<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 2
(Mark One)
/X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 /Fee Required/ For the fiscal year ended: June 30, 1996
OR
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 /No Fee Required/ For the transition period from ____________ to
____________
Commission File Number 0-19806
CYBERONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0236465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17448 Highway 3, Ste. 100, Webster, Texas 77598-4135
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 332-1375
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01
par value
(Title of Class)
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 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. / /
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 / /.
The aggregate market value of voting stock held by non-affiliates
of the registrant as of September 18, 1996, was $37,307,638 based upon the last
sales price reported for such date on the NASDAQ National Market System. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
At September 18, 1996, registrant had outstanding 11,762,542 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference herein.
<PAGE> 2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
Registrant
CYBERONICS, INC.
February 10, 1997 BY: /s/ John K. Bakewell
-----------------------------
John K. Bakewell
Vice President, Finance and
Administration and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*/s/ Reese S. Terry, Jr. Chairman of the Board and February 10, 1997
- --------------------------------------- Executive Vice President
Reese S. Terry, Jr.
*/s/ Robert P. Cummins President, Chief Executive Officer and February 10, 1997
- --------------------------------------- Director
Robert P. Cummins (Principal Executive Officer)
*/s/ John K. Bakewell Vice President, Finance and February 10, 1997
- --------------------------------------- Administration and Chief Financial
John K. Bakewell Officer (Principal Financial and
Accounting Officer)
*/s/ Thomas A. Duerden Director February 10, 1997
- ---------------------------------------
Thomas A. Duerden, Ph.D.
*By /s/ John K. Bakewell
----------------------------------
John K. Bakewell
Attorney-in-Fact
</TABLE>
<PAGE> 3
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cyberonics, Inc.:
We have audited the accompanying consolidated balance sheets of Cyberonics,
Inc., and subsidiary as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cyberonics, Inc.,
and subsidiary as of June 30, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
July 30, 1996
F-1
<PAGE> 4
CYBERONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,121,930 $ 8,862,993
Securities held to maturity -- 1,029,898
Accounts receivable 473,038 339,658
Inventories 671,836 605,556
Prepaid expenses 258,585 267,306
------------ ------------
Total Current Assets 3,525,389 11,105,411
Securities held to maturity 80,032 1,959,728
Property and equipment, net 332,881 481,975
Other assets, net 9,741 13,479
------------ ------------
$ 3,948,043 $ 13,560,593
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 924,059 $ 574,915
Accrued liabilities 1,558,934 1,480,497
Current portion of capital lease obligations -- 61,626
------------ ------------
Total Current Liabilities 2,482,993 2,117,038
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value per share; 2,500,000 shares
authorized; no shares issued and outstanding -- --
Common Stock, $.01 par value per share; 25,000,000 shares
authorized; 9,577,115 and 9,499,261 shares issued and
outstanding at June 30, 1996 and 1995, respectively 95,771 94,993
Additional paid-in capital 39,261,602 39,329,006
Deferred compensation (4,460) (131,800)
Accumulated deficit (37,922,171) (27,808,921)
Cumulative translation adjustment 34,308 (39,723)
------------ ------------
Total Stockholders' Equity 1,465,050 11,443,555
------------ ------------
$ 3,948,043 $ 13,560,593
============ ============
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE> 5
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 1,416,965 $ 966,989 $ 399,689
Cost of sales 411,562 347,457 117,835
------------ ------------ ------------
Gross profit 1,005,403 619,532 281,854
Operating expenses:
Research and development 8,024,502 5,678,024 4,323,671
Selling, general and administrative 3,420,111 2,906,589 2,519,037
------------ ------------ ------------
Total operating expenses 11,444,613 8,584,613 6,842,708
------------ ------------ ------------
Loss from operations (10,439,210) (7,965,081) (6,560,854)
Interest income, net 423,044 688,909 629,993
Other income (expense), net (97,084) 37,362 5,136
------------ ------------ ------------
Net loss $(10,113,250) $ (7,238,810) $ (5,925,725)
============ ============ ============
Net loss per share $ (1.06) $ (.79) $ (.66)
============ ============ ============
