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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997 or
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[_] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 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
incorporation or organization) Identification No.)
Two Marriott Drive, Lincolnshire, IL 60069
(Address of Principal executive offices) (Zip Code)
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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
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(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
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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 February 28, 1998 at a closing sale price of $6.875 as reported
by the Nasdaq National Market was approximately $64,435,000.
As of February 28, 1998 the registrant had 14,587,624 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 21, 1998
(the "Proxy Statement") are incorporated by reference in Part III and portions
of the Registrant's 1997 Annual Report to Stockholders are incorporated by
reference in part II.
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AKSYS, LTD.
INDEX TO ANNUAL REPORT ON FORM 10-K
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Page No.
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PART I...................................................................................... 1
Item 1. Business......................................................................... 1
Item 2. Properties.......................................................................16
Item 3. Legal Proceedings................................................................16
Item 4. Submission of Matters to a Vote of Security-Holders..............................17
PART II.....................................................................................17
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.........17
Item 6. Selected Financial Data..........................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................21
Item 8. Financial Statements and Supplementary Data......................................21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................................22
PART III....................................................................................22
Item 10. Directors and Executive Officers of the Registrant...............................22
Item 11. Executive Compensation...........................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management...................22
Item 13. Certain Relationships and Related Transactions...................................22
PART IV.....................................................................................23
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................23
SIGNATURES..................................................................................24
EXHIBIT INDEX...............................................................................25
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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 Personal Hemodialysis
System (the "PHD system") which is designed to enable patients to perform daily
hemodialysis at alternate sites, such as the patient's home, and to thereby
improve clinical outcomes, reduce costs and enhance the patients' quality of
life. All of these characteristics have been associated with daily hemodialysis.
The Company is currently working toward satisfying the regulatory requirements
for Food and Drug Administration ("FDA") clearance of the PHD system in the
United States. The Company is in the process of compiling data requested by the
FDA and working with the FDA to develop a mutually agreeable scope for a
clinical evaluation planned to commence in the fourth quarter of 1998. The
Company expects 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 1998. The Company expects the clinical
evaluation will be approximately 90-120 days in length. Upon completion of the
clinical evaluation, the data compiled will be submitted along with other
requested data in a new 510(k) Premarket Notification, which the Company expects
to file in early 1999. 510(k) clearance by the FDA is required prior to the U.S.
commercialization of the PHD system.
In parallel with its U.S. regulatory efforts, the Company plans to obtain ISO
9001 certification in 1998, 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 late 1998 or early
1999, followed by a product launch in select European countries.
Japan is also a significant market where Aksys plans to seek regulatory
approval. On January 7, 1998, the Company entered into a strategic alliance with
Teijin Limited of Osaka Japan (see "Foreign Operations" for a description of the
agreements which represent the strategic alliance.) Although the regulatory
approval cycle in Japan is much longer than in the U.S., the Company is
currently working with Teijin to finalize its regulatory strategy for Japan.
There can be no assurance that the Company will be able to obtain any of the
above-mentioned regulatory clearances or approvals in a timely manner or at all.
The Marketplace
The target market of the Company is the ESRD treatment market. 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 (over 90%) of patients, therefore, must rely on
dialysis for the remainder of their lives.
The Company estimates that $13 billion was spent in the U.S. during 1997 for the
treatment of patients suffering from ESRD, of which approximately $4 billion was
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 214,000 at the end of 1996, representing a compound
annual growth rate of approximately 9%. In addition, it is estimated that there
were approximately 339,000 dialysis patients in Europe and Japan in 1996. The
Company believes that the sustained
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growth in the ESRD population, especially in the United States, has been caused
by (i) the aging of the population (the median age of newly diagnosed ESRD
patients in the United States is 62), (ii) the longer average life expectancy of
patients with diabetes and hypertension (two patient groups at high risk for
ESRD), (iii) the relatively more rapid growth in the general population of
certain ethnic subsets that have a higher incidence of ESRD, (iv) competing
risk -with the decline in vascular diseases of the heart, there is a rise in
vascular diseases of the kidney and (v) a possible increase in the use of
medications that damage the kidneys.
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 treatments. 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 a 30-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 30-month
coordination period. Under current rules, Medicare is also the primary payer for
ESRD patients during the 30-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 30-month coordination period during which the employer plan would serve as
primary payer and reimburse health care
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providers at a rate that the Company believes may be higher than the Medicare
composite rate. The rules regarding entitlement to primary Medicare coverage
when the patient is eligible for Medicare on the basis of both age (or
disability) and ESRD have been the subject of frequent legislative and
regulatory change in recent years and there can be no assurance that such rules
will not be unfavorably changed 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 in December 1990.
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 (as defined below). 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. Any actions to change such rate will not be known until
the 1999 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.
In addition to the HCFA ESRD Managed Care Demonstration Project, private
companies have recently initiated managed care programs for the treatment of
ESRD patients.
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
prospects, revenues and earnings. In addition, there have been various
legislative proposals for the reform of numerous aspects of Medicare, including
expanded enrollment of Medicare beneficiaries in managed care programs, the
occurrence and effect of which are uncertain. 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
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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.
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 30-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 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.
Prevailing Treatment Methods
Hemodialysis and peritoneal dialysis are the two prevailing methods of dialysis.
Hemodialysis
HCFA estimates that as of December 31, 1996, approximately 85% (182,000) 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, 1996, approximately 15% (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
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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 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 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 $62,000 in 1996. 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 1998 and
to run for three years.
Peritoneal Dialysis. Although peritoneal dialysis accounted for 15% (or 32,000)
of the dialysis patient population in 1996 according to HCFA, approximately 21%
(or 7,000) of the patients in the United States switched to
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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 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. Several studies over the past 25 years have shown that
increasing the number of dialysis treatments per week leads to dramatic
improvements in patients. The Company has compiled data on 72 patients
(including approximately 24 patients from nine centers in Europe and the U.S.
treated with daily hemodialysis for up to 14 years) 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. Several study centers report that most of the
ESRD patients who performed hemodialysis on a daily basis 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.
In addition to the aforementioned retrospective studies, daily hemodialysis is
rapidly growing. There are initiatives in the U.S. and worldwide to study the
benefits of daily hemodialysis. The Company estimates that in early 1998, there
are 12 centers worldwide, 6 of which are in North America, treating over 100
patients with daily hemodialysis. The Company believes that the clinical and
economic benefits of daily hemodialysis is demonstrated by these studies.
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. Although the Company believes
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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, that belief is based on data collected from patients using a
native fistula. The Company has collected little data from patients using
artificial blood vessel grafts or central venous catheters, and there is no
assurance that such grafts or catheters will withstand daily treatment. 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, (iii) novel graft
materials, (iv) new, totally implanted central venous catheters with titanium
ports and (v) the practice of inserting needles in the same site each day, which
has been demonstrated to have several benefits according to publications by Dr.
Zbylut J. Twardowski, a leading dialysis researcher and the Chairman of the
Company's Scientific Advisory Board.
The Company believes that most barriers to 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 daily 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:
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Drawback Conventional Home Systems Aksys PHD System
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Complexity Complicated equipment designed for Designed for ease of operation by patients
operation only by trained personnel. at home, including computerized, user-
friendly interface.
Time and Effort Difficult and time consuming to setup, Fully automated, reducing patient
operate, clean and maintain. involvement.
Cost of Consumables Requires frequent replacement of blood Integrated automatic disinfection system
circuit. designed to enable safe and effective reuse
of blood circuit.
Clinical Monitoring Patient treatment compliance monitoring Patient monitored by, and able to
and patient ability to consult with communicate with, clinic by fax or modem
clinic not available unless treatment (and eventually through real time on-line
received in an outpatient facility. monitoring system.)
Storage Requirements Large volume of consumables and Substantially fewer and smaller items
dialysate consumed each month. consumed with each treatment.
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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.
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The Company believes that the PHD system offers patients simplification and
control. The new technology of the PHD system integrates three systems into one:
water treatment, delivery of dialysis and dialyzer reprocessing. 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 help 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
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 or fax to the dialysis provider or other healthcare
personnel at pre-determined intervals.
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: (i) 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), (ii) technical service through a 24 hour call
center and through field representatives who will maintain and repair all
components of the PHD system, (iii) 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,
(iv) delivery of ancillary supplies such as dressings, tape, antiseptics, drugs
and syringes and (v) 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 level close to the cost 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.
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<PAGE>
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 1998, virtually all of the Company's resources will be devoted to the
development and regulatory approval process 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.
Business and Marketing Strategy
In October 1997, the National Kidney Foundation released the results of the
first comprehensive effort to standardize practices at U.S. dialysis centers
(the Dialysis Outcomes Quality Initiative, or DOQI guidelines). The
recommendations called for minimum doses of dialysis; however, approximately 32%
of all current U.S. patients are under that recommended minimum dosage. These
recommendations support the Company's belief that patients who receive that
higher dose through daily dialysis would benefit through improved clinical
outcomes. 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,
8,000 and 74,000 dialysis patients, respectively, in 1996 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 sell the instruments to the
customers or to a third party lease company, and enter into contracts with its
customers to provide the 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
9
<PAGE>
the clinical and cost benefits it believes will result from frequent home
hemodialysis using the PHD system. In the first quarter of 1998, the Company
began sponsoring a study at six centers to measure the early improvements in
nutrition and well-being of patients converting from the standard thrice-weekly
hemodialysis regimen to a daily hemodialysis regimen. In addition, the Company
is sponsoring a long-term study, lasting at least two years, to measure the
long-term clinical benefits of daily 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 approximately 169,000 dialysis patients in Europe and 170,000
dialysis patients in Japan, both as of December 31, 1996.
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.
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, including
dialyzers produced by other manufacturers, will be available on terms acceptable
to the Company or at all.
Research and Development
As of December 31, 1997, the Company employed a research and development staff
of 61 full time employees, most of whom are engineers and technicians. In
addition, the Company used contractors on an as needed basis to
10
<PAGE>
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, 1997, 1996 and 1995, the
Company incurred total research and development expenditures of approximately
$10,887,000, $6,515,000 and $4,261,000, respectively. During 1998, research and
development expenditures are expected to increase above historical levels
reported for the year ended December 31, 1997.
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 Medical Care AG
and CGH Medical, Inc. (Cobe, Gambro, Hospal). These companies and most of the
Company's other competitors have substantially greater financial, scientific and
technical resources, research and development capabilities, marketing and
manufacturing resources and experience than the Company and greater experience
in developing products, providing services and obtaining regulatory approvals.
In addition, the Company is aware of at least one other company that may be
developing a machine that could be used for daily home hemodialysis.
The Company's ability to successfully market its products and services could be
adversely 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 pharmacological 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.
11
<PAGE>
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 90-120 days will satisfy the FDA's
requirements and that the clinical trial will commence during the fourth quarter
of 1998.
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 1998. The Company
anticipates compiling the clinical study data shortly thereafter and
resubmitting such data in the form of a new 510(k) premarket notification.
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
12
<PAGE>
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 expects to obtain ISO 9001
certification in 1998, and also to 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 late 1998 or
early 1999, followed by a controlled product launch in select European
countries.
Intellectual Property
As of February 10, 1998, the Company either owns or has exclusive rights to 21
U.S. patents and four foreign patents for technologies that are essential to
developing a safe, convenient, self-contained hemodialysis system. The U.S.
Patent and Trademark Office has also allowed claims on three additional patents.
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 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.
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. 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.
13
<PAGE>
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 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.
14
<PAGE>
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, 1997, the Company had 72 full-time employees, 61 of whom were
employed in research and development capacities. The Company considers its
employee relations to be good.
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 Vice President of Business
Development since November 1997. Mr. Kenley served as the Company's Executive
Vice President and Chief Technical Officer from June 1997 until November 1997,
as its President and Chief Operating Officer from October 1994 until June 1997,
and as its President and Chief Executive Officer from January 1991 to October
1994. Prior to founding the Company, 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, including from
January 1990 until January 1991, when he served as Vice President of Electronic
Drug Infusion.
The following individuals are key employees of the Company:
John R. LaLonde joined the Company in March 1998 as Vice President of Research
and Development. Prior to joining the Company, from 1994 until 1998, he held
various senior management engineering roles at GE Medical Systems, most recently
as Global Engineering Manager, Integrated Imaging Solutions.
Manuel Avila has served as Vice President of Manufacturing and Hardware
Development since July 1997. From January 1997 until July 1997, he served as
Director of Purchasing. Prior to joining the Company, Mr. Avila worked at
Haemonetics Corporation from 1993 until 1996, most recently as Director of
Operations. Prior to joining Haemonetics, Mr. Avila held various engineering
positions with Polaroid Corporation.
Thomas F. Scully joined the Company in January 1996 as Vice President of
Operations. From 1971 to 1995, Mr. Scully worked at Baxter International Inc. in
various operational roles, including responsibilities 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.
15
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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 Operations
In April 1996, the Company established Aksys Japan, K.K. ("AJKK"), a wholly-
owned Japanese subsidiary. AJKK had no employees as of December 31, 1997. The
Company has engaged the services of a business consultant to act on behalf of
AJKK in pursuing business opportunities in Japan. 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.
On January 7, 1998, the Company established a strategic alliance with Teijin
Limited of Osaka, Japan, as a result of mutually initiated negotiations. The
alliance is represented by a Stock Purchase Agreement and a Joint Development
Agreement. Under the terms of the Stock Purchase Agreement, Teijin purchased
493,097 newly issued Aksys common shares at a price of $10.14 per share and
received certain registration rights with respect to such shares.
The Joint Development Agreement provides that, conditional on the achievement of
certain milestones, Teijin will make additional cash payments to Aksys totaling
up to $5,000,000.
Pursuant to the Joint Development Agreement, Aksys and Teijin will cooperate to
commercialize the PHD system in Japan and will share equally the costs of
obtaining the necessary regulatory approvals. While the Joint Development
Agreement remains effective, Aksys may not negotiate with any third party
regarding the assignment of rights to import or manufacture the PHD system for
sale in Japan.
Teijin is a leading Japanese manufacturer of synthetic fibers, chemicals and
plastics, with annual sales in excess of $5 billion, of which over $600 million
is derived from pharmaceuticals and medical products. Teijin pioneered and today
is a leader in the home oxygen therapy business in Japan, and is also one of the
principal suppliers to the dialysis industry of the resins and fibers used to
produce dialyzers.
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. The Company presently expects all manufacturing will be contracted
out to third party subcontractors.
Item 3. Legal Proceedings.
The Company is not involved in any material pending legal proceedings.
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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, 1997.
PART II
Item 5. Market for the Registrant's Common 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, 1997.
<TABLE>
<CAPTION>
Fiscal Fiscal
Year Quarter High Low
------ ------- ---- ---
<S> <C> <C> <C>
1997 1st 13.25 8.50
2nd 9.875 4.00
3rd 8.688 4.25
4th 11.375 5.25
1996 2nd 23.50 10.75
3rd 17.75 8.75
4th 12.375 6.875
</TABLE>
There were 274 stockholders of record of the Company's Common Stock as of
February 12, 1998. In addition, the Company estimates that there were
approximately 4,100 beneficial stockholders at February 12, 1998, who held
shares in "street name." 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.
On January 7, 1998 the Registrant sold to Teijin Limited of Osaka, Japan 493,097
shares of its Common Stock for $5 million (or $10.14 per share) in a private
placement under Section 4(2) of the Securities Act of 1933, as amended. See
"Business - Foreign Operations."
With respect to the use of proceeds of the initial public offering of the
Registrant in May 1996 (Registration Statement on Form S-1, Registration No.
333-2492, effective May 16, 1996), the proceeds therefrom have been and are
currently being used to fund the operation and development of the business of
the Registrant as it currently is experiencing no revenues from operations. See
"Item 1. Business - Background," "Item 6. Selected Financial Data" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 6. Selected Financial Data.
