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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[x] Annual Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998 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 ______
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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)
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,
and related preferred stock purchase rights
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(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __x__ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregated market value of voting stock held by non-affiliates of the
registrant as of March 19, 1999 at a closing sale price of $5.438 as reported by
the Nasdaq National Market was approximately $52,419,000.
As of March 19, 1999 the registrant had 14,812,585 shares of Common Stock
issued and outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement to be used in connection
with the solicitation of proxies for the Annual Meeting to be held on April 22,
1999 (the "Proxy Statement") are incorporated by reference in Part III and
portions of the Registrant's 1998 Annual Report to Stockholders are incorporated
by reference in Part II and Part IV.
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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.............................................................. 17
Item 3. Legal Proceedings....................................................... 17
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................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 22
Item 8. Financial Statements and Supplementary Data............................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................ 23
PART III................................................................................. 23
Item 10. Directors and Executive Officers of the Registrant...................... 23
Item 11. Executive Compensation.................................................. 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 23
Item 13. Certain Relationships and Related Transactions.......................... 23
PART IV.................................................................................. 24
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 24
SIGNATURES............................................................................... 25
EXHIBIT INDEX............................................................................ 26
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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 total ESRD treatment costs and
enhance the patients' quality of life. All 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. On March 30, 1999, the Company filed an
Investigational Device Exemption ("IDE") with the FDA. After approval of the
IDE, the Company will begin a clinical evaluation of the PHD System. The Company
expects the clinical evaluation will be approximately six months in
length. Following completion of the clinical evaluation, the data compiled will
be submitted along with other requested data in a 510(k) pre-market
notification, which the Company expects to file in early 2000. 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 will seek to
obtain ISO 9001 certification in 1999, and also intends to submit final
production systems for CE mark approval (the European equivalent to 510(k)
clearance) during this same time frame. The Company hopes to receive CE mark
approval in late 1999 or early 2000, followed by a product launch in select
European countries.
Japan is also a significant market where Aksys plans to seek regulatory
approval, although the regulatory approval cycle in Japan is much longer than in
the U.S. 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 that represent the strategic alliance). The Company is currently
working with Teijin to jointly develop and eventually commercialize the PHD
System in 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 $15 billion was spent in the U.S. during 1998
for the treatment of patients suffering from ESRD, of which nearly $5 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 approximately 250,000 at the end of 1998,
representing a compound annual growth rate of approximately 8%. In addition, it
is estimated that there were approximately 330,000 dialysis patients in Europe
and Japan in 1997. The Company believes that the sustained growth in the ESRD
population, especially in the United States, has been caused by (i) the aging of
the
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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, after the first 30 months of treatment Medicare is
responsible for payment of 80% of the rate set by HCFA for reimbursement of
outpatient dialysis. Although this program made dialysis available 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, in 1983, capped the Medicare reimbursement rate for outpatient
dialysis 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 have forced dialysis providers to seek
ways to reduce dialysis treatment 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, or are
hospitalized for a kidney transplant and the surgery occurs within a specified
time period.
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 budget and other
legislation and costs incurred in rendering the services if tied to certain
criteria. 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 for each treatment the patient performs
at home. 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 home dialysis.
The Medicare ESRD composite reimbursement rate has been the subject of a number
of reports and studies. Actions to change such rate usually occur in the
context of federal budget negotiations each year.
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 disease management 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 coverage (e.g., oral
medications) that are not covered by Medicare. State regulations
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generally follow Medicare reimbursement levels and coverage 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, 1997, approximately 87% (200,000) 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 reflected the lack of availability of dialysis
clinics and the desire 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, 1997, approximately 13% (30,000) of the
ESRD dialysis patients in the United States were receiving peritoneal dialysis,
with over 99% performing such treatment in their homes. There
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are two principal forms of peritoneal dialysis, and all forms use the patient's
peritoneum, a large membrane rich in blood vessels that surrounds many of the
body's internal organs, as a filter to eliminate toxins and excess fluids from
the patient's blood. Dialysate, a blood-cleansing electrolyte solution, is
infused through a catheter into the 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 often 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 and related "hangover" frequently following each treatment, 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 and frequency 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. 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. According to HCFA, total treatment costs
per dialysis patient have risen from $33,400 in 1988 to $63,000 in 1997. 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 began in 1998 and will run for
three years.
Peritoneal Dialysis. Although peritoneal dialysis accounted for 13% (or 30,000)
of the dialysis patient population in 1997 according to HCFA, approximately 23%
(or 7,000) of the patients in the United States switched to outpatient in-center
hemodialysis. The Company believes that most of these patients switched from
peritoneal dialysis to outpatient hemodialysis because of the following
limitations presented by CAPD, the most common form of peritoneal dialysis: (i)
due to the limited efficiency of using the peritoneal membrane as a filter for
toxin removal,
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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
32 years indicate 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 gaining popularity. There are initiatives in the U.S. and worldwide to study
the benefits of daily hemodialysis. The Company estimates that in early 1999,
there are 21 centers world, 10 of which are in North America, treating over 140
patients with daily hemodialysis.
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 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
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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 member 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.
</TABLE>
Although the most common form of peritoneal dialysis, CAPD, does not require a
dialysis machine, as discussed above, peritoneal dialysis has inherent
limitations. The Company believes that the PHD System addresses the primary
drawbacks of both forms of peritoneal dialysis by delivering a substantially
greater dose of dialysis in significantly less time. Furthermore, by enabling
the use of frequent home hemodialysis, the PHD System overcomes other
limitations of peritoneal dialysis such as the risk of peritonitis and patient
non-compliance to the prescribed regimen.
The Company believes that the PHD System offers patients simplification and
control. The new technology of the PHD System integrates three systems into
one: water treatment, delivery of dialysis and dialyzer reprocessing. The
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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 cost. 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 will
be little or no reduction in dialysis cost (as opposed to total treatment costs)
associated with the PHD System.