Shares used in computing net
loss per share 9,513,038 9,218,008 8,945,968
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 6
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------------- PAID-IN
SHARES AMOUNT CAPITAL
------------ ------------ ------------
<S> <C> <C> <C>
Balances at June 30, 1993 8,916,131 $ 89,161 $ 39,003,552
Stock options exercised 105,040 1,051 28,635
Issuance of Common Stock under Employee Stock Purchase Plan 25,333 253 165,448
Issuance of Common Stock under Employee Special Recognition Stock
Program 3,050 31 27,795
Issuance of Common Stock, other 1,500 15 (19,432)
Amortization of deferred compensation
Net loss for the year
------------ ------------ ------------
Balances at June 30, 1994 9,051,054 90,511 39,205,998
Stock options exercised 415,616 4,156 27,775
Issuance of Common Stock under Employee Stock Purchase Plan 32,391 324 94,485
Issuance of Common Stock under Employee Special Recognition Stock
Program 200 2 748
Amortization of deferred compensation
Translation adjustment
Net loss for the year
------------ ------------ ------------
Balances at June 30, 1995 9,499,261 94,993 39,329,006
Stock options exercised 63,849 638 44,875
Issuance of Common Stock under Employee Stock Purchase Plan 14,005 140 54,485
Effect of early employee terminations on deferred compensation and
related balances (166,764)
Amortization of deferred compensation
Translation adjustment
Net loss for the year
------------ ------------ ------------
Balances at June 30, 1996 9,577,115 $ 95,771 $ 39,261,602
============ ============ ============
<CAPTION>
CUMULATIVE
DEFERRED ACCUMULATED TRANSLATION
COMPENSATION DEFICIT ADJUSTMENT
------------ ------------ ------------
<S> <C> <C> <C>
Balances at June 30, 1993 $ (314,200) $(14,644,386) $ --
Stock options exercised
Issuance of Common Stock under Employee Stock Purchase Plan
Issuance of Common Stock under Employee Special Recognition Stock
Program
Issuance of Common Stock, other
Amortization of deferred compensation 91,200
Net loss for the year (5,925,725)
------------ ------------ ------------
Balances at June 30, 1994 (223,000) (20,570,111) --
Stock options exercised
Issuance of Common Stock under Employee Stock Purchase Plan
Issuance of Common Stock under Employee Special Recognition Stock
Program
Amortization of deferred compensation 91,200
Translation adjustment (39,723)
Net loss for the year (7,238,810)
------------ ------------ ------------
Balances at June 30, 1995 (131,800) (27,808,921) (39,723)
Stock options exercised
Issuance of Common Stock under Employee Stock Purchase Plan
Effect of early employee terminations on deferred compensation and
related balances 56,264
Amortization of deferred compensation 71,076
Translation adjustment 74,031
Net loss for the year (10,113,250)
------------ ------------ ------------
Balances at June 30, 1996 $ (4,460) $(37,922,171) $ 34,308
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 7
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net loss $(10,113,250) $ (7,238,810) $ (5,925,725)
Non-cash items included in net loss:
Depreciation and amortization 273,905 329,738 314,266
Compensation (income) expense related to certain stock
options and common stock issuances (39,424) 91,200 91,200
Issuance of Common Stock under Employee Stock Recognition
Program -- 750 27,826
Change in operating assets and liabilities:
Accounts receivable (133,380) (265,627) (58,228)
Inventories (66,280) (180,257) (230,040)
Prepaid expenses 8,721 (47,693) (143,399)
Accounts payable and accrued liabilities 427,581 983,685 332,500
Other 3,738 4,356 (4,228)
------------ ------------ ------------
Net Cash Used In Operating Activities (9,638,389) (6,322,658) (5,595,828)
Cash Flow From Investing Activities:
Purchases of property and equipment (124,811) (260,497) (356,606)
Purchases of marketable securities (3,181,598) (8,050,344) (15,483,500)
Maturities of marketable securities 6,091,192 18,920,809 17,569,870
------------ ------------ ------------
Net Cash Provided By Investing
Activities 2,784,783 10,609,968 1,729,764
Cash Flow From Financing Activities:
Proceeds from issuance of Common Stock 100,138 126,740 175,970
Payments of capital lease obligations (61,626) (119,397) (141,137)
------------ ------------ ------------
Net Cash Provided By Financing
Activities 38,512 7,343 34,833
------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 74,031 (39,723) --
------------ ------------ ------------
Net (Decrease) Increase In Cash and
Cash Equivalents (6,741,063) 4,254,930 (3,831,231)
Cash and cash equivalents at beginning of year 8,862,993 4,608,063 8,439,294
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,121,930 $ 8,862,993 $ 4,608,063
============ ============ ============
</TABLE>
Interest payments totaled $14,953, $13,348 and $29,104 during the years ended
June 30, 1996, 1995 and 1994, respectively.