The selected statement of operations and balance sheet data set forth below have
been derived from the audited financial statements of the Registrant included as
Exhibit 13 to this Annual Report on Form 10-K. 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.
17
<PAGE>
<TABLE>
<CAPTION>
Cumulative from
January 18, 1991
Year Ended December 31, (inception)
----------------------------------------------------------------------- through
1993 1994 1995 1996 1997 December 31, 1997
--------- ----------- ----------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Operating costs and expenses:
Research and development $ 598,748 $ 1,808,638 $ 4,261,230 $ 6,515,485 $ 10,886,803 $ 24,070,904
Business development -- -- 359,530 547,767 1,043,867 1,951,164
General and administrative 213,923 266,418 876,613 2,559,441 3,848,701 7,881,164
--------- ----------- ----------- ---------- ------------ ------------
Operating loss (812,671) (2,075,056) (5,497,373) (9,622,693) (15,779,371) (33,903,232)
Other income, net 31,582 40,174 152,710 1,803,656 2,272,769 4,370,064
--------- ----------- ----------- ---------- ------------ ------------
Net loss $(781,089) $(2,034,882) $(5,344,663) $(7,819,037) $(13,506,602) $(29,533,168)
========= =========== =========== =========== ============ ============
Net loss per share/(1)/ $ (0.63) $ (0.98)
=========== ============
Weighted average shares
outstanding/(1)/ 12,441,718 13,791,236
=========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 648,193 $ 1,007,015 $ 3,957,105 $ 45,649,934 $ 29,195,656
Working capital 539,127 723,512 3,565,263 45,041,960 28,432,501
Total assets 845,679 1,476,892 4,693,450 50,147,510 36,647,251
Long-term liabilities/(2)/ 22,861 84,436 35,761 19,630 77,269
Redeemable preferred stock 1,500,000 3,900,000 12,406,761 -- --
Deficit accumulated during development stage (827,984) (2,862,866) (8,210,562) (16,029,599) (29,536,201)
Total stockholders' equity (deficit) (807,928) (2,845,166) (8,201,948) 48,684,094 35,287,989
</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 Discussion 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 daily hemodialysis at alternate sites, such as the patient's
home. The Company has never generated sales revenue and has incurred losses
since its inception. At December 31, 1997, the Company had a deficit accumulated
during the development stage of $29.5 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 secure equivalent
regulatory approvals to market the PHD system in countries other than the United
States.
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) risks related to the failure to meet development and
manufacturing milestones on a timely basis, (ii) 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; (iii) 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, (iv) changes in GMP requirements, (v) 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, (vi) the uncertainty regarding the effectiveness and ultimate
market acceptance of the PHD system, the Company's primary product in
development, (vii) changing market conditions, (viii) the need to further
establish the clinical benefits of daily hemodialysis, (ix) 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, (x) the potential adverse
impact of possible changes to Medicare reimbursement policies and rates and (xi)
the Company's dependence on key personnel 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, 1997 Compared to Year Ended December 31, 1996
Research and development expenses were $10.9 million for the year ended December
31, 1997 compared to $6.5 million for the year ended December 31, 1996, an
increase of $4.4 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 increased $0.5 million from $0.5 million in 1996
to $1.0 million in 1997. The increase is due to business development expenses in
Japan and Europe.
General and administrative expenses were $3.8 million for the year ended
December 31, 1997 compared to $2.6 million for the year ended December 31, 1996,
an increase of $1.2 million. The increase was primarily due to hiring additional
management personnel and related support of the Company's continued development
of the PHD system.
Net interest income was $2.3 million for the year ended December 31, 1997
compared to $1.8 million for the year ended December 31, 1996, an increase of
$0.5 million. The increase in net interest income was primarily due to the
investment of proceeds from the Company's initial public offering in May 1996
for a full year in fiscal 1997, as
19
<PAGE>
opposed to only approximately 7 months in fiscal 1996, offset by funds expended
on the development of the PHD system.
As a result of the foregoing, the Company's net loss was $13.5 million ($0.98
per share) for the year ended December 31, 1997, an increase of $5.7 million
($0.35 per share) from the net loss of $7.8 million ($0.63 per share) for the
year ended December 31, 1996.
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.
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, 1997, 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, 1997, the Company made $4.9 million of capital expenditures and
used $27.7 million in cash to support its operations. At December 31, 1997, the
Company had cash, cash equivalents and short-term investments of $29.2 million,
working capital of $28.4 million and long-term investments of $2.8 million. In
January 1998, the Company also received $5 million in proceeds from its sale of
common stock to Teijin Limited of Osaka, Japan (see also "Business - Foreign
Operations.")
The Company estimates that during 1998 it will spend approximately $16 to $18
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 PHD systems for use in clinical trials 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, 1997, together with proceeds from its sale of common stock to
Teijin and future milestone payments to be received from Teijin under the terms
of the joint development agreement, are sufficient to finance the Company's
operations, except for working capital needs related to production of machines,
through December 31, 1999.
20
<PAGE>
Generally, the Company expects U.S. customers to purchase PHD systems and enter
into contracts whereby the Company will provide all products and services
related to the PHD systems for a single monthly price, which would include all
consumables, service and product support. As an alternative, U.S. customers may
enter into lease agreements for the PHD systems, under which the single monthly
price would also include a lease payment. The Company's present
commercialization plan for markets outside of the United States is to develop a
partnership in those markets to distribute the PHD system and related
consumables and service. Financing production of the PHD system in quantities
necessary for commercialization 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. The Company would, therefore, have to rely
on sources of capital beyond cash generated from operations to finance
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 and
receivable financing with a commercial lender. If the Company is unable to
obtain such equipment financing, it would need to seek other forms of financing,
through the sale of equity securities or otherwise, to achieve its business
objectives. The Company has not yet obtained a commitment for such equipment
financing, and there can be no assurance that the Company will be able to obtain
equipment financing or alternative financing on acceptable terms or at all.
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, 1997, the
net operating losses available to offset future taxable income were
approximately $29.0 million. Because the Company has experienced ownership
changes, future utilization of the carryforwards may be limited in any one
fiscal year pursuant to Internal Revenue Code regulations. The carryforwards
expire at various dates beginning in 2008. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce federal income tax liabilities.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The investments of the Company have been made for investment (as opposed to
trading) purposes. Interest rate risk with respect to the investments of the
Company is not significant as substantially all of such investments are in U.S.
dollar cash equivalents and short-term investments (with maturities of less than
18 months), which are by their nature less sensitive to interest rate movements.
The investments of the Company are generally made in U.S. government and federal
agency bonds and high grade commercial paper and corporate bonds.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Balance Sheets as of December 31, 1997 and 1996, and the
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the years ended December 31, 1997, 1996 and 1995 and for the period from January
18, 1991 (inception) through December 31, 1997, the Notes to the Consolidated
Financial Statements and the Independent Auditors' Report set forth on pages 10
through 20 of the 1997 Annual Report to Stockholders of the Registrant are
incorporated herein by reference.
21
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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
and certain key employees is set forth above under "Business - Employees."
Information required by Item 405 of Regulation S-K is set forth in the Proxy
Statement under the heading "Section 16 (a) Beneficial Ownership Reporting
Compliance," 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.
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 -
Certain Relationships and Related Transactions," which information is
incorporated herein by reference.
22
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements:
1. Financial Statements.
The Consolidated Balance Sheets as of December 31, 1997 and 1996, and
the Consolidated Statements of Operations, Stockholders' Equity and
Cash Flows for the years ended December 31, 1997, 1996 and 1995 and
for the period from January 18, 1991 (inception) through December 31,
1997, the Notes to the Consolidated Financial Statements and the
Independent Auditors' Report set forth on pages 10 through 20 of the
1997 Annual Report to Stockholders of the Registrant are incorporated
herein by reference.
2. Financial Statement Schedules.
None.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See "Exhibits Index" below.
23
<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 30th day of
March, 1998.
AKSYS, LTD.
By /s/ Steven A. Bourne
-----------------------------------
Steven A. Bourne
Controller
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 30th day of March, 1998.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Lawrence H.N. Kinet Chairman, Chief Executive Officer and Director
- --------------------------------------------------- (Principal Executive and Financial Officer)
Lawrence H.N. Kinet
/s/ Steven A. Bourne Controller
- ---------------------------------------------------
Steven A. Bourne
/s/ Rodney S. Kenley Vice President, Business Development and Director
- ---------------------------------------------------
Rodney S. Kenley
/s/ Richard B. Egen Director
- ---------------------------------------------------
Richard B. Egen
/s/ Peter H. McNerney Director
- ---------------------------------------------------
Peter H. McNerney
/s/ K. Shan Padda Director
- ---------------------------------------------------
K. Shan Padda
/s/ W. Dekle Rountree, Jr. Director
- ---------------------------------------------------
W. Dekle Rountree, Jr.
/s/ Bernard R. Tresnowski Director
- ---------------------------------------------------
Bernard R. Tresnowski
</TABLE>
24
<PAGE>
AKSYS, LTD.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Aksys, Ltd./(1)/.......................
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/(2)/.........................................
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 License Agreement, dated as of March 11, 1996, between the
Company and Allergan, Inc./(1)/..............................................
10.11 Lease for Property at Two Marriott Drive/(3)/...................................
11 Statement regarding computation of net loss per share/(3)/......................
13 Annual Report to Stockholders. Except as specifically incorporated
herein by reference, this document shall not be deemed "filed" as part
of this Annual Report on Form 10-K/(3)/.........................................
21 Subsidiaries of the Company/(1)/................................................
23 Consent of KPMG Peat Marwick LLP/(3)/...........................................
27 Financial Data Schedule/(3)/....................................................
/(1)/ Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-2492).
/(2)/ Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 333-18073).
/(3)/ Filed herewith.
</TABLE>
25
<PAGE>
Exhibit 10.11
LEASE
--------------------
GREAT LAKES REIT, INC., LANDLORD
and
AKSYS, LTD., TENANT
<PAGE>
TABLE OF CONTENTS
ARTICLE
1. USE AND RESTRICTIONS ON USE..............................................
2. TERM.....................................................................
3. RENT.....................................................................
4. RENT ADJUSTMENTS.........................................................
5. SECURITY DEPOSIT.........................................................
6. ALTERATIONS..............................................................
7. REPAIR...................................................................
8. LIENS....................................................................
9. ASSIGNMENT AND SUBLETTING................................................
10. INDEMNIFICATION..........................................................
11. INSURANCE................................................................
12. WAIVER OF SUBROGATION....................................................
13. SERVICES AND UTILITIES...................................................
14. HOLDING OVER.............................................................
15. SUBORDINATION............................................................
16. RULES AND REGULATIONS....................................................
17. REENTRY BY LANDLORD......................................................
18. DEFAULT..................................................................
<PAGE>
19. REMEDIES..................................................................
20. TENANT'S BANKRUPTCY OR INSOLVENCY.........................................
21. QUIET ENJOYMENT...........................................................
22. DAMAGE BY FIRE, ETC.......................................................
23. EMINENT DOMAIN............................................................
24. SALE BY LANDLORD..........................................................
25. ESTOPPEL CERTIFICATES.....................................................
26. SURRENDER OF PREMISES.....................................................
27. NOTICES...................................................................
28. TAXES PAYABLE BY TENANT...................................................
29. OPTION TO TERMINATE.......................................................
30. DEFINED TERMS AND HEADINGS................................................
31. TENANT'S AUTHORITY........................................................
32. COMMISSIONS...............................................................
33. TIME AND APPLICABLE LAW...................................................
34. SUCCESSORS AND ASSIGNS....................................................
35. ENTIRE AGREEMENT..........................................................
36. EXAMINATION NOT OPTION....................................................
37. RECORDATION...............................................................
38. LIMITATION OF LANDLORD'S LIABILITY........................................
39. GOVERNMENTAL APPROVALS....................................................
EXHIBIT A - PREMISES
<PAGE>
EXHIBIT B - INITIAL ALTERATIONS
EXHIBIT C - RULES AND REGULATIONS
NET OFFICE LEASE
REFERENCE PAGE
BUILDING: Two Marriott Drive
Lincolnshire, Illinois
LANDLORD: Great Lakes REIT, Inc., a Maryland
corporation
LANDLORD'S ADDRESS: 823 Commerce Drive, Suite 300
Oak Brook, IL 60521
LANDLORD'S FAX NUMBER: (847) 368 2929
LEASE REFERENCE DATE: July 15, 1996
TENANT: Aksys, Ltd., a Delaware corporation
TENANT'S ADDRESS: Two Marriott Drive
Lincolnshire, Illinois
TENANT'S FAX NUMBER: (847) 247 6060
PREMISES RENTABLE AREA: Approximately 41,500 sq. ft.
SCHEDULED COMMENCEMENT DATE: September 1, 1996
TERMINATION DATE: August 31, 2006
TERM OF LEASE: 10 years and 0 months beginning on the
Commencement Date and ending on the
Termination Date (unless sooner terminated
pursuant to the Lease)
SCHEDULE OF BASE RENT:
<TABLE>
<CAPTION>
Period Annual Rent Monthly Installment of Annual Rent
------ ----------- ----------------------------------
<S> <C> <C>
9/1/96 - 8/31/97 $337,500.00 $28,125.00
9/1/97 - 8/31/98 $341,250.00 $28,437.50
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
9/1/98 - 8/31/99 $369,350.00 $30,779.17
9/1/99 - 8/31/00 $380,555.00 $31,712.92
9/1/00 - 8/31/01 $391,760.00 $32,646.67
9/1/01 - 8/31/02 $403,795.00 $33,649.58
9/1/02 - 8/31/03 $415,830.00 $34,652.50
9/1/03 - 8/31/04 $428,280.00 $35,690.00
9/1/04 - 8/31/05 $441,145.00 $36,762.08
9/1/05 - 8/31/06 $454,425.00 $37,868.75
</TABLE>
SECURITY DEPOSIT: $780,000 (subject to reduction as provided
in Article 5)
ASSIGNMENT/SUBLETTING FEE $500.00
REAL ESTATE BROKER DUE COMMISSION: Cushman & Wakefield
The Reference Page information is incorporated into and made a part of the
Lease. In the event of any conflict between any Reference Page information and
the Lease, the Lease shall control. This Lease includes Exhibits A through C,
all of which are made a part of this Lease.
LANDLORD: TENANT:
Great Lakes REIT, Inc., a Maryland Aksys, Ltd., a Delaware corporation
corporation
By: /s/Great Lakes REIT, Inc. By: /s/ Rodney S. Kenley
------------------------- ---------------------
Title: Senior Vice President Title: President and COO
--------------------- -----------------
Dated: July 24, 1996 Dated: July 27, 1996
------------- -------------
<PAGE>
LEASE
By this Lease Landlord leases to Tenant and Tenant leases from Landlord the
Premises in the Building as set forth and described on the Reference Page. The
Reference Page, including all terms defined thereon, is incorporated as part of
this Lease.
1. USE AND RESTRICTIONS ON USE
1.1 The Premises are to be used solely for general office purposes except
that not more than 10,000 square feet may be used for laboratory purposes unless
otherwise agreed in writing. Tenant shall not allow the Premises to be used for
any improper, immoral, unlawful, or objectionable purpose. Tenant shall not do,
permit or suffer in, on, or about the Premises the sale of any alcoholic liquor
without the written consent of Landlord first obtained, or the commission of any
waste. Tenant shall comply with all governmental laws, ordinances and
regulations applicable to the use of the Premises and its occupancy and shall
promptly comply with all governmental orders and directions for the correction,
prevention and abatement of any violations in or upon, or in connection with,
the Premises, all at Tenant's sole expense. Tenant shall not do or permit
anything to be done on or about the Premises or bring or keep anything into the
Premises which will in any way increase the rate of, invalidate or prevent the
procuring of any insurance protecting against loss or damage to the Building or
any of its contents by fire or other casualty or against liability for damage to
property or injury to persons in or about the Building or any part thereof.
