinafter "LICENSEE").
Recitals
A. LICENSOR is the sole owner and Assignee of U.S. Patent No. 5,392,653,
Zanger et al., entitled "Pressure Transducer Magnetically-Coupled Interface
Complementing Minimal Diaphragm Movement During Operation," issued February 28,
1995 and its foreign counterparts (hereinafter "Licensed Patents") as currently
set forth in Exhibit A hereto.
B. The LICENSEE is developing machines and systems for performing kidney
dialysis of humans and intends to manufacture, or have manufactured for it, its
kidney dialysis machines in the United States and overseas, and to sell said
machines in the United States and worldwide. The kidney dialysis machines of
LICENSEE comprise many different systems and subcomponents, one of which are
pressure sensors.
C. The LICENSEE represents that it independently conceived and reduced to
practice a non-invasive pressure sensor for use with its kidney dialysis
machines, without having any prior knowledge of the Licensed Patents or the work
of Allergan relating to pressure sensors.
D. LICENSEE is interested in obtaining an exclusive license, in the field
of use of kidney dialysis machines and methods, under the Licensed Patents and
LICENSOR is
<PAGE>
willing to grant an exclusive license to LICENSEE and its Affiliates under the
Licensed Patents limited to the field of use of kidney dialysis machines and
methods.
ARTICLE 1: DEFINITIONS
1.0 "Defined Terms". Terms defined in this Article 1 and elsewhere,
parenthetically, in this Agreement, shall have the same meaning throughout the
Agreement. Defined Terms may be used in the singular or plural.
1.1 "Party". Party means the LICENSEE and/or the LICENSOR.
1.2 "PRESSURE SENSOR" means a non-invasive pressure sensor as generally
described in the Licensed Patents, used to measure the positive or negative
pressure of the medium (either fluid or air) that is contained within the
pressure sensor chamber, including the diaphragm, metal disc, magnetic member,
strain gauge and electrical outputs that supply signals from the pressure sensor
to signal processing equipment.
1.3 "Licensed Products" means any Pressure Sensors and Constituent
components of dialysis machines including extracorporeal circuits manufactured
by LICENSEE under the license acquired under this Agreement and covered by one
or more claims of any unexpired patent in Licensed Patents.
1.4 "Field of Use" means the field of kidney dialysis.
1.5 "Affiliate(s)" means a company which, directly or indirectly,
controls, is controlled by, or are under common control of a party.
ARTICLE 2: LICENSE GRANT
2.1 "Patent Grant". Subject to the terms and conditions of this Agreement,
LICENSOR hereby grants to LICENSEE and its Affiliates an exclusive, worldwide
license under the Licensed Patents, in the Field of Use, to make, have made, use
and sell Licensed Products, with the right to sublicense the right to use and
sell, but without the right to sublicense manufacturing rights without prior
written approval by LICENSOR, which approval shall not be unreasonably withheld.
The license shall not otherwise be transerable except as
<PAGE>
provided in Article 8.15 hereof. LICENSEE agrees not to use or sell Licensed
Products outside the Field of Use and agrees not to sell Licensed Products to
third parties for use outside the Field of Use.
2.2 "Patent Marking". All Licensed Products made, used or sold by Licensee
in the U.S. during the life of the Licensed Patents shall bear a marking in
compliance with 35 U.S.C. (S) 287(a).
ARTICLE 3: LICENSE PAYMENTS
3.1 "Lump Sum Payment". In consideration for the license granted to the
LICENSEE under Article 2, the LICENSEE shall pay to the LICENSOR a License Fee
in the amount of Fifteen Thousand Dollars ($15,000) within ten (10) business
days after this Agreement shall become effective, and another Fifteen Thousand
Dollars ($15,000) upon the LICENSEE's first commercial sale after FDA regulatory
approval (510K) of a Licensed Product. However, the entire License Fee will
become immediately due and payable upon the LICENSOR's termination of this
Agreement for default under Article 7.
3.2 "Running Royalty". In addition to the sums in Section 3.1, LICENSEE
shall pay to LICENSOR on behalf of itself and its Affiliates Thirty Cents
($0.30) for every Pressure Sensor Set (tubing assembly containing two (2)
Pressure Sensors) manufactured and released as finished goods available for sale
by LICENSEE or its Affiliates that is covered by any Licensed Patent during the
term of the Licensed Patent. LICENSEE and its Affiliates shall maintain records
adequate to account for the manufacture of Pressure Sensor Sets during the term
of the Licensed Patent. Payments under this running royalty shall be made
quarterly within sixty (60) days of the end of each calendar quarter and shall
be accompanied with a report of such manufacture of Pressure Sensor Sets.