Investing and financing activities not resulting in cash receipts or payments
consist of reclassifications of $56,264 of deferred compensation to additional
paid-in capital during the year ended June 30, 1996.
See accompanying notes to financial statements
F-5
<PAGE> 8
CYBERONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
Nature of Operations. Cyberonics, Inc. ("Cyberonics" or the "Company"), designs,
develops, manufactures and markets medical devices which deliver a novel
therapy, vagus nerve stimulation (VNS(TM)), for the treatment of epilepsy and
other debilitating neurological disorders. Cyberonics' sole product, its
proprietary implantable device, the NCP(R) System, is marketed internationally
(principally in Europe) using a combination of distributors and the Company's
own employee-based sales organization while it continues clinical testing under
an Investigational Device Exemption ("IDE") from the United States Food and Drug
Administration ("FDA"). Cyberonics cannot commence marketing or commercial sales
of the device in the United States unless and until it receives premarket
approval from the FDA. Cyberonics is headquartered in Webster, Texas.
The Company's future success is dependent upon a number of factors which
include, among others, obtaining and maintaining regulatory and reimbursement
approvals for its products, the possibility of competition and technological
changes, achieving market acceptance and generating sufficient sales volume,
developing its sales and marketing infractures, maintaining an uninterrupted
supply of certain sole source components and materials, adding sufficient
manufacturing capacity to meet future product demand, possible product liability
and reliance on key personnel.
Consolidation. The accompanying consolidated financial statements include the
Company and its wholly-owned subsidiary, Cyberonics Europe, S.A. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation. The balance sheet accounts of Cyberonics Europe
S.A. are generally translated into U.S. dollars at exchange rates in effect on
reporting dates. Income statement items are translated at average exchange rates
in effect during the accounting period. Gains and losses resulting from foreign
currency transactions denominated in currency other than the functional currency
are included in other income and expense.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents.
Marketable Securities. Effective July 1, 1994, the Company adopted Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under Statement No. 115, securities
that the Company has the intent and ability to hold to maturity are classified
as "held to maturity" and reported at amortized cost. Securities that are held
for current resale are classified as "trading securities" and reported at fair
value with unrealized gains and losses included in results of operations.
Securities not classified as either "securities held to maturity" or "trading
securities" are classified as "securities available for sale" and reported at
fair value, with unrealized gains and losses excluded from results of operations
and reported as a separate component of stockholders' equity. Adopting Statement
No. 115 had no effect on the Company's financial position or results of
operations.
F-6
<PAGE> 9
At June 30, 1996 and 1995, the Company's entire investment portfolios consisted
of securities held to maturity. Securities held to maturity are primarily
various types of corporate bonds and asset-backed investments with various
maturity dates of approximately 18 months and have a fair market value of
$79,442 and $3,002,788, respectively. At June 30, 1996 and 1995, the Company's
investment portfolio consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
FAIR MARKET CARRYING FAIR MARKET CARRYING
VALUE VALUE VALUE VALUE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Securities held to maturity-
Current-
Corporate debt $ -- $ -- $1,001,740 $1,029,898
Noncurrent-
Corporate debt 62,384 62,931 1,352,640 1,382,323
Collateralized mortgage obligations 17,058 17,101 648,408 577,405
------- ------- ---------- ----------
79,442 80,032 2,001,048 1,959,728
------- ------- ---------- ----------
Total $79,442 $80,032 $3,002,788 $2,989,626
======= ======= ========== ==========
</TABLE>
Inventories. Cyberonics states its inventories at the lower of cost, first-in,
first-out (FIFO) method, or market. Cost includes the acquisition cost of raw
materials and components, direct labor and overhead.
Property and Equipment. Property and equipment are carried at cost, less
accumulated depreciation. Maintenance, repairs and minor replacements are
charged to expense as incurred; significant renewals and betterments are
capitalized. For financial reporting purposes, the Company computes depreciation
using the double declining balance method over useful lives ranging from three
to seven years.
Stock Options. Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation," requires companies to measure
employee stock compensation plans based on the fair value method of accounting.
However, the statement allows the alternative of continued use of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," with pro forma disclosure of net income and earnings per share
determined as if the fair value method had been applied in measuring
compensation cost. The Company is required to adopt Statement No. 123 in fiscal
1997 and expects to elect the continued use of APB No. 25 with pro forma
disclosures.
