<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
CYBERONICS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
CYBERONICS, INC.
------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JANUARY 8, 1998
------------------------
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN, that the Annual Meeting of Stockholders of
Cyberonics, Inc., a Delaware corporation (the "Company"), will be held on
Thursday, January 8, 1998, at 9:00 a.m., local time, at the South Shore Harbor
Resort & Conference Center, 2500 South Shore Boulevard, League City, Texas, for
the following purposes:
1. To elect six directors to serve for the following year and until
their successors are duly elected;
2. To approve adoption of the Company's 1997 Stock Plan and the grant
of certain options thereunder;
3. To ratify the appointment of Arthur Andersen LLP as independent
accountants of the Company for the fiscal year ending June 30, 1998; and
4. To transact such other business as may properly come before the
meeting or any adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on November 24, 1997,
are entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed Proxy as promptly as possible in the envelope
enclosed for that purpose. Any stockholder attending the meeting may vote in
person even if he or she previously returned a Proxy.
Sincerely,
ROBERT P. CUMMINS
President and Chief Executive Officer
Webster, Texas
November 25, 1997
----------------------------------------------------------------------------
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN THE ENCLOSED
PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. IF YOU ATTEND THE MEETING AND SO DESIRE, YOU MAY
WITHDRAW YOUR PROXY AND VOTE IN PERSON.
THANK YOU FOR ACTING PROMPTLY
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<PAGE>
CYBERONICS, INC.
------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF STOCKHOLDERS
JANUARY 8, 1998
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of Cyberonics, Inc. (the
"Company") for the Annual Meeting of Stockholders to be held on Thursday,
January 8, 1998, at 9:00 a.m., local time, at the South Shore Harbor Resort &
Conference Center, 2500 South Shore Boulevard, League City, Texas or any
adjournment or adjournments thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting.
These Proxy solicitation materials were mailed on or about November 28, 1997
to all stockholders entitled to vote at the meeting.
RECORD DATE; OUTSTANDING SHARES
Only stockholders of record at the close of business on November 24, 1997
(the "Record Date"), are entitled to receive notice of and to vote at the
meeting. The outstanding voting securities of the Company as of such date
consisted of 16,370,400 shares of Common Stock, $.01 par value. For information
regarding holders of more than 5% of the outstanding Common Stock, see "Election
of Directors--Securities Ownership of Certain Beneficial Owners and Management."
REVOCABILITY OF PROXIES
The enclosed Proxy is revocable at any time before its use by delivering to
the Company a written notice of revocation or a duly executed proxy bearing a
later date. If a person who has executed and returned a proxy is present at the
meeting and wishes to vote in person, he or she may elect to do so and thereby
suspend the power of the proxy holders to vote his or her proxy.
VOTING AND SOLICITATION
Every stockholder of record on the record date is entitled, for each share
held, to one vote on each proposal or item that comes before the meeting. In the
election of directors, each stockholder will be entitled to vote for six
nominees and the six nominees with the greatest number of votes will be elected.
The cost of soliciting proxies will be borne by the Company. In addition,
the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
material to such beneficial owners. Proxies may also be solicited by certain of
the Company's directors, officers and regular employees, without additional
compensation personally or by telephone, telecopy, or telegram.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting is
a majority of the shares of Common Stock issued and outstanding on the Record
Date. Shares that are voted "FOR," "AGAINST" or "WITHHELD FROM" a matter are
treated as being present at the meeting for purposes of establishing a quorum
and also treated as shares "represented and voting" at the Annual Meeting (the
"Votes Cast") with respect to such matter.
<PAGE>
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of the quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal. In the absence of controlling president to the
contrary, the Company intends to treat abstentions in this manner. Accordingly,
abstentions will have the same effect as a vote against a proposal.
Broker non-votes will be counted for purposes of determining the presence or
absence of a quorum for the transaction of business, but will not be counted for
purposes of determining the number of Votes Cast with respect to a proposal.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's 1998 Annual Meeting must be received by
the Company no later than July 2, 1998 in order that they may be included in the
proxy statement and form of proxy relating to that meeting.
ELECTION OF DIRECTORS
GENERAL
A Board of six directors is to be elected at the meeting. Unless otherwise
instructed, the proxy holders will vote all of the proxies received by them for
the Company's six nominees named below. In the event that any of the nominees
shall become unavailable, the proxy holders will vote in their discretion for a
substitute nominee. It is not expected that any nominee will be unavailable. The
term of office of each person elected as a director will continue until the next
Annual Meeting of Stockholders and until his successor has been elected and
qualified.
VOTE REQUIRED
The six nominees receiving the highest number of affirmative votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote shall be elected to the Board of Directors. Votes withheld from any
director are counted for purposes of determining the presence or absence of a
quorum, but have no legal effect under Delaware law. THE BOARD OF DIRECTORS
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE NOMINEES LISTED BELOW.
2
<PAGE>
The names and certain information about the Company's nominees, including
their ages as of June 30, 1997 are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- ------------------------------------- --- ----------------------------------------------------------- -----------
<S> <C> <C> <C>
Robert P. Cummins.................... 43 President and Chief Executive Officer of the Company 1988
Reese S. Terry, Jr................... 55 Chairman of the Board, Executive Vice President and 1987
Secretary of the Company
Stanley H. Appel, M.D................ 64 Chairman, Baylor College of Medicine, Department of 1996
Neurology
Tony Coelho.......................... 55 Chairman and Chief Executive Officer, ETC w/tci 1997
Thomas A. Duerden, Ph.D.............. 67 Independent Business Consultant 1989
Michael J. Strauss, M.D.............. 44 Corporate Vice President and General Manager, Covance 1997
Health Economics and Outcomes Services, Inc.
</TABLE>
Except as set forth below, each of the nominees has been engaged in the
principal occupation described above during the past five years. There is no
family relationship between any director or executive officer of the Company.
Mr. Cummins became a director of the Company in June 1988. He was appointed
President and Chief Executive Officer of the Company in September 1995. Until
September 1995, he was also a general partner of Vista Partners, L.P., a venture
capital partnership which he joined in 1984, a general partner of Vista III
Partners, L.P., a venture capital firm formed in 1986 and Vice President of
Vista Ventures Inc., a venture capital advisory firm. Mr. Cummins is also a
director of Sigma Circuits Inc., a manufacturer of electronic interconnect
products.
Mr. Terry co-founded the Company in December 1987 and served as a Director
and Chief Executive Officer of the Company until February 1990, when he became
Chairman of the Board and Executive Vice President. Mr. Terry has also served as
Secretary of the Company from its inception and as President of the Company for
four months in 1995. From 1976 to 1986, Mr. Terry held executive positions with
Intermedics, Inc., a medical device and electronics company, including serving
as Vice President of Engineering, Vice President of Corporate Technical
Resources and, most recently, as Vice President of Quality.
Dr. Appel has been a director of the Company since December 1996 and the
chair of Company's Scientific Advisory Board since its formation in 1994. Since
1977, Dr. Appel has been Chairman of the Baylor College of Medicine Department
of Neurology.
Mr. Coelho has been a director of the Company since March 1997. Mr. Coelho
is the Chairman and Chief Executive Officer of ETC w/tci, the Washington-based
education, training and communications subsidiary of Tele-Communications, Inc.,
a position he held since October 1996. From January 1990 to September 1995, Mr.
Coelho served as the President and Chief Executive Officer of Wertheim Schroder
Investment Services, Inc., an asset management firm, and from October 1989 to
September 1995, he served as Managing Director of Wertheim Schroder and Co., an
investment banking firm. Mr. Coelho served in the United States House of
Representatives as a Representative from California from 1979 to 1989, and
served as House Majority Whip form 1986 to 1989. Mr. Coelho is also a member of
the Board of Directors of Auto Lend Group, Inc., ICF Kaiser International, Inc.,
International Thoroughbred Breeders, Inc., Service Corporation International,
TEI, Inc. and Tele-Communications, Inc.
3
<PAGE>
Dr. Duerden has been a director of the Company since March 1989 and an
independent business consultant since January 1990. From December 1988 through
January 1990, Dr. Duerden served as Chairman of the Board and Chief Executive
Officer of Tonometrics, Inc., a medical diagnostic device company. From 1979
through 1988, Dr. Duerden served as Chairman and Chief Executive Officer of
Electro Biology, Inc., an orthopedic device company.
Dr. Strauss has been a director of the Company since March 1997. Since June
1988, Dr. Strauss served first as President and later as Corporate Vice
President and General Manager at Covance Health Economics and Outcomes Services
Inc. (formerly Health Technology Associates, Inc.), a consulting and research
services firm specializing in third-party health care payment issues.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of 9 meetings during the
fiscal year ended June 30, 1997. The Board has an Audit Committee and a
Compensation Committee. There is no nominating committee or other committee
performing a similar function.
The Audit Committee, which currently consists of Thomas A. Duerden and
Michael J. Strauss, did not meet during the fiscal year ended June 30, 1997.
This Committee recommends engagement of the Company's independent public
accountants and is primarily responsible for approving the services performed by
such accountants and for reviewing and evaluating the Company's accounting
principals and its system of internal accounting controls.
The Compensation Committee, which currently consists of director Tony Coelho
and Stanley H. Appel, did not meet during the fiscal year ended June 30, 1997.
This Committee establishes salary and incentive compensation of the executive
officers of the Company and administers the Company's employee benefit plans.
During the fiscal year ended June 30, 1997, compensation decisions were made by
the Board of Directors.
