<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the fiscal quarter ended: March 31, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-19806
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, Suite 100
Webster, Texas 77598-4135
-------------------------------- -------------------------
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (281) 332-1375
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 30, 1997
Common Stock - $0.01 par value 13,311,862
================================================================================
<PAGE> 2
CYBERONICS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets
March 31, 1997 (unaudited) and June 30, 1996 3
Consolidated Statement of Operations (unaudited)
three and nine months ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited)
nine months ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
</TABLE>
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYBERONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 6,786,147 $ 2,121,930
Securities held to maturity 4,705,607 --
Accounts receivable 504,114 473,038
Inventories 1,014,620 671,836
Prepaid expenses 109,963 258,585
------------ ------------
Total current assets 13,120,451 3,525,389
Securities held to maturity 21,889 80,032
Property and equipment, net 391,212 332,881
Other assets, net 81,016 9,741
------------ ------------
$ 13,614,568 $ 3,948,043
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 492,782 $ 924,059
Accrued liabilities 1,194,063 1,558,934
------------ ------------
Total current liabilities 1,686,845 2,482,993
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value, 2,500,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value, 25,000,000 shares
authorized; 13,311,862 and 9,577,115 shares
issued and outstanding at March 31, 1997 and
June 30, 1996, respectively 133,119 95,771
Additional paid-in capital 57,335,311 39,261,602
Deferred compensation (68,531) (4,460)
Accumulated deficit (45,460,946) (37,922,171)
Cumulative translation adjustments (11,230) 34,308
------------ ------------
Total stockholders' equity 11,927,723 1,465,050
------------ ------------
$ 13,614,568 $ 3,948,043
============ ============
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 4
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 288,979 $ 292,818 $ 1,011,740 $ 885,364
Cost of sales 72,669 71,615 300,341 227,934
------------ ------------ ------------ ------------
Gross profit 216,310 221,203 711,399 657,430
Operating expenses:
Research and development 1,521,472 1,999,229 4,892,387 6,035,392
Selling, general and administrative 1,818,264 665,947 3,662,438 1,936,456
------------ ------------ ------------ ------------
Total operating expenses 3,339,736 2,665,176 8,554,825 7,971,848
------------ ------------ ------------ ------------
Loss from operations (3,123,426) (2,443,973) (7,843,426) (7,315,418)
Interest income, net 62,978 168,606 317,513 438,593
Other income (expense) 10,420 (64,929) (12,862) (69,116)
------------ ------------ ------------ ------------
Net loss $ (3,050,028) $ (2,340,296) $ (7,538,775) $ (6,944,941)
============ ============ ============ ============
Net loss per share $ (0.26) $ (0.25) $ (0.65) $ (0.73)
============ ============ ============ ============
Shares used in computing
net loss per share 11,824,121 9,509,345 11,601,845 9,504,508
============ =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 5
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash Flow From Operating Activities:
Net loss $ (7,538,775) $ (6,944,941)
Non-cash items included in net loss:
Depreciation and amortization 144,615 171,350
Compensation expense related to certain stock options and
common stock issuances 28,584 (42,100)
Change in operating assets and liabilities:
Accounts receivable (31,076) (127,553)
Inventories (342,784) (14,573)
Prepaid expenses 148,622 36,664
Accounts payable and accrued liabilities (796,148) (382,146)
------------ ------------
Net Cash Used In Operating Activities (8,386,962) (7,303,299)
Cash Flow From Investing Activities:
Purchases of property and equipment (202,946) (51,650)
Purchases of investments (7,004,036) (2,393,740)
Maturities of investments 2,356,572 5,164,165
------------ ------------
Net Cash (Used In) Provided By Investing Activities (4,850,410) 2,718,775
Cash Flow From Financing Activities:
Proceeds from issuance of Common Stock, net 18,018,402 32,311
Payments of capital lease obligations -- (61,626)
Other (71,275) 1,492
------------ ------------
Net Cash Provided By (Used In) Financing Activities 17,947,127 (27,823)
Effect of exchange rate changes on cash and cash equivalents (45,538) 22,488
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,664,217 (4,589,859)
Cash and cash equivalents, at beginning of period 2,121,930 8,862,993
------------ ------------
Cash and cash equivalents, at end of period $ 6,786,147 $ 4,273,134
============ ============
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 6
CYBERONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the full year
ending June 30, 1997. The financial information presented herein should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 1996.
NOTE 2 - INVESTMENTS:
At March 31, 1997 and June 30, 1996, 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 over the next 18 months and have a fair market value of
$4,654,536 and a gross unrealized holding loss of $72,960 at March 31, 1997.
NOTE 3 - 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 the Company
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 nine months ended March 31, 1997
consisted of $987,288 from international markets and $24,452 from domestic
risk-sharing arrangements.
NOTE 4 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Raw materials and components...................... $ 415,928 $ 307,707
Work-in-process................................... 202,447 227,821
Finished goods.................................... 396,245 136,308
----------- -----------
$1,014,620 $ 671,836
========== ============
</TABLE>
-6-
<PAGE> 7
NOTE 5 - ACCRUED LIABILITIES:
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1996
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Clinical costs................................ $ 558,617 $ 618,885
Payroll and other compensation................ 147,782 257,468
Professional services......................... 184,771 209,540
Customer deposits............................. 18,364 48,916
Warranties.................................... 215,903 167,778
Marketing activities.......................... -- 155,526
Other......................................... 68,626 100,821
------------ -----------
$1,194,063 $1,558,934
========== ==========
</TABLE>
NOTE 6 - STOCKHOLDERS' EQUITY:
Pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") and a related Common Stock Purchase Agreement (the "Stock Purchase
Agreement") between Cyberonics and St. Jude Medical, Inc. ("St. Jude"), on July
23, 1996, Cyberonics sold to St. Jude 2,181,818 newly-issued shares of
Cyberonics Common Stock at $5.50 per share, netting cash proceeds to Cyberonics
of approximately $11,200,000 after offering costs.
On October 18, 1996, St. Jude's right under the terms of the Merger
Agreement to acquire all remaining outstanding shares of Cyberonics for
$72,090,669 expired unexercised.
In March 1997, the Company issued 1,534,374 shares of its Common
Stock in a private placement for $4.44 per share. Proceeds from the issuance
totaled approximately $6,800,000 after offering costs.
NOTE 7 - DIVIDEND DISTRIBUTION OF PREFERRED SHARE PURCHASE RIGHTS:
In January 1997, the Company's Board of Directors declared a
dividend distribution of one Preferred Shares Purchase Right on each
outstanding share of the Company's Common Stock to stockholders of record on
March 10, 1997.
Each Right will entitle stockholders to buy 1/1000th of a share of
the Company's Series A Participating Preferred Stock at an exercise price of
$30. The Rights will become exercisable following the tenth day after a person
or group announces an acquisition of 20% or more of the Company's Common Stock
or announces commencement of a tender offer the consummation of which would
result in ownership by the persons or group of 20% or more of the Common
Stock. The Company will be entitled to redeem the Rights at $.01 per Right at
any time on or before the tenth day following acquisition by a person or group
of 20% or more of the Company's Common Stock.