Revenue Recognition. Revenue from product sales is generally recognized upon
shipment to the customer. Domestic sales have depended entirely upon the Company
conducting clinical trial activities under arrangements with certain
investigational centers, some of which receive research funding from the
Company. Arrangements with certain investigational centers employ risk-sharing
provisions. Domestic sales made under risk-sharing arrangements are deferred
until Cyberonics receives payment from the centers and the centers in turn
receive third-party reimbursement or satisfy other terms set forth in their
respective arrangements. Sales, net of risk-sharing provisions, for the year
ended June 30, 1996, consisted of $1,307,274 from international markets and
$109,691 from domestic risk-sharing arrangements.
Research and Development. All research and development costs are expensed as
incurred.
Warranty Expense. The Company provides at the time of shipment for the estimated
costs which may be incurred under its product warranties.
License Agreements. The Company has executed licensing agreements under which it
has secured the rights provided under certain patents. License fees and
royalties, payable under the terms of these agreements, are expensed as
incurred.
F-7
<PAGE> 10
Income Taxes. Cyberonics accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
Under Statement No. 109, deferred income taxes reflect the impact of temporary
differences between financial accounting and tax bases of assets and
liabilities. Such differences relate primarily to the Company's election to
defer the deduction of certain start-up costs for federal income tax purposes,
the deductibility of certain accruals and reserves and the effect of tax loss
and tax credit carryforwards not yet utilized. Reflecting its tax loss
carryforward position, a reserve is established to fully offset the Company's
net deferred tax assets at June 30, 1996.
Net Loss Per Share. The Company's net loss per share is based on the weighted
average number of common shares outstanding. Common equivalent shares,
consisting of the effect of stock options and warrants, are excluded from the
per share calculations, as the effect of their inclusion is antidilutive.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Raw materials and components $307,707 $259,402
Work-in-process 227,821 180,944
Finished goods 136,308 165,210
-------- --------
$671,836 $605,556
======== ========
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 232,704 $ 231,478
Office equipment 59,633 46,256
Computer equipment 612,113 555,455
Research and development equipment 109,959 93,147
Manufacturing equipment 501,309 466,779
Leasehold improvements 243,123 243,124
----------- -----------
1,758,841 1,636,239
Accumulated depreciation (1,425,960) (1,154,264)
----------- -----------
$ 332,881 $ 481,975
=========== ===========
</TABLE>
F-8
<PAGE> 11
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Clinical costs $ 618,885 $ 804,587
Payroll and other compensation 257,468 297,977
Professional services 209,540 144,000
Customer deposits 48,916 85,279
Warranties 167,778 106,635
Marketing activities 155,526 --
Other 100,821 42,019
---------- ----------
$1,558,934 $1,480,497
========== ==========
</TABLE>
NOTE 5. MERGER AGREEMENT WITH ST. JUDE MEDICAL, INC.
On April 8, 1996, Cyberonics and St. Jude Medical, Inc. ("St. Jude"), entered
into an Agreement and Plan of Merger ("the Merger Agreement") and a related
Common Stock Purchase Agreement ("the Stock Purchase Agreement").
Under the terms of the Merger Agreement, St. Jude has the right, but not the
obligation, to acquire Cyberonics on or before October 18, 1996, whereby each
outstanding share of Cyberonics Common Stock (other than shares held by St.
Jude) will be converted into the right to receive an amount of cash equal to
$72,090,669 divided by the number of shares of Cyberonics Common Stock
outstanding immediately prior to the effective time of the merger. As described
in Note 7, the merger will cause a substantial majority of all stock options
outstanding under the Company's Stock Option Plan to become fully vested and
exercisable at the time of the merger. Assuming the exercise of these stock
options and their addition to the total number of shares outstanding, cash
proceeds from the merger are expected to total approximately $7.00 per
outstanding share of Cyberonics Common Stock. Completion of the merger is
subject to normal regulatory reviews.
Pursuant to the Stock Purchase Agreement, St. Jude agreed to purchase 2,181,818
newly issued shares of Cyberonics Common Stock for $5.50 per share upon approval
of the Merger Agreement and Stock Purchase Agreement by holders of a majority of
the Company's Common Stock, providing proceeds to the Company of $12 million
before deducting commissions and other offering costs. On July 23, 1996,
Cyberonics shareholders approved both agreements, the stock purchase was
completed and the Company received cash proceeds of approximately $11,300,000,
net of offering costs to date of approximately $700,000.