1.2 Tenant agrees that Tenant, its agents and contractors, licensees, or
invitees shall not handle, use, manufacture, store or dispose of any flammables,
explosives, radioactive materials, hazardous wastes or materials, toxic wastes
or materials, medical wastes or other similar substances, petroleum products or
derivatives (collectively "Hazardous Materials") on, under, or about the
Premises, without Landlord's prior written consent (which consent shall not be
unreasonably withheld as long as Tenant demonstrates and documents to Landlord's
reasonable satisfaction (i) that such Hazardous Materials (A) are necessary or
useful to Tenant's business; and (B) will be used, kept, and stored in
compliance with all laws relating to any Hazardous Materials so brought or used
or kept in or about the Premises; and (ii) that Tenant will give all required
notices concerning the presence in or on the Premises or the release of such
Hazardous Materials from the Premises) provided that Tenant may handle, store,
use or dispose of products containing small quantities of Hazardous Materials,
which products are of a type customarily found in offices and households (such
as aerosol cans containing insecticides, toner for copies, paints, paint
remover, and the like), provided further that Tenant shall handle, store, use
and dispose of any such Hazardous Materials in a safe and lawful manner and
shall not allow such Hazardous Materials to contaminate the Premises or the
environment.
<PAGE>
Tenant further agrees that Tenant will not permit any substance to come
into contact with groundwater under the Premises. Any such substance coming
into contact with groundwater shall, regardless of its inherent hazardous
characteristics, be considered a Hazardous Material for purposes of this Lease.
Notwithstanding the provisions of Paragraph 1.2, Tenant may handle, store,
and use Hazardous Materials, limited to the types, amounts, and use identified
in the Hazardous Materials Exhibit attached hereto. If no Hazardous Materials
Exhibit is attached to this Lease, then this paragraph of Paragraph 1.2 shall be
of no force and effect. Tenant hereby certifies to Landlord that the
information provided by Tenant pursuant to this paragraph is true, correct, and
complete. Tenant covenants to comply with the use restrictions shown on the
attached Hazardous Materials Exhibit. Tenant's business and operations, and
more especially its handling, storage, use and disposal of Hazardous Materials
shall at all times comply with all applicable laws pertaining to Hazardous
Materials. Tenant shall secure and abide by all permits necessary for Tenant's
operations on the Premises. Tenant shall give or post all notices required by
all applicable laws pertaining to Hazardous Materials. If Tenant shall at any
time fail to comply with this Paragraph, Tenant shall immediately notify
Landlord in writing of such noncompliance.
Tenant shall provide Landlord with copies of any Material Safety Data
Sheets (as required by the Occupational Safety and Health Act) relating to any
Hazardous Materials to be used, kept, or stored at or on the Premises, at least
5 business days prior to the first use, placement, or storage of such Hazardous
Material on the Premises (except in the case of an emergency). Landlord shall
have 5 business days (except in the case of an emergency in which case Landlord
shall have 24 hours) following delivery of such Material Safety Data Sheets to
approve or forbid, in its sole discretion subject to the limitation contained
above, such use, placement, or storage of a Hazardous Material on the Premises.
Tenant shall not store hazardous wastes on the premises for more than 90
days; "hazardous waste" has the meaning given it by the Resource Conservation
and Recovery Act of 1976, as amended. Tenant shall not install any underground
or above ground storage tanks on the Premises. Tenant shall not dispose of any
Hazardous Material or solid waste on the Premises. In performing any
alterations of the Premises permitted by the Lease, Tenant shall not install any
Hazardous Material in the Premises without the specific consent of Landlord
attached as an exhibit to this Lease.
Any increase in the premiums for necessary insurance on the Property which
arises from Tenant's use and/or storage of Hazardous Materials shall be solely
at Tenant's expense. Tenant shall procure and maintain at its sole expense such
additional insurance as may be necessary to comply with any requirement of any
Federal, State or local governmental agency with jurisdiction.
If Landlord, in its sole discretion, believes that the Premises or the
environment have become contaminated with Hazardous Materials or similar
materials that must be removed under
<PAGE>
the laws of the state where the Premises are located, in breach of the
provisions of this Lease, Landlord, in addition to its other rights under this
Lease, may enter upon the Premises and obtain samples from the Premises,
including without limitation the soil and groundwater under the Premises, for
the purposes of analyzing the same to determine whether and to what extent the
Premises or the environment have become so contaminated. Tenant shall reimburse
Landlord for the costs of any inspection, sampling and analysis that discloses
contamination for which Tenant is liable under the terms of this Lease. Tenant
may not perform any sampling, testing, or drilling to locate any Hazardous
Materials on the Premises without Landlord's prior written consent.
Without limiting the above, Tenant shall reimburse, defend, indemnify and
hold Landlord harmless from and against any and all claims, losses, liabilities,
damages, costs and expenses, including without limitation, loss of rental
income, loss due to business interruption, and attorneys fees and costs, arising
out of or in any way connected with the use, manufacture, storage, or disposal
of Hazardous Materials by Tenant, its agents or contractors on, under or about
the Premises including, without limitation, the costs of any required or
necessary investigation, repair, cleanup or detoxification and the preparation
of any closure or other required plans in connection herewith, whether voluntary
or compelled by governmental authority. The indemnity obligations of Tenant
under this clause shall survive any termination of the Lease. At Landlord's
option, Tenant shall perform any required or necessary investigation, repair,
cleanup, or detoxification of the Premises. In such case, Landlord shall have
the right, in its sole discretion, to approve all plans, consultants, and
cleanup standards. Tenant shall provide Landlord on a timely basis with (i)
copies of all documents, reports, and communications with governmental
authorities; and (ii) notice and an opportunity to attend all meetings with
regulatory authorities. Tenant shall comply with all notice requirements and
Landlord and Tenant agree to cooperate with governmental authorities seeking
access to the Premises for purposes of sampling or inspection. No disturbance
of Tenant's use of the Premises resulting from activities conducted pursuant to
this Paragraph shall constitute an actual or constructive eviction of Tenant
from the Premises. In the event that such cleanup extends beyond the
termination of the Lease, Tenant's obligation to pay rent (including additional
rent and percentage rent, if any) shall continue until such cleanup is completed
and any certificate of clearance or similar document has been delivered to
Landlord. Rent during such holdover period shall be at market rent; if the
parties are unable to agree upon the amount of such market rent, then Landlord
shall have the option of (a) increasing the rent for the period of such holdover
based upon the increase in the cost-of-living from the third month preceding the
commencement date to the third month preceding the start of the holdover period,
using such indices and assumptions and calculations as Landlord in its sole
reasonable judgement shall determine are necessary; or (b) having Landlord and
Tenant each appoint a qualified MAI appraiser doing business in the area; in
turn, these two independent MAI appraisers shall appoint a third MAI appraiser
and the majority shall decide upon the fair market rental for Premises as of the
expiration of the then current term. Landlord and Tenant shall equally share in
the expense of this appraisal except that in the event the rent is found to be
within fifteen percent of the original rate quoted by Landlord, then Tenant
shall bear the full cost of all the appraisal process. In no event shall the
rent be subject to determination or modification by any person, entity, court,
or
<PAGE>
authority other than as set forth expressly herein, and in no event shall the
rent for any holdover period be less that the rent due in the preceding period.
Notwithstanding anything set forth in this Lease, Tenant shall only be
responsible for contamination of Hazardous Materials or any cleanup resulting
directly therefrom, resulting directly from matters occurring or Hazardous
Materials deposited (other than by contractors, agents or representatives
controlled by Landlord) during the Lease term, and any other period of time
during which Tenant is in actual or constructive occupancy of the Premises.
Tenant shall take reasonable precautions to prevent the contamination of the
Premise with Hazardous Materials by third parties.
It shall not be unreasonable for Landlord to withhold its consent to any
proposed assignment or sublease if (i) the proposed assignee's or sublessee's
anticipated use of the premises involves the generation, storage, use, treatment
or disposal of Hazardous Materials; (ii) the proposed assignee or sublessee has
been required by any prior landlord, lender, or governmental authority to take
remedial action in connection with Hazardous Materials contaminating a property
if the contamination resulted from such assignee's or sublessee's actions or use
of the property in question; or (iii) the proposed assignee or sublessee is
subject to an enforcement order issued by any governmental authority in
connection with the use, disposal, or storage of a hazardous material.
Any of Tenant's insurance insuring against claims of the type dealt with in
this Paragraph 1.2 shall be considered primary coverage for claims against the
Property arising out of or under this paragraph.
In the event of (i) any transfer of Tenant's interest under this Lease; or
(ii) the termination of this Lease, by lapse of time or otherwise, Tenant shall
be solely responsible for compliance with any and all then effective federal,
state or local laws concerning (i) the physical condition of the Premises,
Building, or Property; or (ii) the presence of hazardous or toxic materials in
or on the Premises, Building, or Property (for example, the New Jersey
Environmental Cleanup Responsibility Act, the Illinois Responsible Property
Transfer Act, or similar applicable state laws), including but not limited to
any reporting or filing requirements imposed by such laws. Tenant's duty to pay
rent, additional rent, and percentage rent shall continue until the obligations
imposed by such laws are satisfied in full and any certificate of clearance or
similar document has been delivered to Landlord.
All consents given by Landlord pursuant to this Paragraph 1.2 shall be in
writing and shall be attached as amendments to this Lease. If such consents are
not attached to this Lease, then such consents will be deemed withheld.
<PAGE>
2. TERM.
2.1 The Term of this Lease shall begin on the date ("Commencement Date")
which shall be the later of the Scheduled Commencement Date as shown on the
Reference Page and the date that Landlord shall tender possession of the
Premises to Tenant. Landlord shall tender possession of the Premises with all
the work, if any, to be performed by Landlord pursuant to Exhibit B to this
Lease substantially completed. Landlord and Tenant shall execute a memorandum
setting forth the actual Commencement Date and Termination Date.
2.2 In the event Landlord shall permit Tenant to occupy the Premises
prior to the Commencement Date, such occupancy shall be subject to all the
provisions of this Lease. Said early possession shall not advance the
Termination Date.
3. RENT.
3.1 Tenant agrees to pay to Landlord the Annual Rent in effect from time
to time by paying the Monthly Installment of Rent then in effect on or before
the first day of each full calendar month during the Term, except that the first
month's rent shall be paid upon the execution of this Lease. The Monthly
Installment of Rent in effect at any time shall be one-twelfth of the Annual
Rent in effect at such time. Rent for any period during the Term which is less
than a full month shall be a prorated portion of the Monthly Installment of Rent
based upon a thirty (30) day month. Said rent shall be paid to Landlord,
without deduction or offset and without notice or demand, at the Landlord's
address, as set forth on the Reference Page, or to such other person or at such
other place as Landlord may from time to time designate in writing.
3.2 Tenant recognizes that late payment of any rent or other sum due
under this Lease will result in administrative expense to Landlord, the extent
of which additional expense is extremely difficult and economically impractical
to ascertain. Tenant therefore agrees that if rent or any other sum is not paid
when due and payable pursuant to this Lease, a late charge shall be imposed in
an amount equal to the greater of: (a) Fifty Dollars ($50.00), or (b) a sum
equal to five percent (5%) per month of the unpaid rent or other payment. The
amount of the late charge to be paid by Tenant shall be reassessed and added to
Tenant's obligation for each successive monthly period until paid. The
provisions of this Section 3.2 in no way relieve Tenant of the obligation to pay
rent or other payments on or before the date on which they are due, nor do the
terms of this Section 3.2 in any way affect Landlord's remedies pursuant to
Article 19 of this Lease in the event said rent or other payment is unpaid after
date due.
4. RENT ADJUSTMENTS.
4.1 For the purpose of this Article 4, the following terms are defined as
follows:
<PAGE>
4.1.1 Lease Year: Each calendar year falling partly or wholly
within the Term.
4.1.2 Direct Expenses: All direct costs of operation, maintenance,
repair and management of the Building (including the amount of any credits which
Landlord may grant to particular tenants of the Building in lieu of providing
any standard services or paying any standard costs described in this Section
4.1.2 for similar tenants), as determined in accordance with generally accepted
accounting principles, including the following costs by way of illustration, but
not limitation: water and sewer charges; insurance charges of or relating to
all insurance policies and endorsements deemed by Landlord to be reasonably
necessary or desirable and relating in any manner to the protection,
preservation, or operation of the Building or any part thereof; utility costs,
including, but not limited to, the cost of heat, light, power, steam, gas, and
waste disposal; the cost of security and alarm services; window cleaning costs;
labor costs (including Landlord's employees at Landlord's then standard hourly
charge for time spent at the Building); costs and expenses of managing the
Building including management fees (at the rate of 2% of Annual Rent); air
conditioning maintenance costs; elevator maintenance fees and supplies; material
costs; equipment costs including the cost of maintenance, repair and service
agreements and rental and leasing costs; purchase costs of equipment other than
capital items; current rental and leasing costs of items which would be
amortizable capital items if purchased; tool costs; licenses, permits and
inspection fees; wages, salaries; employee benefits and payroll taxes (at
Landlord's then standard rates for time spent at the Building); accounting and
legal fees; any sales, use or service taxes incurred in connection therewith.
Direct Expenses shall not include depreciation or amortization of the Building
or equipment in the Building except as provided herein, loan principal payments,
costs of alterations of tenants' premises, leasing commissions, interest
expenses on long-term borrowings, advertising costs or management salaries for
executive personnel other than personnel located at the Building. In addition,
Landlord shall be entitled to amortize and include as an additional rental
adjustment: (i) an allocable portion of the cost of capital improvement items
which are reasonably calculated to reduce operating expenses; (ii) fire
sprinklers and suppression systems and other life safety systems; and (iii)
other capital expenses which are required under any governmental laws,
regulations or ordinances which were not applicable to the Building at the time
it was constructed. All such costs shall be amortized over the reasonable life
of such improvements in accordance with such reasonable life and amortization
schedules as shall be determined by Landlord in accordance with generally
accepted accounting principles, with interest on the unamortized amount at one
percent (1%) in excess of the prime lending rate announced from time to time as
such by The Northern Trust Company of Chicago, Illinois. Landlord will, at
Tenant's request, provide Tenant on or before December 1 of any year during the
Term with a budget of expected Direct Expenses for the following year for
Tenant's approval and will consult with Tenant thereafter concerning the budget.
Tenant agrees that its approval will not be unreasonably withheld or delayed.
If Landlord and Tenant cannot agree on the budget, Landlord may proceed on the
basis of its original budget proposal (as it may have been modified in the
course of consultations with Tenant) provided the budgeted Direct Expenses on a
per square foot basis are reasonably equivalent to similar charges for other
comparable buildings in the market area of the Building. Once approved,
Landlord may not exceed the total budgeted Direct Expenses by more than 5%
without the approval of Tenant,
<PAGE>
which approval will not be unreasonably withheld or delayed.
4.1.3 Taxes: Real estate taxes and any other taxes, charges and
assessments which are levied with respect to the Building or the land
appurtenant to the Building, or with respect to any improvements, fixtures and
equipment or other property of Landlord, real or personal, located in the
Building and used in connection with the operation of the Building and said
land, any payments to any ground lessor in reimbursement of tax payments made by
such lessor; and all fees, expenses and costs incurred by Landlord in
investigating, protesting, contesting or in any way seeking to reduce or avoid
increase in any assessments, levies or the tax rate pertaining to any Taxes to
be paid by Landlord in any Lease Year. Landlord agrees that it will protest or
contest Taxes if Tenant so requests. Taxes shall not include any corporate
franchise, or estate, inheritance or net income tax, or tax imposed upon any
transfer by Landlord of its interest in this Lease or the Building.
4.2 Tenant shall pay as additional rent for each Lease Year all Direct
Expenses and Taxes incurred for such Lease Year.