If, prior to redemption of the Rights, a person or group acquires
20% or more of the Company's Common Stock, each Right not owned by a holder of
20% or more of the Common Stock will entitle its holder to purchase, at the
Right's then current exchange price, that number of shares of Common Stock of
the Company (or, in certain circumstances as determined by the Board, cash,
other property or other securities) having a market value at that time of
twice the Right's exercise price. If, after the tenth day following
acquisition by a person or group of 20% or more of the Company's Common Stock,
the Company sells more than 50% of its assets or earning power or is acquired
in
-7-
<PAGE> 8
a merger or other business combination, the acquiring person must assume
the obligations under the Rights and the Rights will become exercisable to
acquire Common Stock of the acquiring person at the discounted price. At any
time after an event triggering exercisability of the Rights at a discounted
price and prior to the acquisition by the acquiring person of 50% or more of
the outstanding Common Stock, the Board of Directors of the Company may
exchange the Rights (other than those owned by the acquiring person or its
affiliates) for the Common Stock of the Company at an exchange ratio of one
share of Common Stock per Right.
NOTE 8 - NET LOSS PER SHARE:
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
Effective July 1, 1997, Cyberonics will adopt the provisions of the new
statement, changing from its current method of accounting for net loss per
share as set forth in APB Opinion No. 15. Adoption of Statement No. 128 will
require retroactive revision of the presentation of net loss per share in
historical financial statements. The Company's net loss per share presented in
the accompanying financial statements as calculated under the provisions of
APB Opinion No. 15 are the same as those had basic net loss per share under
Statement No. 128 been presented. Additionally, net loss per share as
presented herein are also the same as those had diluted net loss per share
under the provisions of Statement No. 128 been presented, since the Company's
outstanding stock options would not have been included in the calculation
because their effect would have been anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could
differ materially from those projected in the forward-looking statements as a
result of a number of important factors. For a discussion of important factors
that could affect the Company's results, please refer to the Summary section
and financial statement line item discussions below. Readers are also
encouraged to refer to the Company's Annual Report on Form 10-K (including the
Form 10-K/A filed with respect thereto) for a further discussion of the
Company's business and the risks and opportunities attendant thereto.
SUMMARY
Cyberonics was founded in 1987 to design, develop and bring to market
medical devices which provide a novel therapy, vagus nerve stimulation, for the
treatment of epilepsy and other debilitating neurological disorders. Clinical
trials of the Company's investigational NeuroCybernetic Prosthesis ("NCP(R)
System") began with the first patient implant in November 1988 under an
Investigational Device Exemption ("IDE") from the United States Food and Drug
Administration ("FDA"). The Company has been unprofitable to date, has no
significant revenues and expects to incur operating losses through the next
several years due to continuing requirements for research and development
activities (including product and process development and clinical trials and
related regulatory activities), sales and marketing activities and manufacturing
start-up. For the period from inception through March 31, 1997, the Company had
incurred a cumulative net deficit of approximately $45.5 million.
Cyberonics is continuing the clinical testing of the NCP System
under its IDE from the FDA. In January 1994, the Company announced that its
amended Premarket Approval ("PMA") application was accepted for filing by the
FDA. While the amended PMA application has been accepted for filing, the FDA
further informed the Company that, based on its initial scientific review of the
amended PMA application, there were "significant
-8-
<PAGE> 9
deficiencies" in the submission and that an amendment containing certain
additional clinical and technical information must be provided before the
regulatory review process could continue.
In response to further discussions with the FDA, the Company
announced in July 1994 that it would initiate an additional confirmatory U.S.
clinical trial for the NCP System. Based on these discussions with the FDA,
this study is an additional requirement of the FDA's regulatory approval
process for the NCP System for the treatment of epilepsy patients experiencing
refractory partial seizures.
In January 1995, the Company announced that it had received
permission to begin enrolling patients into its additional confirmatory trial,
in which an additional 199 patients were ultimately treated at 20 major
investigational centers in the United States. In August 1996, the final
patient completed the confirmatory trial. In January 1997, the Company
submitted an amendment to its PMA application with the FDA that responded to
questions and comments regarding the Company's previous submissions and
included the results of the Company's additional confirmatory trial. Clinical
investigators concluded that the confirmatory study achieved its primary
safety and efficacy objectives, and confirmed the results of the Company's
previous trial.
There can be no assurance that the Company will adequately address
the concerns raised by the FDA, or that additional concerns will not be raised
by the FDA in the future. The timing of the PMA approval process is
unpredictable and there can be no assurance as to when or whether the Company
will receive pre-market approval. The Company is currently clinically testing
the NCP System under an IDE from the FDA and cannot commence marketing or
commercial sales of the NCP System in the United States until it receives
pre-market approval from the FDA. The Company's business, financial condition
and results of operations are critically dependent upon receiving FDA approval
of the Company's PMA application.
Cyberonics is pursuing government and third-party reimbursement
approvals for the NCP System in the United States and in international
markets. The Company believes that such approvals will be critical to market
acceptance of the NCP System when and if regulatory approvals are obtained.
There can be no assurance that third-party reimbursement will be available to
enable the Company to successfully market the NCP System in the United States
when and if the Company's PMA is approved or, if available, that the level of
reimbursement will be sufficient to enable the Company to sell the NCP System
on a profitable basis.
The health-care industry in the United States is undergoing
substantial reform, and there is substantial uncertainty and turmoil
surrounding the issues of funding, reimbursement and regulatory approval.
While the Company believes that the NCP System will be favorably viewed in the
context of the changing health-care industry, there can be no assurances that
the pending health-care reforms will not adversely affect regulatory or
reimbursement approvals for the NCP System. The Company does not expect to
achieve significant sales unless and until both regulatory and reimbursement
approvals are obtained for the NCP System and even if such approvals are
obtained, there can be no assurance the Company will achieve significant
sales.
In June 1994, the Company was granted regulatory approval to market
the NCP System in the original twelve-member countries of the European Union
after having obtained "CE marking," the designation of market approval now
universally accepted by all European Union member countries. The Company has
obtained government and third-party reimbursement approval in certain of the
European Union member countries and is continuing to pursue full reimbursement
approval for substantially all of the remaining European Union member
countries. The Company does not believe that significant sales volume can be
generated without full reimbursement approval. There can be no assurances as
to when or whether such reimbursement will be obtained in any of these
European Union member countries or, if obtained, whether the levels of
reimbursement will be sufficient to enable the Company to sell the NCP System
on a profitable basis.
-9-
<PAGE> 10
The Company believes that existing and future antiepileptic drug
compounds will be the primary competition for its NCP System, although the
Company could also face competition from other medical devices. Four new
antiepileptic drugs, felbamate, gabapentin, lamotrigine and tipiromate
recently received FDA approval. No other major antiepileptic drugs have been
introduced in the United States since 1978. In August 1994, the manufacturer
of felbamate announced that, in conjunction with recommendations from the FDA,
it was advising that patients be withdrawn from the drug based on reports of
serious complications. There can be no assurance that the NCP System will
achieve market acceptance for the treatment of epilepsy or any other
indication.