3.3 "Minimum Annual Royalty". LICENSEE shall pay to LICENSOR during the
term of this Agreement the following minimum annual royalty payments:
<PAGE>
<TABLE>
<CAPTION>
Amount Calendar Year
------ -------------
<S> <C>
$20,000 1998
$30,000 1999
$40,000 2000
$50,000 2001 and annually thereafter
</TABLE> during the term of the
Agreement
Minimum annual royalties shall be due and payable annually at the time the
Fourth Quarter running royalty payment is due. Running royalties paid according
to Section 3.2 shall be credited against minimum annual royalties and minimum
annual royalties shall be payable to the extent the running royalties for the
applicable calendar year are less than the minimum royalty obligation for such
calendar year. Failure to pay applicable minimum royalties when due shall
result, upon written notice thereof by LICENSOR to LICENSEE, in LICENSEE's
exclusive license being converted to a non-exclusive license. Failure to pay at
least one-half (1/2) of the applicable minimum royalties when due shall result,
upon written notice thereof by LICENSOR to LICENSEE, in termination of the
license. For the avoidance of doubt, in the event LICENSEE pays at least one-
half (1/2) of the applicable minimum royalties, but less than the full amount,
LICENSEE's exclusive license, upon written notice thereof by LICENSOR, shall be
converted to a non-exclusive license.
3.4 "Late Payments". If the LICENSEE shall fail or refuse to make any
payment due hereunder on or before the date on which such payment is due, the
LICENSEE shall pay to the LICENSOR, at the time such payment is actually made,
an administrative fee equal to One Percent (1%) of the amount of such payment
for each month, or fraction of a month, that such payment is overdue.
ARTICLE 4: REPRESENTATIONS AND LIMITATIONS
4.1 The LICENSOR makes no warranty or representation that the LICENSEE's
or its Affiliate's utilization of the license received from the LICENSOR will
not infringe patents owned by any third party, nor any warranty or
representation as to the validity or scope of
<PAGE>
any patent under which a license is granted. The LICENSEE and its Affiliates
assume all risks of liability to any third person by reason of infringement of
patents owned by such third persons.
4.2 "Disclaimer of Warranties". Nothing in this Agreement shall be
construed as:
(a) a warranty or representation that anything made, used, sold
or otherwise disposed of under any license granted in this
Agreement is or will be free from infringement of patents of
third persons; or
(b) a requirement that either party shall file any patent
application, secure any patent, or maintain any patent in
force except that LICENSOR agrees to use reasonable efforts
to prosecute and maintain the Licensed Patents; or
(c) an obligation to bring or defend or prosecute actions or
suits against or by third parties for infringement of any
patent; or
(d) granting by implication, estoppel, or otherwise, any
licenses or rights under patents other than the Licensed
Patents.
The LICENSOR does not make any representations, extend any warranties of
any kind, either express or implied, including but not limited to warranties of
fitness for a particular purpose or of merchantability or otherwise, or assume
any responsibilities whatever with respect to use, sale, or other disposition by
the LICENSEE or its Affiliates or its vendees or transferees of products
incorporating or made by use of any information obtained or patents licensed
under this Agreement.
ARTICLE 5: INDEMNITY AND INSURANCE
5.1 "Indemnity". LICENSEE shall defend, indemnify and
hold LICENSOR and its employees, officers and directors harmless from and
against any and all damages, injuries, causes of action, costs, losses and
expenses, including without limitation, Court costs and reasonable attorney
fees, if any, resulting from claims made against LICENSOR by virtue of the
license granted herein to LICENSEE and its Affiliates.
<PAGE>
5.2 "INSURANCE". LICENSEE and its Affiliates shall obtain and maintain a
policy or policies of liability insurance covering Licensed Products in the
amount of not less than Five Million Dollars ($5,000,000) and shall have
LICENSOR named as an additional insures. LICENSEE agrees to have the policy in
force prior to first commercial sale.
ARTICLE 6: GOVERNMENTAL AUTHORIZATION
6.1 "EXPORT AUTHORIZATION". This Agreement may be subject to restrictions
concerning the export of products from the United States which may be imposed by
the U.S. Government or any other competent authority. Accordingly, LICENSEE and
its Affiliates agrees not to export or re-export, directly or indirectly,
Licensed Products for which the U.S. Government or other competent authority at
the time of export requires an export license or other approval, without first
obtaining the written consent to do so from the Department of Commerce or other
agency of the U.S. Government or from other competent authority when required by
an applicable statute or regulation. The LICENSOR shall provide to the LICENSEE
reasonable assistance for determining the need for, and the procuring of, such
consent.
ARTICLE 7: TERM AND TERMINATION
7.1 "EFFECTIVENESS". This Agreement shall become effective on the
Execution Date, and , unless terminated earlier in accordance with Section 7.2,
shall remain in effect until the expiration or lapse or declaration of
invalidity or unenforceability by a Court or agency of competent jurisdiction,
of the last to expire of the Licensed Patents. In the event the U.S. patent is
held invalid or unenforceable by a Court or Agency of competent jurisdiction,
the minimum royalty obligations of Article 3.3 shall be reduced to one-half
(1/2) of the amounts set forth for payments due following the date of such a
holding.