Although the Company believes that the PHD System provides a solution to many of
the problems presented by conventional dialysis modalities, there are a number
of risks that must be overcome for the PHD System to succeed, including the
uncertainty of obtaining regulatory clearance or approval and of achieving
market acceptance and development.
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Other Product Development
During 1999, 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,
12,000 and 80,000 dialysis patients, respectively, in 1997 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 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. Future versions of the PHD System will allow
outcome data to be furnished on-line to the healthcare provider responsible for
treating the patient and will aid the provider in assessing the effectiveness of
the patient's dialysis treatment prescription as well as promote the potential
clinical and cost benefits of frequent home hemodialysis. Outcome data should
become increasingly important if, as the Company believes, HCFA moves towards a
reimbursement system that capitates total ESRD patient cost.
Implement Programs to Demonstrate Clinical Benefits and Cost-Effectiveness.
The Company intends to complement its marketing by conducting clinical studies
and implementing other measures designed to document the clinical and cost
benefits it believes will result from frequent home hemodialysis using the PHD
System. In 1998, the Company sponsored 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.
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Results of the study indicated dramatic improvements in the patients' feeling of
well-being after converting to a regimen of daily hemodialysis. 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 cost effective, 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 160,000 dialysis patients in Europe and 170,000
dialysis patients in Japan, both as of December 31, 1997.
Sales and Marketing
The Company initially 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, 1998, the Company employed a research and development staff
of 64 full time employees, most of whom are engineers and technicians. In
addition, the Company used contractors on an as needed basis to assist in its
development process. The research and development staff is composed of
specialists in the fields of mechanical engineering, electrical engineering,
software engineering, biomedical and systems engineering,
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chemistry and microbiology. For the years ended December 31, 1998, 1997 and
1996, the Company incurred total research and development expenditures of
approximately $15,343,000, $10,887,000 and $6,515,000, respectively.
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 potential 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 pressure 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.
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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 pre-market 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 pre-market 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) pre-market 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) pre-market 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) pre-market 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) pre-market notification.
On March 30, 1999, the Company filed an Investigational Device Exemption ("IDE")
with the FDA, a prerequisite for conducting a clinical evaluation of the PHD
System. After approval of the IDE, the Company will begin a clinical evaluation
of the PHD System. The Company expects the clinical evaluation will be
approximately six months in length. Upon completion of the clinical evaluation,
the data compiled will be submitted along with other requested data in a new
510(k) pre-market notification, which the Company expects to file in early 2000.
Although the FDA has notified the Company that it may submit a new 510(k) pre-
market notification subsequent to the completion of clinical trials, there is no
assurance that the FDA will not require the Company to file a PMA for approval
to market the PHD System rather than a 510(k) pre-market notification. Should
the FDA require a PMA filing, the regulatory approval timeline and commercial
launch date in the United States may be adversely affected.
The IDE approval and 510(k) clearance processes are lengthy and uncertain and
require substantial commitments of the Company's financial resources and
management's time and effort. Significant unforeseen delays in either process
could occur as a result of the FDA's failure to schedule advisory review panels,
changes in established review guidelines, regulations or administrative
interpretations or determinations by the FDA that clinical data collected is
insufficient to support the safety and effectiveness of one or more of the
devices for their intended uses or that the data warrants the continuation of
clinical studies. Delays in obtaining, or failure to obtain, requisite
regulatory approvals or clearances in the United States and other countries
would prevent the marketing of the PHD System and other devices and impair the
Company's ability to generate funds from operations, which in turn would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
The FDC Act requires that medical devices be manufactured in accordance with the
FDA's current GMP regulations. These regulations require, among other things,
that (i) the manufacturing process must be regulated and controlled by the use
of written procedures and (ii) the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. They also require investigation of any deficiencies
in the manufacturing process or in the products produced and detailed record
keeping. Manufacturing facilities are therefore subject to FDA inspection on a
periodic basis to monitor compliance with GMP requirements. If violations of the
applicable regulations are noted during FDA inspections of the Company's
manufacturing facilities or the manufacturing facilities of its contract
manufacturers, there may be a material adverse effect on the continued marketing
of the Company's products.
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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 1999, 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 1999 or
early 2000, followed by a controlled product launch in select European
countries.
Intellectual Property
As of January 29, 1999, the Company either owns or has exclusive rights to 31
U.S. patents and 14 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.
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
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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. 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.
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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, 1998, the Company had 74 full-time employees, 64 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.
Bruce E. Dobsch joined the Company in October 1998 as Senior Vice President of
Research and Development. During his 28 years in the medical diagnostics field
with DuPont and Dade Behring, he was instrumental in overseeing the development
of numerous complex medical products from initial concept to commercialization.
From 1996 to 1998, he was Vice President of Research and Development for Dade
Behring's Chemistry and Engineering Skill Center. Previously, from 1989 through
1996, he was Director of Research and Development for DuPont's Chemistry
Division.
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:
Edward J. Argelander joined the Company in January 1999 as Vice President of
Business Quality Systems. He has more than 30 years of experience in developing
instrumentation and was responsible for creating and implementing an ISO 9001-
based quality management system for the diagnostics division of DuPont.
Manuel Avila has served as Vice President of Manufacturing 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.
Carl M. Kjellstrand, M.D., Ph.D., joined the Company in April 1997 as Vice
President of Medical Affairs. He joined us from the University of Alberta with
more than 40 years of medical teaching experience. As a long-time advocate of
patients' rights, his research in dialysis has been published in more than 450
articles. A former
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consultant to the U.S. Food and Drug Administration on medical devices and
former president of the Canadian Society of Nephrology, he is an active member
of leading scientific societies and editorial boards.
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.
Product Liability Exposure
The Company's business exposes it to potential product liability risks that 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, 1998.
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. The first of those milestones, for agreeing to the regulatory
strategy in Japan, resulted in a payment to Aksys of $1,000,000 during 1998.