During the fiscal year ended June 30, 1997, all current directors attended
at least seventy five percent of the meetings of the Board of Directors, with
the exception of Mr. Coelho, who missed two of the four meetings held since he
became a director.
BOARD COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors. Nonemployee directors are eligible for discretionary
option grants under the Company's 1996 Option Plan. During fiscal 1997, each
nonemployee director was granted an option to purchase 35,000 shares of Common
Stock with an exercise price equal to the fair market value of the Common Stock
on the date of grant. Such options vest as to 25% of the shares at the first
meeting attended by a director following the date of grant of the option and 25%
of the shares on each of the first three anniversaries of the date of grant
based upon continued service on the Board of Directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of October 31, 1997 certain information
with respect to the beneficial ownership of Cyberonics Common Stock (i) by each
person known by Cyberonics to own beneficially more than five percent of the
outstanding shares of Cyberonics Common Stock, (ii) by each director of
Cyberonics, (iii) by each of the Chief Executive Officer and four other most
highly paid executive officers of Cyberonics who earned over $100,000 in fiscal
1997 and (iv) by all directors and executive officers as a
4
<PAGE>
group. Except as otherwise noted below, Cyberonics knows of no agreements among
its stockholders which relate to voting or investment of its shares of
Cyberonics Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
BENEFICIALLY SHARES
NAME OF BENEFICIAL OWNER OWNED(1) OWNED(1)
- --------------------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
St. Jude Medical, Inc.(2) ............................................................. 2,181,818 13.3%
One Lillehei Plaza
St. Paul, MN 55117-9983
Vista III, L.P.(3) .................................................................... 1,179,903 7.2%
36 Grove Street
New Canaan, CT 06840
The Clark Estates(4) .................................................................. 1,226,208 7.5%
30 Wall Street
New York, NY 10005
Reese S. Terry, Jr.(5) ................................................................ 981,271 6.0%
c/o Cyberonics, Inc.
17448 Highway 3, Suite 100
Webster, TX 77598-4135
SmallCap World Fund Inc. .............................................................. 854,800 5.2%
c/o Capital Research and Management
333 South Hope Street
Los Angeles, CA 90071
Wisconsin Investment Board ............................................................ 718,000 4.4%
P.O. Box 7842
Madison, WI 53707
Robert P. Cummins(6)................................................................... 346,750 2.1%
John K. Bakewell(7).................................................................... 144,693 *
William H. Duffell(8).................................................................. 139,167 *
Shawn P. Lunney(9)..................................................................... 140,060 *
Thomas A. Duerden, Ph.D.(10)........................................................... 42,250 *
Stanley H. Appel, M.D.(11)............................................................. 113,750 *
Tony Coelho(12)........................................................................ 23,417 *
Michael J. Strauss(13)................................................................. 8,750 *
All executive officers and directors as a group (11 persons)(14)....................... 2,209,654 12.6%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Shares of Cyberonics Common Stock subject to options and
warrants currently exercisable, or exercisable within 60 days, are deemed
outstanding for computing the percentage holdings of the person holding
such options but are not deemed outstanding for computing the percentage
holdings of any other person. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of
Cyberonics Common Stock shown as beneficially owned by them.
5
<PAGE>
(2) St. Jude acquired these shares pursuant a Common Stock Purchase Agreement
dated April 8, 1996, which acquisition closed in July 1996. In connection
with the Stock Purchase Agreement, St. Jude also entered into a
Stockholders' Agreement which provides, among other things, that St. Jude
will not acquire additional shares of Common Stock. In addition, St. Jude
has agreed that, through July 1, 1998, it will vote its shares of Common
Stock in favor of director nominees as recommended by the Board of
Directors and, for so long as it holds any Common Stock, to vote its shares
of Common Stock on all other matters submitted to the stockholders for a
vote as recommended by the Board of Directors or in the same proportion as
the votes cast by all other stockholders. Finally, St. Jude has agreed with
the Company not to sell or otherwise dispose of its shares of Common Stock
on or before March 31, 1998.
(3) Mr. Cummins, the Chief Executive Officer, President and a director of
Cyberonics, is a limited partner of the partnership that controls Vista
III, L.P.
(4) Pursuant to a letter agreement dated March 28, 1997, the Clark Estates is
entitled to designate one person to serve on the Company's Board of
Directors for as long as the Clark Estates retains at least 600,000 of the
aggregate of 901,408 shares of Common Stock purchased on such date by
parties affiliated with the Clark Estates. To date, the Clark Estates has
not exercised this right.
(5) Includes 148,500 shares held in trusts for the benefit of Mr. Terry's
children of which Mr. Terry serves as trustee. Also includes 45,271 shares
subject to options exercisable on or before December 31, 1997.
(6) Includes 5,000 shares held in trust for the benefit of Mr. Cummins'
daughter of which Mr. Cummins serves as trustee. Also includes 301,250
shares subject to options exercisable on or before December 31, 1997.
Excludes shares held by Vista III, L.P. as to which Mr. Cummins disclaims
beneficial ownership except to the extent of his pecuniary interest
therein.
(7) Includes 143,563 shares subject to options exercisable on or before
December 31, 1997.
(8) Includes 128,975 shares subject to options exercisable on or before
December 31, 1997.
(9) Includes 132,935 shares subject to options exercisable on or before
December 31, 1997.
(10) Includes 18,750 shares subject to options exercisable on or before
December 31, 1997.
(11) Includes 58,750 shares subject to options exercisable on or before
December 31, 1997.
(12) Includes 23,417 shares subject to options exercisable on or before
December 31, 1997.
(13) Includes 8,750 shares subject to options exercisable on or before December
31, 1997.
(14) Includes 1,131,207 shares subject to options held by executive officers
and directors, which options are exercisable on or before December 31,
1997. Also includes shares which may be determined to be beneficially
owned by executive officers and directors. See Notes 5 through 13.
6
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders,
assuming reinvestment of all dividends, of the Company's Common Stock since
February 11, 1993 (the date the Company first became subject to the reporting
requirements of the Exchange Act) to the cumulative total return over such
period of (i) the Standard & Poor's 500 Index and (ii) the Standard & Poor's
Medical Products & Supplies Index. The graph assumes that $100 was invested on
February 11, 1993 in the Common Stock of the Company and in each of the
comparative indices. The graph further assumes that such amount was initially
invested in the Common Stock of the Company at a price of $12.00 per share, the
price at which such stock was first offered to the public by the Company on that
date. The information contained in the Performance Graph shall not be deemed to
be "soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act or the Exchange Act, except to the extent
that the Company specifically incorporates it by reference into such filing.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
2/11/93 6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
<S> <C> <C> <C> <C> <C> <C>
Cyberonics, Inc. $100 77.1 64.6 33.3 50 64.6
Standard & Poor's 500 Index $100 100.6 99.2 121.7 149.8 197.7
Standard & Poor's $100 83.2 78.4 118.3 153.6 201.5
Medical Products &
Supplies Index
</TABLE>
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
paid by the Company for the year ended June 30, 1997 to the Chief Executive
Officer and each of the other most highly compensated executive officers of the
Company whose total compensation exceeded $100,000 (collectively, the "Named
Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
------------------ SECURITIES
FISCAL SALARY BONUS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#) COMPENSATION
- ------------------------------ ------ -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Robert P. Cummins(1) ......... 1997 196,596 68,530 356,000 294(2)
President and Chief 1996 140,758 32,930 50,000 8,194(2)(3)
Executive Officer
Reese S. Terry, Jr. .......... 1997 146,693 32,596 63,500 6,705(2)
Chairman of the Board and 1996 130,880 32,950 -- 5,321(2)
Executive Vice President 1995 127,746 11,158 20,000 5,544(2)
William H. Duffell, Jr.(4) ... 1997 157,356 32,963 90,000 13,952(5)
Vice President, Clinical and 1996 150,000 27,886 -- 27,881(6)
Regulatory Affairs 1995 23,077 5,000 85,000 --
John K. Bakewell ............. 1997 131,187 29,527 135,000 263(2)
Vice President Finance and 1996 105,052 27,537 -- 225(2)
Administration and Chief 1995 101,620 8,630 55,000 226(2)
Financial Officer
Shawn P. Lunney .............. 1997 119,423 54,744 137,750 231(2)
Vice President, Marketing
</TABLE>
- ------------------------
(1) Mr. Cummins became an executive officer of the Company in fiscal 1996.
(2) Represents premiums paid by the Company for term life insurance, the
benefits of which are payable to beneficiaries designated by the Named
Executive Officer.
(3) Includes $7,900 paid to Mr. Cummins in fiscal 1996 as a travel/auto
allowance.
(4) Mr. Duffell joined the Company late in fiscal 1995. Mr. Duffell's bonus in
fiscal 1996 includes a $10,000 bonus related to Mr. Duffell's relocation to
Houston.
(5) Represents $332 paid by the Company for term life insurance and $13,620 paid
to Mr. Duffell for expenses related to relocation to Houston.
(6) Represents $315 paid by the Company for term life insurance and $27,566 paid
to Mr. Duffell for expenses related to relocation to Houston.