The following table sets forth balance sheet data of the Company as of June 30,
1996, and as adjusted to give effect to the sale by the Company of the 2,181,818
shares of Common Stock to St. Jude in connection with the Merger Agreement as if
the sale of common stock were effective at June 30, 1996:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and securities held to maturity $2,202 $13,502
Working capital 1,042 12,342
Total stockholders' equity 1,465 12,765
</TABLE>
F-9
<PAGE> 12
NOTE 6. STOCKHOLDERS' EQUITY
Preferred Stock. The Company has 2,500,000 shares of undesignated Preferred
Stock authorized and available for future issuance, of which none have been
issued through June 30, 1996. With respect to the shares authorized, the
Company's Board of Directors, at its sole discretion, may determine, fix and
alter dividend rights, dividend rates, conversion rights, voting rights, terms
of redemption, redemption prices, liquidation preferences and the number of
shares constituting any such series, and may determine the designation, terms
and conditions of the issuance of any such shares.
Common Stock. During the year ended June 30, 1994, stock option exercises and
issuances of Common Stock under the Company's Employee Stock Purchase Plan, the
Company's Employee Stock Recognition Program and for other purposes increased
the number of common shares by 105,040, 25,333, 3,050 and 1,500, respectively.
During the year ended June 30, 1995, stock option exercises and issuances of
Common Stock under the Company's Employee Stock Purchase Plan and the Company's
Employee Stock Recognition Program increased the number of common shares by
415,616, 32,391 and 200, respectively. During the year ended June 30, 1996,
stock option exercises and issuances of Common Stock under the Company's
Employee Stock Purchase Plan increased the number of common shares by 63,849 and
14,005, respectively.
Warrants. In connection with the execution of certain lease agreements,
Cyberonics granted warrants to a third-party leasing company to effectively
purchase up to 9,104 shares of the Company's Common Stock. Through June 30,
1996, the warrant holder has exercised its rights to purchase 7,534 shares,
netting 5,185 shares upon the execution of a cashless exercise. A warrant for
the purchase of 1,570 shares remains outstanding at June 30, 1996, carries an
exercise price of $5.33 per common share, is currently exercisable, expires in
February 1998 or earlier in the event of a merger and carries certain
registration rights.
NOTE 7. STOCK INCENTIVE AND PURCHASE PLANS
Stock Options. The Company has reserved 1,500,000 shares of its Common Stock for
future issuance pursuant to its Amended 1988 Incentive Stock Option Plan (the
"Stock Option Plan"). Options granted under the Stock Option Plan consist
primarily of Incentive Stock Options ("ISO's") and, in general, vest ratably
over the five year period following their date of grant. The vesting of certain
options is based upon the achievement of specific Company milestones; options to
purchase 204,000 shares vest ratably over the five-year period following date of
grant, with an additional 50 percent of all unvested shares vesting upon FDA
panel recommendation of the Company's Premarket Approval (PMA) application, and
with all remaining unvested shares vesting upon FDA approval of the PMA
application; 50,000 shares vest upon completion of a stated term of employment;
42,500 vest 10 years from their date of grant; and 6,000 shares vest upon the
achievement of certain third-party reimbursement milestones or 10 years from
their date of grant.
The pending merger with St. Jude Medical, Inc., described in Note 5, if
consummated, will constitute a change of control whereby a substantial majority
of options outstanding at the time of the merger shall become fully vested and
exercisable. Upon completion of the merger, 669,552 shares (of the 719,552
shares outstanding at June 30, 1996) will be fully vested and exercisable if not
otherwise canceled or forfeited.