The Company relies upon sole source suppliers for certain of the
key components and materials used in its products. The Company routinely
experiences discontinuation or unavailability of components and materials
requiring qualification of alternative sources or, if no such alternative
sources are identified, product design changes. Qualifying alternative sources
and redesigning products can be time consuming. In addition, such changes
generally require regulatory submissions and approvals. Specifically, the
Company is aware of future product design changes that will be required to
incorporate a new battery and microprocessor into the NCP Generators'
circuitry. Although the Company believes that these changes will be made
without disruption, any extended delays in or inability to secure alternate
sources for these or other components and materials could result in product
supply and manufacturing interruptions which could have a material adverse
effect on the Company's ability to manufacture its products and therefore on
its business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through February 1993 the Company financed its
operations primarily through private placements of its securities and had
raised approximately $16.5 million in net proceeds. In February 1993, the
Company completed an initial public offering of 2,000,000 shares of its Common
Stock, generating net proceeds to the Company of approximately $22 million.
Additionally, through March 31, 1997, the Company has funded approximately
$530,000 of its equipment needs with proceeds from an equipment lease
agreement. As further described below, in July 1996 the Company raised an
additional $11.2 million net of offering costs in a sale of 2,181,818 shares
of its Common Stock to St. Jude Medical, Inc. Additionally, in March 1997, the
Company raised approximately $6.8 million in a sale of 1,534,374 shares of its
Common Stock in a private placement. The Company had no short- or long-term
borrowings outstanding at March 31, 1997, and has no credit facilities
available at this time.
The Company expects to incur substantial additional costs related
to clinical trials and regulatory activities, expansion of manufacturing
capabilities, sales and marketing activities associated with preparation for
United States market entry and international market penetration and product
and process development. In addition, if regulatory and reimbursement
approvals are obtained, the Company will incur substantial marketing and
distribution expenses. The amount and timing of anticipated expenditures will
depend upon numerous factors both within and outside of the Company's control.
Factors within the Company's control include the nature and timing of
additional clinical trials for partial seizures and for other indications, and
the nature and timing of marketing and sales activities. Factors affecting the
amount and timing of expenditures which are largely beyond the Company's
control include the clinical trial and regulatory activities associated with
the Company's effort to obtain FDA approval of its PMA application for partial
seizures. Moreover, even if the Company obtains PMA approval for the NCP
System for partial seizures, the Company's ability to generate income from
operations will be dependent upon obtaining reimbursement approval from
government and third-party payors as well as receiving market acceptance for
the NCP System. While the Company believes that its current resources will be
sufficient to fund its operations through some or possibly all of the fiscal
year ending June 30, 1998, the Company will require additional funds after
that time. There can be no assurance that funds will be available to the
Company on acceptable terms or at all. Lack of access to sufficient
-10-
<PAGE> 11
financing would impair the Company's ability to fully pursue its business
objectives, which could have a material adverse effect on the Company's results
of operations.
On April 8, 1996, the Company and St. Jude Medical, Inc. ("St.
Jude") entered into an Agreement and Plan of Merger (the "Merger Agreement')
and a Common Stock Purchase Agreement (the "Stock Purchase Agreement").
Pursuant to the Stock Purchase Agreement, upon approval of the Merger
Agreement by holders of a majority of the Company's outstanding Common Stock,
St. Jude agreed to purchase 2,181,818 shares of the Company's newly-issued
Common Stock at $5.50 per share, representing a cash investment in the Company
of $12 million before deducting commissions and other offering costs. On July
23, 1996, Cyberonics shareholders approved the Merger Agreement and the Stock
Purchase Agreement, the stock purchase was completed, and St. Jude provided
the Company with cash proceeds totaling approximately $11.2 million net of
commission and other offering costs. The Company believes that the proceeds
from this investment and from its March 1997 private placement will be
sufficient to fund its operations as an independent entity through some or
possibly all of the fiscal year ending June 30, 1998. The availability of
financing after that time will depend upon a number of important factors,
including the state of the United States capital markets and economy in
general and the health care and medical device segments in particular, the
status of the Company's international and domestic sales activities and the
status of the Company's clinical and regulatory activities. There can be no
assurance that the Company will be able to raise such capital when needed or
that the terms upon which capital will be available will be favorable to the
Company.
In addition to providing the Company with approximately $11.2
million of additional capital, the Merger Agreement further gave St. Jude the
right, but not the obligation, to acquire the Company on or before October 18,
1996 in a merger pursuant to which the holders of Company Common Stock (other
than St. Jude) would receive cash totaling approximately $72 million. On
October 18, 1996, St. Jude's right to acquire the Company expired unexercised.
The Company's liquidity will continue to be reduced as amounts are
expended for continuing clinical trials and related regulatory affairs,
manufacturing start-up, product and process development, and expansion of
sales and marketing activities. While not currently anticipated, the Company's
liquidity could also be substantially reduced if significant amounts were
expended for additional facilities and equipment.
RESULTS OF OPERATIONS
Net Sales. Cyberonics has been granted regulatory approval to
market and sell the NCP System internationally in the original twelve member
countries of the European Union (the United Kingdom, Germany, The Netherlands,
France, Spain, Italy, Belgium, Denmark, Greece, Portugal, Ireland and
Luxembourg) and has permission to sell in certain other international markets
including Canada, Sweden, Norway, Finland, Switzerland, Israel, Australia,
South Africa, Hong Kong and China. Cyberonics is engaged in obtaining
reimbursement approvals from the various health care provider systems that
exist in these countries and has received partial or complete reimbursement
approvals in a number of these markets. During the year ending June 30, 1997,
the Company expects that the substantial majority of its net sales will be
generated from its international markets, the extent of which will depend, in
part, on the success of future efforts to obtain broader international
reimbursement approval and additional countries' regulatory approvals.
In the United States, the Company has permission from the FDA to
sell the NCP Systems used in clinical trials for up to $6,000 per system.
Given the experimental nature of the device, the Company believes that
widespread reimbursement from government and third party payors is unlikely in
connection with its clinical studies. Therefore, the Company has not
aggressively sought to sell the NCP Systems used in the clinical studies. The
-11-
<PAGE> 12
Company does not expect to achieve significant sales unless and until both
regulatory and reimbursement approvals are obtained for the NCP System.
Net sales for the three months ended March 31, 1997 totaled
$288,979 compared to $292,818 for the three months ended March 31, 1996. Net
sales for the nine months ended March 31, 1997 totaled $1,011,740 compared to
$885,364 in the same period of the prior year. Domestic sales depend entirely
upon the Company conducting clinical trial activities under arrangements with
certain investigational centers, some of which receive research funding from
the Company. Domestic sales made in connection with such clinical studies have
been limited to date as the Company is not presently seeking reimbursement for
implants associated with United States clinical trials. 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 deferred risk-sharing provisions, for the nine
months ended March 31, 1997, consisted of $987,288 from international markets
and $24,452 from domestic risk-sharing arrangements.