8
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth each
grant of stock options made during the year ended June 30, 1997 to each of the
Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
---------------------------------------------------- RATES OF STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM($)(2)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE 5% 10%
- -------------------------------------- ---------- --------------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Cummins..................... 2,000(3) 0.1% $3.06 06/01/03 2,318 5,342
2,000(3) 0.1% $3.06 07/05/04 2,776 6,589
2,000(3) 0.1% $3.06 06/01/05 3,183 7,749
50,000(3) 2.6% $3.06 10/11/05 83,391 204,912
300,000 15.8% $3.06 11/01/06 577,325 1,463,056
Reese S. Terry, Jr.................... 20,000(3) 1.1% $3.06 09/20/04 28,488 67,920
43,500 2.3% $3.06 11/01/06 83,712 212,143
John K. Bakewell...................... 45,000(3) 2.4% $3.06 05/10/03 51,388 118,151
15,000(3) 0.8% $3.06 09/20/04 21,366 50,940
75,000 4.0% $3.06 11/01/06 144,331 365,764
William H. Duffell, Jr................ 90,000 4.8% $3.06 11/01/06 173,197 438,917
Shawn P. Lunney....................... 3,000(3) 0.2% $3.06 12/09/02 3,172 7,213
10,000(3) 0.5% $3.06 03/25/03 11,249 25,805
15,000(3) 0.8% $3.06 09/20/04 21,640 51,812
104,750 5.5% $3.06 11/01/06 201,583 510,850
</TABLE>
- --------------------------
(1) Total number of shares subject to options granted to employees in fiscal
1997 was 1,893,388, which number includes options granted to employee
directors.
(2) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date of
grant until the end of the ten-year option term. These numbers are
calculated based on the requirements promulgated by the SEC and do not
reflect the Company's estimate of future stock price growth.
(3) In November 1996, the Company repriced stock options that had an exercise
price in excess of the fair market value in effect on the date of repricing.
The option grants indicated reflect previously granted options that were
repriced as if such options had been newly granted in November 1996.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
VALUES. The following table sets forth, for each of the Names Executive
Officers, each exercise of stock options during the fiscal year ended June 30,
1997 and the year-end value of unexercised options:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED ON VALUE YEAR-END: YEAR-END:
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE/UNEXERCISABLE(2) EXERCISABLE/UNEXERCISABLE(3)
- ------------------------------ ------------- ------------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
Robert P. Cummins............. -- -- 176,750/181,250 $829,078/$850,063
Reese S. Terry, Jr............ -- -- 27,219/36,281 $127,657/$170,158
John K. Bakewell.............. -- -- 104,355/70,645 $481,771/$327,629
William H. Duffell, Jr........ -- -- 83,542/91,458 $382,708/$421,892
Shawn P. Lunney............... 7,125 $ 29,231 86,081/74,669 $399,546/$349,802
</TABLE>
- ------------------------
(1) Represents market value of underlying securities at date of exercise less
option exercise price.
(2) Options granted by the Company are generally vest over a four-year period
such that 12.5% of the shares subject to the option vest on the six month
anniversary of the grant date, and 1/48 of the optioned shares vest each
month thereafter until fully vested.
(3) Market value of underlying securities at fiscal year-end ($7.75/per share)
minus the exercise price.
9
<PAGE>
TEN YEAR OPTION REPRICINGS. In November 1996, the Company extended an offer
to all optionees to reprice options then held by them with exercise prices above
the then prevailing market price. The following table sets forth information
with respect to stock options held by executive officers of the Company that
were repriced in November 1996. No other option repricings involving executive
officers have occurred. The Report on Executive Compensation and Repricing of
Options set forth below describes the rationale of the Board of Directors behind
the repricing.
<TABLE>
<CAPTION>
LENGTH
(IN YEARS)
NUMBER OF OF ORIGINAL
SECURITIES MARKET PRICE OPTION TERM
UNDERLYING OF STOCK EXERCISE PRICE NEW REMAINING AT
DATE OF OPTIONS AT TIME OF AT TIME OF EXERCISE DATE OF
NAME REPRICING REPRICED(#) REPRICING($) REPRICING($) PRICE($) REPRICING
- ---------------------------------- ----------- ------------- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Cummins ................ 11/1/96 2,000 $ 3.06 $ 8.00 $ 3.06 6.6
President and Chief Executive 11/1/96 2,000 $ 3.06 $ 7.50 $ 3.06 7.6
Officer 11/1/96 2,000 $ 3.06 $ 4.00 $ 3.06 8.6
11/1/96 50,000 $ 3.06 $ 4.75 $ 3.06 8.9
John K. Bakewell ................. 11/1/96 45,000 $ 3.06 $ 7.75 $ 3.06 6.5
Vice President, Finance and 11/1/96 15,000 $ 3.06 $ 4.75 $ 3.06 7.9
Administration and Chief
Financial Officer
Stephen D. Ford .................. 11/1/96 20,000 $ 3.06 $ 6.50 $ 3.06 6.3
Vice President, Manufacturing 11/1/96 20,000 $ 3.06 $ 4.75 $ 3.06 7.9
11/1/96 25,000 $ 3.06 $ 3.25 $ 3.06 8.5
Shawn P. Lunney .................. 11/1/96 3,000 $ 3.06 $ 5.25 $ 3.06 6.1
Vice President, Marketing 11/1/96 10,000 $ 3.06 $ 5.25 $ 3.06 6.4
11/1/96 15,000 $ 3.06 $ 4.75 $ 3.06 7.9
12/9/94 3,000 $ 3.50 $ 7.00 $ 5.25 8.0
12/9/94 10,000 $ 3.50 $ 6.50 $ 5.25 8.3
Reese S. Terry, Jr. .............. 11/1/96 20,000 $ 3.06 $ 4.75 $ 3.06 7.9
Chairman of the Board and
Executive Vice President
</TABLE>
REPORT ON EXECUTIVE COMPENSATION AND STOCK OPTION REPRICING
The following Report of the Board of Directors describes the compensation
policies and rationale applicable to the Company's executive officers with
respect to the compensation paid to such executive officers for the year ended
June 30, 1997, as well as the Board's rationale for the stock option repricing
effected in late fiscal 1997. The information contained in the reports shall not
be deemed to be "soliciting material" or to be "filed" with the Securities and
Exchange Commission nor shall such information be incorporated by reference into
any previous or future filing under the Securities Act of 1933, as amended (the
"Securities Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), except to the extent that the Company specifically incorporates
it by reference into such filing.
TO THE STOCKHOLDERS:
The period beginning in mid-fiscal 1996 and running through fiscal 1997 was
a period year of substantial transition for Cyberonics which was reflected in
the actions taken with respect to executive compensation during the period. The
Company entered into fiscal 1997 with a compensation committee consisting of
only one outside director, Dr. Duerden. In mid year, Dr. Appel was added to the
Compensation Committee and, in June 1997, the Compensation Committee was
restructured, with Dr. Duerden dropping off and Mr. Coelho joining of the
Committee. Given the transitions facing the Company, as well as the transitions
on the Compensation Committee during fiscal 1997, the Board of Directors took
direct responsibility for executive compensation decisions during the year. The
Board of Directors expects the
10
<PAGE>
Compensation Committee to resume normal responsibility for executive
compensation decisions going forward.
The primary factor affecting the Company's executive compensation decisions
during fiscal 1997 was the acquisition agreement which the Company entered into
in April 1996 with St. Jude Medical, Inc. ("St. Jude"). That agreement gave St.
Jude the right, but not the obligation to acquire the Company. St. Jude's right
to acquire Cyberonics expired unexercised in October 1996. The acquisition
agreement with St. Jude provided that Cyberonics could not change the
compensation of its executive officers from the levels prevailing before the
agreement was entered into. Accordingly, through October 1996, executive
compensation was held at the levels established in fiscal 1996.
Following expiration of St. Jude's option to acquire the Company, the Board
of Directors reviewed the compensation levels of the Company's executive
officers. While the agreement with St. Jude was in effect, significant momentum
had been built toward transitioning Cyberonics' employees, including most
executive officers, to St. Jude. In addition, during fiscal 1996, the Company
entered into agreements with its key employees, including executive officers,
which were designed to provide incentives for the contracting employees to stay
with Cyberonics through the acquisition and with the surviving entity following
the acquisition. When the acquisition option expired unexercised, the primary
concern of the Board of Directors was to keep the management team intact and
focused on pursuing the Company's key regulatory objectives.
COMPENSATION POLICY
The Company's executive compensation policies are designed to attract,
retain and motivate the highly skilled executive officers upon whose performance
the Company is dependent by providing compensation packages competitive with
those provided by similarly situated companies with whom the Company competes
for key employees. It is the Company's policy that compensation of executive
officers should include base compensation coupled with stock-based incentive
opportunities and cash bonuses. The Company does not contribute to any
retirement programs on behalf of any employees. Compensation levels for all
employees, including executive officers, are generally established for each
fiscal year near the beginning of the fiscal year.
BASE SALARIES
Base salaries for all employees are generally set at levels that are viewed
as competitive. Base salaries for fiscal 1997 were established at the beginning
of fiscal 1997, and generally reflected increases of 3% to 6% over fiscal 1996
levels. The level of increase for specific executive officers was determined by
comparing salaries paid by the Company with those paid by similarly situated
companies. In addition, in November 1996, executive compensation levels were
reviewed in light of expiration of St. Jude's option to acquire the Company and
the need to retain officers, many of whom were seeking or had secured
alternative employment in contemplation of the St. Jude transaction being
completed. As a result of this review, the base salary level of certain officers
was increased modestly.
BONUSES
The Company generally establishes target bonus levels for executive officers
at the same time that annual salary levels are established for the fiscal year.
For fiscal 1997, maximum bonus levels were set at 30% of base salary, the same
as fiscal 1996. Bonus payout is generally tied to a number of Company-wide
performance goals. Based upon Company performance during fiscal 1997, and in
particular the regulatory approvals achieved by the Company, executive officers
were paid 100% of their potential bonuses.