F-10
<PAGE> 13
Transactions involving options are summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
SHARES
SHARES ------------------------- PRICE PER
RESERVED TOTAL EXERCISABLE SHARE
-------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at June 30, 1993 486,433 938,449 389,511 $ .07 -$ 8.00
Granted (67,400) 67,400 -- 7.00 - 11.75
Options becoming exercisable -- -- 201,714 .07 - 10.25
Exercised -- (105,040) (105,040) .13 - 3.00
Canceled or forfeited 8,096 (8,096) -- .07 - 10.25
-------- -------- --------
Balances at June 30, 1994 427,129 892,713 486,185 .13 - 11.75
Shares reserved 500,000 -- --
Granted (613,800) 613,800 -- 3.25 - 5.25
Options becoming exercisable -- -- 133,523 .13 - 11.75
Exercised -- (429,666) (429,666) .13 - 3.00
Canceled or forfeited 273,396 (273,396) -- .13 - 11.75
-------- -------- --------
Balances at June 30, 1995 586,725 803,451 190,042 .07 - 7.75
Granted (52,000) 52,000 -- 4.75 - 5.38
Options becoming exercisable -- -- 167,412 .37 - 7.75
Exercised -- (63,849) (63,849) .07 - 4.00
Canceled or forfeited 72,050 (72,050) -- .67 - 8.00
-------- -------- --------
Balances at June 30, 1996 606,775 719,552 293,605 $.37 -$ 8.00
======== ======== ========
</TABLE>
For certain options granted, the Company recognizes as compensation expense the
excess of the deemed value for accounting purposes of the Common Stock on the
date the options were granted over the aggregate exercise price of such options.
This compensation expense is amortized ratably over the vesting period of each
option. The Company recognized compensation expense totaling $91,200 during each
of the fiscal years 1994 and 1995 and $71,076 during fiscal 1996. The Company
also recognized adjustments totaling $56,264 during fiscal 1996 to reduce
deferred compensation balances as a result of early employee terminations.
Stock Purchase Plan. Under the Cyberonics, Inc. Employee Stock Purchase Plan
(the "Stock Purchase Plan"), 100,000 shares of the Company's Common Stock have
been reserved for issuance. Subject to certain limits, the Stock Purchase Plan
allows eligible employees to purchase shares of the Company's Common Stock
through payroll deductions of up to 15 percent of their respective current
compensation at a price equaling the lesser of 85 percent of the fair market
value of the Company's Common Stock on (i) the first business day of the
purchase period or (ii) the last business day of the purchase period. Purchase
periods, under provisions of the Stock Purchase Plan, are six months in length
and begin on the first business days of June and December. At June 30, 1996,
28,271 shares remain available for future issuances under the Stock Purchase
Plan.
Stock Recognition Program. In May 1992, the Company's Board of Directors
established the Cyberonics Employee Stock Recognition Program. Since its
inception, a total of 8,600 shares of the Company's Common Stock has been
reserved for issuance as special recognition grants. The shares are granted to
employees for special performances and/or contributions at the discretion of the
Company's President, based on nominations made by fellow employees. At June 30,
1996, 4,030 shares remain available for future issuances under the program.
F-11
<PAGE> 14
NOTE 8. INCOME TAXES
Components of the Company's loss before taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Domestic $ (8,772,435) $(6,604,780) $(5,749,017)
Foreign (1,340,815) (634,030) (176,708)
------------ ----------- -----------
$(10,113,250) $(7,238,810) $(5,925,725)
============ =========== ===========
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
U.S. statutory rate (34.0)% (34.0)% (34.0)%
Effect of unused tax loss and tax credit carryforwards 30.8 31.4 32.7
Amortization of deferred compensation (.1) .4 .5
Other, net 3.3 2.2 .8
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards $ 11,436,378 $ 8,406,147
Foreign net operating loss carryforwards 210,852 79,452
Tax credit carryforwards 1,003,964 1,003,964
Start-up costs, net of amortization 37,436 170,676
Depreciation 77,787 77,448
Clinical costs 81,772 60,180
Other, net 188,771 110,527
------------ -----------
Total deferred tax assets 13,036,960 9,908,394
Total deferred tax liabilities, net (23,514) (12,676)
Deferred tax valuation reserve (13,013,446) (9,895,718)
------------ -----------
Net deferred tax assets and liabilities $ -- $ --
============ ===========
</TABLE>
At June 30, 1996, the Company has net operating loss carryforwards of
approximately $33,600,000 for federal income tax purposes, which expire during
the years 2003 through 2011, and tax credit carryforwards of approximately
$1,000,000 for federal income tax purposes, which expire during the years 2006
through 2010. As required under Statement No. 109, for financial reporting
purposes, a valuation allowance totaling $13,013,446 is established as of June
30, 1996, to fully offset the Company's net deferred tax assets, including those
relating to its carryforwards. The valuation allowance increased by $3,117,728
during fiscal 1996 due primarily to the Company's additional net operating
losses. Current federal income tax regulations with respect to changes in
ownership could limit the utilization of the Company's net operating loss
carryforwards.