The Company expects to earn remaining milestone payments under the Joint
Development Agreement during 1999 and 2000, but there can be no assurance that
the Company will meet the requisite milestones.
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.
16
<PAGE>
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.
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, 1998.
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 (NNM) under the
symbol AKSY. The following table lists the quarterly high and low prices of the
Common Stock for the period from January 1, 1997 through December 31, 1998.
Fiscal Fiscal
Year Quarter High Low
------ ------- -------- -------
1998 1st 8.375 5.75
2nd 7.50 5.75
3rd 8.875 4.75
4th 7.50 3.50
1997 1st 13.25 8.50
2nd 9.875 4.00
3rd 8.688 4.25
4th 11.375 5.25
There were 267 stockholders of record of the Company's Common Stock as of
March 4, 1999. In addition, the Company estimates that there were
approximately 4,200 beneficial stockholders at March 4, 1999, who held
shares in "street name." The Company has not paid cash dividends to date, and
management anticipates that future earnings will be retained for development of
the Company's business.
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
17
<PAGE>
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.
18
<PAGE>
<TABLE>
<CAPTION>
Cumulative from
January 18, 1991
Year Ended December 31, (inception)
---------------------------------------------------------------------------- through
1998 1997 1996 1995 1994 December 31, 1998
------------ ------------ ------------ ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Joint development
income $ 1,000,000 $ -- $ -- $ -- $ -- $ 1,000,000
------------ ------------ ------------ ----------- ----------- ------------
Operating costs and expenses:
Research and development 15,342,533 10,886,803 6,515,485 4,261,230 1,808,638 39,413,437
Business development 1,185,254 1,043,867 547,767 359,530 -- 3,136,418
General and administrative 3,304,747 3,848,701 2,559,441 876,613 266,418 11,185,911
------------ ------------ ------------ ----------- ----------- ------------
Total operating expenses 19,832,534 15,779,371 9,622,693 5,497,373 2,075,056 53,735,766
------------ ------------ ------------ ----------- ----------- ------------
Operating loss (18,832,534) (15,779,371) (9,622,693) (5,497,373) (2,075,056) (52,735,766)
Other income, net 1,677,807 2,272,769 1,803,656 152,710 40,174 6,047,871
------------ ------------ ------------ ----------- ----------- ------------
Net loss $(17,154,727) $(13,506,602) $ (7,819,037) $(5,344,663) $(2,034,882) $(46,687,895)
============ ============ ============ =========== =========== ============
Net loss per share(1) $(1.17) $(0.98) $(0.63)
============ ============ ============
Weighted average shares
outstanding(1) 14,653,953 13,791,236 12,441,718
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 20,260,268 $ 29,195,656 $ 45,649,934 $ 3,957,105 $ 1,007,015
Working capital 18,009,636 28,432,501 45,041,960 3,565,263 723,512
Total assets 25,941,835 36,647,251 50,147,510 4,693,450 1,476,892
Long-term liabilities(2) 123,041 77,269 19,630 35,761 84,436
Redeemable preferred stock -- -- -- 12,406,761 3,900,000
Deficit accumulated during
development stage (46,690,928) (29,536,201) (16,029,599) (8,210,562) (2,862,866)
Total stockholders' equity (deficit) 23,301,944 35,287,989 48,684,094 (8,201,948) (2,845,166)
</TABLE>
(1) Computed on the basis described in Note 1 of Notes to Consolidated Financial
Statements.
(2) Consists primarily of deferred rent under operating lease for facilities.
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, 1998, the Company had a deficit
accumulated during the development stage of $46.7 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
19
<PAGE>
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.
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) the Company's
need to achieve manufacturing scale-up in a timely manner with its primary
manufacturing contractor, SeaMED Corporation, and its need to provide for the
efficient manufacturing of sufficient quantities of its products, (iii) changes
in GMP requirements, (iv) 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, (v) the uncertainty
regarding the effectiveness and ultimate market acceptance of the PHD System,
the Company's primary product in development, (vi) changing market conditions,
(vii) the need to further establish the clinical benefits of daily hemodialysis,
(viii) 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, (ix)
the potential adverse impact of possible changes to Medicare reimbursement
policies and rates, (x) the Company's dependence on key personnel and on patents
and proprietary information, and (xi) risks related to the regulatory approval
process. Regulatory risks include whether and when the Company will obtain an
approved Investigational Device Exemption (IDE), the timing, scope and results
of the Company's clinical trials, and whether and when the Company will obtain
clearance from the FDA of a 510(k) pre-market notification or PMA (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. 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, 1998 Compared to Year Ended December 31, 1997
Net loss for the year ended December 31, 1998 was $17.2 million ($1.17 per
share), compared with $13.5 million ($0.98 per share), 1997 fiscal year. The
increase in net loss during 1998 compared with 1997 is due to increased
operating expenses, offset by income from the Company's joint development
agreement with Teijin Limited of Osaka, Japan. The Company's use of cash to
fund operations resulted in a reduction of interest bearing investments and a
related decrease in interest income during 1998 as compared to 1997.
Joint development income. During July 1998, the Company received a
milestone payment of $1.0 million under the terms of a joint development
agreement entered into during January 1998. The milestone payment signifies the
completion of a written strategy for Aksys and Teijin to develop the PHD System
for use in Japan.
Research and development expenses. For the year ended December 31, 1998,
research and development expenses increased to $15.3 million from $10.9 million
for the year ended December 31, 1997. The increase of $4.4 million included one-
time charges related to delivery of PHD Systems to be used during the 1999
clinical evaluation.
20
<PAGE>
Excluding the one-time charge, research and development expenses increased by
$2.8 million, reflecting increased activity as the Company completes development
work and prepares for clinical trials in 1999.
Business development expenses. During 1998, business development expenses
increased $0.2 million, from $1.0 million in 1997 to $1.2 million in 1998. The
increase is attributable to the Company preparing for commercialization of the
PHD System in Europe and expenses related to operations of Aksys Japan, K.K.,
the Company's wholly-owned subsidiary in Japan.