11
<PAGE>
STOCK OPTION AWARDS
Following expiration of the St. Jude option to acquire the Company, the
Board of Directors believed that it was critical to provide adequate long term
incentives for key employees, including executive officers, to remain with the
Company notwithstanding the uncertainty presented by expiration of the St. Jude
agreement. Accordingly, the Board evaluated the levels of options held by all
employees, and granted additional options to substantially all employees. With
respect to all employees (including executive officers), option grants were made
to bring employees to a level of option holdings based upon their functional
level within the Company. The same arrangement was made for executive officers
(other than Reese Terry who, because of his status as a founder and major
stockholder of the Company, received a lesser level of options).
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Cummins became an executive officer of the Company in September 1995,
and entered into an Employment Agreement at that time. In April 1996, Mr.
Cummins' employment agreement was extended to run through December 31, 1996. At
the time Mr. Cummins became an executive officer of the Company, the Company was
contemplating effecting an acquisition or other similar transaction in the near
term. Accordingly, Mr. Cummins' compensation was structured primarily to reward
success of a change of control transaction. In particular, Mr. Cummins'
compensation package included a substantial bonus payout if a change of control
of the Company were accomplished within a specified period. Mr. Cummins base
salary ($150,000 per year) and option grant (50,000 shares) were set at
relatively modest levels for a chief executive officer given the narrow role he
was expected to play.
In connection with the expiration of the St. Jude acquisition option, and
based upon Mr. Cummins' performance on behalf of the Company since becoming an
executive officer, the Board acknowledged that Mr. Cummins role had shifted from
a temporary, limited purpose role to that of a customary chief executive officer
with and indefinite employment period and full management responsibility.
Accordingly, it was determined that Mr. Cummins' compensation, and in particular
Mr. Cummins' option holdings should be adjusted to fully reflect the
responsibilities of his position. The Board accordingly increased Mr. Cummins'
base salary to $200,000 per year and granted Mr. Cummins an option to purchase
an additional 300,000 shares of Common Stock at an exercise price equal to the
fair market value as of the date of grant.
REPRICING OF OPTIONS
As indicated above, in November 1996 (shortly after St. Jude's option to
acquire Cyberonics expired), the Board of Directors met to review and take
action upon a number of compensation issues. One issue of concern to the Board
of Directors was the fact that the trading price of the Company's Common Stock
had decreased significantly following expiration of the St. Jude acquisition
option and, as a result, many employees including executive officers were
holding stock options with exercise prices that were higher than the prevailing
market price of the Company's Common Stock. As a result, these options were
failing to provide the long term incentive for which they were intended.
Moreover, given the uncertainty facing Cyberonics following expiration of the
St. Jude option, the Board of Directors believed that it was critically
important that the Company retain its employees, including its executive
officers. Accordingly, in November 1996, the Board elected to extend an offer to
all optionees (including executive officers and non-employee directors) holding
stock options with exercise prices higher than the prevailing market price for
shares of the Company's Common Stock ($3.06) the opportunity to reprice such
"underwater" options to $3.06 per share.
Repriced options retained their original vesting provisions and term. As a
condition to the repricing, however, optionees agreed that the repriced options
would not be exercisable until the earlier of (i) December 31, 1997 or (ii) that
date on which the United States Food and Drug Administration
12
<PAGE>
Advisory Panel recommends approval of the Company's then pending Pre-Market
Approval Application. (The FDA Advisory Panel recommended such approval on June
27, 1997.)
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, compensation decisions were made by the entire Board of
Directors. Messrs. Cummins and Terry participated in deliberations regarding
compensation of executive officers but abstained from decisions relating to
their own compensation. No other member of the Company's Board of Directors has
previously served as an officer of the Company or any of its subsidiaries.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the
Securities and Exchange Commission (the "SEC"). Such officers, directors and
ten-percent stockholders are also required by SEC rules to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that, for the fiscal year ended June 30, 1997, all Section
16(a) filing requirements applicable to its officers, directors and ten-percent
stockholders were complied with.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain stockholders of the Company, including Messrs. Cummins and Terry,
Drs. Appel and Duffell and venture capital firms formerly affiliated with Mr.
Cummins, are entitled to certain registration rights with respect to the Common
Stock and certain stock options held by them.
In March 1997, the Company sold an aggregate of 1,534,374 shares of its
Common Stock to a group of investors for $4.44 per share. The price of the
Common Stock was determined in arm's length negotiations between the Company and
the lead investor (which was not affiliated with the Company), and was based
largely upon the prevailing market price of the Company's Common Stock at the
time the terms of the financing were negotiated. Mr. Cummins, Dr. Appel, Dr.
Duffell and a family member of Mr. Lunney purchased an aggregate of 82,627
shares of Common Stock in such financing on the same terms as all other
investors.
The Company's Bylaws provide that the Company is required to indemnify its
officers and directors to the fullest extent permitted by Delaware law,
including those circumstances in which indemnification would otherwise be
discretionary, and that the Company is required to advance expenses to its
officers and directors as incurred. Further, the Company has entered into
indemnification agreements with its officers and directors. The Company believes
that its charter and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
13
<PAGE>
PROPOSAL TO APPROVE 1997 STOCK PLAN
BACKGROUND
In October 1997, the Board of Directors adopted the 1997 Stock Plan and
reserved 1,000,000 shares of Common Stock for issuance thereunder. The 1997
Stock Plan was adopted by the Board because it determined that the Company did
not have a sufficient number of shares available for issuance under the
Company's prior option plans. The Board of Directors is seeking stockholder
approval of the 1997 Stock Plan. In addition, as described below, the Company
has granted certain stock options SUBJECT TO STOCKHOLDER APPROVAL of the 1997
Stock Plan. Accordingly, a vote "FOR" approval of the 1997 Stock Plan also
constitutes approval of the option grants described below.
Prior to adoption of this 1997 Stock Plan, the Company had the following
option plans in effect:
The 1988 Incentive Stock Plan was adopted in 1988 and, as of October 31,
1997, a total of 2,000,000 shares of Common Stock had been reserved for
issuance under such Plan, of which options to purchase 703,699 shares had
been exercised, options to purchase 1,261,702 shares were outstanding and
34,599 shares were available for future grant.
The 1996 Stock Option Plan was adopted in 1996 and, as of October 31,
1997, a total of 2,000,000 shares of Common Stock had been reserved for
issuance under such Plan, of which options to purchase 28,002 shares had
been exercised, options to purchase 1,918,243 shares were outstanding and
53,755 shares were available for grant.
NEW PLAN BENEFITS. The following table sets forth the number of options
that will be granted under the 1997 Stock Plan: (i) to the Named Executive
Officers; (ii) all executive officers as a group; (iii) all non-employee
directors as a group; and (iv) to all employees excluding executive officers:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND POSITION TO BE RECEIVED(1)
- ------------------------------------------------------------------------------ -----------------
<S> <C>
Robert P. Cummins ............................................................ 250,000
President and Chief Executive Officer
John K. Bakewell ............................................................. 50,000
Vice President, Finance and Administration, Chief Financial Officer
Stephen D. Ford .............................................................. 50,000
Vice President, Manufacturing
Shawn P. Lunney .............................................................. 50,000
Vice President, Marketing
Reese S. Terry, Jr. .......................................................... --
Executive Vice President
All Executive Officers as a Group (6 persons)................................. 500,000
All Non-Employee Directors as a Group (4 persons)............................. --
All Employees, excluding Executive Officers(2)................................ 500,000
</TABLE>
- ------------------------
(1) Information reflects actual options granted pursuant to the 1997 Stock Plan
as of October 31, 1997. Although the Board of Directors has no present
intention to do so, as described below, the Board of Directors has the
discretion to grant additional options to the executive officers or to
non-employee directors. To the extent that additional options are granted to
executive officers or non-employee directors, the number of shares available
for issuance to employees excluding executive officers would be reduced.
(2) Includes 75,000 shares subject to options granted in October 1997 and
425,000 shares remaining available for future grant.
14
<PAGE>
In the Fall of 1997, the Compensation Committee of the Board of Directors
conducted a review of the stock options held by the Company's executive officers
and certain other senior employees. This review revealed that approximately 80%
of the options held by such persons were vested. The Compensation Committee
determined that, in order to retain the Company's officers and senior employees,
and provide them incentives to continue to contribute to the success of the
Company, it was necessary to grant such persons additional options. Accordingly,
in October 1997, the Company granted the stock options set forth in the
preceding table (the "October 1997 Options"). Each of the October 1997 Options
will vest ratably over a five-year period from the date of grant. The exercise
price of the October 1997 Options will be the closing price of the Company's
Common Stock as reported on the Nasdaq National Market on the day preceding the
date of the Company's Annual Meeting of Stockholders. The grant of the October
1997 Options is conditioned upon the stockholders approving the 1997 Stock Plan.
In the event that the stockholders do not approve such plan, the October 1997
Options will be void. The Compensation Committee and the Board of Directors as a
whole believes that approval of the 1997 Stock Plan (and implicit approval of
the October 1997 Options) is important to the Company and in the best interests
of the Company's stockholders.
SECTION 162(m). In 1993, Section 162(m) was added to the Internal Revenue
Code of 1986, as amended. Section 162(m) limits the Company's deduction in any
one fiscal year for federal income tax purposes to $1,000,000 per person with
respect to the Company's Chief Executive Officer and its four other highest paid
executive officers who are employed on the last day of the fiscal year unless
the compensation was not otherwise subject to the deduction limit. Grants under
the 1997 Stock Plan will not be subject to the deduction limitation if the
stockholders approve the 1997 Stock Plan, including the option grant limitations
described below.