Gross Profit. In determining gross profit, cost of sales is
calculated primarily to include the acquisition cost of raw materials and
components, direct labor and allocated manufacturing overhead. Direct labor
and overhead constitute a substantial majority of cost of sales. The Company
is obligated to pay royalties ranging from 7% to 7.75% on the first $12
million in cumulative net sales, and from 4% to 4.75% thereafter. Minimum
royalty obligations under the Company's license agreements totaled $46,000
during the year ended June 30, 1996, and will continue at or above this level
in future years. Royalties up to the minimum amount are presently classified
as research and development expenses. Any future amounts which may exceed this
minimum will be included as a component of the Company's cost of sales.
The Company's gross margin percentage was 74.9% for the three
months ended March 31, 1997 compared to 75.5% for the prior year period.
Future fluctuations in gross margin percentages can be expected prior to the
Company achieving commercial levels of production volume, particularly if the
Company continues to experience period-to-period changes in unit production.
Research and Development Expenses. Research and development
expenses are comprised of both expenses related to the Company's product and
process development efforts and expenses associated with conducting clinical
trials and certain related regulatory activities. Research and development
expenses totaled $1,521,472 and $1,999,229 during the three months ended March
31, 1997 and 1996, respectively. Research and development expenses were
$4,892,387 and $6,035,392 during the nine months ended March 31, 1997 and
1996, respectively. The decreased level of research and development
expenditures in the current three- and nine-month periods is due primarily to
lower costs associated with the Company's confirmatory clinical trial. As of
August 1996, all study patients had completed the more expensive acute phase
of the study and entered the less costly long-term follow-up phase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $1,818,264 and $665,947 during the three
months ended March 31, 1997 and 1996, respectively. Selling, general and
administrative expenses totaled $3,662,438 and $1,936,456 during the nine
months ended March 31, 1997 and 1996, respectively. The third quarter increase
from period to period was primarily due to additional expenditures for
international marketing activities. The Company expects to incur higher
selling, general and administrative expenses in developing its international
market and in anticipation of regulatory and reimbursement approvals for the
NCP System, and expects these expenses to increase significantly when and if
such approvals are obtained.
-12-
<PAGE> 13
Interest Income, net. Net interest income totaled $62,978 and
$168,606 during the three months ended March 31, 1997 and 1996, respectively,
and $317,513 and $438,593 for the nine months ended March 31, 1997 and 1996,
respectively. The Company expects to have interest income that will partially
offset operating losses for several fiscal quarters.
Other Income (Expense), net. Other income (expense), totaled
$10,420 and $(64,929) during the three months ended March 31, 1997 and 1996,
respectively, and $(12,862) and $(69,116) for the nine months ended March 31,
1997 and 1996, respectively. Other income consists of net gains and losses
resulting from foreign currency transactions.
Income Taxes. Due to its net operating loss history, to date the
Company has incurred no income tax expense for financial reporting purposes.
Current federal income tax regulations with respect to changes in ownership
could limit the utilization of the Company's net operating loss carry
forwards.
Effect of Inflation. The Company believes that inflation has not
had a material impact on its operating or financial ratios during the three
months ended March 31, 1997 as compared to the prior year period.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits.
10.1 Registration Rights Agreement dated March 1997
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during
the quarter ended March 31, 1997.
</TABLE>
-14-
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERONICS, INC.
Registrant
By: /s/JOHN K. BAKEWELL
--------------------------------------
John K. Bakewell
Vice President, Finance and Administration and
Chief Financial Officer (principal financial and
accounting officer)
Dated: May 9, 1997
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document
----------- ----------------------------------------
<S> <C>
10.1 Registration Rights Agreement
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
REGISTRATION RIGHTS AGREEMENT
CYBERONICS, INC.
March 28, 1997
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C> <C>
1. Certain Definitions.................................................1
2. Notice of Proposed Transfers........................................2
2.1 Restriction on Transfer.................................2
2.2 Permitted Transfers.....................................3
2.3 Stockholder Covenant....................................3
2.4 Restrictive Legend......................................3
3. Registration Rights.................................................3
3.1 Requested Registration..................................3
3.2 Company Registration....................................5
3.3 Underwriting............................................5
3.4 Expenses of Registration................................6
3.5 Registration Procedures.................................6
3.6 Indemnification.........................................7
3.7 Information by Holder..................................10
3.8 Transfer of Registration Rights........................10
3.9 Holdback Agreements....................................10
4. Miscellaneous......................................................11
4.1 Governing Law..........................................11
4.2 Successors and Assigns.................................11
4.3 Termination............................................11
4.4 Amendment..............................................11
4.5 Entire Agreement.......................................11
4.6 Notices, etc...........................................11
4.7 Counterparts...........................................11
4.8 Severability...........................................12
4.9 Titles and Subtitles...................................12
</TABLE>
-i-
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of this
28th day of March, 1997, by and among Cyberonics, Inc., a Delaware Corporation
(the "Company") and the stockholders whose names are set forth on Exhibit A
hereto (the "Stockholders").
Recitals
WHEREAS, the Company and the Stockholders are parties to a Common Stock
Purchase Agreement dated the date hereof pursuant to which the Stockholders are
purchasing an aggregate of up to 1,700,000 shares of the Company's Common Stock
(the "Shares");
WHEREAS, the Company has agreed to provide the Stockholders with
certain rights to register the Shares as provided herein;
NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
"Holder" shall mean any Stockholder holding Registrable
Securities and any Person holding Registrable Securities to whom the rights
under this Agreement have been transferred in accordance with Section 3.8
hereof.
"Initiating Holders" shall mean any Stockholders or
transferees of Stockholders under Section 3.8 hereof who in the aggregate are
Holders of not less than 50% of the then outstanding Registrable Securities.
"Person" shall mean an individual, corporation, partnership,
limited liability company, association, joint-stock company, trust where the
interests of the beneficiaries are evidenced by a security, unincorporated
organization, estate, governmental or political subdivision thereof or
governmental agency.
"Public Offering" shall mean the closing of an underwritten
public offering of Common Stock registered with the Commission under the
Securities Act.
<PAGE> 4
"Registrable Securities" means (i) the Shares and (ii) any
Common Stock of the Company issued or issuable in respect of the Shares upon any
stock split, stock dividend, recapitalization, or similar event; excluding in
all cases, however, any Registrable Securities sold by a Holder including a sale
pursuant to a registration statement under this Agreement, a transaction
pursuant to Rule 144 or any other transaction in which registration rights are
not transferred pursuant to Section 3.8 hereof.
