Document:

Exhibit
10.3

 

AKSYS, LTD.

 

NOTE PURCHASE AGREEMENT

 

 

This NOTE PURCHASE AGREEMENT
(the “Agreement”) is effective as of February 23, 2004, by and
among AKSYS,
LTD., a Delaware corporation (the “Company”), DURUS LIFE
SCIENCES MASTER FUND LTD., a Cayman Islands Exempted Company (“Durus”),
and ARTAL LONG BIOTECH PORTFOLIO LLC,
a Delaware limited liability company (“Artal” and, together with Durus, each a “Purchaser” and, collectively,
the “Purchasers”).

 

WHEREAS, the Company and the
Purchasers, among others, have entered into that certain Settlement Agreement
and Mutual Release, dated as of the date hereof (the “Settlement Agreement”);
and

 

WHEREAS, as part of the
Settlement Agreement, the Company has agreed to issue to the Purchasers certain
unsecured subordinated promissory notes in the Company in consideration for
cash payments to the Company, pursuant to the terms and conditions hereof.

 

NOW, THEREFORE, the parties
hereby agree as follows:

 

1.                                      The
Notes.

 

1.1                               The
Notes.  The Purchasers agree to
purchase from the Company at the Closing in the aggregate principal amount of
Sixteen Million One Hundred Thousand Dollars ($16,100,000.00) (the “Principal
Amount”) unsecured subordinated promissory notes, in the form of Exhibit
A attached hereto and made a part hereof (each a “Note” and,
collectively, the “Notes”), to be governed by the terms and conditions
of, and repaid in accordance with, this Agreement and the Notes.  The Notes shall be issued in increments of
One Thousand Dollars ($1,000.00) of Principal Amount.

 

1.2                               Closing.  The purchase and sale of the Notes (the “Closing”)
will take place at the principal offices of Schulte Roth & Zabel LLP, 919
Third Avenue, New York, New York 10022 concurrently with the date and time that
the Purchasers pay to the Company the aggregate sum of Eighteen Million Dollars
($18,000,000.00) pursuant to the Settlement Agreement, or at such date and time
as the parties shall otherwise mutually agree. 
At the Closing, the Company shall deliver to each Purchaser one duly
executed Note, representing such Purchaser’s portion of the Principal Amount
(each, a “Purchase Amount”), in the following denominations:

 

 

	
  Name of
  Purchaser

  	
   

  	
  Purchase Amount of Notes

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Durus

  	
   

  	
  $

  	
  15,778,000.00

  	
   

  
	
  Artal

  	
   

  	
  $

  	
  322,000.00

  	
   

  

 

Each Purchaser may request in advance from the Company that its
Purchase Amount be

 

 

represented by more than one Note, in which case the Company shall
issue such number of Notes as requested by such Purchaser.  At the Closing, each Purchaser shall deliver
its Purchase Amount to the Company by wire transfer.

 

2.                                      Representations
and Warranties of the Company.  The
Company hereby makes the following representations and warranties to the
Purchasers as of the date of this Agreement:

 

2.1                               Organization,
Good Standing and Power. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted.  The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure to so qualify or
be in good standing would not have a Material Adverse Effect (as defined
below).  For purposes of this Agreement,
the term “Material Adverse Effect” shall mean a material adverse effect
upon the business, financial condition, properties or results of operations of
the Company and its subsidiaries, taken as a whole, or on the ability of the
Company to perform its obligations hereunder.

 

2.2                               Capitalization.
The authorized capital stock of the Company consists of a total of fifty
million (50,000,000) shares of common stock, par value $0.01 per share (“Common
Stock”), of which 29,806,475 shares of Common Stock were issued and
outstanding as of February 10, 2004, and a total of one million (1,000,000)
shares of preferred stock of the Company, $0.01 par value per share (“Preferred
Stock”), none of which Preferred Stock is issued or outstanding as of the
date hereof.  All of the outstanding
shares of Common Stock have been duly and validly authorized and issued, and
are fully paid and non-assessable.  The Company’s
filings with the Securities and Exchange Commission (the “Commission”)
include true and correct copies of the Company’s Restated Certificate of
Incorporation, as amended and in effect on the date hereof, and the Company’s
Bylaws, as amended and in effect on the date hereof.

 

2.3                               Commission
Documents, Financial Statements. The Company’s Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the
Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of
the Exchange Act (all of the foregoing, including filings incorporated by
reference therein, being referred to herein as the “Commission Documents”).  The Company has maintained all requirements
for the continued listing or quotation of its Common Stock, and such Common
Stock is currently listed or quoted on the Nasdaq National Market.  As of its date, the Company’s Form 10-K for
the year ended December 31, 2002 complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder applicable to such document, and, as of its date, after
giving effect to the information disclosed and incorporated by reference
therein, such Form 10-K did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.  As of
their respective dates, the financial statements of the Company included in the
Commission Documents filed with the Commission since December 31, 2002

 

2

 

complied as to form and
substance in all material respects with applicable accounting requirements and
the published rules and regulations of the Commission or other applicable rules
and regulations with respect thereto. 
Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed or summary statements).

 

2.4                               Exemption
from Registration; Valid Issuances. The issuance and sale of the Notes, in
accordance with the terms and on the basis of the representations and
warranties set forth in this Agreement, may and shall be properly issued
pursuant to an exemption from the registration requirements under the
Securities Act of 1933, as amended (the “Securities Act”), and
applicable state securities laws. 
Neither the sale of the Notes pursuant to, nor the Company’s performance
of its obligations under or exercise of its rights pursuant to, the this
Agreement and the Notes (collectively, the “Purchase Agreements”) shall
(i) result in the creation or imposition of any liens, charges, claims or other
encumbrances upon the Notes or any of the assets of the Company, or (ii)
entitle the holders of any outstanding shares of capital stock of the Company
to preemptive or other rights to subscribe to or acquire the shares of Common
Stock or other securities of the Company.