The approval of the adoption of the 1997 Stock Plan requires the affirmative
vote of the holders of a majority of the shares of the Company's Common Stock
represented, in person or by proxy, and voting at the Annual Meeting. THE
COMPENSATION COMMITTEE AND THE BOARD OF DIRECTORS AS A WHOLE RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE 1997 STOCK PLAN.
SUMMARY OF THE 1997 STOCK PLAN
GENERAL. The purpose of the 1997 Stock Plan is to attract and retain the
best available persons for positions of substantial responsibility with the
Company, to provide additional incentive to the employees, directors and
consultants of the Company and to promote the success of the Company's business.
Options granted under the 1997 Stock Plan may be either "incentive stock
options," as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or non-statutory stock options. In addition, awards of, as
well as rights to purchase, shares of the Company's common stock ("Stock
Rights") may be granted under the 1997 Stock Plan.
ADMINISTRATION. The 1997 Stock Plan may generally be administered by the
Compensation Committee of the Board (the "Administrator"). Subject to the other
provisions of the 1997 Stock Plan, the Board has the authority to (i) interpret
the 1997 Stock Plan and apply its provisions; (ii) prescribe, amend or rescind
rules and regulations relating to the 1997 Stock Plan; (iii) select the persons
to whom options and Stock Rights are to be granted; (iv) determine the number of
shares to be made subject to each option or Stock Right; (v) reduce the exercise
price of any option to the then current fair market value; (vi) prescribe the
terms and conditions of each option or Stock Right; (vii) amend any outstanding
option or Stock Right, subject to applicable legal and 1997 Stock Plan
restrictions; (viii) authorize any person to execute, on behalf of the Company,
any instrument required to effect the grant of an option or Stock Right; and
(ix) take any other actions deemed necessary or advisable for the administration
of the 1997 Stock Plan. All decisions, interpretations and other actions of the
Administrator shall be final and binding on all holders of options and Stock
Rights and on all persons deriving their rights therefrom.
15
<PAGE>
ELIGIBILITY, LIMITATIONS. Non-statutory stock options and Stock Rights may
be granted under the 1997 Stock Plan to employees, directors and consultants of
the Company or any parent or subsidiary of the Company. Incentive stock options
may be granted only to employees of the Company or any parent or subsidiary of
the Company.
As discussed above, Section 162(m) of the Code places limits on the
deductibility for federal income tax purposes of compensation paid to certain
executive officers of the Company. In order to preserve the Company's ability to
deduct the compensation income associated with options granted to such persons,
the 1997 Stock Plan provides that no employee may be granted, in any fiscal year
of the Company, options to purchase more than 350,000 shares of common stock.
Notwithstanding this limit, however, in connection with an employee's initial
employment, he or she may be granted options to purchase up to an additional
50,000 shares of common stock.
TERMS AND CONDITIONS OF OPTIONS. Each option granted under the 1997 Stock
Plan is evidenced by a written stock option agreement between the Company and
the optionee, and is subject to the following additional terms and conditions:
(a) EXERCISE PRICE. The Administrator determines the exercise price of
options at the time the options are granted. The exercise of an incentive
stock option may not be less than 100% of the fair market value of the
common stock on the date such option is granted; provided, however, the
exercise of an incentive stock option granted to a 10% stockholder may not
be less than 110% of the fair market value of the common stock on the date
such option is granted. The fair market value of the common stock is
generally determined with reference to the closing sale price for the common
stock (or the closing bid if no sales were reported) on the last market
trading day prior to the date the option is granted. The exercise price of a
non-statutory stock option may be determined by the Administrator, provided
however, the exercise price of a non-statutory stock option intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code may not be less than 100% of the fair market value of the
common stock on the date of grant.
(b) EXERCISE OF OPTION. The Administrator determines when options
become exercisable, and may in its discretion, accelerate the vesting of any
outstanding option.
(c) FORM OF CONSIDERATION. The means of payment for shares issued upon
exercise of an option is specified in each option agreement. The 1997 Stock
Plan permits payment to be made by cash, check, promissory note, other
shares of common stock of the Company (with some restrictions), cashless
exercise, a reduction in the amount of any Company liability to the
optionee, any other form of consideration permitted by applicable law, or
any combination thereof.
(d) TERM OF OPTION. The term of an incentive stock option may be no
more than ten years from the date of grant; provided that in the case of an
incentive stock option granted to a 10% stockholder, the term of the option
may be no more than five years from the date of grant. No option may be
exercised after the expiration of its term.
(e) TERMINATION OF EMPLOYMENT. If an optionee's employment,
directorship or consulting relationship terminates for any reason (other
than death or disability), then all options held by the optionee under the
1997 Stock Plan expire on the earlier of: (i) the date set forth in his or
her notice of grant or stock option agreement; or (ii) the expiration date
of such option. To the extent the option is exercisable at the time of such
termination, the optionee may exercise all or part of his or her option at
any time before its termination.
(f) PERMANENT DISABILITY; DEATH. If an optionee's employment,
directorship or consulting relationship terminates as a result of permanent
and total disability (as defined in the Code) or death, then all options
held by such optionee under the 1997 Stock Plan will generally expire on the
earlier of: (i) twelve months from the date of termination of optionee's
employment; or (ii) the expiration date of the option. The optionee or, if
applicable, the executor or other legal representative of the
16
<PAGE>
optionee's estate may exercise all or part of the optionee's option at any
time before such expiration to the extent that such option was exercisable
at the time of termination of employment.
(g) NONTRANSFERABILITY OF OPTIONS. Options granted under the 1997 Stock
Plan generally are not transferable other than by will or the laws of
descent and distribution, and generally may be exercised during the
optionee's lifetime only by the optionee.
(h) VALUE LIMITATION. If the aggregate fair market value of all shares
of common stock subject to an optionee's incentive stock option which are
exercisable for the first time during any calendar year exceeds $100,000,
the excess portion of such option will be treated as a non-statutory stock
option.
(i) OTHER PROVISIONS. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 1997 Stock Plan
as may be determined by the Administrator.
STOCK RIGHTS. A Stock Right may award the recipient common stock or may
give the recipient the right to purchase common stock. Shares received or
purchased pursuant to a Stock Right are subject to a restricted stock agreement
between the Company and the recipient. Unless the Administrator determines
otherwise, the restricted stock agreement shall give the Company a reacquisition
option exercisable upon the voluntary or involuntary termination of the
recipient's employment or consulting relationship with the Company for any
reason (including death and disability). The acquisition price for any shares
reacquired by the Company shall be the original price paid by the recipient, if
any. The reacquisition option lapses at a rate determined by the Administrator.
A Stock Right and the stock acquired pursuant thereto (while restricted) is
generally nontransferable other than by will or the laws of descent and
distribution.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event that the stock of
the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar changes in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments will be made in the number and class of shares of stock
subject to the 1997 Stock Plan, the number and class of shares of stock subject
to any option or Stock Right outstanding under the 1997 Stock Plan, and the
exercise price of any such award. In the event of a liquidation or dissolution,
any unexercised options will terminate. The Administrator may, in its
discretion, provide that each optionee will fully vest in and have the right to
exercise the optionee's option or Stock Right as to all of the optioned stock,
and shall release all restrictions on any restricted stock prior to the
consummation of the liquidation or dissolution.
In connection with any merger, consolidation, acquisition of assets or like
occurrence involving the Company that is not a change of control, each
outstanding option or Stock Right shall be assumed or an equivalent option or
right substituted by the successor corporation. If the successor corporation
refuses to assume the options or Stock Rights or to substitute substantially
equivalent options or rights, the optionee shall fully vest in and have the
right to exercise the option or Stock Right as to all of the optioned stock and
any restrictions shall lapse with respect to restricted stock. In such event,
the Administrator shall notify the optionee that the option or Stock Right is
fully vested and exercisable for fifteen (15) days from the date of such notice,
that the option or Stock Right shall terminate upon expiration of such period,
and that all restrictions have lapsed with respect to their restricted shares.
In connection with any change of control of the Company, the optionee shall
fully vest in and have the right to exercise the optionee's options or Stock
Rights as to all of the optioned stock, and any restrictions shall lapse with
respect to any unreleased restricted stock. In such event, the Administrator
shall notify the optionee that the option or Stock Right is fully vested and
exercisable for fifteen (15) days from the date of such notice, that the option
or Stock Purchase Right shall terminate upon expiration of such period, and that
restrictions have been released on restricted shares. A change of control is
defined to include certain mergers, asset sales, or consolidations, the
acquisition of more than fifty percent (50%) of the Company by any person or
certain changes in the composition of the Board of Directors.
17
<PAGE>
AMENDMENT AND TERMINATION OF THE 1997 STOCK PLAN. The Board may amend,
alter, suspend or terminate the 1997 Stock Plan, or any part thereof, at any
time and for any reason. No such action by the Board or stockholders may alter
or impair any option or Stock Right previously granted under the 1997 Stock Plan
without the written consent of the optionee/recipient. Unless terminated
earlier, the 1997 Stock Plan will terminate ten years from the date of its
approval by the stockholders or the Board, whichever is earlier.