4.3 The annual determination of Direct Expenses shall be made by Landlord
and if certified by a nationally recognized firm of public accountants selected
by Landlord shall be binding upon Landlord and Tenant. Tenant may review the
books and records supporting such determination in the office of Landlord, or
Landlord's agent, during normal business hours, upon giving Landlord five (5)
days advance written notice within sixty (60) days after receipt of such
determination, but in no event more often than once in any one year period. In
the event that during all or any portion of any Lease Year, the Building is not
fully rented and occupied Landlord may make any appropriate adjustment in
occupancy-related Direct Expenses for such year for the purpose of avoiding
distortion of the amount of such Direct Expenses to be attributed to Tenant by
reason of variation in total occupancy of the Building, by employing sound
accounting and management principles to determine Direct Expenses that would
have been paid or incurred by Landlord had the Building been fully rented and
occupied, and the amount so determined shall be deemed to have been Direct
Expenses for such Lease Year.
4.4 Prior to the actual determination thereof for a Lease Year, Landlord
may from time to time estimate Tenant's liability for Direct Expenses and/or
Taxes under Section 4.2, Article 6 and Article 29 for the Lease Year or portion
thereof. Landlord will give Tenant written notification of the amount of such
estimate and Tenant agrees that it will pay, by increase of its Monthly
Installments of Rent due in such Lease Year, additional rent in the amount of
such estimate. Any such increased rate of Monthly Installments of Rent pursuant
to this Section 4.4 shall remain in effect until further written notification to
Tenant pursuant hereto.
4.5 When the above mentioned actual determination of Tenant's liability
for Direct Expenses and/or Taxes is made for any Lease Year and when Tenant is
so notified in writing, then:
4.5.1 If the total additional rent Tenant actually paid pursuant to
Section 4.3 on
<PAGE>
account of Direct Expenses and/or Taxes for the Lease Year is less than Tenant's
liability for Direct Expenses and/or Taxes, then Tenant shall pay such
deficiency to Landlord as additional rent in one lump sum within thirty (30)
days of receipt of Landlord's bill therefor; and
4.5.2 If the total additional rent Tenant actually paid pursuant to
Section 4.3 on account of Direct Expenses and/or Taxes for the Lease Year is
more than Tenant's liability for Direct Expenses and/or Taxes, then Landlord
shall credit the difference against the then next due payments to be made by
Tenant under this Article 4.
4.6 If the Commencement Date is other than January 1 or if the
Termination Date is other than December 31, Tenant's liability for Direct
Expenses and Taxes for the Lease Year in which said Date occurs shall be
prorated based upon a three hundred sixty-five (365) day year.
5. SECURITY DEPOSIT. Tenant shall deposit the Security Deposit in the form of
cash or a letter of credit with Landlord upon the execution of this Lease. Said
sum shall be held by Landlord as security for the faithful performance by Tenant
of all the terms, covenants and conditions of this Lease to be kept and
performed by Tenant and not as an advance rental deposit or as a measure of
Landlord's damage in case of Tenant's default. If Tenant defaults with respect
to any provision of this Lease, Landlord may use any part of the Security
Deposit (or draw such amount under the letter of credit) for the payment of any
rent or any other sum in default, or for the payment of any amount which
Landlord may spend or become obligated to spend by reason of Tenant's default,
or to compensate Landlord for any other loss or damage which Landlord may suffer
by reason of Tenant's default. If any portion is so used, Tenant shall within
five (5) days after written demand therefor, deposit with Landlord an amount
sufficient to restore the Security Deposit to its original amount (or restore
the balance of the letter of credit) and Tenant's failure to do so shall be a
material breach of this Lease. Except to such extent, if any, as shall be
required by law, Landlord shall not be required to keep the Security Deposit
separate from its general funds, and Tenant shall not be entitled to interest on
such deposit. If Tenant shall fully and faithfully perform every provision of
this Lease to be performed by it, the Security Deposit or any balance thereof
shall be returned to Tenant at such time after termination of this Lease when
Landlord shall have determined that all of Tenant's obligations under this Lease
have been fulfilled.
Any letter of credit shall be issued by a bank reasonably acceptable to
Landlord, shall be drawable by Landlord solely upon presentation of a statement
from Landlord that the amount drawn is due and payable under the Lease, shall
allow for partial draws, and shall otherwise be in form and substance reasonably
acceptable to Landlord. The letter of credit shall have an expiry date not
earlier than one month after the Termination Date of the Lease or shall be
replaced by Tenant not less than thirty (30) days prior to its expiry date with
another letter having an expiry date at least one year later. If Tenant fails to
replace an expiring letter of credit or restore the letter of credit to its full
amount following a draw by Landlord, Landlord may draw the full amount of the
letter of credit and treat such amount as cash Security Deposit. In the event
of a
<PAGE>
transfer of Landlord's interest in the Lease, Tenant will promptly deposit
a replacement letter of credit drawable by Landlord's successor and if Tenant
shall fail to do so within ten (10) days of Landlord's request, Landlord may
draw the full amount of the letter of credit and treat such amount as a cash
Security Deposit.
Notwithstanding the above, if Tenant shall fully and faithfully perform
every provision of this Lease to be performed by it as of each of the applicable
dates set forth below, the Security Deposit shall be reduced (or the maximum
amount drawable under the letter of credit shall be reduced) on each applicable
date as follows:
(i) On the date which is ten (10) days after Tenant delivers to Landlord
evidence reasonably satisfactory to Landlord that Tenant has obtained all
required Federal Drug Administration approvals to begin marketing a new medical
device which includes the Aksys PHD system (as described in its Form S-1 filed
with the Securities and Exchange Commission on March 18, 1996), the Security
Deposit shall be reduced to $600,000; and
(ii) For each fiscal year of Tenant beginning thereafter in which Tenant's
net income from continuing operations is greater than $2,000,000 (as evidenced
by its audited financial statement), the Security Deposit shall be reduced by
$150,000 for each $2,000,000 increment of net income from continuing operations,
such reduction to be effective as the of date which is ten (10) days after such
financial statements are delivered to Landlord.
6. ALTERATIONS.
6.1 Except for those, if any, specifically provided for in Exhibit B to
this Lease, Tenant shall not make or suffer to be made any alterations,
additions, or improvements, including, but not limited to, the attachment of any
fixtures or equipment in, on, or to the Premises or any part thereof or the
making of any improvements as required by Article 7, without the prior written
consent of Landlord. When applying for such consent, Tenant shall, if requested
by Landlord, furnish complete plans and specifications for such alterations,
additions and improvements.
6.2 In the event Landlord consents to the making of any such alteration,
addition or improvement by Tenant, the same shall be made using a contractor
reasonably acceptable to Landlord at Tenant's sole cost and expense. If Tenant
shall employ any Contractor other than Landlord's Contractor and such other
Contractor or any Subcontractor of such other Contractor shall employ any non-
union labor or supplier, Tenant shall be responsible for and hold Landlord
harmless from any and all delays, damages and extra costs suffered by Landlord
as a result of any dispute with any labor unions concerning the wage, hours,
terms or conditions of the employment of any such labor. In any event Landlord
may charge Tenant a reasonable charge to cover its overhead as it relates to
such proposed work.
6.3 All alterations, additions or improvements proposed by Tenant shall
be constructed
<PAGE>
in accordance with all government laws, ordinances, rules and regulations and
Tenant shall, prior to construction, provide the additional insurance required
under Article 11 in such case, and also all such assurances to Landlord,
including but not limited to, waivers of lien, surety company performance bonds
and personal guaranties of individuals of substance as Landlord shall require to
assure payment of the costs thereof and to protect Landlord and the Building and
appurtenant land against any loss from any mechanic's, materialmen's or other
liens. Tenant shall pay in addition to any sums due pursuant to Article 4, any
increase in real estate taxes attributable to any such alteration, addition or
improvement for so long, during the Term, as such increase is ascertainable; at
Landlord's election said sums shall be paid in the same way as sums due under
Article 4.
6.4 All alterations, additions, and improvements in, on, or to the
Premises made or installed by Tenant, including carpeting, shall be and remain
the property of Tenant during the Term but, excepting furniture, furnishings,
movable partitions of less than full height from floor to ceiling and other
trade fixtures, shall become a part of the realty and belong to Landlord without
compensation to Tenant upon the expiration or sooner termination of the Term, at
which time title shall pass to Landlord under this Lease as by a bill of sale,
unless Landlord elects otherwise. Upon such election by Landlord, Tenant shall
upon demand by Landlord, at Tenant's sole cost and expense, forthwith and with
all due diligence remove any such alterations, additions or improvements which
are designated by Landlord to be removed, and Tenant shall forthwith and with
all due diligence, at its sole cost and expense, repair and restore the Premises
to their original condition, reasonable wear and tear and damage by fire or
other casualty excepted. Landlord will, if requested by Tenant at the time
Tenant seeks Landlord's approval of any alterations, additions, and
improvements, inform Tenant at the time of granting its approval whether such
alterations, additions, and improvements will be required to be removed at the
end of the Term. Notwithstanding the above, Landlord agrees that Tenant shall
have no obligation to remove any installations, additions, or improvements which
are of a type customarily found in offices and which are part of the tenant
improvements initially constructed by Tenant; Tenant shall remove, if Landlord
so requests, all voice and data cabling and all improvements connected with any
laboratories and will level and restore the floors.
7. REPAIR.
7.1 Landlord shall have no obligation to alter, remodel, improve, repair,
decorate or paint the Premises, except as specified in Exhibit B if attached to
this Lease and except that Landlord shall repair and maintain the structural
portions of the Building, including the basic plumbing, roof, air conditioning,
heating and electrical systems installed or furnished by Landlord. By taking
possession of the Premises, Tenant accepts them as being in good order,
condition and repair and in the condition in which Landlord is obligated to
deliver them. It is hereby understood and agreed that no representations
respecting the condition of the Premises or the Building have been made by
Landlord to Tenant, except as specifically set forth in this Lease. Tenant has
no authority to go upon the roof or make any cuts or holes in the roof without
the
<PAGE>
prior written consent of the Landlord.
7.2 Tenant shall, at all times during the Term, keep the Premises in good
condition and repair excepting damage by fire, or other casualty, and in
compliance with all applicable governmental laws, ordinances and regulations,
promptly complying with all governmental orders and directives for the
correction, prevention and abatement of any violations or nuisances in or upon,
or connected with, the Premises, all at Tenant's sole expense.
7.3 Landlord shall not be liable for any failure to make any repairs or
to perform any maintenance unless such failure shall persist for an unreasonable
time after written notice of the need of such repairs or maintenance is given to
Landlord by Tenant.
7.4 Except as provided in Article 22, there shall be no abatement of rent
and no liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or to
fixtures, appurtenances and equipment in the Building. Except to the extent, if
any, prohibited by law, Tenant waives the right to make repairs at Landlord's
expense under any law, statute or ordinance now or hereafter in effect.
8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land
and Tenant's leasehold interest in the Premises free from any liens arising out
of any services, work or materials performed, furnished, or contracted for by
Tenant, or obligations incurred by Tenant. In the event that Tenant shall not,
within ten (10) days following the imposition of any such lien, either cause the
same to be released of record or provide Landlord with insurance against the
same issued by a major title insurance company or such other protection against
the same as Landlord shall accept, Landlord shall have the right to cause the
same to be released by such means as it shall deem proper, including payment of
the claim giving rise to such lien. All such sums paid by Landlord and all
expenses incurred by it in connection therewith shall be considered additional
rent and shall be payable to it by Tenant on demand.
9. ASSIGNMENT AND SUBLETTING.
9.1 Tenant shall not have the right to assign or pledge this Lease or to
sublet the whole or any part of the Premises whether voluntarily or by operation
of law, or permit the use or occupancy of the Premises by anyone other than
Tenant, and shall not make, suffer or permit such assignment, subleasing or
occupancy without the prior written consent of Landlord, which shall not be
unreasonably withheld, and said restrictions shall be binding upon any and all
assignees of the Lease and subtenants of the Premises. In the event Tenant
desires to sublet, or permit such occupancy of, the Premises, or any portion
thereof, or assign this Lease, Tenant shall give written notice thereof to
Landlord at least thirty (30) days but no more than one hundred eighty (180)
days prior to the proposed commencement date of such subletting or assignment,
<PAGE>
which notice shall set forth the name of the proposed subtenant or assignee, the
relevant terms of any sublease or assignment and copies of financial reports and
other relevant financial reports and other relevant financial information of the
proposed subtenant or assignee.
9.2 Notwithstanding any assignment or subletting, permitted or otherwise,
Tenant shall at all times remain directly, primarily and fully responsible and
liable for the payment of the rent specified in this Lease and for compliance
with all of its other obligations under the terms, provisions and covenants of
this Lease. Upon the occurrence of an Event of Default, if the Premises or any
part of them are then assigned or sublet, Landlord, in addition to any other
remedies provided in this Lease or provided by law, may, at its option, collect
directly from such assignee or subtenant all rents due and becoming due to
Tenant under such assignment or sublease and apply such rent against any sums
due to Landlord from Tenant under this Lease, and no such collection shall be
construed to constitute a novation or release of Tenant from the further
performance of Tenant's obligations under this Lease.
9.3 In addition to Landlord's right to approve of any subtenant or
assignee, Landlord shall have the option, in its sole discretion, in the event
of any proposed subletting or assignment, to terminate this Lease, or in the
case of a proposed subletting of less than the entire Premises, to recapture the
portion of the Premises to be sublet, as of the date the subletting or
assignment is to be effective. The option shall be exercised, if at all, by
Landlord giving Tenant written notice given by Landlord to Tenant within sixty
(60) days following Landlord's receipt of Tenant's written notice as required
above. If this Lease shall be terminated with respect to the entire Premises
pursuant to this Section, the Term of this Lease shall end on the date stated in
Tenant's notice as the effective date of the sublease or assignment as if that
date had been originally fixed in this Lease for the expiration of the Term. If
Landlord recaptures under this Section only a portion of the Premises, the rent
to be paid from time to time during the unexpired Term shall abate
proportionately based on the proportion by which the approximate square footage
of the remaining portion of the Premises shall be less than that of the Premises
as of the date immediately prior to such recapture. Tenant shall, at Tenant's
own cost and expense, discharge in full any outstanding commission obligation on
the part of Landlord with respect to this Lease, and any commissions which may
be due and owing as a result of any proposed assignment or subletting, whether
or not the Premises are recaptured pursuant to this Section 9.3 and rented by
Landlord to the proposed tenant or any other tenant.
9.4 In the event that Tenant sells, sublets, assigns or transfers this
Lease, Tenant shall pay to Landlord as additional rent an amount equal to fifty
percent (50%) of any Increased Rent (as defined below) when and as such
Increased Rent is received by Tenant. As used in this Section, "Increased Rent"
shall mean the excess of (a) all rent and other consideration which Tenant is
entitled to receive by reason of any sale, sublease, assignment or other
transfer of this Lease, over (b) the sum of (i) the rent otherwise payable by
Tenant under this Lease at such time, (ii) the cost of tenant improvements paid
for by Tenant in order to prepare the space for the occupancy of the subtenant,
assignee or transferee, and (iii) reasonable and customary leasing commissions
paid for by Tenant in connection with the sublet, assignment or transfer. For
<PAGE>
purposes of the foregoing, any consideration received by Tenant in form other
than cash shall be valued at its fair market value as determined by Landlord in
good faith.