 

3.                                      Representations
and Warranties of the Purchasers. 
Each of the Purchasers, severally but not jointly, hereby represents and
warrants to the Company as of the date of this Agreement, except that, with
regard to Section 3.1 below, only Durus represents and warrants to such
information, as follows:

 

3.1                               Ownership.  Durus, with and through its affiliates and
associates, first became an owner of fifteen percent (15%) or more of the
Company’s outstanding voting stock on or prior to August 30, 2002.

 

3.2                               Purchase
Entirely for Own Account.  The
Note(s) are being acquired by the Purchaser for investment for its own account,
and not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and the Purchaser has no present intention of
selling, granting any participation in, or otherwise distributing the
same.  The Purchaser does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participation in the Note(s) to such person or to any third
person.  The Purchaser has not been
organized for the purpose of acquiring the Note(s).

 

3.3                               Investment
Risk.  The Purchaser understands
that any loan to the Company or investment in the Note(s) involves substantial
risks.

 

3.4                               Accredited
Investor.  The Purchaser is an
“accredited investor” within the meaning of Rule 501(a) of
Regulation D promulgated under the Securities Act, as presently in effect.

 

3.5                               Restricted
Securities.  The Purchaser
understands that the Note(s) issued to the Purchaser have not been registered
under the Securities Act or state securities laws and have been issued by
reason of a specific exemption from the registration provisions of the
Securities

 

3

 

Act and applicable state
securities laws that depends upon, among other matters, the bona fide nature of
the investment intent and the accuracy of the Purchaser’s representations as
expressed in this Agreement.  The
Purchaser further understands that, except to the extent otherwise agreed in
the Settlement Agreement and other Transaction Agreements (as such term is
defined in the Settlement Agreement), the Company shall have no obligation to
register the Note(s) under the Securities Act or any state securities laws or
to take any action that would make available any exemption from the registration
requirements of such laws.  The
Purchaser hereby acknowledges that, because of the restrictions on transfer or
assignment, under securities laws, of the Note(s), the Purchaser may have to
bear the economic risk of the investment commitment in the Note(s) for an
indefinite period of time.

 

3.6                               Legends.  It is understood that the certificate or
certificates evidencing the Note(s) or any substitute therefor or interest
therein may bear the following legend or its substantial equivalent:

“THIS SECURITY HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.  IT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITY UNDER SUCH ACT OR EXEMPTION THEREFROM OR UNLESS SOLD
PURSUANT TO RULE 144 PROMULGATED UNDER SUCH ACT.”

 

4.                                      Miscellaneous.

 

4.1                               Governing
Law.  The Purchase Agreements shall
be governed by and construed in accordance with the laws of the State of New
York, without regard to conflict of laws principles.

 

4.2                               Survival.  The representations, warranties, covenants
and agreements made herein shall survive the Closing of the transactions
contemplated hereby.

 

4.3                               Successors
and Assigns.  Except as otherwise
expressly provided herein and subject to any restrictions on transfer under
applicable securities laws, the provisions hereof shall inure to the benefit of
and be binding upon each of the parties; the successors and assigns of the
Company; and the heirs, devisees, executors, administrators, representatives, successors
and assigns of the Purchasers.  Subject
to applicable law, each of the Purchasers may assign, transfer, distribute or
otherwise dispose of (by operation of law or otherwise) its Note(s), in whole
or in part, or its rights or obligations under this Agreement or its Note(s),
or any interests therein, including without limitation through subdivision of
any then-outstanding Note(s), without the written consent of the Company.  The Company shall not assign, transfer,
distribute or otherwise dispose of (by operation of law or otherwise) this
Agreement or its rights or obligations under or in this Agreement without the
prior written consent of each of the Purchasers.  The Company shall not
assign, transfer or otherwise dispose of (by operation of law or otherwise) its
rights or obligations under or in any Note without the prior written consent of
the Purchaser of such Note.  Any
purported assignment, transfer or other disposition by the Company, except as
permitted herein, shall be null and void.

 

4

 

4.4                               Entire
Agreement.  Together with the
Settlement Agreement and the other Transaction Agreements, the Purchase
Agreements constitute the full and entire understanding and agreement between
the parties with regard to the subject matter hereof and thereof.  Together with the Settlement Agreement and
the other Transaction Agreements, the Purchase Agreements supersede all prior
agreements and understandings between the Company and the Purchasers with
respect to the subject matter hereof and thereof.  This Agreement may not be modified or amended nor may any of the
terms thereof be waived except by an instrument in writing executed by the
Company and a majority of the principal amount of the Notes then
outstanding.  A Note may be modified or
amended and the terms thereof may be waived, in each case, only by an
instrument in writing executed by the Company and the Purchaser of such Note.

 

4.5                               Notices,
etc. 
All demands, notices, communications and reports provided for in
this Agreement shall be in writing and shall be either sent by facsimile with
confirmation to the number specified below or personally delivered or sent by
reputable overnight courier service (delivery charges prepaid) to any party at
the address specified below.

 

If to the Company, to:

 

Aksys, Ltd.