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. An optionee who is granted an incentive stock
option does not generally recognize taxable income at the time the option is
granted or upon its exercise, although the exercise may subject the optionee to
the alternative minimum tax. Upon a disposition of the shares more than two
years after grant of the option and one year after exercise of the option, any
gain or loss is treated as long-term capital gain or loss. If these holding
periods are not satisfied, the optionee recognizes ordinary income at the time
of disposition equal to the difference between the exercise price and the lower
of (i) the fair market value of the shares at the date of the option exercise or
(ii) the sale price of the shares. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated as ordinary
income is treated as long-term or short-term capital gain or loss, depending on
the holding period. A different rule for measuring ordinary income upon such a
premature disposition may apply if the optionee is an officer, director, or 10%
stockholder of the Company. The Company is entitled to a deduction in the same
amount as the ordinary income recognized by the optionee.
NON-STATUTORY STOCK OPTIONS. An optionee does not recognize any taxable
income at the time he or she is granted a non-statutory stock option. Upon
exercise, the optionee recognizes taxable income generally by the excess of the
then fair market value of the shares over the exercise price. Any taxable income
recognized in connection with an option exercise by an employee of the Company
is subject to tax withholding by the Company. The Company is entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Upon a disposition of such shares by the optionee, any difference between the
sale price and the optionee's exercise price, to the extent not recognized as
taxable income as provided above, is treated as long-term or short-term capital
gain or loss, depending on the holding period.
STOCK RIGHTS. Restricted stock is generally acquired pursuant to Stock
Rights. At the time of acquisition, restricted stock is subject to a
"substantial risk of forfeiture" within the meaning of Section 83 of the Code.
As a result, the recipient will not generally recognize ordinary income at the
time of acquisition. Instead, the recipient will recognize ordinary income on
the dates when the stock ceases to be subject to a substantial risk of
forfeiture. The stock will generally cease to be subject to a substantial risk
of forfeiture when it is no longer subject to the Company's right to reacquire
the stock upon the recipient's termination of employment with the Company. At
such times, the recipient will recognize ordinary income measured as the
difference between the purchase price (if any) and the fair market value of the
stock on the date the stock is no longer subject to a substantial risk of
forfeiture.
The purchaser may accelerate to the date of acquisition his or her
recognition of ordinary income, if any, and the beginning of any capital gain
holding period, by timely filing an election pursuant to Section 83(b) of the
Code. In such event, the ordinary income recognized, if any, is measured as the
difference between the purchase price and the fair market value of the stock on
the date of purchase and the capital gain holding period commences on such date.
The ordinary income recognized by a purchaser who is an employee will be subject
to tax withholding by the Company. Different rules may apply if the purchaser is
also an officer, director, or 10% stockholder of the Company.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF
OPTIONS, AND UPON RECIPIENTS OF STOCK RIGHTS, UNDER THE 1997 STOCK PLAN. IT DOES
NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF THE
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EMPLOYEE'S, DIRECTOR'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE INCOME TAX
LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE EMPLOYEE,
DIRECTOR OR CONSULTANT MAY RESIDE.
REQUIRED VOTE
At the Annual Meeting, the stockholders are being asked to approve the
adoption of the 1997 Stock Plan. The affirmative vote of the holders of a
majority of the shares entitled to vote at the Annual Meeting will be required
to approve the adoption of the 1997 Stock Plan. THE BOARD OF DIRECTORS
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE COMPANY'S 1997 STOCK
PLAN.
PROPOSAL TO RATIFY APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Management has selected Arthur Andersen LLP, independent accountants, to
audit the books, records and accounts of the Company for the current fiscal year
ending June 30, 1998. Arthur Andersen LLP has audited the Company's financial
statements since the fiscal year ended June 30, 1987.
The affirmative vote of the holders of a majority of the Company's Common
Stock represented and voting at the meeting will be required to approve and
ratify the Board's selection of Arthur Andersen LLP The Board of Directors
recommends voting "FOR" approval and ratification of such selection. In the
event of a negative vote on such ratification, the Board of Directors will
reconsider its selection.
A representative of Arthur Andersen LLP is expected to be available at the
Annual Meeting to make a statement if such representative desires to do so and
to respond to appropriate questions. THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE FOR RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS
THE COMPANY'S INDEPENDENT ACCOUNTANTS.
OTHER MATTERS
Management does not intend to bring before the meeting any matters other
than those set forth herein, and has no present knowledge that any other matters
will or may be brought before the meeting by others. However, if any other
matters properly come before the meeting, it is the intention of the persons
named in the enclosed form of proxy to vote the proxies in accordance with their
judgement.
BY ORDER OF THE BOARD OF DIRECTORS
Reese S. Terry, Jr.
Secretary
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CYBERONICS, INC.
1997 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees, Directors
and Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Options or Stock Rights are, or
will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the common stock of the Company.
(g) "COMPANY" means Cyberonics, Inc., a Delaware corporation.
(h) "CONSULTANT" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
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(j) "DISABILITY" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed
by statute or contract. If reemployment upon expiration of a leave of
absence approved by the Company is not so guaranteed, on the 181st day of
such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as
a Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment"
by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination, as
reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the last market trading day prior to the
day of determination, as reported in THE WALL STREET JOURNAL or such other
source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code
and the regulations promulgated thereunder.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "NOTICE OF GRANT" means a written or electronic notice
evidencing certain terms and conditions of an individual Option or Stock
Right grant.
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(q) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(t) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise price.
(u) "OPTIONED STOCK" means the Common Stock subject to an Option
or Stock Right.
(v) "OPTIONEE" means the holder of an outstanding Option or Stock
Right granted under the Plan.
(w) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(x) "PLAN" means this 1997 Stock Plan.
(y) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Right under Section 11 of the Plan.
(z) "RESTRICTED STOCK AGREEMENT" means a written agreement between
the Company and the Optionee evidencing the terms and restrictions applying
to stock received under a Stock Right. The Restricted Stock Agreement is
subject to the terms and conditions of the Plan and the Notice of Grant.
(aa) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor rule or provision.
(bb) "SECTION 16(b)" means Section 16(b) of the Exchange Act.
(cc) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(dd) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "STOCK RIGHT" means a right to acquire Common Stock pursuant
to Section 11 of the Plan, as evidenced by a Notice of Grant.
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(ff) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 1,000,000. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Right expires or becomes unexercisable without
having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated); PROVIDED, however, that Shares that have actually been issued
under the Plan, whether upon exercise of an Option or Stock Right, shall not
be returned to the Plan and shall not become available for future
distribution under the Plan, except that if Shares of Restricted Stock are
reacquired by the Company at their original purchase price (if any), such
Shares shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different groups of
Service Providers.
(ii) SECTION 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above,
the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Rights may be granted hereunder;
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(iii) to determine the number of shares of Common Stock to
be covered by each Option and Stock Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option or Stock Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Rights may be
exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Right of the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Right shall have declined since
the date the Option or Stock Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax
treatment under foreign tax laws;
(x) to modify or amend each Option or Stock Right
(subject to Section 15(c) of the Plan), including the discretionary authority
to extend the post-termination exercisability period of Options longer than
is otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Right that number of Shares having
a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by
an Optionee to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary or
advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
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(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on
all Optionees and any other holders of Options or Stock Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Rights
may be granted to Service Providers. Incentive Stock Options may be
granted only to Employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Option Agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by the
Optionee during any calendar year (under all plans of the Company and
any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in
the order in which they were granted. The Fair Market Value of the
Shares shall be determined as of the time the Option with respect to
such Shares is granted.
(b) Neither the Plan nor any Option or Stock Right shall
confer upon an Optionee any right with respect to continuing the
Optionee's relationship as a Service Provider with the Company, nor
shall they interfere in any way with the Optionee's right or the
Company's right to terminate such relationship at any time, with or
without cause.
(c) The following limitations shall apply to grants of
Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than 250,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider may be granted Options to purchase up to an additional
250,000 Shares which shall not count against the limit set forth in
subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of
the Company in which it was granted (other than in connection with a
transaction described in Section 13), the cancelled Option will be counted
against the limits set forth in subsections (i) and (ii) above. For this
purpose, if the exercise price of an Option is reduced, the transaction will
be treated as a cancellation of the Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of
the Plan.
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8. TERM OF OPTION. The term of each Option shall be stated in the
Option Agreement. In the case of an Incentive Stock Option, the term shall
be ten (10) years from the date of grant or such shorter term as may be
provided in the Option Agreement. Moreover, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Incentive Stock Option shall be five
(5) years from the date of grant or such shorter term as may be provided in
the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. In the case of
a Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value
per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied
before the Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the
time of grant. Such consideration may consist entirely of:
(i) cash;
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(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be tolled during any
unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by
the Administrator and permitted by the Option Agreement and the Plan. Shares
issued upon exercise of an Option shall be issued in the name of the Optionee
or, if requested by the Optionee, in the name of the Optionee and his or her
spouse. Until the Shares are issued (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such Shares promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the Shares are issued, except as provided in Section 13 of the Plan.
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Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's
death or Disability, the Optionee may exercise his or her Option within such
period of time as is specified in the Option Agreement to the extent that the
Option is vested on the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified by the Administrator, the Option
shall terminate, and the Shares covered by such Option shall revert to the
Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise
his or her Option within such period of time as is specified in the Option
Agreement to the extent the Option is vested on the date of termination (but
in no event later than the expiration of the term of such Option as set forth
in the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by
the unvested portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later than the expiration
of the term of such Option as set forth in the Notice of Grant), by the
Optionee's estate or by a person who acquires the right to exercise the
Option by bequest or inheritance, but only to the extent that the Option is
vested on the date of death. In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, at the time of death, the Optionee
is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall immediately revert to the Plan. The
Option may be exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the Option under
the Optionee's will or the laws of descent or distribution. If the Option is
not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
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11. STOCK RIGHTS.