9.5 Notwithstanding any other provision hereof, Tenant shall have no
right to make (and Landlord shall have the absolute right to refuse consent to)
any assignment of this Lease or sublease of any portion of the Premises if at
the time of either Tenant's notice of the proposed assignment or sublease or the
proposed commencement date thereof, there shall exist any uncured default of
Tenant or matter which will become a default of Tenant with passage of time
unless cured, or if the proposed assignee or sublessee is an entity: (a) with
which Landlord is already in negotiation as evidenced by the issuance of a
written proposal; (b) is a governmental agency; (c) is incompatible with the
character of occupancy of the Building; or (d) would subject the Premises to a
use which would: (i) involve increased personnel or wear upon the Building;
(ii) violate any exclusive right granted to another tenant of the Building;
(iii) require any addition to or modification of the Premises or the Building in
order to comply with building code or other governmental requirements; or, (iv)
involve a violation of Section 1.2. Tenant expressly agrees that Landlord shall
have the absolute right to refuse consent to any such assignment or sublease and
that for the purposes of any statutory or other requirement of reasonableness on
the part of Landlord such refusal shall be reasonable.
9.6 Upon any request to assign or sublet, Tenant will pay to Landlord the
Assignment/Subletting Fee plus, on demand, a sum equal to all of Landlord's
reasonable costs, including attorney's fees, incurred in investigating and
considering any proposed or purported assignment or pledge of this Lease or
sublease of any of the Premises, regardless of whether Landlord shall consent
to, refuse consent, or determine that Landlord's consent is not required for,
such assignment, pledge or sublease. Any purported sale, assignment, mortgage,
transfer of this Lease or subletting which does not comply with the provisions
of this Article 9 shall be void.
9.7 If Tenant is a corporation, partnership or trust, any transfer or
transfers of or change or changes within any twelve month period in the number
of the outstanding voting shares of the corporation, the general partnership
interests in the partnership or the identity of the persons or entities
controlling the activities of such partnership or trust resulting in the persons
or entities owning or controlling a majority of such shares, partnership
interests or activities of such partnership or trust at the beginning of such
period no longer having such ownership or control shall be regarded as
equivalent to an assignment of this Lease to the persons or entities acquiring
such ownership or control and shall be subject to all the provisions of this
Article 9 to the same extent and for all intents and purposes as though such an
assignment. Notwithstanding the above, this provision shall not apply as long
as Tenant is a corporation whose shares are publicly traded on a nationally
recognized exchange or over-the-counter market.
10. INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant
hereby waives all claims against them for any damage to any property or any
injury to any person in or about the Premises or the Building by or from any
cause whatsoever (including without limiting
<PAGE>
the foregoing, rain or water leakage of any character from the roof, windows,
walls, basement, pipes, plumbing works or appliances, the Building not being in
good condition or repair, gas, fire, oil, electricity or theft), except to the
extent caused by or arising from the gross negligence or willful misconduct of
Landlord or its agents, employees or contractors. Tenant shall protect,
indemnify and hold the Landlord Entities harmless from and against any and all
loss, claims, liability or costs (including court costs and attorney's fees)
incurred by reason of (a) any damage to any property (including but not limited
to property of any Landlord Entity) or any injury (including but not limited to
death) to any person occurring in, on or about the Premises or the Building to
the extent that such injury or damage shall be caused by or arise from any
actual or alleged act, neglect, fault, or omission by or of Tenant, its agents,
servants, employees, invitees, or visitors to meet any standards imposed by any
duty with respect to the injury or damage; (b) the conduct or management of any
work or thing whatsoever done by the Tenant in or about the Premises or from
transactions of the Tenant concerning the Premises; (c) Tenant's failure to
comply with any and all governmental laws, ordinances and regulations applicable
to the condition or use of the Premises or its occupancy; or (d) any breach or
default on the part of Tenant in the performance of any covenant or agreement on
the part of the Tenant to be performed pursuant to this Lease. The provisions of
this Article shall survive the termination of this Lease with respect to any
claims or liability accruing prior to such termination.
11. INSURANCE.
11.1 Tenant shall keep in force throughout the Term: (a) a Commercial
General Liability insurance policy or policies to protect the Landlord Entities
against any liability to the public or to any invitee of Tenant or a Landlord
Entity incidental to the use of or resulting from any accident occurring in or
upon the Premises with a limit of not less than $1,000,000.00 per occurrence and
not less than $2,000,000.00 in the annual aggregate, or such larger amount as
Landlord may prudently require from time to time, covering bodily injury and
property damage liability and $1,000,000 products/completed operations
aggregate; (b) Business Auto Liability covering owned, non-owned and hired
vehicles with a limit of not less than $1,000,000 per accident; (c) insurance
protecting against liability under Worker's Compensation Laws with limits at
least as required by statute; (d) Employers Liability with limits of $500,000
each accident, $500,000 disease policy limit, $500,000 disease--each employee;
(e) All Risk or Special Form coverage protecting Tenant against loss of or
damage to Tenant's alterations, additions, improvements, carpeting, floor
coverings, panelings, decorations, fixtures, inventory and other business
personal property situated in or about the Premises to the full replacement
value of the property so insured; and, (f) Business Interruption Insurance with
limit of liability representing loss of at least approximately six months of
income.
11.2 Each of the aforesaid policies shall (a) be provided at Tenant's
expense; (b) name the Landlord Entities as additional insureds; (c) be issued by
an insurance company with a minimum Best's rating of "A:VII" during the Term;
and (d) provide that said insurance shall not be canceled unless thirty (30)
days prior written notice (ten days for non-payment of premium)
<PAGE>
shall have been given to Landlord; and said policy or policies or certificates
thereof shall be delivered to Landlord by Tenant upon the Commencement Date and
at least thirty (30) days prior to each renewal of said insurance.
11.3 Whenever Tenant shall undertake any alterations, additions or
improvements in, to or about the Premises ("Work") the aforesaid insurance
protection must extend to and include injuries to persons and damage to property
arising in connection with such Work, without limitation including liability
under any applicable structural work act, and such other insurance as Landlord
shall require; and the policies of or certificates evidencing such insurance
must be delivered to Landlord prior to the commencement of any such Work.
12. WAIVER OF SUBROGATION. So long as their respective insurers so permit,
Tenant and Landlord hereby mutually waive their respective rights of recovery
against each other for any loss insured by fire, extended coverage, All Risks or
other insurance now or hereafter existing for the benefit of the respective
party but only to the extent of the net insurance proceeds payable under such
policies. Each party shall obtain any special endorsements required by their
insurer to evidence compliance with the aforementioned waiver.
13. SERVICES AND UTILITIES.
13.1 Provided Tenant shall not be in default under this Lease, and
subject to the other provisions of this Lease, Landlord agrees to furnish to the
Premises, the following services and utilities subject to the rules and
regulations of the Building prescribed from time to time: (a) water suitable
for normal office use of the Premises; (b) heat and air conditioning required
for the use and occupation of the Premises; (c) elevator service by nonattended
automatic elevators; (d) such window washing as may from time to time in
Landlord's judgment be reasonably required; and, (e) equipment to bring to
Tenant's meter, electricity for lighting, convenience outlets and other normal
office use. To the extent that Tenant is not billed directly by a public
utility, Tenant shall pay, upon demand, as additional rent, for all electricity
used by Tenant in the Premises. The charge shall be at the rates charged for
such services by the local public utility. Landlord shall not be liable for,
and Tenant shall not be entitled to, any abatement or reduction of rental by
reason of Landlord's failure to furnish any of the foregoing, unless such
failure shall persist for an unreasonable time after written notice of such
failure is given to Landlord by Tenant and provided further that Landlord shall
not be liable when such failure is caused by accident, breakage, repairs, labor
disputes of any character, energy usage restrictions or by any other cause,
similar or dissimilar, beyond the reasonable control of Landlord. Landlord
shall use reasonable efforts to remedy any interruption in the furnishing of
services and utilities. Tenant shall contract for its own janitorial services
which services shall be in accordance with specifications to be proposed by
Tenant and approved by Landlord, which approval shall not be unreasonably
withheld provided such services are reasonably equivalent to similar services
provided to other comparable buildings in the market area of the Building
<PAGE>
13.2 Tenant, as the sole tenant of the Building, may control the hours
and amounts of HVAC service to the Premises, subject to the normal capacity
limits of the equipment. Wherever heat-generating machines or equipment are
used by Tenant in the Premises which affect the temperature otherwise maintained
by the air conditioning system, Landlord reserves the right to install
supplementary air conditioning units in or for the benefit of the Premises and
the cost thereof, including the cost of installation and the cost of operations
and maintenance, shall be paid by Tenant to Landlord upon demand as such
additional rent. Tenant shall supply its own janitorial service using a
contractor reasonably acceptable to Landlord.
13.3 Tenant will not, without the written consent of Landlord, connect
with electric current, except through existing electrical outlets in the
Premises, or water pipes, any apparatus or device for the purposes of using
electrical current or water. Tenant covenants and agrees that at all times its
use of electric current shall never exceed the capacity of the feeders to the
Building or the risers or wiring installed thereon.
14. HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains
possession of the Premises or part of them after termination of this Lease by
lapse of time or otherwise at the rate ("Holdover Rate") which shall be 150% of
the greater of: (a) the amount of the Annual Rent for the last period prior to
the date of such termination plus all Rent Adjustments under Article 4; and, (b)
the then market rental value of the Premises as determined by Landlord assuming
a new lease of the Premises of the then usual duration and other terms, in
either case prorated on a daily basis, and also pay all damages sustained by
Landlord by reason of such retention. If Landlord gives notice to Tenant of
Landlord's election to that effect, such holding over shall constitute renewal
of this Lease for a period from month to month at the Holdover Rate, but if the
Landlord does not so elect, no such renewal shall result notwithstanding
acceptance by Landlord of any sums due hereunder after such termination; and
instead, a tenancy at sufferance at the Holdover Rate shall be deemed to have
been created. In any event, no provision of this Article 14 shall be deemed to
waive Landlord's right of reentry or any other right under this Lease or at law.
15. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, this Lease
shall be subject and subordinate at all times to ground or underlying leases and
to the lien of any mortgages or deeds of trust now or hereafter placed on,
against or affecting the Building, Landlord's interest or estate in the
Building, or any ground or underlying lease; provided, however, that if the
lessor, mortgagee, trustee, or holder of any such mortgage or deed of trust
elects to have Tenant's interest in this Lease be superior to any such
instrument, then, by notice to Tenant, this Lease shall be deemed superior,
whether this Lease was executed before or after said instrument. Notwithstanding
the foregoing, Tenant covenants and agrees to execute and deliver upon demand
such further instruments evidencing such subordination or superiority of this
Lease as may be required by Landlord.
<PAGE>
16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with
all the rules and regulations as set forth in Exhibit C to this Lease and all
reasonable modifications of and additions to them from time to time put into
effect by Landlord. Landlord shall not be responsible to Tenant for the non-
performance by any other tenant or occupant of the Building of any such rules
and regulations.
17. REENTRY BY LANDLORD.
17.1 Landlord reserves and shall at all times have the right to re-enter
the Premises during normal business hours (except in the case of emergencies) to
inspect the same, to supply janitor service and any other service to be provided
by Landlord to Tenant under this Lease, to show said Premises to prospective
purchasers, mortgagees or tenants, and to alter, improve or repair the Premises
and any portion of the Building, without abatement of rent, and may for that
purpose erect, use and maintain scaffolding, pipes, conduits and other necessary
structures and open any wall, ceiling or floor in and through the Building and
Premises where reasonably required by the character of the work to be performed,
provided entrance to the Premises shall not be blocked thereby, and further
provided that the business of Tenant shall not be interfered with unreasonably.
17.2 Landlord shall have the right at any time, if required by applicable
law, to change the arrangement and/or locations of entrances, or passageways,
doors and doorways, and corridors, windows, elevators, stairs, toilets or other
public parts of the Building and to change the name, number or designation by
which the Building is commonly known. In the event that Landlord damages any
portion of any wall or wall covering, ceiling, or floor or floor covering within
the Premises, Landlord shall repair or replace the damaged portion to match the
original as nearly as commercially reasonable but shall not be required to
repair or replace more than the portion actually damaged.
17.3 Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned by any action
of Landlord authorized by this Article 17. Tenant agrees to reimburse Landlord,
on demand, as additional rent, for any expenses which Landlord may incur in thus
effecting compliance with Tenant's obligations under this Lease.
17.4 For each of the aforesaid purposes, Landlord shall at all times have
and retain a key with which to unlock all of the doors in the Premises,
excluding Tenant's vaults and safes or special security areas (designated in
advance), and Landlord shall have the right to use any and all means which
Landlord may deem proper to open said doors in an emergency to obtain entry to
any portion of the Premises. As to any portion to which access cannot be had by
means of a key or keys in Landlord's possession, Landlord is authorized to gain
access by such means as
<PAGE>
Landlord shall elect and the cost of repairing any damage occurring in doing so
shall be borne by Tenant and paid to Landlord as additional rent upon demand.
18. DEFAULT.
18.1 Except as otherwise provided in Article 20, the following events
shall be deemed to be Events of Default under this Lease:
18.1.1 Tenant shall have failed to pay an installment of Annual
Rent and such failure shall be continuing for a period of more than five (5)
days after such installment was due or Tenant shall have failed to pay any other
amount payable hereunder, and such failure shall be continuing for a period of
more than five (5) days after written notice to Tenant that such amount was due.
18.1.2 Tenant shall fail to comply with any term, provision or
covenant of this Lease which is not provided for in another Section of this
Article and shall not cure such failure within twenty (20) days (forthwith, if
the failure involves a hazardous condition) after written notice of such failure
to Tenant, provided, however, Tenant shall not be in default if such failure
cannot reasonably be cured within twenty (20) days and Tenant commences promptly
to cure and prosecutes diligently such cure to completion.
18.1.3 Tenant shall fail to vacate the Premises immediately upon
termination of this Lease, by lapse of time or otherwise, or upon termination of
Tenant's right to possession only.
18.1.4 Tenant shall become insolvent, admit in writing its inability
to pay its debts generally as they become due, file a petition in bankruptcy or
a petition to take advantage of any insolvency statute, make an assignment for
the benefit of creditors, make a transfer in fraud of creditors, apply for or
consent to the appointment of a receiver of itself or of the whole or any
substantial part of its property, or file a petition or answer seeking
reorganization or arrangement under the federal bankruptcy laws, as now in
effect or hereafter amended, or any other applicable law or statute of the
United States or any state thereof.
18.1.5 A court of competent jurisdiction shall enter an order,
judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of
Tenant, or of the whole or any substantial part of its property, without the
consent of Tenant, or approving a petition filed against Tenant seeking
reorganization or arrangement of Tenant under the bankruptcy laws of the United
States, as now in effect or hereafter amended, or any state thereof, and such
order, judgment or decree shall not be vacated or set aside or stayed within
thirty (30) days from the date of entry thereof.
<PAGE>
19. REMEDIES.
19.1 Except as otherwise provided in Article 20, upon the occurrence of
any of the Events of Default described or referred to in Article 18, Landlord
shall have the option to pursue any one or more of the following remedies
without any notice or demand whatsoever, concurrently or consecutively and not
alternatively:
19.1.1 Landlord may, at its election, terminate this Lease or
terminate Tenant's right to possession only, without terminating the Lease.
19.1.2 Upon any termination of this Lease, whether by lapse of time
or otherwise, or upon any termination of Tenant's right to possession without
termination of the Lease, Tenant shall surrender possession and vacate the
Premises immediately, and deliver possession thereof to Landlord, and Tenant
hereby grants to Landlord full and free license to enter into and upon the
Premises in such event and to repossess Landlord of the Premises as of
Landlord's former estate and to expel or remove Tenant and any others who may be
occupying or be within the Premises and to remove Tenant's signs and other
evidence of tenancy and all other property of Tenant therefrom without being
deemed in any manner guilty of trespass, eviction or forcible entry or detainer,
and without incurring any liability for any damage resulting therefrom, Tenant
waiving any right to claim damages for such re-entry and expulsion, and without
relinquishing Landlord's right to rent or any other right given to Landlord
under this Lease or by operation of law.