Two Marriott
Drive

Lincolnshire,
Illinois  60069

Attn:                    Chief
Executive Officer

Chief Financial Officer

Telecopy:  (847) 229-2235

Telephone:  (847) 229-2020

 

With a copy to:

 

Kirkland & Ellis LLP

200 East Randolph Drive

Chicago, Illinois 
60601

Attn:  Keith S.
Crow, P.C.

Telecopy: 
(312) 861-2200

Telephone:  (312) 861-2000

 

If to Durus, to:

 

Durus Life
Sciences Master Fund Ltd.

c/o
International Fund Services (Ireland) Limited

3rd Floor,
Bishops Square

Redmonds Hill

Dublin 2,
Ireland

Attn:  Susan Byrne

Telecopy:  (011) 35-31-707-5113

Telephone:  (011) 35-31-707-5013

 

5

 

With a copy to:

 

Schulte Roth
& Zabel LLP

919 Third
Avenue

New York, New
York 10022

Attn:  Paul N. Roth, Esq.

Telecopy:
(212) 593-5955

Telephone:
(212) 756-2000

 

And an additional copy to:

 

Morrison &
Foerster LLP

425 Market
Street

San Francisco,
California 94105

Attn:  Gavin Grover, Esq.

Telecopy:
(415) 268-7522

Telephone:
(415) 268-7113

 

If to Artal, to:

 

Artal Long
Biotech Portfolio LLC

c/o Artal Alternative Treasury Management

19A Rue de la Croix-d’or

Geneva

Switzerland

Attn: Christian Tedeschi, Managing Director

 

With a copy to:

 

Shartsis, Friese & Ginsburg LLP

One Maritime Plaza, 18th Floor

San Francisco, California 94111

Attn: Carolyn Gorman, Esq.

Telecopy: (415) 421-2922

Telephone: (415) 421-6500

 

Any such demand, notice, communication or report shall
be deemed to have been given pursuant to this Agreement when delivered
personally, when confirmed if by facsimile or on the second business day after
deposit with a reputable overnight courier service, as the case may be.

 

4.6                               Severability
of this Agreement.  If any provision
of this Agreement or the Notes is determined to be invalid, void or unenforceable,
in whole or in part, this determination will not affect any other provision of
this Agreement or the Notes, and the provision in question shall be modified so
as to be rendered valid and enforceable and the Company and the Purchasers
additionally shall take all such reasonable further actions as are necessary to
give each other the intended benefit of such provision.

 

6

 

4.7                               Counterparts.  This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall be deemed to constitute one instrument.

 

IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the date and year first written above.

 

	
   

  	
  THE
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  AKSYS,
  LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  William C. Dow

  	
   

  
	
   

  	
  Its:

  	
  President
  and Chief Executive Officer

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE
  PURCHASERS:

  
	
   

  	
   

  
	
   

  	
  DURUS
  LIFE SCIENCES MASTER FUND

  LTD.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Leslie L. Lake

  	
   

  
	
   

  	
  Its:

  	
  Director

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTAL
  LONG BIOTECH PORTFOLIO LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Artal
  Alternative Treasury Management

  
	
   

  	
  Its:

  	
  Managing
  Member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Christian Tedeschi

  	
   

  
	
   

  	
  Its:

  	
  Managing
  Director

  	
   

  

 

7Exhibit
10.4

 

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED.  IT MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT WITH RESPECT TO THE SECURITY UNDER SUCH ACT OR EXEMPTION THEREFROM OR
UNLESS SOLD PURSUANT TO RULE 144 PROMULGATED UNDER SUCH ACT.

 

 

AKSYS,
LTD.

UNSECURED SUBORDINATED PROMISSORY NOTE

 

	
  No.    

  	
   

  	
                   
  ,      2004

  
	
  $               

  	
   

  	
  Lincolnshire,
  Illinois

  

 

1.                                      Principal.

 

1.1       Aksys,
Ltd., a Delaware corporation (the “Company”), for value received, hereby
promises to pay to the order of
                        ,
or its permitted assignee(s) (hereinafter, the “Purchaser” or the “Holder”),
the amount of
                        
Dollars ($              )
(“Principal”) in lawful money of the United States or as otherwise
hereinafter set forth.  This Unsecured
Subordinated Promissory Note (the “Note”) is being issued by the Company
pursuant to that certain Note Purchase Agreement, dated as of February 23, 2004
(the “Agreement”), by and among the Company, the Purchaser and [Durus
Life Sciences Master Fund Ltd./Artal Long Biotech Portfolio LLC] pursuant to
which the Company is issuing, unsecured subordinated promissory notes in
aggregate principal amount of Sixteen Million One Hundred Thousand Dollars
($16,100,000.00) (collectively, the “Notes”), of which this Note is one,
in increments of One Thousand Dollars ($1,000.00).

 

1.2       This
Note shall not bear interest.  No
payment of Principal or other amounts under this Note shall be due until the
applicable “Maturity Date” which shall be the earliest to occur of
(i) an Event of Default (as defined in Article 2 hereof), (ii) a
Change of Control (as defined in Article 6 hereof), (iii) four (4)
business days after a Selection Date (as defined in Article 5 hereof),
(iv) an Expiration Date (as defined in Article 5 hereof), or
(v) February 23, 2009, and on any such Maturity Date the Note shall be
repaid in full except as otherwise provided in this Note.  This Note is not secured by any assets or
securities of the Company and is subordinated to all Senior Indebtedness (as
defined in Article 4 hereof) of the Company.