(a) GRANT. Stock Rights may be issued either alone, in addition
to, or in tandem with other awards granted under the Plan and/or cash awards
made outside of the Plan. After the Administrator determines that it will
offer Stock Rights under the Plan, it shall advise the offeree in writing or
electronically, by means of a Notice of Grant, of the terms, conditions and
restrictions related to the offer, including the number of Shares subject to
the Stock Right, the price to be paid (if any), and the time within which the
offeree must accept such offer. The offer shall be accepted by execution of
a Restricted Stock Agreement in such form as is determined by the
Administrator.
(b) REACQUISITION OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Agreement shall grant the Company a
reacquisition option exercisable upon the voluntary or involuntary
termination of the recipient's status as a Service Provider for any reason
(including death or Disability) . The reacquisition price (if any) for
Shares reacquired pursuant to the Restricted Stock Agreement shall be
determined by the Administrator and may be paid by cancellation of any
indebtedness of the recipient to the Company. The reacquisition option shall
lapse at a rate determined by the Administrator.
(c) OTHER PROVISIONS. The Restricted Stock Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) RIGHTS AS A SHAREHOLDER. Once Restricted Stock is acquired
pursuant to a Stock Right, the recipient shall have rights equivalent to
those of a shareholder, and shall be a shareholder when his or her
acquisition is entered upon the records of the duly authorized transfer agent
of the Company. No adjustment will be made for a dividend or other right for
which the record date is prior to the date of issuance of Common Stock
pursuant to a Stock Right, except as provided in Section 13 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK RIGHTS. Unless determined
otherwise by the Administrator, an Option or Stock Right may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Right transferable, such Option or
Stock Right shall contain such additional terms and conditions as the
Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Rights have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option or Stock
Right, as well as the price per share of Common Stock covered by each such
outstanding Option or Stock Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a
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stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an Option or Stock Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until fifteen (15)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company
reacquisition option applicable to any Shares acquired upon exercise of an
Option or Stock Right shall lapse as to all such Shares, provided the
proposed dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option
or Stock Right will terminate immediately prior to the consummation of such
proposed action.
(c) MERGER OR ASSET SALE. Subject to Section 13(d), in the event
of a merger of the Company with or into another corporation, or the sale of
substantially all of the assets of the Company, each outstanding Option and
Stock Right shall be assumed or an equivalent option or right substituted by
the successor corporation or a Parent or Subsidiary of the successor
corporation. In the event that the successor corporation refuses to assume
or substitute for the Option or Stock Right, the Optionee shall fully vest in
and have the right to exercise the Option or Stock Right as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested
or exercisable, and any Company reacquisition option applicable to any Shares
acquired upon exercise of an Option or Stock Right shall lapse as to all such
Shares. If an Option or Stock Right becomes fully vested and exercisable in
lieu of assumption or substitution in the event of a merger or sale of
assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Right shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice,
and the Option or Stock Right shall terminate upon the expiration of such
period. For the purposes of this paragraph, the Option or Stock Right shall
be considered assumed if, following the merger or sale of assets, the option
or right confers the right to purchase or receive, for each Share of Optioned
Stock subject to the Option or Stock Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities
or property) received in the merger or sale of assets by holders of Common
Stock for each Share held on the effective date of the transaction (and if
holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets
is not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option or Stock
Right, for each Share of Optioned Stock subject to the Option or Stock Right,
to be solely common stock of
A-11
<PAGE>
the successor corporation or its Parent equal in fair market value to the per
share consideration received by holders of Common Stock in the merger or sale
of assets.
(d) CHANGE OF CONTROL. In the event of a Change of Control (as
defined below), the Optionee shall fully vest in and have the right to
exercise the Option or Stock Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable, and any
Company reacquisition option applicable to any Shares acquired upon exercise
of an Option or Stock Right shall lapse as to all such Shares. If an Option
or Stock Right becomes fully vested and exercisable as the result of a Change
of Control, the Administrator shall notify the Optionee in writing or
electronically prior to the Change of Control that the Option or Stock Right
shall be fully vested and exercisable for a period of fifteen (15) days from
the date of such notice, and the Option or Stock Right shall terminate upon
the expiration of such period. For purposes of this Plan, a "Change of
Control" means the happening of any of the following events:
(i) When any "person," as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), other than the Company, a subsidiary of the Company or a
Company employee benefit plan, including any trustee of such plan acting as
trustee, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the combined voting power of the
Company's then outstanding securities entitled to vote generally in the
election of directors; or
(ii) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the
shareholders of the Company approve an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets; or
(iii) A change in the composition of the Board of
Directors of the Company, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date the Plan
is approved by the shareholders, or (B) are elected, or nominated for
election, to the Board of Directors of the Company with the affirmative votes
of at least a majority of the Incumbent Directors at the time of such
election or nomination (but shall not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest
relating to the election of directors to the Company).
14. DATE OF GRANT. The date of grant of an Option or Stock Right shall
be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Right, or such other later date
as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such
grant.
A-12
<PAGE>
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder with
respect to Options granted under the Plan prior to the date of such
termination.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Right unless the exercise of such Option or
Stock Right and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for
the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option or Stock Right, the Company may require the person exercising such
Option or Stock Right to represent and warrant at the time of any such
exercise that the Shares are being acquired only for investment and without
any present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
19. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan
is adopted. Such shareholder approval shall be obtained in the manner and to
the degree required under Applicable Laws.
A-13
<PAGE>
CYBERONICS, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan
shall have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name, Address and Social Security Number]
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule: 1/60th of the Shares subject
to the Option shall vest
each month after the Vesting
Commencement Date until the
Option is fully vested,
subject to the Optionee
continuing to be a Service
Provider on such dates.
Termination Period: This Option may be exercised
for ninety (90) days after
Optionee ceases to be a
Service Provider. Upon the
death or Disability of the
Optionee, this Option may be
exercised one (1) year after
Optionee ceases to be a
Service Provider. In no
<PAGE>
event shall this Option be
exercised later than the
Term/Expiration Date as
provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby
grants to the Optionee named in the Notice of Grant attached as Part I of
this Agreement (the "Optionee") an option (the "Option") to purchase the
number of Shares, as set forth in the Notice of Grant, at the exercise price
per share set forth in the Notice of Grant (the "Exercise Price"), subject to
the terms and conditions of the Plan, which is incorporated herein by
reference. Subject to Section 15(c) of the Plan, in the event of a conflict
between the terms and conditions of the Plan and the terms and conditions of
this Option Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option under Section
422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and
the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise
Notice"), which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the Company pursuant to the provisions of the Plan. The Exercise Notice
shall be completed by the Optionee and delivered to the Director of Corporate
Compliance or to the Secretary of the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the
Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option unless
such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect
to such Exercised Shares.
3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall
be by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
B-2
<PAGE>
(b) check; or
(c) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares; or
4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by the
Optionee. The terms of the Plan and this Option Agreement shall be binding
upon the executors, administrators, heirs, successors and assigns of the
Optionee.
5. TERM OF OPTION. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. TAX CONSEQUENCES. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISING THE OPTION.
(i) NONSTATUTORY STOCK OPTION. The Optionee may incur
regular federal income tax liability upon exercise of a NSO. The Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the Fair Market Value of
the Exercised Shares on the date of exercise over their aggregate Exercise
Price. If the Optionee is an Employee or a former Employee, the Company will
be required to withhold from his or her compensation or collect from Optionee
and pay to the applicable taxing authorities an amount in cash equal to a
percentage of this compensation income at the time of exercise, and may
refuse to honor the exercise and refuse to deliver Shares if such withholding
amounts are not delivered at the time of exercise.
(ii) INCENTIVE STOCK OPTION. If this Option qualifies as
an ISO, the Optionee will have no regular federal income tax liability upon
its exercise, although the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price
will be treated as an adjustment to alternative minimum taxable income for
federal tax purposes and may subject the Optionee to alternative minimum tax
in the year of exercise. In the event that the Optionee ceases to be an
Employee but remains a Service Provider, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive
Stock Option and will be treated for tax
B-3
<PAGE>
purposes as a Nonstatutory Stock Option on the date three (3) months and one
(1) day following such change of status.
(b) DISPOSITION OF SHARES.
(i) NSO. If the Optionee holds NSO Shares for at least
one year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least
one year after exercise and two years after the grant date, any gain realized
on disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within
one year after exercise or two years after the grant date, any gain realized
on such disposition will be treated as compensation income (taxable at
ordinary income rates) to the extent of the excess, if any, of the lesser of
(A) the difference between the Fair Market Value of the Shares acquired on
the date of exercise and the aggregate Exercise Price, or (B) the difference
between the sale price of such Shares and the aggregate Exercise Price. Any
additional gain will be taxed as capital gain, short-term or long-term
depending on the period that the ISO Shares were held.
(c) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant
to an ISO on or before the later of (i) two years after the grant date, or
(ii) one year after the exercise date, the Optionee shall immediately notify
the Company in writing of such disposition. The Optionee agrees that he or
she may be subject to income tax withholding by the Company on the
compensation income recognized from such early disposition of ISO Shares by
payment in cash or out of the current earnings paid to the Optionee.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein
by reference. The Plan and this Option Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and
supersede in their entirety all prior undertakings and agreements of the
Company and Optionee with respect to the subject matter hereof, and may not
be modified adversely to the Optionee's interest except by means of a writing
signed by the Company and Optionee. This agreement is governed by the
internal substantive laws, but not the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES
AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE
HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL
OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED
AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT
AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S
RIGHT TO TERMINATE
B-4
<PAGE>
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and
governed by the terms and conditions of the Plan and this Option Agreement.