General and administrative expenses. For the year ended December 31, 1998,
general and administrative expenses decreased from $3.8 million in 1997 to $3.3
in 1998. The decrease of $0.5 million results from the Company's efforts to
keep administrative and overhead costs to a minimum and direct its funds toward
the Company's development efforts.
Interest income. For the year ended December 31, 1998, interest income was $1.7
million, compared with $2.3 million for the year ended December 31, 1997, a
decrease of $0.6 million. The Company's use of cash to fund operations resulted
in a reduction of interest bearing investments and a related decrease in
interest income during the year ended December 31, 1998.
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.
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 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 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.
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, 1998, the Company
had received net offering proceeds from public and private sales of equity
securities of approximately $69.9 million. Since its inception in 1991 through
December 31, 1998, the Company made $6.3 million of capital expenditures and
used $42.5 million in cash to support its operations. At December 31, 1998, the
Company had cash, cash equivalents and short-term investments of $20.3 million,
working capital of $18.0 million and long-term investments of $0.8 million.
21
<PAGE>
The Company estimates that during 1999 it will spend approximately $13 to $15
million for operations, clinical evaluation and preparation for
commercialization of the PHD System. The Company expects that substantially all
of this amount will be used to (i) purchase PHD Systems to be used in clinical
trials, (ii) fund product testing and validation including the purchase of PHD
Systems for use in clinical trials from such independent contractors, and (iii)
conduct clinical studies using the PHD System. 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, 1998, together with 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 the date the Company files for 510(k) approval
of the PHD System.
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 were 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, the extent and results of 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, 1998, the
net operating losses available to offset future taxable income were
approximately $49.9 million. Because the Company has experienced ownership
changes, future utilization of the carryforwards may be limited in any one
fiscal year pursuant to Internal Revenue Code regulations. The carryforwards
expire at various dates beginning in 2008. As a result of the annual
limitation, a portion of these carryforwards may expire before ultimately
becoming available to reduce federal income tax liabilities.
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
22
<PAGE>
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, 1998 and 1997, and the
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the years ended December 31, 1998, 1997 and 1996 and for the period from January
18, 1991 (inception) through December 31, 1998, the Notes to the Consolidated
Financial Statements and the Independent Auditors' Report set forth on pages 11
through 22 of the 1998 Annual Report to Stockholders of the Registrant are
incorporated herein by reference.
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.
23
<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, 1998 and 1997, and the
Consolidated Statements of Operations, Stockholders' Equity and Cash
Flows for the years ended December 31, 1998, 1997 and 1996 and for the
period from January 18, 1991 (inception) through December 31, 1998, the
Notes to the Consolidated Financial Statements and the Independent
Auditors' Report set forth on pages 11 through 22 of the 1998 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.
24
<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 31st day of
March, 1999.
AKSYS, LTD.
By /s/ Steven A. Bourne
-------------------------------
Steven A. Bourne
Controller and Acting
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on this 31st day of March, 1999.
Signature Capacity
--------- --------
/s/ Lawrence H.N. Kinet Chairman, Chief Executive Officer and Director
- -----------------------------
Lawrence H.N. Kinet (Principal Executive Officer)
/s/ Steven A. Bourne Controller and Acting Chief Financial Officer
- -----------------------------
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
25
<PAGE>
AKSYS, LTD.
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
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)......................
10.12 Severance, Confidentiality and Post-Employment Restrictions
Agreement, dated as of October 12, 1998, between the Company
and Bruce E. Dobsch (4)........................................
11 Statement regarding computation of net loss per share (4).........
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 (4)....................................
21 Subsidiaries of the Company (1)...................................
23 Consent of KPMG LLP (4)..............................
27 Financial Data Schedule (4).......................................
(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) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(4) Filed herewith.
26
<PAGE>
Exhibit 10.12
SEVERANCE, CONFIDENTIALITY
AND POST-EMPLOYMENT RESTRICTIONS AGREEMENT
THIS AGREEMENT is made as of October 12, 1998 by and between Aksys,
Ltd., a Delaware corporation (the "Company"), and Bruce Dobsch (the
"Executive").
WHEREAS, the Company and the Executive desire to enter into an
agreement (i) defining the relative rights of the Company and the Executive with
respect to Intellectual Property (as defined below) owned by the Company or its
customers or clients to which the Executive may have access or may contribute as
a result of the Executive's employment with the Company, (ii) setting forth the
obligation of the Executive to refrain from competing with the Company during
his employment with the Company and for a period of time thereafter as provided
herein and (iii) the severance conditions associated with termination from the
Company.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. Restriction on Post-Termination Employment
(a) The Executive acknowledges and agrees with the Company that the
Executive's services to the Company are unique in nature and that the Company
would be irreparably damaged if the Executive were to provide similar services
to any person or entity competing with the Company or engaged in a similar
business. Executive accordingly covenants and agrees with the Company that if
the Executive's employment with the Company terminates (a "Termination") as a
result of the Executive's Disability (as defined below) or as a result of
Termination by the Company without Cause (as defined below), then during the
period
<PAGE>
commencing with the date of this Agreement and ending on the first anniversary
of the date of Termination of Executive's employment with the Company (the "Non-
Competition Period"), Executive shall not directly or indirectly, either for
himself or for any other individual, corporation, partnership, joint venture, or
other entity, provide services as an employee or consultant or participate in
any business (including, without limitation, any division, group or franchise of
a larger organization) wherein Executive's duties include the promotion,
development, sale, distribution or production of a product or products whose
primary intended use is home hemodialysis or any other business hereafter
contemplated by the Company prior to Employee's termination. For purposes of
this Agreement, the term "participate in" will include, without limitation,
having any direct or indirect interest in any corporation, partnership, joint
venture or other entity, whether as a sole proprietor, owner, stockholder,
partner, joint venturer, creditor or otherwise, or rendering any direct or
indirect service or assistance to any individual, corporation, partnership,
joint venture and other business entity (whether as a director, officer,
manager, supervisor, employee, agent, consultant or otherwise); provided that
the term "participate in" shall not include ownership of less than five percent
of the stock of a publicly-held corporation whose stock is traded on a national
securities exchange or in the over-the-counter market. In addition, for purposes
of this Agreement, "any other business hereafter contemplated by the Company"
shall include only those businesses which have been (i) targeted or otherwise
identified by the Company's board of directors (the "Board") or management as
potential new businesses and (ii) actually pursued in any respect by the Board
or the Company's management.