19.1.3 Upon any termination of this Lease, whether by lapse of time
or otherwise, Landlord shall be entitled to recover as damages, all rent,
including any amounts treated as additional rent under this Lease, and other
sums due and payable by Tenant on the date of termination, plus as liquidated
damages and not as a penalty, an amount equal to the sum of: (a) an amount
equal to the then present value of the rent reserved in this Lease for the
residue of the stated Term of this Lease including any amounts treated as
additional rent under this Lease and all other sums provided in this Lease to be
paid by Tenant, minus the fair rental value of the Premises for such residue;
(b) the value of the time and expense necessary to obtain a replacement tenant
or tenants, and the estimated expenses described in Section 19.1.4 relating to
recovery of the Premises, preparation for reletting and for reletting itself;
and (c) the cost of performing any other covenants which would have otherwise
been performed by Tenant.
19.1.4 Upon any termination of Tenant's right to possession only
without termination of the Lease:
19.1.4.1 Neither such termination of Tenant's right to
possession nor Landlord's taking and holding possession thereof as provided in
Section 19.1.2 shall terminate the Lease or release Tenant, in whole or in part,
from any obligation, including Tenant's obligation to pay the rent, including
any amounts treated as additional rent, under this Lease for the full Term, and
if Landlord so elects Tenant shall pay forthwith to Landlord the sum equal to
the
<PAGE>
entire amount of the rent, including any amounts treated as additional rent
under this Lease, for the remainder of the Term plus any other sums provided in
this Lease to be paid by Tenant for the remainder of the Term.
19.1.4.2 Landlord may, but need not, relet the Premises or any
part thereof for such rent and upon such terms as Landlord, in its sole
discretion, shall determine (including the right to relet the premises for a
greater or lesser term than that remaining under this Lease, the right to relet
the Premises as a part of a larger area, and the right to change the character
or use made of the Premises). In connection with or in preparation for any
reletting, Landlord may, but shall not be required to, make repairs, alterations
and additions in or to the Premises and redecorate the same to the extent
Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the
cost thereof, together with Landlord's expenses of reletting, including, without
limitation, any commission incurred by Landlord. If Landlord decides to relet
the Premises or a duty to relet is imposed upon Landlord by law, Landlord and
Tenant agree that nevertheless Landlord shall at most be required to use only
the same efforts Landlord then uses to lease premises in the Building generally
and that in any case that Landlord shall not be required to give any preference
or priority to the showing or leasing of the Premises over any other space that
Landlord may be leasing or have available and may place a suitable prospective
tenant in any such other space regardless of when such other space becomes
available. Landlord shall not be required to observe any instruction given by
Tenant about any reletting or accept any tenant offered by Tenant unless such
offered tenant has a credit-worthiness acceptable to Landlord and leases the
entire Premises upon terms and conditions including a rate of rent (after giving
effect to all expenditures by Landlord for tenant improvements, broker's
commissions and other leasing costs) all no less favorable to Landlord than as
called for in this Lease, nor shall Landlord be required to make or permit any
assignment or sublease for more than the current term or which Landlord would
not be required to permit under the provisions of Article 9.
19.1.4.3 Until such time as Landlord shall elect to terminate
the Lease and shall thereupon be entitled to recover the amounts specified in
such case in Section 19.1.3, Tenant shall pay to Landlord upon demand the full
amount of all rent, including any amounts treated as additional rent under this
Lease and other sums reserved in this Lease for the remaining Term, together
with the costs of repairs, alterations, additions, redecorating and Landlord's
expenses of reletting and the collection of the rent accruing therefrom
(including reasonable attorney's fees and broker's commissions), as the same
shall then be due or become due from time to time, less only such consideration
as Landlord may have received from any reletting of the Premises; and Tenant
agrees that Landlord may file suits from time to time to recover any sums
falling due under this Article 19 as they become due. Any proceeds of reletting
by Landlord in excess of the amount then owed by Tenant to Landlord from time to
time shall be credited against Tenant's future obligations under this Lease but
shall not otherwise be refunded to Tenant or inure to Tenant's benefit.
19.2 Landlord may, at Landlord's option, enter into and upon the Premises
if Landlord determines in its sole discretion that Tenant is not acting within a
commercially reasonable time
<PAGE>
to maintain, repair or replace anything for which Tenant is responsible under
this Lease and correct the same, without being deemed in any manner guilty of
trespass, eviction or forcible entry and detainer and without incurring any
liability for any damage or interruption of Tenant's business resulting
therefrom. If Tenant shall have vacated the Premises, Landlord may at Landlord's
option re-enter the Premises at any time during the last six months of the then
current Term of this Lease and make any and all such changes, alterations,
revisions, additions and tenant and other improvements in or about the Premises
as Landlord shall elect, all without any abatement of any of the rent otherwise
to be paid by Tenant under this Lease.
19.3 If, on account of any breach or default by Tenant in Tenant's
obligations under the terms and conditions of this Lease, it shall become
necessary or appropriate for Landlord to employ or consult with an attorney
concerning or to enforce or defend any of Landlord's rights or remedies arising
under this Lease, Tenant agrees to pay all Landlord's reasonable attorney's fees
so incurred. Landlord and Tenant each expressly waives any right to trial by
jury.
19.4 Pursuit of any of the foregoing remedies shall not preclude pursuit
of any of the other remedies provided in this Lease or any other remedies
provided by law (all such remedies being cumulative), nor shall pursuit of any
remedy provided in this Lease constitute a forfeiture or waiver of any rent due
to Landlord under this Lease or of any damages accruing to Landlord by reason of
the violation of any of the terms, provisions and covenants contained in this
Lease.
19.5 No act or thing done by Landlord or its agents during the Term shall
be deemed a termination of this Lease or an acceptance of the surrender of the
Premises, and no agreement to terminate this Lease or accept a surrender of said
Premises shall be valid, unless in writing signed by Landlord. No waiver by
Landlord of any violation or breach of any of the terms, provisions and
covenants contained in this Lease shall be deemed or construed to constitute a
waiver of any other violation or breach of any of the terms, provisions and
covenants contained in this Lease. Landlord's acceptance of the payment of
rental or other payments after the occurrence of an Event of Default shall not
be construed as a waiver of such Default, unless Landlord so notifies Tenant in
writing. Forbearance by Landlord in enforcing one or more of the remedies
provided in this Lease upon an Event of Default shall not be deemed or construed
to constitute a waiver of such Default or of Landlord's right to enforce any
such remedies with respect to such Default or any subsequent Default.
19.6 To secure the payment of all rentals and other sums of money becoming
due from Tenant under this Lease, Landlord shall have and Tenant grants to
Landlord a first lien upon the leasehold interest of Tenant under this Lease,
which lien may be enforced in equity, and a continuing security interest upon
all goods, wares, equipment, fixtures, furniture, inventory, accounts, contract
rights, chattel paper and other personal property of Tenant situated on the
Premises, and such property shall not be removed therefrom without the consent
of Landlord until all arrearages in rent as well as any and all other sums of
money then due to Landlord under this Lease shall first have been paid and
discharged. In the event of a default under this Lease, Landlord shall have, in
addition to any other remedies provided in this Lease or by law, all rights and
remedies under the Uniform Commercial Code, including without limitation the
right to sell
<PAGE>
the property described in this Section 19.6 at public or private sale upon five
(5) days' notice to Tenant. Tenant shall execute all such financing statements
and other instruments as shall be deemed necessary or desirable in Landlord's
discretion to perfect the security interest hereby created.
19.7 Any and all property which may be removed from the Premises by
Landlord pursuant to the authority of this Lease or of law, to which Tenant is
or may be entitled, may be handled, removed and/or stored, as the case may be,
by or at the direction of Landlord but at the risk, cost and expense of Tenant,
and Landlord shall in no event be responsible for the value, preservation or
safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all
expenses incurred in such removal and all storage charges against such property
so long as the same shall be in Landlord's possession or under Landlord's
control. Any such property of Tenant not retaken by Tenant from storage within
thirty (30) days after removal from the Premises shall, at Landlord's option, be
deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale
without further payment or credit by Landlord to Tenant.
20. TENANT'S BANKRUPTCY OR INSOLVENCY.
20.1 If at any time and for so long as Tenant shall be subjected to the
provisions of the United States Bankruptcy Code or other law of the United
States or any state thereof for the protection of debtors as in effect at such
time (each a "Debtor's Law"):
20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or
receiver of Tenant's assets (each a "Tenant's Representative") shall have no
greater right to assume or assign this Lease or any interest in this Lease, or
to sublease any of the Premises than accorded to Tenant in Article 9, except to
the extent Landlord shall be required to permit such assumption, assignment or
sublease by the provisions of such Debtor's Law. Without limitation of the
generality of the foregoing, any right of any Tenant's Representative to assume
or assign this Lease or to sublease any of the Premises shall be subject to the
conditions that:
20.1.1.1 Such Debtor's Law shall provide to Tenant's
Representative a right of assumption of this Lease which Tenant's Representative
shall have timely exercised and Tenant's Representative shall have fully cured
any default of Tenant under this Lease.
20.1.1.2 Tenant's Representative or the proposed assignee, as
the case shall be, shall have deposited with Landlord as security for the timely
payment of rent an amount equal to the larger of: (a) three months' rent and
other monetary charges accruing under this Lease; and (b) any sum specified in
Article 5; and shall have provided Landlord with adequate other assurance of the
future performance of the obligations of the Tenant under this Lease. Without
limitation, such assurances shall include, at least, in the case of assumption
of this Lease, demonstration to the satisfaction of the Landlord that Tenant's
Representative has and will continue to have sufficient unencumbered assets
after the payment of all secured obligations and administrative expenses to
assure Landlord that Tenant's Representative will have sufficient
<PAGE>
funds to fulfill the obligations of Tenant under this Lease; and, in the case of
assignment, submission of current financial statements of the proposed assignee,
audited by an independent certified public accountant reasonably acceptable to
Landlord and showing a net worth and working capital in amounts determined by
Landlord to be sufficient to assure the future performance by such assignee of
all of the Tenant's obligations under this Lease.
20.1.1.3 The assumption or any contemplated assignment of this
Lease or subleasing any part of the Premises, as shall be the case, will not
breach any provision in any other lease, mortgage, financing agreement or other
agreement by which Landlord is bound.
20.1.1.4 Landlord shall have, or would have had absent the
Debtor's Law, no right under Article 9 to refuse consent to the proposed
assignment or sublease by reason of the identity or nature of the proposed
assignee or sublessee or the proposed use of the Premises concerned.
21. QUIET ENJOYMENT. Landlord represents and warrants that it has full right
and authority to enter into this Lease and that Tenant, while paying the rental
and performing its other covenants and agreements contained in this Lease, shall
peaceably and quietly have, hold and enjoy the Premises for the Term without
hindrance or molestation from Landlord subject to the terms and provisions of
this Lease. Landlord shall not be liable for any interference or disturbance by
other tenants or third persons, nor shall Tenant be released from any of the
obligations of this Lease because of such interference or disturbance.
22. DAMAGE BY FIRE, ETC.
22.1 In the event the Premises or the Building are damaged by fire or
other cause and in Landlord's reasonable estimation such damage can be
materially restored within ninety (90) days, Landlord shall forthwith repair the
same and this Lease shall remain in full force and effect, except that Tenant
shall be entitled to a proportionate abatement in rent from the date of such
damage. Such abatement of rent shall be made pro rata in accordance with the
extent to which the damage and the making of such repairs shall interfere with
the use and occupancy by Tenant of the Premises from time to time. Within
forty-five (45) days from the date of such damage, Landlord shall notify Tenant,
in writing, of Landlord's reasonable estimation of the length of time within
which material restoration can be made, and Landlord's determination shall be
binding on Tenant. For purposes of this Lease, the Building or Premises shall
be deemed "materially restored" if they are in such condition as would not
prevent or materially interfere with Tenant's use of the Premises for the
purpose for which it was being used immediately before such damage.
22.2 If such repairs cannot, in Landlord's reasonable estimation, be made
within ninety (90) days, Landlord and Tenant shall each have the option of
giving the other, at any time within
<PAGE>
sixty (60) days after such damage, notice terminating this Lease as of the date
of such damage. In the event of the giving of such notice, this Lease shall
expire and all interest of the Tenant in the Premises shall terminate as of the
date of such damage as if such date had been originally fixed in this Lease for
the expiration of the Term. In the event that neither Landlord nor Tenant
exercises its option to terminate this Lease, then Landlord shall repair or
restore such damage, this Lease continuing in full force and effect, and the
rent hereunder shall be proportionately abated as provided in Section 22.1.
22.3 Landlord shall not be required to repair or replace any damage or
loss by or from fire or other cause to any panelings, decorations, partitions,
additions, railings, ceilings, floor coverings, office fixtures or any other
property or improvements installed on the Premises or belonging to Tenant. Any
insurance which may be carried by Landlord or Tenant against loss or damage to
the Building or Premises shall be for the sole benefit of the party carrying
such insurance and under its sole control.
22.4 In the event that Landlord should fail to complete such repairs and
material restoration within sixty (60) days after the date estimated by Landlord
therefor as extended by this Section 22.4, Tenant may at its option and as its
sole remedy terminate this Lease by delivering written notice to Landlord,
within fifteen (15) days after the expiration of said period of time, whereupon
the Lease shall end on the date of such notice or such later date fixed in such
notice as if the date of such notice was the date originally fixed in this Lease
for the expiration of the Term; provided, however, that if construction is
delayed because of changes, deletions or additions in construction requested by
Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor
shortages, government regulation or control or other causes beyond the
reasonable control of Landlord, the period for restoration, repair or rebuilding
shall be extended for the amount of time Landlord is so delayed.
22.5 Notwithstanding anything to the contrary contained in this Article:
(a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or
restore the Premises when the damages resulting from any casualty covered by the
provisions of this Article 22 occur during the last six (6) months of the Term
or any extension thereof, but if Landlord determines not to repair such damages
Landlord shall notify Tenant and if such damages shall render any material
portion of the Premises untenantable Tenant shall have the right to terminate
this Lease by notice to Landlord within fifteen (15) days after receipt of
Landlord's notice; and (b) in the event the holder of any indebtedness secured
by a mortgage or deed of trust covering the Premises or Building requires that
any insurance proceeds be applied to such indebtedness, then Landlord shall have
the right to terminate this Lease by delivering written notice of termination to
Tenant within fifteen (15) days after such requirement is made by any such
holder, whereupon this Lease shall end on the date of such damage as if the date
of such damage were the date originally fixed in this Lease for the expiration
of the Term.
22.6 In the event of any damage or destruction to the Building or Premises
by any peril covered by the provisions of this Article 22, it shall be Tenant's
responsibility to properly secure
<PAGE>
the Premises and upon notice from Landlord to remove forthwith, at its sole cost
and expense, such portion of all of the property belonging to Tenant or its
licensees from such portion or all of the Building or Premises as Landlord shall
request.
23. EMINENT DOMAIN. If all or any substantial part of the Premises shall be
taken or appropriated by any public or quasi-public authority under the power of
eminent domain, or conveyance in lieu of such appropriation, either party to
this Lease shall have the right, at its option, of giving the other, at any time
within thirty (30) days after such taking, notice terminating this Lease, except
that Tenant may only terminate this Lease by reason of taking or appropriation,
if such taking or appropriation shall be so substantial as to materially
interfere with Tenant's use and occupancy of the Premises. If neither party to
this Lease shall so elect to terminate this Lease, the rental thereafter to be
paid shall be adjusted on a fair and equitable basis under the circumstances. In
addition to the rights of Landlord above, if any substantial part of the
Building shall be taken or appropriated by any public or quasi-public authority
under the power of eminent domain or conveyance in lieu thereof, and regardless
of whether the Premises or any part thereof are so taken or appropriated,
Landlord shall have the right, at its sole option, to terminate this Lease.
Landlord shall be entitled to any and all income, rent, award, or any interest
whatsoever in or upon any such sum, which may be paid or made in connection with
any such public or quasi-public use or purpose, and Tenant hereby assigns to
Landlord any interest it may have in or claim to all or any part of such sums,
other than any separate award which may be made with respect to Tenant's trade
fixtures and moving expenses; Tenant shall make no claim for the value of any
unexpired Term.
24. SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the
Building, the same shall operate to release Landlord from any future liability
upon any of the covenants or conditions, expressed or implied, contained in this
Lease in favor of Tenant, and in such event Tenant agrees to look solely to the
responsibility of the successor in interest of Landlord in and to this Lease.
Except as set forth in this Article 24, this Lease shall not be affected by any
such sale and Tenant agrees to attorn to the purchaser or assignee. If any
security has been given by Tenant to secure the faithful performance of any of
the covenants of this Lease, Landlord may transfer or deliver said security, as
such, to Landlord's successor in interest and thereupon Landlord shall be
discharged from any further liability with regard to said security.
25. ESTOPPEL CERTIFICATES. Within ten (10) days following any written request
which Landlord may make from time to time, Tenant shall execute and deliver to
Landlord or mortgagee or prospective mortgagee a sworn statement certifying: (a)
the date of commencement of this Lease; (b) the fact that this Lease is
unmodified and in full force and effect (or, if there have been modifications to
this Lease, that this lease is in full force and effect, as modified, and
stating the date and nature of such modifications); (c) the date to which the
rent and other sums payable under this Lease have been paid; (d) the fact that
there are no current defaults
<PAGE>
under this Lease by either Landlord or Tenant except as specified in Tenant's
statement; and (e) such other matters as may be requested by Landlord. Landlord
and Tenant intend that any statement delivered pursuant to this Article 25 may
be relied upon by any mortgagee, beneficiary or purchaser and Tenant shall be
liable for all loss, cost or expense resulting from the failure of any sale or
funding of any loan caused by any material misstatement contained in such
estoppel certificate. Tenant irrevocably agrees that if Tenant fails to execute
and deliver such certificate within such ten (10) day period Landlord or
Landlord's beneficiary or agent may execute and deliver such certificate on
Tenant's behalf, and that such certificate shall be fully binding on Tenant.
26. SURRENDER OF PREMISES.
26.1 Tenant shall, at least thirty (30) days before the last day of the
Term, arrange to meet Landlord for a joint inspection of the Premises. In the
event of Tenant's failure to arrange such joint inspection to be held prior to
vacating the Premises, Landlord's inspection at or after Tenant's vacating the
Premises shall be conclusively deemed correct for purposes of determining
Tenant's responsibility for repairs and restoration.
26.2 At the end of the Term or any renewal of the Term or other sooner
termination of this Lease, Tenant will peaceably deliver up to Landlord
possession of the Premises, together with all improvements or additions upon or
belonging to the same, by whomsoever made, in the same conditions received or
first installed, broom clean and free of all debris, excepting only ordinary
wear and tear and damage by fire or other casualty. Tenant may, and at
Landlord's request shall, at Tenant's sole cost, remove upon termination of this
Lease, any and all furniture, furnishings, movable partitions of less than full
height from floor to ceiling, trade fixtures and other property installed by
Tenant, title to which shall not be in or pass automatically to Landlord upon
such termination, repairing all damage caused by such removal. Property not so
removed shall, unless requested to be removed, be deemed abandoned by the Tenant
and title to the same shall thereupon pass to Landlord under this Lease as by a
bill of sale. All other alterations, additions and improvements in, on or to
the Premises shall be dealt with and disposed of as provided in Article 6
hereof.
26.3 All obligations of Tenant under this Lease not fully performed as of
the expiration or earlier termination of the Term shall survive the expiration
or earlier termination of the Term. In the event that Tenant's failure to
perform prevents Landlord from releasing the Premises, Tenant shall continue to
pay rent pursuant to the provisions of Article 14 until such performance is
complete. Upon the expiration or earlier termination of the Term, Tenant shall
pay to Landlord the amount, as estimated by Landlord, necessary to repair and
restore the Premises as provided in this Lease and/or to discharge Tenant's
obligation for unpaid amounts due or to become due to Landlord. All such
amounts shall be used and held by Landlord for payment of such obligations of
Tenant, with Tenant being liable for any additional costs upon demand by
Landlord, or with any excess to be returned to Tenant after all such obligations
have been
<PAGE>
determined and satisfied. Any otherwise unused Security Deposit shall be
credited against the amount payable by Tenant under this Lease.
27. NOTICES. Any notice or document required or permitted to be delivered
under this Lease shall be addressed to the intended recipient, shall be
transmitted personally, by facsimile transmission (followed by delivery of an
original by a method specified herein), by fully prepaid registered or certified
United States Mail return receipt requested, or by reputable independent
contract delivery service furnishing a written record of attempted or actual
delivery, and shall be deemed to be delivered when tendered for delivery to the
addressee at its address set forth on the Reference Page, or at such other
address as it has then last specified by written notice delivered in accordance
with this Article 27, or if to Tenant at either its aforesaid address or its
last known registered office or home of a general partner or individual owner,
whether or not actually accepted or received by the addressee.
28. TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid
by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any
and all taxes payable by Landlord (other than net income taxes) whether or not
now customary or within the contemplation of the parties to this Lease: (a)
upon, allocable to, or measured by or on the gross or net rent payable under
this Lease, including without limitation any gross income tax or excise tax
levied by the State, any political subdivision thereof, or the Federal
Government with respect to the receipt of such rent; (b) upon or with respect to
the possession, leasing, operation, management, maintenance, alteration, repair,
use or occupancy of the Premises or any portion thereof, including any sales,
use or service tax imposed as a result thereof; (c) upon or measured by the
Tenant's gross receipts or payroll or the value of Tenant's equipment,
furniture, fixtures and other personal property of Tenant or leasehold
improvements, alterations or additions located in the Premises; or (d) upon this
transaction or any document to which Tenant is a party creating or transferring
any interest of Tenant in this Lease or the Premises. In addition to the
foregoing, Tenant agrees to pay, before delinquency, any and all taxes levied or
assessed against Tenant and which become payable during the term hereof upon
Tenant's equipment, furniture, fixtures and other personal property of Tenant
located in the Premises.
29. OPTION TO TERMINATE. Provided (a) the Lease is in full force and effect,
and (b) Tenant is not in default hereunder at the time of notification or
termination, Tenant shall have one (1) option to terminate the Lease as of the
seventh anniversary of the Commencement Date, by notice in writing delivered to
Landlord not later than the sixth anniversary of the Commencement Date. To be
effective, Tenant's notice of termination must be accompanied by a termination
payment equal to $346,550.
30. DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are
for
<PAGE>
convenience of reference and shall in no way define, increase, limit or describe
the scope or intent of any provision of this Lease. Any indemnification or
insurance of Landlord shall apply to and inure to the benefit of all the
following "Landlord Entities", being Landlord, Landlord's investment manager,
and the trustees, boards of directors, officers, general partners,
beneficiaries, stockholders, employees and agents of each of them. Any option
granted to Landlord shall also include or be exercisable by Landlord's trustee,
beneficiary, agents and employees, as the case may be. In any case where this
Lease is signed by more than one person, the obligations under this Lease shall
be joint and several. The terms "Tenant" and "Landlord" or any pronoun used in
place thereof shall indicate and include the masculine or feminine, the singular
or plural number, individuals, firms or corporations, and their and each of
their respective successors, executors, administrators and permitted assigns,
according to the context hereof. The term "rentable area" shall mean the
rentable area of the Premises or the Building as calculated by the Landlord on
the basis of the plans and specifications of the Building including a
proportionate share of any common areas. Tenant hereby accepts and agrees to be
bound by the figures for the rentable space footage of the Premises shown on the
Reference Page.
31. TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons
executing this Lease on behalf of Tenant represents and warrants that Tenant has
been and is qualified to do business in the state in which the Building is
located, that the corporation has full right and authority to enter into this
Lease, and that all persons signing on behalf of the corporation were authorized
to do so by appropriate corporate actions. Tenant agrees to furnish promptly
upon request a corporate resolution, proof of due authorization by partners, or
other appropriate documentation evidencing the due authorization of Tenant to
enter into this Lease.
32. COMMISSIONS. Each of the parties represents and warrants to the other that
it has not dealt with any broker or finder in connection with this Lease, except
as described on the Reference Page.
33. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of
its provisions. This Lease shall in all respects be governed by the laws of the
state in which the Building is located.
34. SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms,
covenants and conditions contained in this Lease shall be binding upon and inure
to the benefit of the heirs, successors, executors, administrators and assigns
of the parties to this Lease.
35. ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all
agreements of the parties to this Lease and supersedes any previous
negotiations. There have been no
<PAGE>
representations made by the Landlord or understandings made between the parties
other than those set forth in this Lease and its exhibits. This Lease may not be
modified except by a written instrument duly executed by the parties to this
Lease.
36. EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be
a reservation of the Premises. Landlord shall not be bound by this Lease until
it has received a copy of this Lease duly executed by Tenant and has delivered
to Tenant a copy of this Lease duly executed by Landlord, and until such
delivery Landlord reserves the right to exhibit and lease the Premises to other
prospective tenants. Notwithstanding anything contained in this Lease to the
contrary, Landlord may withhold delivery of possession of the Premises from
Tenant until such time as Tenant has paid to Landlord any security deposit
required by Article 5, the first month's rent as set forth in Article 3 and any
sum owed pursuant to this Lease.
37. RECORDATION. Tenant shall not record or register this Lease or a short
form memorandum hereof without the prior written consent of Landlord, and then
shall pay all charges and taxes incident such recording or registration.
38. LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord
under this Lease shall be limited to and enforceable only against and to the
extent of Landlord's interest in the Building. The obligations of Landlord under
this Lease are not intended to and shall not be personally binding on, nor shall
any resort be had to the private properties of, any of its trustees or board of
directors and officers, as the case may be, its investment manager, the general
partners thereof, or any beneficiaries, stockholders, employees, or agents of
Landlord or the investment manager.
39. GOVERNMENTAL APPROVALS. Tenant is responsible for obtaining all necessary
permits and governmental approvals to construct improvements in the Premises and
otherwise make use of the Premises for its intended purposes. Landlord has not
made, and does not make. any representation or warranty as to the availability
of such permits or approvals. Tenant acknowledges that at the time of executing
this Lease, Tenant has not obtained all necessary permits and governmental
approvals to construct improvements in the Premises and otherwise make use of
the Premises for its intended purposes. Tenant has, however, requested that
Landlord purchase the Building and execute this Lease. Tenant recognizes that
Landlord would not purchase the Building but for this Lease. Tenant, therefore,
agrees that its obligations under this Lease shall not be affected by Tenant's
inability to obtain necessary permits or governmental approvals and that its
obligation to pay rent and otherwise perform its obligations under this Lease
shall be effective even if Tenant is not able to construct improvements in the
Premises or otherwise make use of the Premises for its intended purposes.
<PAGE>
LANDLORD: TENANT:
Great Lakes REIT, Inc., a Maryland Aksys, Ltd., a Delaware,
corporation corporation
By: /s/ Great Lakes REIT, Inc. By: /s/ Rodney S. Kenley
-------------------------- --------------------
Title: Senior Vice President Title: President and COO
---------------------- -----------------
Dated: July 24, 1996 Dated: July 27, 1996
------------- -------------
<PAGE>
EXHIBIT A
attached to and made a part of Lease bearing the
Lease Reference Date of July 15, 1996 between
Great Lakes REIT, Inc., as Landlord and
Aksys, Ltd., a Delaware, corporation, as Tenant
PREMISES
Tenant is leasing all of the rentable area of the Building.
<PAGE>
EXHIBIT B
attached to and made a part of Lease bearing the
Lease Reference Date of July 15, 1996 between
Great Lakes REIT, Inc., as Landlord and
Aksys, Ltd., a Delaware, corporation, as Tenant
INITIAL ALTERATIONS
Tenant is leasing the Premises in its current "AS IS" condition and will
construct all improvements in the Premises at its own cost, subject to
compliance with the Lease, except as follows:
1. Landlord will place the existing HVAC roof top units in operable
condition prior to September 1, 1996.
2. Landlord will cause a reputable roofing contractor to inspect the roof
as promptly as possible. On or before September 1, 1996, Landlord will
repair any leaks in the roof identified by such contractor. Tenant will
be responsible for any leaks or other damage to the roof caused by its
improvement work.
3. Landlord will cause a reputable paving contractor to inspect the parking
lot as promptly as possible and give a firm quote for resealing and
restriping the parking lot. On a date acceptable to the Landlord, Tenant
and the contractor, such contractor will reseal and restripe the parking
lot. If there is any additional charge beyond initial quote as a result
of damage to the parking lot caused by Tenant's contractors in
performing Tenant's improvement work, then such additional charge shall
be paid by Tenant.
<PAGE>
EXHIBIT C
attached to and made a part of Lease bearing the
Lease Reference Date of July 15, 1996 between
Great Lakes REIT, Inc., as Landlord and
Aksys, Ltd., a Delaware, corporation, as Tenant
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be installed
or displayed on any part of the outside of the Building without the prior
written consent of the Landlord.
2. If Landlord objects in writing to any curtains, blinds, shades or screens
attached to or hung in or used in connection with any window or door of the
Premises, Tenant shall immediately discontinue such use. No awning shall be
permitted on any part of the Premises. Tenant shall not place anything or allow
anything to be placed against or near any glass partitions or doors or windows
which may appear unsightly, in the opinion of Landlord, from outside the
Premises.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances,
elevators, escalators or stairways of the Building. The halls, passages, exits,
entrances, shopping malls, elevators, escalators and stairways are not for the
general public, and Landlord shall in all cases retain the right to control and
prevent access to the Building of all persons whose presence in the judgment of
Landlord would be prejudicial to the safety, character, reputation and interests
of the Building and its tenants provided that nothing contained in this rule
shall be construed to prevent such access to persons with whom any tenant
normally deals in the ordinary course of its business, unless such persons are
engaged in illegal activities. No tenant and no employee or invitee of any
tenant shall go upon the roof of the Building.
4. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's instructions in
their installation.
5. Tenant shall not place a load upon any floor which exceeds the load per
square foot which such floor was designed to carry and which is allowed by law.
Landlord shall have the right to prescribe the weight, size and position to all
equipment, materials, furniture or other property brought into the Building.
Heavy objects shall, stand on such platforms as determined by Landlord to be
necessary to properly distribute the weight. Business machines and mechanical
equipment belonging to Tenant which cause noise or vibration that may be
transmitted to the structure of the Building or to any space in the Building to
such a degree as to be objectionable to Landlord or to any tenants shall be
placed and maintained by Tenant, at Tenant's expense, on vibration eliminators
or other devices sufficient to eliminate noise or vibration. The persons
employed to move such equipment in or out of the Building must be acceptable to
Landlord. Landlord will not be responsible for loss of, or damage to, any such
equipment or other property from any cause, and all damage done to the
<PAGE>
Building by maintaining or moving such equipment or other property shall be
repaired at the expense of Tenant.
6. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed, no
foreign substance of any kind whatsoever shall be thrown into any of them, and
the expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by the Tenant who, or whose employees or invitees,
shall have caused it.
7. Tenant shall not install any radio or television antenna, satellite dish,
loudspeaker or other device on the roof or exterior walls of the Building.
Tenant shall not interfere with radio or television broadcasting or reception
from or in the Building or elsewhere.
8. Except as approved by Landlord, Tenant shall not mark, drive nails, screw or
drill into the partitions, woodwork or plaster or in any way deface the
Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix
any floor covering to the floor of the Premises in any manner except as approved
by Landlord. Tenant shall repair any damage resulting from noncompliance with
this rule.
9. Tenant shall not use the name of the Building in connection with or in
promoting or advertising the business of Tenant except as Tenant's address.
10. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all of the tenants of the Building.
11. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of any lease of premises in the Building.
12. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for safety and
security, for care and cleanliness of the Building and for the preservation of
good order in and about the Building. Tenant agrees to abide by all such rules
and regulations in this Exhibit C stated and any additional rules and
regulations which are reasonably adopted.
13. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees and guests.
<PAGE>
Exhibit 11
ASKYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Statement Regarding Computation of Net Loss Per Share
<TABLE>
<CAPTION>
========================================================================
Year ended December 31,
-----------------------------
1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Net loss $(13,506,602) (7,819,037)
========================================================================
Weighted average shares used
to compute net loss per share:
Weighted average common
shares outstanding* 13,791,236 12,239,554
Additional shares pursuant
to SAB83 computation - 82,164
- ------------------------------------------------------------------------
13,791,236 12,441,718
========================================================================
Net loss per share $ (0.98) (0.63)
========================================================================
</TABLE>
* 1996 amount includes conversion of preferred shares.
<PAGE>
Exhibit 13
AKSYS, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................
Consolidated Balance Sheets.........................................
Consolidated Statements of Operations...............................
Consolidated Statements of Stockholders' Equity.....................
Consolidated Statements of Cash Flows...............................
Notes to Consolidated Financial Statements..........................
<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, 1997 and 1996,
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,
1997 and for the period from January 18, 1991 (inception) through December 31,
1997. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 and for the period from
January 18, 1991 (inception) through December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 21, 1998
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
==============================================================================================
Assets 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,150,612 10,900,059
Short-term investments 21,045,044 34,749,875
Interest receivable 398,561 698,124
Prepaid expenses 85,326 81,075
Other current assets 34,951 56,613
- ----------------------------------------------------------------------------------------------
Total current assets 29,714,494 46,485,746
Long-term investments 2,808,349 780,000
Property and equipment, net 3,866,157 2,737,620
Other assets 258,251 144,144
- ----------------------------------------------------------------------------------------------
$ 36,647,251 50,147,510
==============================================================================================
Liabilities and Stockholders' Equity
==============================================================================================
Current liabilities:
Accounts payable 930,880 1,141,829
Accrued liabilities 351,113 269,918
Current maturities of lease obligation - 32,039
- ----------------------------------------------------------------------------------------------
Total current liabilities 1,281,993 1,443,786
Other long-term liabilities 77,269 19,630
- ----------------------------------------------------------------------------------------------
Total liabilities 1,359,262 1,463,416
- ----------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized, 0 shares issued and outstanding in 1997 and 1996 - -
Common stock, par value $.01 per share, 50,000,000 shares
authorized, 14,002,663 and 13,708,555 shares issued and
outstanding in 1997 and 1996, respectively 140,027 137,086
Additional paid-in capital 64,673,596 64,573,686
Foreign currency translation adjustment 10,567 2,921
Deficit accumulated during development stage (29,536,201) (16,029,599)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 35,287,989 48,684,094
Commitments
- ----------------------------------------------------------------------------------------------
$ 36,647,251 50,147,510
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 and for the period
from January 18, 1991 (inception) through December 31, 1997
<TABLE>
<CAPTION>
==========================================================================================================
Cumulative from
January 18, 1991
(inception)
through
1997 1996 1995 December 31, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research and development expenses $ 10,886,803 6,515,485 4,261,230 24,070,904
Business development expenses 1,043,867 547,767 359,530 1,951,164
General and administrative expenses 3,848,701 2,559,441 876,613 7,881,164
- ---------------------------------------------------------------------------------------------------------
Operating loss (15,779,371) (9,622,693) (5,497,373) (33,903,232)
- ---------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 2,272,769 1,811,585 163,613 4,325,771
Interest expense - (7,929) (10,903) (23,591)
Other income - - - 67,884
- ---------------------------------------------------------------------------------------------------------
2,272,769 1,803,656 152,710 4,370,064
- ---------------------------------------------------------------------------------------------------------
Net loss $(13,506,602) (7,819,037) (5,344,663) (29,533,168)
=========================================================================================================
Net loss per share (pro forma in 1995) $ (0.98) (0.63) (0.52)
========================================
Weighted average shares outstanding 13,791,236 12,441,718 10,322,837
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 and for the period
from January 18, 1991 (inception) through December 31, 1997
<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
- ----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 289,813 2,898 70,418 - - 73,316
Issuance of shares to Employee Stock Purchase Plan 3,650 37 25,951 - - 25,988
Issuance of common stock for services received 645 6 3,541 - - 3,547
Foreign currency translation adjustment - - - 7,646 - 7,646
Net loss - - - - (13,506,602) (13,506,602)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 14,002,663 $140,027 64,673,596 10,567 (29,536,201) 35,287,989
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 and for the period
from January 18, 1991 (inception) through December 31, 1997
<TABLE>
<CAPTION>
========================================================================================================================
Cumulative from
January 18, 1991
(inception)
through
1997 1996 1995 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,506,602) (7,819,037) (5,344,663) (29,533,168)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 701,951 347,323 149,776 1,284,316
Compensation expense related to stock options - - - 3,240
Issuance of stock in exchange for services
received 3,547 66,003 - 69,550
Changes in assets and liabilities:
Interest receivable 299,563 (689,622) (6,685) (398,561)
Prepaid expenses (4,521) (74,862) 4,747 (85,596)
Other current assets 21,662 (10,294) (4,977) (34,951)
Accounts payable (210,949) 825,429 80,750 930,880
Accrued and other liabilities 146,480 202,724 36,798 438,949
Other assets (189,952) (107,487) (58,282) (378,572)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (12,738,821) (7,259,823) (5,142,536) (27,703,913)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (25,133,915) (47,849,574) (8,810,484) (85,047,503)
Proceeds from sale of investments 36,813,298 15,692,509 5,821,360 61,183,337
Purchases of property and equipment (1,757,274) (2,432,615) (351,047) (4,895,993)
Organizational costs incurred - - - (19,595)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 9,922,109 (34,589,680) (3,340,171) (28,779,754)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 99,304 52,229,394 333 52,401,704
Proceeds from issuance of preferred stock - - 8,494,309 12,336,096
Proceeds from issuance of note payable - - - 41,792
Repayment of notes payable - (16,115) (13,825) (41,792)
Repayment of lease obligation (32,039) (34,338) (37,144) (103,521)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 67,265 52,178,941 8,443,673 64,634,279
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,749,447) 10,329,438 (39,034) 8,150,612
Cash and cash equivalents at beginning of period 10,900,059 570,621 609,655 -
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,150,612 10,900,059 570,621 8,150,612
========================================================================================================================
Supplemental disclosures of cash flow information:
Conversion on redeemable preferred stock - 12,406,761 - 12,406,761
Capital lease obligation incurred to
acquire equipment $ - - - 103,521
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Organization and Nature of Business
Aksys, Ltd. (the Company) was originally incorporated in Illinois on
January 18, 1991. During 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 product development and
preparation for clinical trials, 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 lives of the related instruments 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, 1997
and 1996, long-term investments include certificates of deposit to secure a
letter of credit for the required security deposit on the Company's leased
facilities. Fair value of investments is calculated as market value, based
on quoted market prices, and 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.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(c) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in its
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
(d) Long-Lived Assets
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.
Long-lived assets are reviewed for impairment in value based upon
undiscounted future cash flows, and appropriate losses are recognized,
whenever the carrying amount of an asset may not be recovered.
(e) Research and Development Costs
Research and development costs are charged to expense when incurred.
(f) 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.
(g) Computation of 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.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share", (SFAS 128) for the year ended
December 31, 1997. SFAS 128 establishes standards for computing and
presenting earnings per share. It replaces the presentation of primary
earnings per share with a presentation of basic earnings per share;
requires dual presentation of basic and diluted earnings per share on the
face of the income statement for all entities with complex capital
structures; and requires a reconciliation of the numerator and denominator
of the basic earnings per share to the numerator and denominator of the
diluted earnings per share computations. Management has elected not to
present such a reconciliation as all of the Company's potential common
shares are anti-dilutive.
(2) Short-Term Investments
Investments consisted of the following at December 31:
<TABLE>
<CAPTION>
=================================================================================
1997 1996
---------------------- ----------------------
Amortized Market Amortized Market
cost value cost value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency Bonds $ 2,000,000 1,999,380 24,440,427 24,690,548
Commercial Paper 4,461,170 4,460,340 5,285,810 5,460,920
Corporate Bonds 6,625,147 6,625,303 3,992,171 4,001,570
International Bonds 3,858,553 3,857,869 1,031,467 1,034,350
Municipal Bonds 2,100,000 2,100,000 - -
Certificates of Deposit 2,000,174 2,000,000 - -
- ---------------------------------------------------------------------------------
$21,045,044 21,042,892 34,749,875 35,187,388
=================================================================================
</TABLE>
<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 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures 7 years $ 999,616 910,615
Leasehold improvements 10 years 1,146,511 1,133,204
Equipment 3-7 years 2,824,652 1,169,686
- ----------------------------------------------------------------------------------------------
4,970,779 3,213,505
Less accumulated depreciation and amortization (1,104,622) (475,885)
- ----------------------------------------------------------------------------------------------
$3,866,157 2,737,620
==============================================================================================
</TABLE>
(4) Stockholders' Equity
On April 23, 1996, the Company effected a 3-for-2 stock split of its
common stock. All references in the 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.
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.
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, giving effect to
the 3-for-2 split) 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.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Stock Options
During 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. During July 1997, the
compensation committee of the board of directors approved the cancellation
and re-issuance of 132,000 stock options. The original options, carrying
exercise prices ranging from $7.875 to $16.00, were canceled and reissued
with a new vesting schedule and an exercise price of $5.00, the fair
market value of the Company's common stock on the date of reissue.
Executive officers of the Company did not participate in the cancellation
and re-issuance. At December 31, 1997, 2,007,728 shares of common stock
have been reserved for issuance under the Stock Plans, including 470,393
shares available for future grants under the 1996 Stock Awards Plan.
The per share weighted-average fair value of stock options granted during
1997 and 1996 was $3.16 and $3.08, respectively, on the dates of grant
using the Black Scholes option-pricing model with the following weighted-
average assumptions: 1997 - expected dividend yield 0%, expected
volatility of 50%, risk-free interest rate of 6.25%, and an expected life
of 5 years; 1996 - expected dividend yield 0%, expected volatility of 15%,
risk-free interest rate of 6.0%, 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 reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
===============================================================================
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Net loss as reported $13,506,602 7,819,037
Pro forma 13,972,518 8,052,159
Loss per share as reported 0.98 0.63
Pro forma 1.01 0.65
===============================================================================
</TABLE>
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma net loss reflects only options granted since January 1, 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.
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, 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
Granted 402,000 6.2554
Exercised (289,813) 0.2530
Canceled (290,409) 8.7155
- --------------------------------------------------------------------------------------------
Balance at December 31, 1997 1,537,335 $ 1.9974
============================================================================================
</TABLE>
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Life Price at 12/31/97 Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.1067 to $1.0000 1,116,304 4.0 years $ 0.1685 952,607 $ 0.1582
$5.0000 to $8.5000 343,437 9.7 years $ 5.7604 39,948 $ 6.8673
$9.0000 to $15.2500 77,594 8.7 years $11.6541 48,094 $13.1027
- -----------------------------------------------------------------------------------------
$0.1067 to $15.2500 1,537,335 1,040,649
=========================================================================================
</TABLE>
(6) 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 of the Company 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.
(7) Income Taxes
No Federal or state income taxes have been provided for in the
accompanying financial statements because of net operating losses incurred
to date and the establishment of a valuation allowance equal to the amount
of the Company's deferred tax assets. At December 31, 1997, the Company
has a net operating loss and research and development credit carryforwards
for Federal income tax purposes of approximately $28,958,000 and
$1,109,000, respectively. These carryforwards expire between 2008 and
2012. Changes in the Company ownership may cause annual limitations on the
amount of loss and credit carryforwards that can be utilized to offset
income in the future.
The net deferred tax assets are summarized at December 31 as follows:
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
=======================================================================================
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 11,293,000 6,556,000
Research and development credit carryforwards 1,109,000 359,000
Other 35,000 12,000
- ---------------------------------------------------------------------------------------
Total deferred tax assets 12,437,000 6,927,000
Less valuation allowance (12,390,000) (6,840,000)
- ---------------------------------------------------------------------------------------
Net deferred tax assets 47,000 87,000
Deferred tax liability - depreciation 47,000 87,000
- ---------------------------------------------------------------------------------------
Net deferred taxes $ - -
=======================================================================================
</TABLE>
(8) Employee Savings and Retirement Plan
In 1995 the Company instituted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all full-time employees. The
401(k) Plan provides a match of up to 10% of the employees' contributions.
Total expense for the years ended December 31, 1997, 1996 and 1995 was
$17,776, $12,372 and $3,151, respectively.
(9) 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 issued in 1997 based on 1996 payroll withholdings was
3,650, and total shares to be issued during January 1998 for 1997 payroll
withholdings was 25,613.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(10) Commitments
Purchases
The Company has entered into various supply agreements in preparation for
commercialization of its products. The Company has contractual obligations
to purchase fixed quantities of components and final assemblies once its
products are commercially available.
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. The Company also leases certain equipment under
operating leases. Included in both research and development expenses and
general and administrative expenses for the years ended December 31, 1997,
1996 and 1995 were $573,915, $332,423 and $108,996, respectively, for rent
expense under operating leases for certain equipment and the Company's
offices and research facilities. The Company has commitments for future
minimum rent payments under these lease agreements.
<TABLE>
===============================================================================
<S> <C>
1998 $ 388,976
1999 373,085
2000 384,290
2001 395,772
2002 407,807
Thereafter 1,601,070
===============================================================================
</TABLE>
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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>
===============================================================================
<S> <C>
1998 $ 75,000
1999 95,000
2000 125,000
2001 155,000
2002 185,000
2003 215,000
All subsequent years 255,000
===============================================================================
</TABLE>
Total royalty payments for the years ended December 31, 1997, 1996 and
1995 were $45,000, $35,000 and $5,000, respectively.
(11) Subsequent Event
On January 7, 1998, the Company entered into a stock purchase agreement
and a joint development agreement with Teijin Limited of Osaka, Japan
("Teijin"). Under the terms of the stock purchase agreement, Teijin
purchased 493,097 newly issued Aksys common shares at a price of $10.14
per share, representing a total equity investment in Aksys of $5,000,000.
The Company has granted to Teijin certain demand registration rights for
the shares issued under the stock purchase agreement, beginning January 7,
1999.
Under the terms of the joint development agreement, Teijin will make
additional cash payments to Aksys totaling up to $5,000,000, conditional
on the achievement of certain milestones. The companies will cooperate to
commercialize the Aksys PHD(TM) Personal Hemodialysis System ("PHD(TM)
System") in Japan and will share equally the costs of obtaining the
necessary regulatory approvals. While these agreements remain effective,
Aksys may not negotiate with any third party regarding the assignment of
rights to import or manufacture the PHD(TM) System for sale in Japan.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Aksys, Ltd.:
We consent to incorporation by reference in the registration statement (No. 333-
18073) on Form S-8 of Aksys, Ltd. of our report dated January 21, 1998, relating
to the consolidated balance sheets of Aksys, Ltd. as of December 31, 1997, and
1996, 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, 1997, and for the period from January 18, 1991 (inception) through
December 31, 1997, which report appears in the December 31, 1997, annual report
on Form 10-K of Aksys, Ltd.
KPMG Peat Marwick LLP
Chicago, Illinois
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1997 and the consolidated
statement of operations for the year ended December 31, 1997, and is qualified
in its entirety by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,151
<SECURITIES> 21,045
<RECEIVABLES> 399
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,714
<PP&E> 4,971
<DEPRECIATION> 1,105
<TOTAL-ASSETS> 36,647
<CURRENT-LIABILITIES> 1,282
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 35,148
<TOTAL-LIABILITY-AND-EQUITY> 36,647
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,507)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,507)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> 0
</TABLE>