"Registration Statement" shall mean a registration statement
provided for in Section 6 of the Securities Act under which securities are
registered under the Securities Act, together with any preliminary, final or
summary prospectus contained therein, any amendment or supplement thereto, and
any document incorporated by reference therein.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, other than
Selling expenses (as defined below), incurred by the Company in complying with
Sections 3.1 or 3.2 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company) and the reasonable fees and disbursements
of one counsel for all Holders.
"Rule 144" shall mean Rule 144 promulgated under the
Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and, except as set forth in the definition of
"Registration Expenses" above, all fees and disbursements of counsel for any
Holder.
2. Notice of Proposed Transfers.
2.1 Restriction on Transfer. The Shares shall not be sold,
assigned, transferred or pledged except upon the conditions specified in this
Agreement, which conditions are intended to ensure compliance with the
provisions of the Securities Act. Each Stockholder will cause any proposed
purchaser, assignee, transferee, or pledgee of the Shares to agree to take and
hold such securities subject to the provisions and upon the conditions specified
in this Agreement. If a Holder wishes to sell Registrable Securities (other than
in a registered offering pursuant to Section 3 hereof, pursuant to Rule 144 or
pursuant to a permitted transfer pursuant to Section 2.2 below), it shall
deliver a written notice to the Company disclosing in reasonable detail the
terms and conditions of the proposed sale and shall provide to the Company, at
such Holder's expense either (i) a written opinion of legal counsel who
-2-
<PAGE> 5
shall be, and whose legal opinion shall be, reasonably satisfactory to the
Company, addressed to the Company, to the effect that the proposed transfer of
the Shares may be effected without registration under the Securities Act, or
(ii) a "no action" letter from the Commission to the effect that the transfer of
such securities without registration will not result in a recommendation by the
staff of the Commission that action be taken with respect thereto.
2.2 Permitted Transfers. Notwithstanding Section 2.1
hereof, any Holder may transfer the whole or any part of the Registrable
Securities and all rights provided in this Agreement with respect thereto (a) to
any entity or Person whose affairs are under common management with a
Stockholder, (b) to any partners, or retired partners, or to the estate of any
partners or retired partners of a Stockholder which is a partnership, and (c) to
any stockholder, parent or subsidiary corporation of a Stockholder which is a
corporation; provided that the Transferee enters into an Agreement with the
Stockholders and the Company in which the Transferee shall be bound by and
entitled to the benefit of the provisions of this Agreement.
2.3 Stockholder Covenant. No Holder shall mortgage,
pledge, charge, hypothecate, grant a security interest in, or otherwise
encumber, or allow or permit any charge, security interest, encumbrance, pledge,
mortgage, hypothecation, lien or adverse claim to attach to, affect or encumber,
his or its Registrable Securities or any part thereof, or any interest therein.
2.4 Restrictive Legend. Each certificate representing
Registrable Securities shall be stamped or otherwise imprinted with legends
substantially in the following form (in addition to any legend required under
applicable state securities laws or otherwise):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE
TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID
ACT."
Each Stockholder consents to the Company making a notation on
its records and giving instructions to any transfer agent of the Common Stock in
order to implement the restrictions on transfer established in this Agreement.
3. Registration Rights.
3.1 Requested Registration.
(a) In case the Company shall receive from
Initiating Holders a written request that the Company effect any registration,
qualification or compliance with respect to a proposed registration of Shares (a
"Requested Registration") with an aggregate offering price to the public of (x)
at
-3-
<PAGE> 6
least $1,000,000 if such registration may be effected pursuant to a Registration
Statement on Form S-3 (or a successor form) or (y) at least $5,000,000 if such
registration is effected pursuant to a Registration Statement on a form other
than Form S-3, the Company will:
(i) promptly give written notice of the
proposed registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best
lawful efforts to effect such registration, qualification or compliance
(including, without limitation, appropriate qualification under applicable blue
sky or other state securities law and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested by the Initiating Holders
and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holders
joining in such request as are specified in a written request received by the
Company within 20 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to take any action to
effect any such registration, qualification or compliance pursuant to this
Section 3.1:
(A) In any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act;
(B) During the period starting
with the date sixty (60) days prior to the Company's estimated date of filing
of, and ending on the date three (3) months immediately following the effective
date of, any registration statement pertaining to securities of the Company
(other than a registration of securities in a Rule 145 transaction or with
respect to an employee benefit plan), providing that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective (and provided, further, that the Company cannot
pursuant to this Section 3.l(a)(ii)(B) delay implementation of a demand for
registration more than once in any 12-month period);
(C) After the Company has
effected two such registrations pursuant to this subsection 3.1(a); provided,
that a registration will only be counted for purposes of this Section
3.1(a)(ii)(C) if (x) such registration has been declared or ordered effective,
and (y) no stop order, injunction or the like has been entered barring sales of
securities thereunder (other than a stop order, injunction or the like which is
promptly resolved, in which case the Company shall use its best lawful efforts
to keep the Registration Statement effective for an additional period equal to
the period during which the stop order, injunction or the like barred sales); or
(D) If the Company shall
furnish to such Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company or its shareholders for a registration
statement to be filed in the near future, then the Company's obligation to use
its best lawful efforts to register, qualify or
-4-
<PAGE> 7
comply under this Section 3.1 shall be deferred once (with respect to any demand
for registration hereunder) for a period not to exceed ninety (90) days from the
date of receipt of written request from the Initiating Holders, provided that
the Company may, by furnishing another certificate pursuant to this Section
3.1(a)(ii)(D), delay implementation of a demand for registration for one
additional period of up to ninety (90) days. In the event of such a delay by the
Company, the Initiating Holders will be entitled to withdraw their request for
such Requested Registration, in which case such right of Requested Registration
shall be restored under Section 3.1(a)(C) hereof.
Subject to the foregoing clauses (A) through
(D), the Company shall file a registration statement covering the Registrable
Securities so requested to be registered as soon as practicable, after receipt
of the request or requests of the Initiating Holders.
(b) The Company may register securities for sale
for its own account in any registration requested pursuant to this Section 3.1
and may also register restricted securities held by other stockholders;
provided, however, that in the event that the number of shares to be included in
a registration is to be limited, then securities to be sold for the Company's
own account and restricted securities held by other stockholders shall be
eliminated from the registration prior to reducing the number of Shares included
in such registration.
3.2 Company Registration.
(a) Notice of Registration. If at any time or
from time to time the Company shall determine to register any of its securities,
either for its own account or the account of a security holder or holders, other
than (i) a registration relating solely to employee benefit plans, or (ii) a
registration relating solely to a Commission Rule 145 transaction, the Company
will:
(i) promptly give to each Holder written
notice thereof; and
(ii) include in such registration (and
any related qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within 20 days after receipt of such written
notice from the Company, by any Holder (a "Piggyback Registration").
(b) Right to Terminate Registration. The
Company shall have the right to terminate or withdraw any registration initiated
by it under this Section 3.2 (but not its obligation to pay registration
expenses pursuant to Section 3.4 hereof) prior to the effectiveness of such
registration whether or not any Holder has elected to include securities in such
registration.