(b) If the Executive's employment with the Company terminates as a
result of the Executive's resignation or Termination by the Company for Cause,
the Noncompetition
<PAGE>
Period shall continue until the second anniversary of the date of the
Termination.
(c) "Cause" means (i) the commission of a felony or a crime involving
moral turpitude or the commission of any other act involving dishonesty,
disloyalty or fraud with respect to the Company, (ii) conduct tending to bring
the Company into substantial public disgrace or disrepute, (iii) repeated
failure (after written notice of such failure) to perform duties as reasonably
directed by the Board, (iv) gross negligence or willful misconduct with respect
to the Company or (v) any other material breach of this Agreement which is not
cured within 15 days after written notice thereof to the Executive.
(d) "Disability" shall mean the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of the Executive to
carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company for a
period of at least 90 consecutive days or for shorter periods aggregating at
least 120 days (whether or not consecutive) during any twelve-month period, as
determined in the good faith judgment of the Board.
2. Severance.
(a) If the Executive's employment with the Company terminates as a
result of the Executive's Disability or Termination by the Company without
Cause, the Company shall continue, for a period of six months, to make monthly
cash payments to the Executive in an amount equal to the Executive's monthly
base salary immediately prior to the Termination.
(b) If the Executive's employment with the Company terminates as a
result of the Executive's resignation or termination by the Company for Cause,
the Executive shall not be entitled to any severance payments and the Company
will make no such payments.
(c) If the Executive is offered and accepts other employment during
the period
<PAGE>
of severance payments from the Company, then the Executive shall immediately
notify the Board of such fact, and the Company shall make no further severance
payments to the Executive.
(d) All of the Executive's rights to fringe benefits and bonuses (if
any) otherwise accruing with respect to any period including any period
commencing on or after the date of Termination shall terminate immediately upon
the close of business on the date of Termination.
3. Nonsolicitation. During the Noncompetition Period, the Executive
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee there, (ii) hire directly or through another entity
any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
any such customer, supplier, licensee or business relation and the Company.
4. Nondisclosure and Nonuse of Confidential Information.
(a) The Executive will not disclose or use at any time, either during
his employment with the Company or thereafter, any Confidential Information (as
defined below) of which the Executive is or becomes aware, whether or not such
information is developed by him, except to the extent that such disclosure or
use is directly related to and required by the Executive's performance of duties
assigned to the Executive by the Company. The Executive will take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential Information"
means
<PAGE>
information that is not generally known to the public and that is used,
developed or obtained by the Company in connection with its business, including
but not limited to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data bases, (ix)
accounting and business methods, (x) inventions, devices, new developments,
methods and processes, whether patentable or unpatentable and whether or not
reduced to practice, (xi) customers and clients and customer or client lists,
(xiii) other copyrightable works, (xiii) all technology and trade secrets, and
(xiv) all similar and related information in whatever form. Confidential
Information will not include any information that has been published in a form
generally available to the public prior to the date the Executive proposes to
disclose or use such information. Information will not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material features comprising such
information have been published in combination.
5. The Company's Ownership of Intellectual Property.
(a) In the event that the Executive as part of his activities on
behalf of the Company generates, authors or contributes to any invention,
design, new development, device, product, method or process (whether or not
patentable or reduced to practice or comprising Confidential Information), any
copyrightable work (whether or not comprising Confidential Information) or any
other form of Confidential Information relating directly or indirectly to the
Company's business as now or hereinafter conducted (collectively, "Intellectual
Property"), the Executive acknowledges that such Intellectual Property is the
exclusive property of the Company and hereby assigns all rights, title and
interest in and to such Intellectual Property to the
<PAGE>
Company. Any copyrightable work prepared in whole or in part by the Executive
will be deemed "a work made for hire" under Section 201(b) of the 1976 Copyright
Act, and the Company will own all of the rights comprised in the copyright
therein. The Executive will promptly and fully disclose all Intellectual
Property to the Company and will cooperate with the Company to protect the
Company's interests in and rights to such Intellectual Property (including,
without limitation, providing reasonable assistance in securing patent
protection and copyright registrations and executing all documents as reasonably
requested by the Company, whether such requests occur prior to or after
termination of the Executive's employment with the Company).
(b) In accordance with Section 2872 of the Illinois Employee Patent
Act, Ill. Reve. Stat. Chap. 140, (S) 301 et seq. (1983), the Executive is hereby
advised that Section 2 of this Agreement regarding the Company's ownership of
Intellectual Property does not apply to any invention for which no equipment,
supplies, facilities or trade secret information of the Company was used and
which was developed entirely on the Executive's own time, unless (i) the
invention relates to the business of the Company or to the Company's actual or
demonstrably anticipated research or development or (ii) the invention results
from any work performed by the Executive for the Company.
6. Acknowledgment of Protectible Interests. Executive agrees that the
Company has a protectible interest in the Confidential Information, Intellectual
Property, goodwill and specialized knowledge acquired by Executive during the
course of his employment with Company.
7. Delivery of Materials Upon Termination of Employment. As requested by
the Company from time to time and upon the termination of the Executive's
employment with the
<PAGE>
Company for any reason, the Executive will promptly deliver to the Company all
copies and embodiments, in whatever form, of all Confidential Information or
Intellectual Property in the Executive's possession or within his control
(including, but not limited to, written records, notes, photographs, manuals,
notebooks, documentation, program listings, flow charts, magnetic media, disks,
diskettes, tapes and all other materials containing any Confidential Information
or Intellectual Property) irrespective of the location or form of such material
and, if requested by the Company, will provide the Company with written
confirmation that all such materials have been delivered to the Company.