 

1.3       Upon
payment in full of Principal hereof and all other amounts due hereunder, this
Note shall be cancelled and shall be surrendered to the Company, but any prior
cancellation of this Note shall not limit the Holder’s subsequent right to
receive the Acquisition Premium Amount, if applicable, in accordance with the
terms hereof.

 

1.4       Principal
and any other amounts due under this Note shall be payable to the Holder hereof
at such address as provided by the Holder pursuant to the Agreement or as the
Holder shall from time to time designate by written notice to the Company
pursuant to the notice provisions set forth in the Agreement.

 

 

2.                                      Events of Default.  The occurrence of any one or more of the
following events shall constitute an “Event of Default” hereunder:

 

2.1       Failure
to pay all Principal or any other amounts due and payable hereunder on the Maturity
Date; or

 

2.2       Any
of the following events:  (a)  The commencement of a voluntary petition in
bankruptcy or the filing of a petition to have the Company declared bankrupt or
insolvent or the filing of any other petition of reorganization, arrangement or
similar relief by or for the Company under any applicable law regarding
insolvency or relief for debtors, unless such proceeding is vacated,
discharged, or stayed or bonded pending appeal within 60 days from the
commencement thereof; (b) the making by the Company of a general assignment for
the benefit of creditors or any similar undertaking; (c) the appointment of a
receiver, trustee or similar officer for the business or property of the
Company, which appointment is not vacated, discharged, stayed or bonded pending
appeal within 60 days from such appointment; or (d) the admission by the
Company in writing of its inability to pay its debts generally as such debts
become due.

 

3.                                      Remedies upon an Event of Default.  At any time an Event of Default exists, the
Holder shall have such remedies, as provided herein or by applicable law.  Upon the occurrence of any Event of Default
under Section 2.2, payment of Principal and any other amounts payable hereunder
shall be deemed accelerated automatically and immediately due and payable to
the Holder.  At any time any other Event
of Default exists, payment of Principal and any other amounts payable hereunder
shall be accelerated and shall be due and payable to the Holder upon notice
thereof from the Holder.

 

4.                                      Subordination.

 

4.1       Terms
of Subordination.  Notwithstanding
anything to the contrary, the obligations of the Company in respect of this
Note will be subordinate and junior in right of payment to the payment in full
in cash of any and all existing and future Senior Indebtedness (as defined
below) on the terms set forth in this Section 4.1.  Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company, in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, or
in an assignment for the benefit of creditors or in any marshaling of the
Company’s assets and liabilities:  (a)
holders of Senior Indebtedness will be entitled to receive payment in full of
all obligations due in respect of such Senior Indebtedness (including interest
after the commencement of any bankruptcy proceeding at the rate specified in
the applicable Senior Indebtedness) before the Holder of this Note will be
entitled to receive any payment or distribution with respect to this Note; and
(b) until all obligations with respect to Senior Indebtedness (as provided in
clause (a) above) are paid in full, any distribution to which the Holder would
be entitled but for this Article 4 will be made to holders of Senior
Indebtedness, except that the Holder may receive common stock, par value $0.01
per share, of the Company (“Common Stock”) in exchange for all or a
portion of this Note (to the extent provided in Section 5.2 below).  In the event any such distribution is paid
to the holders of Senior Indebtedness instead of to the Holder of this Note,
then upon payment in full in cash of all Senior Indebtedness, the Holder of
this Note shall be subrogated to the

 

2

 

claims of the
holders of Senior Indebtedness to the extent of such distribution.  Payments may not be made hereunder, and no
rights or remedies may be exercised by the Holder in respect of this Note, to
the extent, but only to the extent, (i) any such payment or the exercise of
such rights or remedies by the Holder would result in a default or acceleration
under any material agreement or instrument with a third party unaffiliated with
the Company with respect to Senior Indebtedness, or (ii) any default exists
under any material agreement or instrument with a third party unaffiliated with
the Company with respect to Senior Indebtedness.  The restrictions on payment and the exercise of rights and
remedies in the preceding sentence shall not be applicable (i) to the Company’s
obligation to make cash payments to the holder of the Note in connection with a
Change of Control; and (ii) to the Company’s obligation to issue Common Stock
as payment for the Note at any time when the Company may pay the Note by exchange
of Common Stock as provided herein. 
Accordingly, any delay in any cash payment under this Note (other than
in connection with a Change of Control) resulting from the restrictions
contained in this Article 4 shall not result in any breach or default under
this Note so long as the Company provides in lieu of cash payment, payment of
the Note by exchange of its Common Stock if and to the extent that payment in
Common Stock is available under the terms of this Note at such time.  The Holder, whether upon original issue or
upon transfer or assignment hereof, by its acceptance hereof agrees that this
Note shall be subject to the provisions of this Article 4.  If the Company shall determine to create
senior debt securities, senior credit facilities or other senior financing
arrangements (including without limitation senior equipment financing) and, in
order to consummate such transactions, the creditor(s) thereto request that the
Holder execute and deliver to such creditor(s) other instruments, documents or
agreements evidencing the subordination of this Note to such securities,
facilities or arrangements, the Holder agrees to cooperate with the Company and
to take, or cause to be taken, all action, and do, or cause to be done, all
things, reasonably necessary, or reasonably requested by the applicable senior
creditor(s) for such securities, facilities or arrangements, to carry out and
effectuate the intent of the subordination terms of this Article 4;
provided such undertakings are not otherwise inconsistent with the intent of
the parties in this Note.