F-12
<PAGE> 15
NOTE 9. EMPLOYEE RETIREMENT SAVINGS PLAN
In September 1994, Cyberonics implemented an employee retirement savings plan
(the "Plan") which qualifies under Section 401(k) of the Internal Revenue Code.
The Plan is designed to provide eligible employees with an opportunity to make
regular contributions into a long-term investment and savings program.
Substantially all U.S. employees are eligible to participate in the Plan
beginning with the first quarterly open enrollment date following start of
employment. Employer contributions are made solely at the Company's discretion.
No employer contributions were made to the Plan for the years ended June 30,
1996 and 1995.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Clinical Testing. The ability of the Company to successfully develop,
manufacture and market its proprietary products is dependent upon many factors,
including regulatory approval. Cyberonics is currently involved in clinical
trials for the testing of an implantable device and is committed for the costs
to complete those trials currently in process. The Company has recorded an
accrual for estimated costs incurred which had not yet been billed as of the
respective balance sheet dates.
License Agreements. The Company executed a license agreement which provides
Cyberonics with worldwide exclusive rights under three United States patents
(and their international counterparts) covering the method and devices of the
implantable NeuroCybernetic Prosthesis System (the "NCP System") for vagus nerve
stimulation for the control of epilepsy and other movement disorders. The
license agreement provides that the Company will pay a royalty equal to the
greater of $36,000 per year or at the rate of 6 percent on the first $12 million
of sales and at the rate of 3 percent thereafter for the remaining term of the
licensed patents. The license agreement runs for successive three-year terms,
renewable at the Company's election. The license agreement, and its periods of
extension, may not be terminated by the licensor without cause. The Company's
royalty payments pursuant to this agreement are ratably charged to expense.
On July 28, 1989, the Company executed a license agreement for a specific
application of the patented "Implantable Electrode Array" to be used in the
control of epilepsy and other movement disorders. The licensor retains all
rights to this patent for applications outside the above specified use. Pursuant
to the license agreement, as amended in 1991, the Company was obligated to pay a
license fee of $200,000, of which all had been paid as of June 30, 1996. The
Company has a limited-term option to expand the licensed field of use for
additional indications for a license fee of $15,000 per indication and has made
partial payments for certain such indications. Amounts due under this agreement
are being charged to expense as incurred. In addition, the Company is obligated
to pay the licensor an earned royalty of 1 percent of the Company's net sales
price of implantable systems incorporating the licenser's standard electrodes
and 1.75 percent of net sales incorporating the licenser's bi-directional
electrodes. The Company paid royalties of $10,000 during fiscal year 1994,
$26,000 during fiscal year 1995 and $35,000 during fiscal year 1996, and has
agreed to pay minimum royalties of $35,000 in each fiscal year thereafter for
the life of the licensed patents. Beginning in fiscal 1997, if total combined
annual royalties paid to the licensor are not equal to at least $200,000 each
fiscal year and if the Company elects not to make a payment sufficient to meet
such minimum royalty, the licensor may convert the license regarding the
bi-directional lead to a non-exclusive license.
Lease Agreements. The Company leases its domestic office and production facility
under an operating lease agreement which extends through October 1997. Future
minimum lease payments relating to this lease agreement are as follows:
<TABLE>
<CAPTION>
Year ended June 30-
<S> <C>
1997 $229,752
1998 76,584
--------
$306,336
========
</TABLE>
F-13
<PAGE> 16
Legal Matters. The Company is subject to certain claims and proceedings which
arise in the ordinary course of its business. Management does not believe that
the outcome of any of these matters will have a material adverse effect on the
Company's financial condition or results of operations.
Other Arrangements. The Company has entered into arrangements with certain key
employees which provide compensation in the event that more than 50 percent of
the Company's ownership becomes held by a single party. The maximum amount of
potential future payments under these arrangements totals approximately
$1,500,000 at June 30, 1996. Certain amounts under these arrangements are
payable upon completion of the merger with St. Jude, as further described in
Note 5.
NOTE 11. CONCENTRATIONS OF CREDIT RISK
The Company's cash equivalents and securities held to maturity represent
potential concentrations of credit risk. The Company minimizes potential
concentrations of credit risk in cash equivalents and marketable securities by
placing investments in high quality financial instruments and, as required by
its corporate investment policy, limiting the amount of investment in any one
issuing party. At June 30, 1996, management believes that the Company has no
significant concentrations of credit risk and has incurred no material
impairments in the carrying values of its cash equivalents and securities held
to maturity.