8. General Provisions.
(a) Absence of Conflicting Agreements. The Executive hereby warrants
and covenants that his execution, delivery and performance of this Agreement do
not and will not result in a breach of the terms, conditions or provisions of
any agreement, order, judgment or decree to which the Executive is subject.
(b) Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents or even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings,
<PAGE>
agreements or representations by or among the parties, written or oral, which
may have related to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
Agreement will bind and inure to the benefit of and be enforceable by the
Company and the Executive and their respective successors and assigns; provided
that the rights and obligations of the Executive under this Agreement will not
be assignable without the prior written consent of the Company.
(f) Choice of Law. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by and construed
in accordance with the domestic laws of the State of Delaware, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Delaware.
(g) Remedies. Each of the parties to this Agreement will be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorneys fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that the Executive's breach of
any term or provision of this Agreement will materially and irreparably harm the
Company, that money damages will accordingly not be an adequate remedy for any
breach of the provisions of this Agreement by the Executive and that the Company
in its sole discretion and in addition to any other remedies it may have at law
or in equity may apply to any
<PAGE>
court of law or equity of competent jurisdiction (without posting any bond or
deposit) for specific performance and/or other injunctive relief in order to
enforce or prevent any violations of the provisions of this Agreement.
(h) Ability to Earn Livelihood. Executive expressly agrees and
acknowledges that the restrictions contained in this Agreement do not preclude
Executive from earning a livelihood, nor does it unreasonably impose limitations
on Executive's ability to earn a living. In addition, the Executive agrees and
acknowledges that the potential harm to the Company of its non-enforcement
outweighs any harm to the Executive of its enforcement by injunction or
otherwise.
(i) Reasonableness. Executive acknowledges that he has carefully read
this Agreement and has given careful consideration to the restraints imposed
upon the Executive by this Agreement, and is in full accord as to their
necessity for the reasonable and proper protection of the Company's Confidential
Information. The Executive expressly acknowledges and agrees that each and
every restraint imposed by this Agreement is reasonable with respect to subject
matter, time period and geographical area.
(j) Acknowledgment of Consideration. Executive acknowledges that the
provisions of this Article are in consideration of: (1) employment with the
Company; (2) eligibility to participate in the Employee Incentive Compensation
Program in accordance with the additional terms of that Program; and (3)
additional good and valuable consideration as set forth in this Agreement.
(k) Amendment and Waiver. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company and the
Executive.
* * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Severance,
Confidentiality and Noncompetition Agreement on the date first written above.
Aksys, Ltd.
By /s/Lawrence H.N. Kinet
----------------------
Its Chairman and CEO
/s/Bruce E. Dobsch
------------------
Bruce Dobsch
<PAGE>
Exhibit 11
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Statement Regarding Computation of Net Loss Per Share
- -------------------------------------------------------------------------
Year ended December 31,
--------------------------------
1998 1997
-------------- --------------
Net loss $ (17,154,727) $ (13,506,602)
- -------------------------------------------------------------------------
Weighted average common
shares outstanding 14,653,953 13,791,236
- -------------------------------------------------------------------------
Net loss per share, basic and diluted $ (1.17) $ (0.98)
- -------------------------------------------------------------------------
<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, 1998 and
1997, 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, 1998 and for the period from January 18, 1991 (inception) through
December 31, 1998. 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, 1998
and 1997, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1998 and for the period from
January 18, 1991 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
January 27, 1999
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Balance Sheets
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
December 31, December 31,
Assets 1998 1997
- -------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 8,671,576 8,150,612
Short-term investments 11,588,692 21,045,044
Interest receivable 81,358 398,561
Prepaid expenses 85,660 85,326
Other current assets 99,200 34,951
- -------------------------------------------------------------------------------
Total current assets 20,526,486 29,714,494
Long-term investments 780,000 2,808,349
Property and equipment, net 4,369,924 3,866,157
Other assets 265,425 258,251
- -------------------------------------------------------------------------------
$ 25,941,835 36,647,251
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 2,109,409 930,880
Accrued liabilities 407,441 351,113
- -------------------------------------------------------------------------------
Total current liabilities 2,516,850 1,281,993
Other long-term liabilities 123,041 77,269
- -------------------------------------------------------------------------------
Total liabilities 2,639,891 1,359,262
- -------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.01 per share,
1,000,000 shares authorized, 0 shares issued
and outstanding in 1998 and 1997. - -
Common stock, par value $.01 per share,
50,000,000 shares authorized, 14,758,542
and 14,002,663 shares issued and outstanding
in 1998 and 1997, respectively 147,585 140,027
Additional paid-in capital 69,831,490 64,673,596
Accumulated other comprehensive income 13,797 10,567
Deficit accumulated during development stage (46,690,928) (29,536,201)
- -------------------------------------------------------------------------------
Total stockholders' equity 23,301,944 35,287,989
Commitments
- -------------------------------------------------------------------------------
$ 25,941,835 36,647,251
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996 and for the period
from January 18, 1991 (inception) through December 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Cumulative
from
Jan. 18, 1991
(inception)
through
1998 1997 1996 Dec. 31, 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Joint development income $ 1,000,000 - - 1,000,000
- ----------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 15,342,533 10,886,803 6,515,485 39,413,437
Business development 1,185,254 1,043,867 547,767 3,136,418
General and administrative 3,304,747 3,848,701 2,559,441 11,185,911
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 19,832,534 15,779,371 9,622,693 53,735,766
- ----------------------------------------------------------------------------------------------------------------