(c) Survival of Requested Registration. No
registration of Registrable Securities effected under Section 3.2(a) shall
relieve the Company of its obligation to effect any Requested Registration under
Section 3.1(a) hereof.
3.3 Underwriting. In the event that a registration
pursuant to Section 3.1 or 3.2 is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as part
-5-
<PAGE> 8
of the notice given to Holders. In such event, the Company shall (together with
all Holders and other holders proposing to distribute their securities through
such underwriting) enter into an underwriting agreement in customary form with
the managing underwriter selected for such underwriting (x) by the Company if
such registration is initiated by the Company or (y) by a majority in interest
of the Holders initially requesting registration if such registration is
initiated by Holders; provided, however, that underwriters selected by Holders
shall be subject to the Company's reasonable approval. Notwithstanding any other
provision of this Section 3.3, if the managing underwriter advises the Company
and the Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten on behalf of stockholders, then the Company
shall so advise all Holders, and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated as
follows: (i) any shares which were to be included in such registration that are
not "Registrable Securities" under this Agreement would first be eliminated from
the offering; (ii) if further reduction in the number of shares is required,
then the number of shares to be included on behalf of Holders would be allocated
among all Holders requesting registration of Shares in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest 100 shares.
If any Holder of Registrable Securities (or other holder
distributing its securities through the underwriting) disapproves of the terms
of the underwriting, such person may elect to withdraw therefrom by written
notice to the Company and the managing underwriter. The Registrable Securities
and/or other securities so withdrawn shall also be withdrawn from registration.
3.4 Expenses of Registration. All Registration Expenses
incurred in connection with the registrations pursuant to Section 3.1 and all
registrations pursuant to Section 3.2 shall be borne by the Company. All Selling
Expenses relating to securities registered on behalf of the Holders or other
holders registering securities shall be borne by the Holders or holders of such
securities pro rata on the basis of the number of shares so registered.
3.5 Registration Procedures. In the case of each
registration, qualification or compliance effected by the Company pursuant to
this Agreement, the Company will keep each Holder advised in writing as to the
initiation of each registration, qualification and compliance and as to the
completion thereof. At its expense, the Company will:
(a) Prepare and file with the Commission a
Registration Statement (including amendments and supplements thereto) with
respect to such securities and use its best lawful efforts to cause such
Registration Statement to become and remain effective for at least ninety (90)
days or until the distribution described in the Registration Statement has been
completed;
(b) Furnish to each underwriter such number of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Securities Act, and such other documents as such
underwriter may reasonably request in order to facilitate the public sale of the
-6-
<PAGE> 9
shares by such underwriter. In addition, the Company will promptly furnish to
each underwriter and Holder notice of any NASDAQ listing, and notice of any
stop-order or similar notice issued by the Commission or any state agency
charged with the regulation of securities, and use commercially reasonable
efforts to promptly obtain the withdrawal of any order suspending the
effectiveness of such Registration Statement or sales of securities thereunder;
and
(c) At any time when a prospectus relating
thereto is required to be delivered under the Securities Act, notify each seller
of Registrable Securities covered by such Registration Statement promptly after
the Company discovers that the prospectus included in such Registration
Statement as then in effect includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, and at the request of any such seller promptly
prepare and furnish to such seller a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. Each
holder of Registrable Securities agrees that upon receipt of any notice from the
Company of the happening of any event of the kind described in this Section
3.5(c), such holder will discontinue immediately such holder's disposition of
securities pursuant to the Registration Statement until such holder receives
copies of the supplemented or amended prospectus contemplated by this Section
3.5(c) and, if so directed by the Company, will deliver to the Company all
copies, other than permanent file copies, then in such holder's possession of
the prospectus relating to such Registrable Securities current at the time of
receipt of such notice.
3.6 Indemnification.
(a) To the extent permitted by law, the Company
will indemnify each Holder participating in a registration pursuant to this
Agreement, each of such Holder's officers, directors, partners and trustees, and
each person controlling such Holder within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification or compliance
has been effected pursuant to this Agreement, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of the
Securities Act or any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder or
holder, each of its officers, directors, partners and trustees, and each person
controlling such Holder or holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss,
-7-
<PAGE> 10
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by such Holder, controlling person or
underwriter specifically for use therein. Notwithstanding the foregoing, insofar
as the foregoing indemnity relates to any such untrue statement (or alleged
untrue statement) or omission (or alleged omission) made in the preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement becomes effective or in the
final prospectus filed with the Commission pursuant to Rule 424(b) of the
Commission, the indemnity agreement herein shall not inure to the benefit of any
underwriter or (if there is no underwriter) any Holder if a copy of the final
prospectus filed pursuant to Rule 424(b) was delivered to such underwriter or
Holder, but was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the Securities Act.
(b) To the extent permitted by law, each Holder
or holder will, if Registrable Securities or other securities held by such
Holder or holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder or holder, each of its officers,
directors, partners and trustees and each person controlling such Holder or
holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, and will reimburse the Company, such Holders or holders, such
directors, officers, partners, trustees, persons, underwriters or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Company by such Holder or holder specifically for use therein.
Notwithstanding the foregoing, the liability of each Holder or holder under this
subsection (b) shall be limited in an amount equal to the net proceeds from the
sale of the shares sold by such Holder or holder, unless such liability arises
out of or is based on willful misconduct by such Holder or holder. In addition,
insofar as the foregoing indemnity relates to any such untrue statement (or
alleged untrue statement) or omission (or alleged omission) made in the
preliminary prospectus but eliminated or remedied in the amended prospectus on
file with the Commission at the time the registration statement becomes
effective or in the final prospectus filed pursuant to Rule 424(b) of the
Commission, the indemnity agreement herein shall not inure to the benefit of the
Company, any underwriter or (if there is no underwriter) any Holder if a copy of
the final prospectus filed pursuant to Rule 424(b) was not furnished to the
person or entity asserting the loss, liability, claim or damage at or prior to
the time such furnishing is required by the Securities Act.
-8-
<PAGE> 11
(c) Each party entitled to indemnification under
this Section 3.6 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
separate or different defenses. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnified Party shall consent to entry of any
judgment or enter into any settlement without the consent of each Indemnifying
Party.
(d) If the indemnification provided for in this
Section 3.6 is unavailable to an Indemnified Party in respect of any losses,
claims, damages or liabilities referred to therein, then each Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities, in a proportion which reflects the relative
fault of the Company on the one hand and of the stockholders offering securities
in the offering (the "Selling Stockholders") on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and the Selling Stockholders on
the other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of material fact or the omission or alleged
omission to state a material fact relates to information supplied in writing by
the Company or by the Selling Stockholders and the parties' relevant intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Selling Stockholders agree that it
would not be just and equitable if contribution pursuant to this Section 3.6(d)
were based solely upon the number of entities from whom contribution was
requested or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 3.6(d). The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to above in this Section 3.6(d) shall
be deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim, subject to the provisions of Section 3.6(c) hereof. Notwithstanding
the provisions of this Section 3.6(d), no Selling Stockholder shall be required
to contribute any amount or make any other payments under this Agreement which
in the aggregate exceed the proceeds received by such Selling Stockholder. No
person guilty of fraudulent misrepresentation (within the meaning of Section 11
of the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
-9-
<PAGE> 12
3.7 Information by Holder.
(a) The Holder or Holders of Registrable
Securities included in any registration and the holder or holders of any other
securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, holder or holders, the Registrable
Securities or other securities held by them and the distribution proposed by
such Holder or Holders, holder or holders as the Company may request in writing
and as shall be required in connection with any registration, qualification or
compliance referred to in Section 3.