 

4.2       Senior
Indebtedness.  For purposes of this
Note and the Agreement, “Senior Indebtedness” shall mean the
following:  all advances, debts,
liabilities, obligations, covenants and duties, contingent or otherwise, that
in accordance with generally accepted accounting principles should be
classified on the Company’s balance sheet as liabilities, or to which reference
should be made by footnotes thereto, together with any amendments, renewals,
extensions, modifications, refinancings and refundings of any of the foregoing,
including in any event and whether so classified all:  (a) obligations created, issued or incurred by the Company
for borrowed money (whether by loan, the issuance and sale of debt securities
or the sale of property to another person subject to an agreement, contingent
or otherwise, to repurchase such property from such person);
(b) obligations of the Company to pay the deferred purchase or acquisition
price of property or services, including trade accounts payable and accrued
expenses; (c) indebtedness of others secured by a lien on the property of the
Company, whether or not the respective indebtedness so secured has been assumed
by the Company; (d) obligations of the Company in respect of letters of credit
or similar instruments issued or accepted by banks and other financial
institutions for the account of the Company; (e) lease obligations of the
Company; and (f) without duplication, obligations of the Company under
guarantees of indebtedness of others; provided, however, notwithstanding

 

3

 

anything to the
contrary in this Section 4.1, “Senior Indebtedness” shall not include any
other obligations, including indebtedness, that by the terms of the instrument(s)
by which such obligations were created or incurred expressly provides that it
(i) is junior in right of payment to this Note or (ii) ranks pari passu
in right of payment with this Note.

 

4.3       Relative
Rights. This Article 4 defines the relative rights of the Holder of  this Note and holders of Senior Indebtedness
and nothing in this Note or the Agreement will:  (a) impair, as between the Company and the Holder of this Note,
the obligation of the Company, which is absolute and unconditional, to pay Principal
of, and, if any, premium and other amounts on, the Note in accordance with its
terms; or (b) affect the relative rights of the Holder of this Note and
creditors of the Company other than such rights in relation to holders of
Senior Indebtedness.  If the Company
fails because of this Article 4 to pay Principal of, and, if any, premium and
other amounts on, this Note on the applicable due date, the failure is still an
Event of Default.  The right of the
Holder of this Note to receive payment of (i) Principal, premium and other
amounts, if any, in cash in connection with a Change in Control, or (ii)
Principal in Common Stock in connection with all other respective due dates
expressed in the Note (so long as and to the extent that Common Stock may be issued
to the Holder in connection with such due date in accordance with the terms of
the Note), and to bring suit for the enforcement of any such payment (in cash
in the case of a Change of Control or for Common Stock in connection with all
other applicable due dates), shall not be impaired or affected without the
consent of the Holder.

 

4.4       Permitted
Payments.  To the extent permitted
by the terms of Section 4.1 above, the Company may pay, and the Holder may
accept, payments against any otherwise subordinated amount on or before the
Maturity Date subject to the terms of Article 6 below.

 

5.                                      Payment or Prepayment; Exchange for Common
Stock of the Company.

 

5.1       Payment
or Prepayment.  Subject to the terms
of Article 6 below, the Company shall have the right at any time and from
time to time, including on the Maturity Date, upon ten (10) business days
written notice to the Holder, to pay or prepay Principal and any other amounts
then determinable and payable to the Holder in cash, in whole or in part,
without prepayment penalty.  The Company
may further exercise its right to pay or prepay all or any part of this Note at
any time notwithstanding any one or more partial prepayments hereunder.  If not previously prepaid, the Company shall
repay this Note on the Maturity Date.

 

5.2       Exchange
for Common Stock of the Company. 
Subject to the terms of Article 6 below, the Company shall have the
right, at any time from and after the Initial Exchange Eligibility Date (as
such term is defined below) through and including the one (1) year anniversary
date of the Initial Exchange Eligibility Date (the “Expiration Date”), to elect, in its sole discretion and in lieu of repayment in cash of all or any
portion of Principal due under this Note, to repay such amount of Principal in
Common Stock of the Company (hereinafter, an “Election”), subject to the
following:

 

(a)                                  The
Company may only make an Election within one year after the later of the
following dates (the “Initial Exchange Eligibility Date”):  (i) August 30, 2005; and (ii) the first

 

4

 

trading date upon which the Holder is not subject to
Section 16 of the Securities Exchange Act of 1934, as amended (“Section 16”),
with respect to its then-current holdings, either directly or indirectly, of
equity securities of the Company or the Holder being part of a Section 16
“group” or subject to Section 16 in any other way; provided, that with regard
to subsection (ii) of this Section 5.2(a), the Holder shall provide
written notice to the Company within twenty (20) business days following the
date the Holder first satisfies the requirements thereunder.

 

(b)                                 Upon
the Election, the Company may exchange all or a portion of the then-outstanding
Principal under this Note (the “Election Amount”) for that number of
duly authorized, validly issued, fully paid and non-assessable shares of Common
Stock of the Company equal to the Election Amount divided by the Exchange Price
(as such term is defined below).  To the extent that the Company does not cause
the exchange of all of the then-outstanding Principal under this Note, and
provided the Note is not then subject to a Section 16 Cutback (as such
term is defined below), then the Company shall pay the remaining balance
of Principal thereof in cash four (4) business days after the Selection Date in
connection with the Election.