Operating loss (18,832,534) (15,779,371) (9,622,693) (52,735,766)
- ----------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 1,677,807 2,272,769 1,811,585 6,003,578
Interest expense - - (7,929) (23,591)
Other income - - - 67,884
- ----------------------------------------------------------------------------------------------------------------
1,677,807 2,272,769 1,803,656 6,047,871
- ----------------------------------------------------------------------------------------------------------------
Net loss $ (17,154,727) $ (13,506,602) $ (7,819,037) $ (46,687,895)
- ----------------------------------------------------------------------------------------------------------------
Net loss per share, basic and diluted $ (1.17) $ (0.98) $ (0.63)
- -------------------------------------------------------------------------------------------------
Weighted average shares outstanding 14,653,953 13,791,236 12,441,718
- -------------------------------------------------------------------------------------------------
</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, 1998, 1997 and 1996 and for the period
from January 18, 1991 (inception) through December 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated accumulated
Common Stock Additional other during Other Total
-------------- paid-in comprehensive development comprehensive stockholders'
Shares Amount capital income stage income equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <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)
- -------------------------------------------------------------------------------------------------- -----------
Comprehensive Income:
Net loss (7,819,037) (7,819,037) (7,819,037)
Other comprehensive income
Foreign currency translation
adjustment 2,921 2,921 2,921
----------
Comprehensive income (7,816,116)
==========
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
- -------------------------------------------------------------------------------------------------- -----------
Balance at December 31, 1996 13,708,555 137,086 64,573,686 2,921 (16,029,599) 48,684,094
- -------------------------------------------------------------------------------------------------- -----------
Comprehensive Income:
Net loss (13,506,602) (13,506,602) (13,506,602)
Other comprehensive income
Foreign currency translation
adjustment 7,646 7,646 7,646
----------
Comprehensive income (13,498,956)
==========
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
- ------------------------------------------------------------------------------------------------- -----------
Balance at December 31, 1997 14,002,663 140,027 64,673,596 10,567 (29,536,201) 35,287,989
- ------------------------------------------------------------------------------------------------- -----------
Comprehensive Income:
Net loss (17,154,727) (17,154,727) (17,154,727)
Other comprehensive income
Foreign currency translation
adjustment 3,230 3,230 3,230
----------
Comprehensive income (17,151,497)
==========
Issuance of common stock 493,097 4,931 4,995,069 -- -- 5,000,000
Exercise of stock options 237,169 2,371 35,272 -- -- 37,643
Issuance of shares to Employee
Stock Purchase Plan 25,613 256 127,553 -- -- 127,809
- ------------------------------------------------------------------------------------------------- -----------
Balance at December 31, 1998 14,758,542 $147,585 69,831,490 13,797 (46,690,928) 23,301,944
- ------------------------------------------------------------------------------------------------- -----------
</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, 1998, 1997 and 1996 and for the period
from January 18, 1991 (inception) through December 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------- -----------------
Cumulative from
January 18, 1991
(inception)
through
1998 1997 1996 December 31, 1998
- -------------------------------------------------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(17,154,727) (13,506,602) (7,819,037) (46,687,895)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 960,849 701,951 347,323 2,245,165
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 317,203 299,563 (689,622) (81,358)
Prepaid expenses (334) (4,521) (74,862) (85,930)
Other current assets (64,249) 21,662 (10,294) (99,200)
Accounts payable 1,178,529 (210,949) 825,429 2,109,409
Accrued and other liabilities 102,100 146,480 202,724 541,049
Other assets (92,467) (189,952) (107,487) (471,039)
- -------------------------------------------------------------------------------------------------------- -----------------
Net cash used in operating activities (14,753,096) (12,738,821) (7,259,823) (42,457,009)
- -------------------------------------------------------------------------------------------------------- -----------------
Cash flows from investing activities:
Purchases of investments (23,452,069) (25,133,915) (47,849,574) (108,499,572)
Proceeds from maturities of investments 34,940,000 36,813,298 15,692,509 96,123,337
Purchases of property and equipment (1,379,323) (1,757,274) (2,432,615) (6,275,316)
Organizational costs incurred -- -- -- (19,595)
- -------------------------------------------------------------------------------------------------------- -----------------
Net cash provided by (used in) investing activities (10,108,608) (9,922,109) {34,589,680) (18,671,146)
- -------------------------------------------------------------------------------------------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,165,452 99,304 52,229,394 57,567,156
Proceeds from issuance of preferred stock -- -- -- 12,336,096
Proceeds from issuance of note payable -- -- -- 41,792
Repayment of notes payable -- -- (16,115) (41,792)
Repayment of lease obligation -- (32,039) (34,338) (103,521)
- -------------------------------------------------------------------------------------------------------- -----------------
Net cash provided by financing activities 5,165,452 67,265 52,178,941 69,799,731
- -------------------------------------------------------------------------------------------------------- -----------------
Net increase (decrease) in cash and cash equivalents 520,964 (2,749,447) 10,329,438 8,671,576
Cash and cash equivalents at beginning of period 8,150,612 10,900,059 570,621 --
- -------------------------------------------------------------------------------------------------------- -----------------
Cash and cash equivalents at end of period 8,671,576 8,150,612 10,900,059 8,671,576
- -------------------------------------------------------------------------------------------------------- -----------------
Supplemental disclosures of cash flow information:
Conversion of 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, 1998 and 1997
(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. The Company operates in one industry segment and all
of its long-lived assets are located in the United States.
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements of the Company follows:
(a) 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.
(b) 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.
(c) 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 them 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
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
adjustment to yield using the straight-line method, which approximates the
effective interest method. Interest income is recognized when earned. At
December 31, 1998 and 1997, 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.