Optionee has reviewed the Plan and this Option Agreement in their entirety,
has had an opportunity to obtain the advice of counsel prior to executing
this Option Agreement and fully understands all provisions of the Plan and
Option Agreement. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Administrator upon any
questions relating to the Plan and Option Agreement. Optionee further agrees
to notify the Company upon any change in the residence address indicated
below.
OPTIONEE: CYBERONICS, INC.
_______________________________ _______________________________________
Signature By:
_______________________________ _______________________________________
Social Security Number Title:
_______________________________
Printed Name
_______________________________
Residence Address
B-5
<PAGE>
EXHIBIT A
1997 STOCK PLAN
EXERCISE NOTICE
Cyberonics, Inc.
__________________
__________________
Attention: Chief Financial Officer
1. EXERCISE OF OPTION. Effective as of today, ___________, ___,
____, the undersigned ("Purchaser") hereby elects to purchase ______________
shares (the "Shares") of the Common Stock of Cyberonics, Inc. (the "Company")
under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock Option
Agreement dated _______________, 19___ (the "Option Agreement"). The
purchase price for the Shares shall be $_______________, as required by the
Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the
Company the full purchase price for the Shares.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that
Purchaser has received, read and understood the Plan and the Option Agreement
and agrees to abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the Shares, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
the Optioned Stock, notwithstanding the exercise of the Option. The Shares
so acquired shall be issued to the Optionee as soon as practicable after
exercise of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date of issuance, except as
provided in Section 13 of the Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition
of the Shares. Purchaser represents that Purchaser has consulted with any
tax consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company
for any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and Purchaser with respect to the subject
matter hereof,
<PAGE>
and may not be modified adversely to the Purchaser's interest except by means
of a writing signed by the Company and Purchaser. This agreement is governed
by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER: CYBERONICS, INC.
_________________________________ _____________________________________
Signature By:
_________________________________ _____________________________________
Print Name Its:
_________________________________
Social Security Number
Address: Address:
- -------- --------
_________________________________ Cyberonics, Inc.
_________________________________ _____________________________________
_________________________________ _____________________________________
Date Received
-2-
<PAGE>
EXHIBIT B
SECURITY AGREEMENT
This Security Agreement is made as of __________, 19___ between
Cyberonics, Inc., a Delaware corporation ("Pledgee"), and
_________________________ ("Pledgor").
RECITALS
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated ________ (the "Option"), between Pledgor and Pledgee under
Pledgee's 1997 Stock Plan, and Pledgor's election under the terms of the
Option to pay for such shares with his promissory note (the "Note"), Pledgor
has purchased _________ shares of Pledgee's Common Stock (the "Shares") at a
price of $________ per share, for a total purchase price of $__________. The
Note and the obligations thereunder are as set forth in Exhibit C to the
Option.
NOW, THEREFORE, it is agreed as follows:
1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee
("Pledgeholder"), who shall hold said certificate subject to the terms and
conditions of this Security Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the
Pledgeholder as security for the repayment of the Note, and any extensions or
renewals thereof, to be executed by Pledgor pursuant to the terms of the
Option, and the Pledgeholder shall not encumber or dispose of such Shares
except in accordance with the provisions of this Security Agreement.
2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to
enter into this Security Agreement, Pledgor represents and covenants to
Pledgee, its successors and assigns, as follows:
a. PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum
of the Note secured hereby, together with interest thereon, at the time and
in the manner provided in the Note.
b. ENCUMBRANCES. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without
the prior written consent of Pledgee.
<PAGE>
c. MARGIN REGULATIONS. In the event that Pledgee's Common Stock
is now or later becomes margin-listed by the Federal Reserve Board and
Pledgee is classified as a "lender" within the meaning of the regulations
under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation
G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the
Note or providing any additional collateral as may be necessary to comply
with such regulations.
3. VOTING RIGHTS. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the
terms of the Note, Pledgor shall have the right to vote all of the Shares
pledged hereunder.
4. STOCK ADJUSTMENTS. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are
declared or made in the capital structure of Pledgee, all new, substituted
and additional shares or other securities issued by reason of any such change
shall be delivered to and held by the Pledgee under the terms of this
Security Agreement in the same manner as the Shares originally pledged
hereunder. In the event of substitution of such securities, Pledgor, Pledgee
and Pledgeholder shall cooperate and execute such documents as are reasonable
so as to provide for the substitution of such Collateral and, upon such
substitution, references to "Shares" in this Security Agreement shall include
the substituted shares of capital stock of Pledgor as a result thereof.
5. OPTIONS AND RIGHTS. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then
held by Pledgeholder shall be immediately delivered to Pledgeholder, to be
held under the terms of this Security Agreement in the same manner as the
Shares pledged.
6. DEFAULT. Pledgor shall be deemed to be in default of the Note and
of this Security Agreement in the event:
a. Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
b. Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the
California Commercial Code.
7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal
of the Note. The number of the pledged Shares which shall be released shall
be that number of full Shares which bears the same proportion to the initial
number of Shares pledged hereunder as the payment of principal bears to the
initial full principal amount of the Note.
-2-
<PAGE>
8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. TERM. The within pledge of Shares shall continue until the payment
of all indebtedness secured hereby, at which time the remaining pledged stock
shall be promptly delivered to Pledgor, subject to the provisions for prior
release of a portion of the Collateral as provided in paragraph 7 above.
10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for
the property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due
and payable, and Pledgee may proceed as provided in the case of default.
11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his
acts, or omissions to act, as Pledgeholder.
12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree
that the enforceability or invalidity of any provision or provisions of this
Security Agreement shall not render any other provision or provisions herein
contained unenforceable or invalid.
13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective
successors and assigns, and that the term "Pledgor" and the term "Pledgee" as
used herein shall be deemed to include, for all purposes, the respective
designees, successors, assigns, heirs, executors and administrators.
14. GOVERNING LAW. This Security Agreement shall be interpreted and
governed under the internal substantive laws, but not the choice of law
rules, of Texas.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
"PLEDGOR" __________________________________________
Signature
__________________________________________
Print Name
__________________________________________
Social Security Number
__________________________________________
Address
__________________________________________
"PLEDGEE" Cyberonics, Inc.,
a Delaware corporation
By:_______________________________________
Signature
__________________________________________
Print Name
Its:_______________________________________
Title
"PLEDGEHOLDER" __________________________________________
Signature
__________________________________________
Print Name
Title: Secretary of Cyberonics, Inc.
-4-
<PAGE>
EXHIBIT C
NOTE
$_______________ Webster, Texas
______________, 19___
FOR VALUE RECEIVED, _______________________ promises to pay to
Cyberonics, Inc., a Delaware corporation (the "Company"), or order, the
principal sum of _______________________ ($_____________), together with
interest on the unpaid principal hereof from the date hereof at the rate of
_______________ percent (____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on __________, 19___.
Payment of principal and interest shall be made in lawful money of the United
States of America.
The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith
and is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the
undersigned, and shall not be required to proceed against the collateral
securing this Note in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of
the Company, be accelerated, and the whole unpaid balance on this Note of
principal and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by
the undersigned.
____________________________________
Signature
_______________________________ ____________________________________
Social Security Number Printed Name
<PAGE>
DETACH HERE CYD1
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CYBERONICS, INC.
ANNUAL MEETING OF STOCKHOLDERS - JANUARY 8, 1998
The undersigned stockholder of Cyberonics, Inc., a Delaware corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders
and Proxy Statement for the Annual Meeting of Stockholders, and hereby
appoints Robert P. Cummins and John K. Bakewell, and each of them, proxies
and attorneys-in-fact, with full power of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the Annual Meeting
of Stockholders of Cyberonics, Inc., to be held on January 8, 1998, at 9:00
a.m., local time, at the South Shore Harbor Resort & Conference Center, 3500
South Shore Boulevard, League City, Texas, and at any adjournment or
adjournments thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if then and there personally present,
on the matters set forth on the reverse side.
A majority of such attorneys and substitutes as shall be present and
shall act at said meeting or any adjournment or adjournments thereof (or if
only one shall be present and act, then that one) shall have and may exercise
all of the powers of said attorney-in-fact hereunder.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
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DETACH HERE CYD1
/X/ Please mark
votes as in
this example.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR APPROVAL OF
THE COMPANY'S 1997 STOCK PLAN, FOR THE RATIFICATION OF THE APPOINTMENT
OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS, AND AS SAID
PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE
MEETING.
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FOR AGAINST ABSTAIN
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1. ELECTION OF DIRECTORS. 2. PROPOSAL TO APPROVE THE / / / / / /
COMPANY'S 1997 STOCK PLAN.
NOMINEES: Robert P. Cummins;
Reese S. Terry, Jr.;
Thomas A. Duerden, Ph.D.;
Stanley H. Appel, M.D.;
Tony Coelho;
Michael J. Strauss, M.D.
FOR WITHHELD 3. PROPOSAL TO RATIFY THE APPOINT- / / / / / /
/ / / / MENT OF ARTHUR ANDERSEN LLP
AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE
1998 FISCAL YEAR.
/ / _________________________________________
For all nominations except as noted above and upon such other matter or matters which may properly come
before the meeting or any adjournment or adjournments thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
(This proxy should be dated, signed by the
stockholder(s) exactly as his or her name
appears hereon and returned promptly in the
enclosed envelope. Persons signing in a fiduciary
capacity should so indicate. If the shares are held
by joint tenants or as community property, both
should sign.)
Signature: ________________________ Date: _________________ Signature: ___________________ Date: ______________
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