7.2 "TERMINATION". This Agreement may be terminated (1) for cause by
either party serving notice of such termination if a Party shall default in the
performance or observance of any of its obligations under this Agreement, and
such default shall continue for ninety (90) days after notice specifying such
default has been served upon the defaulting Party, or (2) without cause by
LICENSEE on ninety (90) days written notice, subject to the payment of all
royalty obligations through the date of termination, including pro-rata payment
of any minimum royalties.
<PAGE>
Such right to termination shall not be exclusive, and exercise by either
Party shall not preclude the exercise by such Party of any other right or remedy
that it may have by law against the defaulting Party on account of any default
by the defaulting Party.
7.3 "SURVIVAL". Except as expressly otherwise proviced in this Agreement,
its termination shall not relieve any party of any obligation or liability
accrued hereunder prior to such termination.
ARTICLE 8: GENERAL TERMS AND CONDITIONS
8.1 "MARK AND PUBLICITY". Nothing contained in this Agreement shall be
construed as conferring any right to use in advertising, publicity or other
promotional activities any name, trade name, trademark, or other designation
(including any contraction, abbreviation, or simulation of any of the
foregoing), without the express written approval of the other Party, no party
shall use any designation of the other Party in any promotional activity
associated with this Agreement or the Licensed Product. Neither Party shall
issue any press release or make any public statement in regard to this Agreement
without the prior written approval of the other Party.
8.2 "FORCE MAJEURE". Neither the LICENSOR nor the LICENSEE shall be held
responsible for any delay or failure in the performance of this Agreement to the
extent such delay or failure is caused by fire, flood, explosion, war, embargo,
the act of any civil or military authority, acts of God, inability to secure
transportation facilities, acts or omissions of carriers, power outages, or by
any other causes beyond its control whether or not similar to the foregoing,
provided that the hindered Party (a) notifies the other Party of such cause, (b)
exercises reasonable effort to cure such delay or failure and resume
performance, and (c) excuses performance by the other Party during the period of
such delay or failure.
8.3 "NOTICES". Notices and payment under this Agreement shall be in
writing and sent by first class mail as follows:
As to AKSYS, LTD. Lawrence H.N. Kinet
Chairman and CEO
AKSYS, LTD.
1113 S. Milwaukee Avenue
Suite 300
Libertyville, IL 60048
<PAGE>
As to ALLERGAN, INC. General Counsel
ALLERGAN, INC.
2525 Dupont Drive
Irvine, CA 92715
8.4 "RIGHT TO CONTINUE WORK WITH THIRD PARTIES". Subject to the terms of
this Agreement, each Party shall be free to engage in other work, alone or with
others, and to furnish information to and receive information from others.
8.5 "LIMITATION OF RIGHTS". Except as expressly provided in this
Agreement, nothing contained herein shall be construed as conferring any license
or other rights by implication, estoppel or otherwise, under any patent or
patent applications, or any copyrights, trademarks, trade names or trade dress.
8.6 "LIMITATION OF LIABILITY". Neither Party will be liable to the other
for any indirect, special or consequential damages whatsoever, whether grounded
in tort (including negligence), strict liability or contract, and neither
Party's liability under any circumstances shall exceed the contract price
hereunder.
8.7 "INDEPENDENT CONTRACTOR". In the performance of this Agreement, the
status of the parties, including its employees and agents, shall be that of
independent contractors and not as employees or agents, or fiduciaries of the
other Party, and as such, neither Party shall have the right to make commitments
for or on behalf of the other Party.
8.8 "GENERAL INDEMNIFICATION". Each Party shall be responsible for (a)
the safety of its own employees and agents while engaged in work under the
Agreement, and (b) any liability for damages or personal injuries, including
death, resulting from work under the Agreement, without any warranty, liability,
or indemnification on the part of the other Party.
8.9 "NO WAIVER". Failure at any time to require performance of any of the
provisions herein shall not waive or diminish a Party's right thereafter to
demand compliance therewith or with any other provision. Waiver of any default
shall not waive any other default. A Party shall not be deemed to have waived
any rights hereunder unless such waiver is in writing and signed by a duly
authorized officer of the Party making such waiver.
<PAGE>
8.10 "SEVERABILITY". If one or more of the provisions of this Agreement
shall be held invalid, illegal or unenforceable, the remaining provisions shall
not in any way be affected for impaired thereby. In the event any provision is
held invalid, illegal or unenforceable, the parties shall use reasonable efforts
to substitute a valid, legal and enforceable provision which, insofar as is
practical, implements purposes of the section held invalid, illegal and
unenforceable.