 

(c)                                  “Exchange Price” shall mean the
average of the closing prices of Common Stock on the Nasdaq National Market
over the twenty (20) trading-day period, as adjusted for the effect of any
stock split, stock dividend, combination, reclassification or other similar
transaction during such period, ending on the trading day immediately prior to
the date (the “Selection Date”) selected by the Board of Directors of
the Company in good faith (the “Measurement Period”), provided that
(i) the Selection Date is the date the Board of Directors of the Company
meets or acts by written consent to make its selection, and (ii) the
Company has not sold any capital stock of the Company (other than upon the
exercise of stock options, pursuant to employee benefit plans or upon exercise
of previously issued warrants or similar rights) or taken any other similar
action that has adversely affected the price of Common Stock during the
Measurement Period, including announcing during the Measurement Period the
intention to sell capital stock of the Company.

 

(d)                                 The
Company shall provide written notice to the Holder, no later than one (1)
business day after the Selection Date, of (i) the Selection Date, (ii) the
Exchange Price, and (iii) the amount of Principal that the Company shall
exchange for Common Stock of the Company.

 

(e)                                  The
Company shall cause promptly to be issued and delivered to the Holder or such
other person as the Holder may designate in writing to the Company, but no
later than four (4) business days after the Selection Date, the number of full
shares of Common Stock so issued upon the Election.  At the prompt election of the Holder, the Company shall issue
such shares of Common Stock (i) in the form of a certificate or
certificates or (ii) if available, through The Depository Trust Company’s
DWAC system, provided the Holder has first surrendered to the Company this Note
(and, in the event of a partial payment of the Note by exchange for Common Stock
as a result of a Section 16 Cutback, the Company shall issue a new
unsecured subordinated promissory note (representing the portion of Principal
of the Note not so exchanged) otherwise having the same terms and provisions as
this Note and reflecting the remaining unpaid balance of Principal thereof, or
shall pay the remaining balance of Principal thereof in cash, as the case may
be).  The Holder may designate in
writing to the Company at any time prior to the date of issuance, including
prior to the Selection Date, its desired method of issuance for shares of
Common Stock and the name or names in which such shares are to be issued.  Any such certificate or certificates or
shares of Common Stock delivered through The Depository Trust Company’s DWAC
system shall

 

5

 

be deemed to have been issued and any person so
designated to be named therein shall be deemed to have become a holder of
record of such shares of Common Stock as of the Selection Date.

 

(f)                                    Notwithstanding
the fixing of the Selection Date, if the Exchange Price upon such Selection
Date would result in the issuance of shares of Common Stock to the Holder or
its Section 16 Group such that the Holder or its Section 16 Group
(i) would hold in excess of 9.9% of the Company’s Common Stock, including
any shares of Common Stock otherwise owned by the Holder or its Section 16
Group and after giving effect to the exchange of all outstanding Notes then
held by the Holder or its Section 16 Group, respectively, or (ii) would
otherwise be subject to Section 16 after giving effect to the exchange of
all outstanding Notes then held by the Holder or its Section 16 Group,
respectively, then the Exchange Price shall automatically be fixed as to only
that portion of this Note, and this Note may only be exchanged for Common Stock
(hereinafter, a “Section 16 Cutback”), such that, upon delivery of such
shares of Common Stock, together with Common Stock delivered upon a pro rata
exchange of the Notes held by the Holder’s Section 16 Group, if applicable,
does not cause the Holder, or its Section 16 Group, respectively, to exceed in
the aggregate an ownership level of 9.9% of the Company’s Common Stock or, if
applicable, such lower amount of Common Stock such that the Holder, and its
Section 16 Group, respectively, do not otherwise become subject to
Section 16.  Upon receipt of the
written notice from the Company of the fixing of the Selection Date, if the
Holder shall then determine that the Note is subject to a Section 16 Cutback,
the Holder shall notify the Company promptly in writing.

 

(g)                                 In
the event of a Section 16 Cutback, the Company shall have the option to pay the
balance of the unpaid Principal under this Note in cash or to set an Exchange
Price applicable to the balance of this Note held by the Holder upon action of
the Board of Directors in one or more successive tranches, as applicable, in
accordance with the terms of this Section 5.2, provided, however, that in
the event that the Company elects to cause the exchange of the remaining
balance of Principal into shares of Common Stock it shall do so as promptly as
practicable after such remaining balance may be exchanged without causing the
Holder to become subject to Section 16. 
The Company shall consult with the Holder of the Note in order to
establish the new Exchange Price for the remaining balance of the Note as soon
as practicable after the initial tranche of shares issued upon exchange of the
initial portion of the Principal under this Note has been exchanged with
respect to the Initial Exchange Eligibility Date.  In connection with any remaining tranche(s), in setting the
Exchange Price for such remaining tranche(s), (i)  reference to the
Initial Exchange Eligibility Date herein shall be substituted with the first
date the initial or, if applicable, subsequent tranche(s) of Common Stock
delivered in exchange for portions of this Note and held by the Holder or its
Section 16 Group shall have all been sold or otherwise distributed to persons
not a part of the Holder’s Section 16 Group such that additional shares of
Common Stock may be issued to the Holder without making the Holder subject to
Section 16 after giving effect to the exchange of  subsequent tranche(s) of Common Stock for the Notes,
(ii) with respect to each new Initial Exchange Eligibility Date for
subsequent tranche(s), the Board of Directors of the Company shall select in
good faith pursuant to terms of Section 5.2(c) above and this Section
5.2(g) a corresponding Selection Date for the exchange of such subsequent
tranche, (iii) the Expiration Date herein shall be the one (1) year
anniversary date of the new Initial Exchange Eligibility Date set forth in
subsection (i) of this Section 5.2(g) and (iv) notice
requirements under this Section 5.2 shall adjust accordingly.  In the event of a Section 16 Cutback, the
Maturity Date shall only apply to that portion of the Note then exchangeable
for shares of Common Stock following such Section 16

 

6

 

Cutback and the Maturity Date for the remaining
balance of unpaid Principal under this Note shall be established in successive
tranche(s) in accordance with the terms of Section 5.2.