(b) The failure of any Holder or Holders of
Registrable Securities or any holder or holders of other securities to be
included in a registration to furnish the information requested pursuant to
Section 3.7(a) shall not affect the obligation of the Company under Section 3 to
the remaining Holder(s) or holder(s) who furnish such information unless, in the
reasonable opinion of counsel to the Company or the underwriters, such failure
impairs or may impair the legality of the Registration Statement or the
underlying offering.
3.8 Transfer of Registration Rights. The rights granted
to a Stockholder under this Agreement may be assigned to a transferee or
assignee in connection with any transfer or assignment of Registrable Securities
by a purchaser provided that: (i) such transfer may otherwise be effected in
accordance with applicable securities laws, (ii) such assignee or transferee
acquires at least 100,000 shares of Registrable Securities (subject to
appropriate adjustment for stock splits, dividends, subdivisions, combinations,
recapitalization and the like) and (iii) the Stockholder notifies the Company in
writing of the transfer or assignment and the assignee or transferee agrees in
writing to be bound by the provisions of this Agreement.
3.9 Holdback Agreements.
(a) Each Holder of Common Stock party hereto
agrees by acquisition of such Common Stock not to effect any public sale or
distribution of any equity securities of the Company during the seven days prior
to and the 120 days after any Public Offering, Requested Registration or
Piggyback Registration has become effective, except as part of such Public
Offering, Requested Registration or Piggyback Registration, as the case may be,
unless the managing underwriter of the Public Offering, Requested Registration
or Piggyback Registration otherwise agrees to such sale or distribution.
(b) The Company agrees (x) not to effect any
public sale or distribution of its equity securities or securities convertible
into or exchangeable or exercisable for any of such securities during the seven
days prior to and the 120 days after any Public Offering, Requested Registration
or Piggyback Registration has become effective, except as part of such Public
Offering, Requested Registration or Piggyback Registration, as the case may be,
and except pursuant to registrations on Form S-4, S-8 or any successor or
similar forms thereto unless the managing underwriter otherwise agrees to such
sale or distribution.
-10-
<PAGE> 13
4. Miscellaneous.
4.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN
ALL RESPECTS BY THE INTERNAL LAWS OF THE STATE OF DELAWARE.
4.2 Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
4.3 Termination. The provisions of this Agreement shall
terminate as to each Holder, at such time as such Holder may sell all Shares
held by it in any single three-month period. In addition this Agreement shall
terminate in its entirety upon the earliest to occur of the following:
(a) three years from the date hereof;
(b) the effective date of a corporate
reorganization of the Company which results in the then current stockholders of
the Company owning less than 50% of the equity securities of the surviving
company, or the sale of all or substantially all of the assets of the Company;
and
(c) the sale of all or substantially all of the
assets of the Company.
4.4 Amendment. This Agreement may be amended, waived,
discharged or terminated by a written instrument signed by the Company and by
the holders of at least sixty percent (60%) in interest of the aggregate of the
then outstanding Registrable Securities; provided, however, that any amendment,
waiver, discharge or termination of any provision hereof which would have the
effect of altering the rights of any Holder or Holders in relation to the rights
of any other Holder or Holders shall not be effective unless approved by Holders
of a majority in interest of the adversely affected Registrable Securities.
4.5 Entire Agreement. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subject hereof.
4.6 Notices, etc. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand or
by messenger including Federal Express or similar courier service, addressed (a)
if to a Stockholder, at such Stockholder's address set forth on Exhibit A
hereto, or at such other address as such Stockholder shall have furnished to the
Company in writing, or (b) if to the Company, to Cyberonics, Inc., 17448 Highway
3, Suite 100, Webster, Texas 77598, Attn: President, or at such other address as
the Company shall have furnished to the Stockholders. Each such notice or other
communication shall for all purposes of this Agreement be treated as effective
upon receipt.
4.7 Counterparts. This Agreement may be executed in any
number of counterparts, each of which may be executed by less than all of the
Stockholders, each of which shall be enforceable
-11-
<PAGE> 14
against the parties actually executing such counterparts, and all of which
together shall constitute one instrument.
4.8 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
4.9 Titles and Subtitles. The titles and subtitles used
in this Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
-12-
<PAGE> 15
IN WITNESS WHEREOF, the undersigned or each of their respective duly
authorized officers or representatives have executed this Agreement effective
upon the date first set forth above.
"COMPANY"
CYBERONICS, INC.
By:
-----------------------------------------
Title:
--------------------------------------
THE FERNLEIGH FOUNDATION
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Treasurer
THE CLARK FOUNDATION
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Treasurer
THE SCRIVEN FOUNDATION
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Treasurer
-13-
<PAGE> 16
THE MARY IMOGENE BASSETT HOSPITAL-SCC
RESEARCH FUND
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Treasurer
THE FARMERS' MUSEUM, INC.
By:
-----------------------------------------
Name: Richard C. Vanison
Title: Treasurer
ANNUITY TRUST FOR KATHRYN J. CLARK u/w
STEPHEN C. CLARK, JR. ART 18
By:
-----------------------------------------
Name: Edward W. Stack
Title: Trustee
TRUST FOR MARTIN PERETZ, 1976
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Trustee
TRUST FOR ANNE L. PERETZ, 1944
By:
-----------------------------------------
Name: Edward W. Stack
Title: Trustee
-14-
<PAGE> 17
EDMUND S. TWINING III
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Attorney in Fact
TRUST FOR DOROTHY POTTER BOARDMAN
By:
-----------------------------------------
Name: Edward W. Stack
Title: Trustee
TRUST FOR SUSAN CLARK TWINING, 1946
By:
-----------------------------------------
Name: Edward W. Stack
Title: Trustee
THE SCRIVEN FOUNDATION - M FUND
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Treasurer
THE MARY IMOGENE BASSETT HOSPITAL-
TRUSTEE FUND
By:
-----------------------------------------
Name: Kevin S. Moore
Title: Treasurer
-15-
<PAGE> 18
EVE C. LABOUISSE
By:
---------------------------------------
Name: Kevin S. Moore
Title: Attorney in Fact
NEW YORK STATE HISTORICAL
ASSOCIATION - STEPHEN C. CLARK FUND
By:
---------------------------------------
Name: Kevin S. Moore
Title: Treasurer
JANE FORBES CLARK
By:
---------------------------------------
Name: Kevin S. Moore
Title: Attorney in Fact
TRUST FOR EVGENIA S. PERETZ
By:
---------------------------------------
Name: Edward W. Stack
Title: Trustee
TRUST FOR JESSE W. PERETZ
By:
---------------------------------------
Name: Edward W. Stack
Title: Trustee
-16-
<PAGE> 19
TRUST FOR DAVID L. FARNSWORTH
By:
---------------------------------------
Name: Edward W. Stack
Title: Trustee
TRUST FOR ANNE E. FARNSWORTH
By:
---------------------------------------
Name: Edward W. Stack
Title: Trustee
RESIDUARY TRUST FOR JANE FORBES CLARK II
By:
---------------------------------------
Name: Kevin S. Moore
Title: Trustee
CLARA WELCH THANKSGIVING HOME, INC.