8.11 "APPLICABLE LAW". This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California and/or the
United States of America as may be applicable.
8.12 "SETTLEMENT OF DISPUTES". In the event of occurrence of any dispute
or disagreement other than payment of minimum royalties, the Parties shall first
exert their best efforts in good faith to resolve the matter amicably between
themselves as provided for in this Section 8.12. Within thirty (30) days after
written demand by either Party, each Party shall designate two (2)
representatives from among those personnel acquainted with the work involved who
shall discuss and attempt to resolve the dispute or disagreement at the offices
of the Party on which demand was served, or such other place agreeable to the
Parties. If a resolution has not been achieved within thirty (30) days from the
date on which the written demand for such working-level discussions was
originally made, then either Party may demand in writing that an officer (vice
president, president or director) from each Party discuss and attempt to resolve
the dispute or disagreement at a place mutually agreed upon by the Parties. If a
resolution has not been achieved within thirty (30) days after the written
demand for discussions between officers of the Parties, then either Party shall
be free to resort to a court of justice having jurisdiction over the Parties and
the subject matter of the dispute provided, however, that both Parties hereby
waive irrevocably any right to have such dispute or disagreement tried before a
jury.
8.13 "AMENDMENTS". No addition to, deletion from or modification of any
of the provisions of this Agreement shall be binding upon the Parties unless
made in writing and signed by a duly authorized representative of each Party.
8.14 "ENTIRE AGREEMENT". This Agreement and the attached Exhibit
constitute the entire agreement between the Parties with respect to its subject
matter, and supersede all previous discussions, representations and
understandings.
<PAGE>
8.15 "ASSIGNMENT". This Agreement may not be assigned or transferred in
any manner by either Party without the prior written consent of the other Party,
except that either Party may assign or transfer this Agreement to a third party
in connection with the transfer or sale of all or substantially all of its
business to which this Agreement pertains or the merger or consolidation of a
Party with or into a third party if said third party agrees in writing to accept
all of the terms and conditions of this Agreement.
EXECUTION
In consideration of the foregoing terms and conditions, the LICENSOR and
LICENSEE have executed this Agreement as of the date first written above.
AKSYS, LTD. ALLERGAN, INC.
By: /s/ Lawrence H.N. Kinet By: /s/ Richard M. Haugen
----------------------- ---------------------
Name: L.H.N. Kinet Name: Richard M. Haugen
------------ -----------------
Title: Chairman & CEO Title: COO
-------------- ---
Date: 3/4/96 Date: 3/11/96
------ -------
ALLERGAN
By: /s/ Martin A. Voet
------------------
Name: Martin A. Voet
--------------
Title: Ass't Secretary
---------------
Date: 3/7/96
------
<PAGE>
EXHIBIT A
"LICENSED PATENTS"
Country Patent (Appln) Number
------- ---------------------
U.S. 5,392,653
Australia (43959/93)
Canada (2,136,640)
EPO (0 643 823)
Japan (500788/94)
<PAGE>
Exhibit 11
-----------
AKSYS LTD. AND SUBSIDIARY
(a development stage enterprise)
<TABLE>
<CAPTION>
Statement Regarding Computation of Net
Loss Per Share
================================================================================
Year ended December 31,
----------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net loss $(7,819,037) (5,344,663)
================================================================================
Weighted average shares used
to compute net loss per share:
Weighted average common shares 12,359,554 8,227,110
outstanding*
Additional shares pursuant
to SAB83 computation 82,164 2,095,727
- --------------------------------------------------------------------------------
12,441,718 10,322,837
================================================================================
Net loss per share $ (0.63) (0.52)
================================================================================
</TABLE>
* Includes conversion of preferred shares.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Aksys, Ltd.:
We consent to incorporation by reference in the registration statement on Form
S-8 (No. 333-18073) of Aksys, Ltd. of our report dated January 24, 1997,
relating to the balance sheets of Aksys, Ltd. as of December 31, 1996, 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, 1996, and for
the period from January 18, 1991 (inception) through December 31, 1996, which
report appears in the December 31, 1996, annual report on Form 10-K of Aksys,
Ltd.
KPMG Peat Marwick LLP
Chicago, Illinois
February 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the consolidated balance sheet as of December 31, 1996 and the consolidated
statement of operations for the year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,900
<SECURITIES> 34,750
<RECEIVABLES> 698
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,486
<PP&E> 3,214
<DEPRECIATION> 476
<TOTAL-ASSETS> 50,148
<CURRENT-LIABILITIES> 1,444
<BONDS> 0
<COMMON> 137
0
0
<OTHER-SE> 48,547
<TOTAL-LIABILITY-AND-EQUITY> 50,148
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 9,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,819)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,819)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