 

(h)                                 For
purposes of Section 5.2(f) above, the Holder’s “Section 16 Group”
shall mean any group of security holders of the Company who, together with the
Holder, would otherwise constitute a “group” for purposes of Section 16, in
each case as set forth in a notice in writing by the Holder to the Company.

 

(i)                                     For
purposes of Section 5.2(f) above, the number of shares of Common Stock
beneficially owned by the Holder and its Section 16 Group shall include the
number of shares of Common Stock issuable upon exchange of this Note, or
portion thereof, with respect to which the determination of Section 5.2(f)
is being made, but shall exclude the number of shares of Common Stock which
would otherwise be available for exchange by the Company upon (A) exchange of
the remaining portion of this Note or other Notes beneficially owned by the
Holder or its Section 16 Group and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Notes), in each case subject to a
limitation on exchange, conversion or exercise analogous to the limitation
contained herein beneficially owned by the Holder or any of its Section 16
Group.  Except as set forth in the
preceding sentence, for purposes of Section 5.2(f), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended.  For purposes
of  Section  5.2(f), in determining
the number of outstanding shares of Common Stock, the calculation shall be made
using the number of outstanding shares of Common Stock as reflected in (x) the
Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more
recent public announcement by the Company or (z) any other more recent notice
by the Company or its transfer agent to the Holder setting forth the number of
shares of Common Stock outstanding.  For
any reason and at any time, upon the written or oral request of the Holder, the
Company shall within two (2) business days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the exchange,
conversion or exercise of securities of the Company, including, to the extent
applicable, this Note, by the Holder or its Section 16 Group since the date as
of which such number of outstanding shares of Common Stock was reported.

 

(j)                                     The
Company covenants to the Holder that, should the Holder be subject to a
Section 16 Cutback, the Company shall only elect to exchange Notes owned
by the Holder’s Section 16 Group for shares of Common Stock on a pro rata
basis based upon the Principal amount of the Notes held by them.

 

6.                                      Change of Control.

 

(a)                                  In
the event of a Change of Control (as defined below), payment of Principal
hereunder shall accelerate and become due and payable in cash upon the
Transaction Closing Date (as defined below); provided, however,
that if such Change of Control is later abandoned prior to the Transaction
Closing Date, no acceleration shall be deemed to have occurred and no payment
shall be required pursuant to this Section 6.

 

“Change of Control” shall mean (i) any acquisition of the
Company, or such subsidiary or subsidiaries of the Company the assets of 

which constitute all or substantially all of
the assets of 

 

7

 

the business of the Company and its subsidiaries taken as a whole, by
means of merger, consolidation or other form of corporate reorganization in
which the stockholders of the Company holding the right to vote with respect to
matters generally immediately preceding such acquisition do not own a majority
of the outstanding shares or other equity interests of the surviving or
acquiring corporation, (ii) a sale, lease or transfer of all or
substantially all of the assets of the Company, whether pursuant to a single
transaction or a series of related transactions or a plan (which assets shall
include for these purposes the assets of the Company’s subsidiaries), or (iii)
any consolidation or merger of the Company into or with any other entity or
entities which results in the exchange of fifty percent (50%) or more of the
outstanding capital stock of the Company for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or entities or
affiliate(s) thereof (other than a merger to reincorporate the Company in a
different jurisdiction or a merger or consolidation in which the stockholders
of the Company immediately preceding such merger or consolidation own a
majority of the shares or other equity interest of the surviving entity
resulting from such merger or consolidation).

 

(b)                                 In
the event of a Change of Control, in addition to payment of Principal described
in Section 6(a) above, the Acquisition Premium Amount (as defined below)
shall be due and payable in cash upon the Transaction Closing Date.  If the Company exercises its right to pay or
prepay Principal in whole or in part, including in exchange for Common Stock,
pursuant to Article 5 above, during the period beginning six (6) months
prior to an Announcement Date (as defined below) and ending on the Transaction
Closing Date, the Company shall, notwithstanding the prepayment of such
Principal, continue to be obligated to pay the Holder upon the Transaction
Closing Date the Acquisition Premium Amount (but only if the Company would have
otherwise been obligated to pay the Holder such Acquisition Premium Amount had
the Company not earlier prepaid such Principal).

 

7.                                      Binding Effect.  Except as otherwise expressly provided
herein and subject to any restrictions on transfer under applicable securities
laws, the provisions hereof shall inure to the benefit of and be binding upon
each of the parties, the successors and assigns of the Company, and the heirs,
devisees, executors, administrators, representatives, successors and assigns of
the Holder.

 

8.                                      Notices.  Any notice or other communication or payment required or
permitted hereunder shall made pursuant to the notice provisions set forth in
the Agreement.

 

9.                                      Governing Law.  This Note shall be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.

 

10.                               Severability.  If
any provision of this Note is determined to be invalid, void or unenforceable,
in whole or in part, this determination will not affect any other provision of
this Note, and the provision in question shall be modified so as to be rendered
valid and enforceable and the Company and the Holder additionally shall take
all such reasonable further actions as are necessary to give each other the
intended benefit of such provision.