By:
---------------------------------------
Name: Richard C. Vanison
Title: Treasurer
RESIDUARY TRUST u/w SUSAN CLARK TWINING
By:
---------------------------------------
Name: Jane Forbes Clark
Title: Trustee
-17-
<PAGE> 20
DIANA R. TWINING
By:
---------------------------------------------------
Name: Kevin S. Moore
Title: Attorney in Fact
Capital Research and Management Company on behalf of
SMALLCAP World Fund, Inc.
By:
---------------------------------------------------
Name: Catherine M. Ward
Title: Senior Vice President
AEOW 96, LLC
By:
---------------------------------------------------
Name: Will K. Weinstein
Title: Managing Member
STANLEY H. APPEL, M.D.
By:
---------------------------------------------------
ROBERT P. CUMMINS
By:
---------------------------------------------------
-18-
<PAGE> 21
MARILYN LUNNEY
By:
--------------------------------------------
WILLIAM H. DUFFELL, JR.
By:
--------------------------------------------
IRA FBO ROBERT P. CUMMINS, DLJSC AS CUSTODIAN
By:
--------------------------------------------
Name:
Title:
ROBERT P. CUMMINS AS CUSTODIAN FOR LINDA
G. CUMMINS UNDER THE TEXAS UNIFORM
TRANSFERS TO MINORS ACT
By:
--------------------------------------------
Name: Robert P. Cummins
Title: Custodian
-19-
<PAGE> 22
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
NUMBER OF
REGISTRABLE
NAME AND ADDRESS OF PURCHASER SECURITIES
----------------------------- ---------------
<S> <C>
THE FERNLEIGH FOUNDATION 16,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
THE CLARK FOUNDATION 347,408
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
THE SCRIVEN FOUNDATION 82,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
THE MARY IMOGENE BASSETT HOSPITAL - SCC RESEARCH 15,000
FUND
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
THE FARMERS' MUSEUM, INC. 60,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
ANNUITY TRUST FOR KATHRYN J. CLARK u/w STEPHEN C. 10,000
CLARK, JR. ART. 18
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
TRUST FOR MARTIN PERETZ, 1976 6,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
TRUST FOR ANNE L. PERETZ, 1944 20,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
</TABLE>
<PAGE> 23
<TABLE>
<CAPTION>
NUMBER OF
REGISTRABLE
NAME AND ADDRESS OF PURCHASER SECURITIES
- ---------------------------------------------------------------------- ----------------
<S> <C>
EDMUND S. TWINING III 20,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
TRUST FOR DOROTHY POTTER BOARDMAN 12,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
TRUST FOR SUSAN CLARK TWINING, 1946 14,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
THE SCRIVEN FOUNDATION - M FUND 70,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
THE MARY IMOGENE BASSETT HOSPITAL - TRUSTEE FUND 22,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
EVE C. LABOUISSE 30,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
NEW YORK STATE HISTORICAL ASSOCIATION - STEPHEN C. 30,000
CLARK FUND
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
JANE FORBES CLARK 70,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
TRUST FOR EVGENIA S. PERETZ 4,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
</TABLE>
-2-
<PAGE> 24
<TABLE>
<CAPTION>
NUMBER OF
REGISTRABLE
NAME AND ADDRESS OF PURCHASER SECURITIES
- ---------------------------------------------------------------------- ----------------
<S> <C>
TRUST FOR JESSE W. PERETZ 4,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
TRUST FOR DAVID L. FARNSWORTH 4,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
TRUST FOR ANNE E. FARNSWORTH 4,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
RESIDUARY TRUST FOR JANE FORBES CLARK II 35,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
CLARA WELCH THANKSGIVING HOME, INC. 4,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
RESIDUARY TRUST u/w SUSAN CLARK TWINING 20,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
DIANA R. TWINING 2,000
c/o The Clark Estates
30 Wall Street, 9th Floor
New York, NY 10005
SMALLCAP WORLD FUND, INC. 494,000
(Registered in the name of Kane & Co.)
c/o Capital Research & Management Company
Attn: James P. Ryan
333 South Hope Street
Los Angeles, CA 90071
AEOW 96, LLC 56,339
c/o Genesis Merchant Group
Attn: Will K. Weinstein
909 Montgomery Street, #600
San Francisco, CA 94133
</TABLE>
-3-
<PAGE> 25
<TABLE>
<CAPTION>
NUMBER OF
REGISTRABLE
NAME AND ADDRESS OF PURCHASER SECURITIES
- ---------------------------------------------------------------------- ----------------
<S> <C>
STANLEY H. APPEL, M.D. 40,000
c/o Baylor College of Medicine
1 Baylor Place
Houston, TX 77030
ROBERT P. CUMMINS 22,750
c/o Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598
MARILYN LUNNEY 6,000
c/o Cyberonics, Inc.
Attn: Shawn Lunney
17448 Highway 3, Suite 100
Webster, TX 77598
WILLIAM H. DUFFELL, JR. 1,127
c/o Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598
IRA FBO ROBERT P. CUMMINS, 7,750
DLJSC AS CUSTODIAN
c/o Pershing
Attn: ______________________
1 Pershing Plaza
Jersey City, NJ 07399
ROBERT P. CUMMINS AS CUSTODIAN 5,000
FOR LINDA G. CUMMINS UNDER THE
TEXAS UNIFORM TRANSFERS TO
MINORS ACT
c/o Cyberonics, Inc.
Attn: Robert P. Cummins
17448 Highway 3, Suite 100
Webster, TX 77598
</TABLE>
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 6,786,147
<SECURITIES> 4,727,496
<RECEIVABLES> 504,114
<ALLOWANCES> 0
<INVENTORY> 1,014,620
<CURRENT-ASSETS> 13,120,451
<PP&E> 391,212
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,614,568
<CURRENT-LIABILITIES> 1,686,845
<BONDS> 0
0
0
<COMMON> 133,119
<OTHER-SE> 11,794,604
<TOTAL-LIABILITY-AND-EQUITY> 13,614,568
<SALES> 1,011,740
<TOTAL-REVENUES> 1,011,740
<CGS> 300,341
<TOTAL-COSTS> 8,554,825
<OTHER-EXPENSES> 12,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,538,775)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,538,775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,538,775)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> 0
</TABLE>