(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.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(2) Short-Term Investments
Investments consisted of the following at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
----------------------- ----------------------
Amortized Market Amortized Market
cost value cost value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency Bonds $ 5,508,332 5,517,675 2,000,000 1,999,380
Commercial Paper 1,973,417 1,971,640 4,461,170 4,460,340
Corporate Bonds - - 6,625,147 6,625,303
International Bonds 2,006,943 2,018,740 3,858,553 3,857,869
Municipal Bonds 2,100,000 2,100,000 2,100,000 2,100,000
Certificates of Deposit - - 2,000,174 2,000,000
- ------------------------------------------------------------------------------
$11,588,692 11,608,055 21,045,044 21,042,892
- ------------------------------------------------------------------------------
</TABLE>
(3) Property and Equipment
Property and equipment are summarized at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Estimated
useful life 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and fixtures 7 years $ 1,117,974 999,616
Leasehold improvements 10 years 1,146,511 1,146,511
Equipment 3-7 years 4,085,617 2,824,652
- ------------------------------------------------------------------------------
6,350,102 4,970,779
Less accumulated depreciation
and amortization (1,980,178) (1,104,622)
- ------------------------------------------------------------------------------
$ 4,369,924 3,866,157
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4) Stockholders' Equity
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.
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.
(5) Stock Option Plans
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
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
established, the 1993 Stock Option Plan was terminated, except with respect
to options then outstanding. At December 31, 1998, 1,767,587 shares of
common stock have been reserved for issuance under the Stock Plans,
including 293,070 shares available for future grants under the 1996 Stock
Awards Plan.
The per share weighted-average fair value of stock options granted during
1998 and 1997 was $2.87 and $3.16, respectively, on the dates of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions: 1998 - expected dividend yield 0%, expected volatility of 50%,
risk-free interest rate of 5.50%, and an expected life of 5 years; 1997
expected dividend yield 0%, expected volatility of 50%, risk-free interest
rate of 6.25%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Stock Plans
and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date of its stock
options under SFAS No. 123, the Company's net loss would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- -----------------------------------------------------
1998 1997
- -----------------------------------------------------
<S> <C> <C>
Net loss as reported $17,154,727 13,506,602
Pro forma 17,620,643 3,972,518
Loss per share as reported 1.17 0.98
Pro forma 1.20 1.01
</TABLE>
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.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Number of Weighted-average
shares exercise price
- ----------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 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
Granted 340,000 5.6073
Exercised (237,169) 0.1587
Canceled (165,649) 7.5175
- ----------------------------------------------------------------
Balance at December 31, 1998 1,474,517 $ 2.5054
- ----------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<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 12/31/98 Life Price at 12/31/98 Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.1067 to $1.0000 876,538 3.3 years $ 0.1728 822,976 $ 0.1690
$4.2500 to $6.0000 420,375 9.0 years $ 5.0112 97,672 $ 5.3395
$6.1250 to $9.0000 149,000 8.9 years $ 7.3268 50,125 $ 7.9838
$9.7500 to $15.2500 28,604 8.0 years $12.0443 18,104 $13.3749
- -----------------------------------------------------------------------------------------
$0.1067 to $15.2500 1,474,517 988,877
=========================================================================================
</TABLE>
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(6) Employee Benefit Plans
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, 1998, 1997 and 1996 was
$19,429, $17,776 and $12,372, respectively.
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, total shares
issued in 1998 based on 1997 payroll withholdings was 25,613, and total
shares to be issued during January 1999 for 1998 payroll withholdings was
46,678.
(7) 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.
(8) 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
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
valuation allowance equal to the amount of the Company's deferred tax
assets. At December 31, 1998, the Company has a net operating loss and
research and development credit carryforwards for Federal income tax
purposes of approximately $49,897,000 and $1,371,000, respectively. These
carryforwards expire between 2008 and 2018. 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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 20,601,000 11,293,000
Research and development credit carryforwards 1,371,000 1,109,000
Other 14,000 35,000
- ---------------------------------------------------------------------------------
<S> <C> <C>
Total deferred tax assets 21,986,000 12,437,000
Less valuation allowance (21,870,000) (12,390,000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net deferred tax assets 116,000 47,000
Deferred tax liability - depreciation 116,000 47,000
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net deferred taxes $ -- --
- ---------------------------------------------------------------------------------
</TABLE>
Given the Company's historical losses and uncertainty with respect to the
Company's ability to generate taxable income, management has determined that
realization of deferred tax assets is less likely than not and accordingly
has established a valuation allowance of $21,870,000 at December 31, 1998
and $12,390,000 at December 31, 1997. The change in the valuation allowance
was $9,480,000 and $5,550,000 in 1998 and 1997, respectively.
(9) 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.
<PAGE>
AKSYS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 1998, 1997 and 1996 were $625,484,
$573,915 and $332,423, 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.
- --------------------------------------------------------------------------------
1999 $ 373,085
2000 384,290
2001 395,772
2002 407,807
2003 419,980
Thereafter 1,181,090
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
1999 $ 95,000
2000 125,000
2001 155,000
2002 185,000
2003 215,000
All subsequent years 255,000
- --------------------------------------------------------------------------------
Total royalty payments for the years ended December 31, 1998, 1997 and
1996 were $75,000, $45,000 and $35,000, respectively.
<PAGE>
Exhibit 23
CONSENT OF KPMG LLP
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 27, 1999, relating
to the consolidated balance sheets of Aksys, Ltd. as of December 31, 1998, and
1997, 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, 1998, and for the period from January 18, 1991 (inception) through
December 31, 1998, which report appears in the December 31, 1998 Annual Report
on Form 10-K of Aksys, Ltd.
KPMG LLP
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the consolidated balance sheet as of December 31, 1998 and the consolidated
statement of operations for the year ended December 31, 1998, 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,672
<SECURITIES> 12,369
<RECEIVABLES> 81
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,526
<PP&E> 6,350
<DEPRECIATION> 1,980
<TOTAL-ASSETS> 25,942
<CURRENT-LIABILITIES> 2,517
<BONDS> 0
0
0
<COMMON> 148
<OTHER-SE> 23,154
<TOTAL-LIABILITY-AND-EQUITY> 25,942
<SALES> 0
<TOTAL-REVENUES> 1,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,155)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,155)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