 

11.                               Entire Agreement.  Together with that certain Settlement
Agreement and Mutual Release, dated as of February 23, 2004, by and among the
Company and the Holder,

 

8

 

among others (the “Settlement Agreement”), and
the other Transaction Agreements (as such term is defined in the Settlement
Agreement), this Note and the Agreement constitute the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and thereof, and supersede all prior agreements and
understandings between the Company and the Holder with respect to the subject
matter hereof and thereof.  The Note may
be modified or amended and the terms hereof may be waived, in each case, only
by an instrument in writing executed by the Company and the Holder.

 

12.                               Interpretation.

 

(c)                                  The
parties acknowledge that each party has reviewed this Note, and no provision of
this Note shall be interpreted for or against any party because such party or
its representative drafted such provision.

 

(d)                                 “Acquisition
Premium Amount” shall mean, in the event of a Change of Control, an amount
in cash equal to the difference between (1) the product of (a) the
Change of Control Value (as defined below), multiplied by (b) the quotient
of (i) Principal of this Note as of the Transaction Closing Date, divided
by (ii) $16,100,000 (for purposes of clause (i), without regard to any
repayment of such Notes that has occurred within six (6) months prior to the
Announcement Date or on or after the Announcement Date through the Transaction
Closing Date), less (2) any Principal paid during the six (6) months prior to
the Announcement Date or on or after the Announcement Date through the
Transaction Closing Date, including any Principal paid on the Transaction
Closing Date pursuant to Section 6(a) above.  For purposes of clause (2) of the preceding sentence, the amount
of Principal paid during the six (6) month period shall equal (a) in the
case of payments made in the form of cash, the amount of cash paid or
(b) in the case of payments made in the form of shares of Common Stock,
the value of any such shares held by the Holder on the Transaction Closing Date
(based on the closing price on the day immediately prior to the Transaction
Closing Date) plus the net sales proceeds received by the Holder from the sale
of any such shares prior to the Transaction Closing Date.

 

(e)                                  “Change
of Control Value” shall mean five percent (5.0%) of the aggregate
consideration received upon consummation of the Change of Control (the “Transaction
Closing Date”) (1) in an asset sale transaction, by the Company and/or
its subsidiaries, net of corporate taxes, transaction expenses and amounts paid
on Senior Indebtedness, or (2) in other Change of Control transactions, by
the Company’s stockholders and the holders of Notes issued pursuant to the
Agreement.

 

(f)                                    “Announcement
Date” shall mean the earliest public announcement of any of (A) the
Change of Control, (B) the process of negotiating the Change of Control or
(C) the process for sale of the Company that gave rise to the Change of
Control.

 

13.                               Collection Costs.  The Company promises to pay any and all
costs of collection, including reasonable attorneys’ fees, incurred in the
collection of this Note following an Event of Default.

 

14.                               Waiver by the Company.  The Company hereby waives demand, notice,
presentment, protest and notice of dishonor with respect to the enforcement of
this Note in

 

9

 

accordance with its express terms.  The Company will not report any deduction
for interest with respect to the Notes for purposes of determining its federal,
state and local income and franchise taxes (or for purposes of any comparable
taxes).

 

15.                               Successors and Assigns.  Subject to applicable law, the Holder may
assign, transfer, distribute or otherwise dispose of (by operation of law or
otherwise) this Note, in whole or in part, or its rights or obligations under
the Agreement, or any interests therein, including without limitation through
subdivision of this Note, without the written consent of the Company.  Any
transfer of the Note or portion thereof shall be registered with the Company by
submission to it of the Note, together with the annexed Assignment Form
attached hereto as Schedule A duly completed and executed.  After the receipt by the Company of the Note
and the Assignment Form so completed and executed and after compliance with all
conditions hereunder, the Company will issue and deliver to the transferee a
new unsecured subordinated promissory note (representing the portion of Principal of the Note so transferred)
otherwise having the same terms and provisions as this Note, which the Company
will register in the new holder’s name. 
In the event of a partial transfer of the Note, the Company shall
concurrently issue and deliver to the transferring holder a new unsecured
subordinated promissory note that reflects
the balance of Principal of the Note not so transferred and that otherwise is
upon the same terms and conditions as this Note.  Upon the due delivery of this Note for transfer, the transferee
holder shall be deemed for all purposes to have become the holder of the
portion of the Note so transferred, effective immediately prior to the close of
business on the date of such delivery, irrespective of the date of actual
delivery of the new unsecured subordinated promissory note representing such portion of this Note so
transferred to the transferee.

 

The Company shall not assign, transfer or otherwise dispose of (by
operation of law or otherwise) its rights or obligations under or in this Note
without the prior written consent of the Holder.  Any purported assignment, transfer or other disposition by the
Company, except as permitted herein, shall be null and void.

 

IN
WITNESS WHEREOF, the Company has caused this Note to be executed in its
corporate name and this Note to be dated, issued and delivered, all on the date
first above written.

 

 

	
   

  	
  AKSYS, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

10

 

Schedule A

 

ASSIGNMENT FORM

 

To:                              Aksys, Ltd.

 

The
undersigned hereby assigns and transfers this Note, or portion thereof or
interest therein, to:

 

	
   

  
	
  (Insert
  assignee’s social security or tax identification number)

  
	
   

  
	
   

  
	
   

  
	
   

  
	
  (Print
  or type assignee’s name, address and postal code)

  

 

	
  and irrevocably appoints

  	
   

  
	
  to transfer this Note on
  the books of the Company.

  

 

	
  Date:

  	
   

  	
   

  	
  [Holder]

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

(Sign exactly as your name appears on the face of this Note)

 

11

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