NOTE 12. GEOGRAPHIC AREA INFORMATION
The Company's business activities are represented by a single industry segment,
the manufacturing and distribution of medical products. For management purposes,
the Company is segmented into two geographic areas: North America and Europe
(which includes all export sales to unaffiliated customers in Europe, the Middle
East, Africa and Asia/Pacific). Sales between geographic areas are made at
prices which would approximate transfers to unaffiliated distributors. Because
of the interdependence of the Company's geographic areas, the operating loss as
presented below may not be representative of the geographic distribution which
would occur if the areas were not interdependent.
The Company's net sales, losses from operations and assets by geographic area
for the fiscal years that separate geographic business units have operated are
as follows:
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------
<S> <C> <C> <C> <C>
1996
Customer sales $ 109,691 $ 1,307,274 $ -- $ 1,416,965
Intercompany sales 1,227,500 -- (1,227,500) --
------------ ----------- ----------- ------------
Total net sales $ 1,337,191 $ 1,307,274 $(1,227,500) $ 1,416,965
============ =========== =========== ============
Loss from operations $(10,492,597) $(1,243,843) $ 1,297,230 $(10,439,210)
============ =========== =========== ============
Identifiable assets $ 3,689,080 $ 420,193 $ (161,230) $ 3,948,043
============ =========== =========== ============
1995
Customer sales $ 204,187 $ 762,802 $ -- $ 966,989
Intercompany sales 778,437 -- (778,437) --
------------ ----------- ----------- ------------
Total net sales $ 982,624 $ 762,802 $ (778,437) $ 966,989
============ =========== =========== ============
Loss from operations $ (7,917,323) $ (671,384) $ 623,626 $ (7,965,081)
============ =========== =========== ============
Identifiable assets $ 13,509,248 $ 282,305 $ (230,960) $ 13,560,593
============ =========== =========== ============
</TABLE>
F-14
<PAGE> 17
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------
<S> <C> <C> <C> <C>
1994
Customer sales $ 198,000 $ 201,689 $ -- $ 399,689
Intercompany sales 159,500 -- (159,500) --
----------- --------- --------- -----------
Total net sales $ 357,500 $ 201,689 $(159,500) $ 399,689
=========== ========= ========= ===========
Loss from operations $(6,534,208) $(185,004) $ 158,358 $(6,560,854)
=========== ========= ========= ===========
Identifiable assets $19,699,687 $ 95,371 $ (38,910) $19,756,148
=========== ========= ========= ===========
</TABLE>
NOTE 13. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The tables below contain summarized unaudited quarterly data for the years ended
June 30, 1996 and 1995. The Company believes this information reflects all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of the quarterly information presented. The operating results
for any quarter presented are not necessarily indicative of the results that may
be expected for future periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH ANNUAL
QUARTER QUARTER QUARTER QUARTER TOTALS
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1996
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 192,310 $ 400,236 $ 292,818 $ 531,601 $ 1,416,965
Gross profit 136,250 299,977 221,203 347,973 1,005,403
Operating expenses 2,414,645 2,892,027 2,665,176 3,472,765 11,444,613
Net loss (2,129,564) (2,475,081) (2,340,296) (3,168,309) (10,113,250)
Net loss per share $ (.22) $ (.26) $ (.25) $ (.33) $ (1.06)
Shares used in computing net
loss per share 9,500,209 9,503,971 9,509,345 9,538,626 9,513,038
<CAPTION>
FIRST SECOND THIRD FOURTH ANNUAL
QUARTER QUARTER QUARTER QUARTER TOTALS
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1995
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 144,687 $ 141,920 $ 282,721 $ 397,661 $ 966,989
Gross profit 84,311 105,152 194,014 236,055 619,532
Operating expenses 1,769,209 1,890,731 1,990,212 2,934,461 8,584,613
Net loss (1,550,496) (1,625,489) (1,621,297) (2,441,528) (7,238,810)
Net loss per share $ (.17) $ (.18) $ (.17) $ (.26) $ (.79)
Shares used in computing net
loss per share 9,052,990 9,065,170 9,268,992 9,484,878 9,218,008
</TABLE>
Quarterly and annual loss per share are computed independently based upon the
applicable number of weighted average common shares and share equivalents for
each period.
F-15
