<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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 240.141-11(c) or Section
240.14a-12
Cyberonics, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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:
N/A
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
N/A
------------------------------------------------------------------------
(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):
N/A
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
N/A
------------------------------------------------------------------------
(5) Total fee paid:
N/A
------------------------------------------------------------------------
/ / 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:
N/A
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
N/A
------------------------------------------------------------------------
(3) Filing Party:
N/A
------------------------------------------------------------------------
(4) Date Filed:
N/A
------------------------------------------------------------------------
<PAGE>
CYBERONICS, INC.
------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JANUARY 28, 1999
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 28, 1999, 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 ratify the appointment of Arthur Andersen LLP as independent
accountants of the Company for the fiscal year ending June 30, 1999; and
3. 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 December 15, 1998,
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
Houston, Texas
December 18, 1998
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<PAGE>
CYBERONICS, INC.
------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
JANUARY 28, 1999
------------
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 28, 1999, 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 December 18,
1998 to all stockholders entitled to vote at the meeting.
RECORD DATE; OUTSTANDING SHARES
Only stockholders of record at the close of business on December 15, 1998
(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 17,458,928 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.
1
<PAGE>
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.
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 1999 Annual Meeting must be received by
the Company no later than August 20, 1999 in order that they may be included in
the proxy statement and form of proxy relating to that meeting.
The attached proxy card grants the proxy holder discretionary authority to
vote on any matter raised at the Annual Meeting. If a stockholder intends to
submit a proposal at the 1999 Annual Meeting, which is not eligible for
inclusion in the proxy statement and form of proxy related to that meeting, the
stockholder must give notice to the Company in accordance with the requirements
set forth in the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), no later than October 16, 1999. If such a stockholder fails to comply
with the foregoing notice provision, the proxy holders will be allowed to use
their discretionary voting authority when the proposal is raised at the 1999
Annual 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
2
<PAGE>
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.
The names and certain information about the Company's nominees, including
their ages as of the Record Date are set forth below:
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
---- --- -------------------- --------
<C> <C> <S> <C>
Robert P. Cummins. . . . . . 44 President and Chief Executive Officer of the Company 1988
Reese S. Terry, Jr.. . . . . 56 Chairman of the Board, Executive Vice President and 1987
Secretary of the Company
Stanley H. Appel, M.D. . . . 65 Chairman, Baylor College of Medicine, Department 1996
of Neurology
Tony Coelho. . . . . . . . . 56 Independent Business Consultant 1997
Thomas A. Duerden, Ph.D.. . 69 Independent Business Consultant 1989
Michael J. Strauss, M.D.. . 45 Executive Vice President, Covance Health Economics 1997
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. 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 and an
independent business consultant since June 1998. From October 1992 to June
1998, Mr. Coelho was the Chairman and Chief Executive Officer of ETC w/tci, the
Washington-based education, training and communications subsidiary of
Tele-Communications, Inc. From January 1990 to September 1995, Mr. Coelho
served as the President and
3
<PAGE>
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 ICF Kaiser International, Inc., ITT Educational Services, Inc.,
Service Corporation International and TEI, Inc.
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, then as Corporate Vice
President and General Manager and currently as Executive Vice President 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 six meetings and
acted by written consent one time during the fiscal year ended June 30, 1998.
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, held three meetings during the fiscal year ended June 30,
1998. 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, held one meeting and acted by written consent 46
times during the fiscal year ended June 30, 1998. 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, 1998, no director attended fewer than
75% of the aggregate of the total number meetings of the Board of Directors and
meetings held by all committees of the Board of Directors on which he served,
except that Mr. Coehlo attended only five of the seven total meetings of the
Board of Directors and Compensation Committee held during fiscal 1998.
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
1998, each nonemployee director was granted an option to purchase 5,000 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
4
<PAGE>
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 the Record Date 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
1998 and were officers as of the Record Date and (iv) by all directors and
executive officers as a 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>
The Clark Estates(2) . . . . . . . . . . . . . . . . . . . . . . . . . 1,526,208 8.7%
30 Wall Street
New York, NY 10005
St. Jude Medical, Inc.(3) . . . . . . . . . . . . . . . . . . . . . . . 1,501,181 8.6%
One Lillehei Plaza
St. Paul, MN 55117-9983
Rho Management Partners L.P. . . . . . . . . . . . . . . . . . . . . . 1,066,386 6.1%
Cedar Ridge Road
Bedminster, NJ 07921
Reese S. Terry, Jr.(4) . . . . . . . . . . . . . . . . . . . . . . . . 735,500 4.2%
Robert P. Cummins(5) . . . . . . . . . . . . . . . . . . . . . . . . . 589,368 3.3%
William H. Duffell(6) . . . . . . . . . . . . . . . . . . . . . . . . . 178,681 1.0%
Stanley H. Appel, M.D.(7) . . . . . . . . . . . . . . . . . . . . . . . 125,050 *
Thomas A. Duerden, Ph.D.(8) . . . . . . . . . . . . . . . . . . . . . . 62,750 *
Tony Coelho(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,765 *
Michael J. Strauss(10) . . . . . . . . . . . . . . . . . . . . . . . . 40,000 *
All executive officers and directors as a group (10 persons)(11) . . . 2,096,091 11.3%
</TABLE>
- --------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission 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.
(2) 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
5
<PAGE>
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.
(3) In connection with the acquisition of these shares, St. Jude entered into a
Stockholders' Agreement which provides, among other things, that St. Jude
will not acquire additional shares of Common Stock if such acquisition
results in St. Jude holding more than 19% of the outstanding Common Stock
of the Company.
(4) Includes 134,500 shares held in trusts for the benefit of Mr. Terry's
children of which Mr. Terry serves as trustee. Also includes 44,500 shares
subject to options exercisable on or before February 13, 1999.
(5) Includes 10,000 shares held in trust for the benefit of Mr. Cummins'
children of which Mr. Cummins serves as trustee. Also includes 416,668
shares subject to options exercisable February 13, 1999.
(6) Includes 108,333 shares subject to options exercisable on or before
February 13, 1999.
(7) Includes 81,250 shares subject to options exercisable on or before February
13, 1999.
(8) Includes 41,250 shares subject to options exercisable on or before February
13, 1999.
(9) Includes 42,165 shares subject to options exercisable on or before February
13, 1999.
(10) Includes 22,500 shares subject to options exercisable on or before February
13, 1999.
(11) Includes 1,058,249 shares subject to options held by executive officers and
directors, which options are exercisable on or before February 13, 1999.
Also includes shares which may be determined to be beneficially owned by
executive officers and directors. See Notes 4 through 10.
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 June 30, 1993 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 June
30, 1993 in the Common Stock of the Company and in each of the comparative
indices. 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 of 1933, as amended (the
"Securities Act") or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
6/30/93 6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cyberonics, Inc. 100.0 83.8 43.2 64.9 83.8 114.9
S&P 500 100.0 98.6 120.9 148.9 196.5 251.7
S&P Medical 100.0 94.3 142.2 184.7 242.3 321.5
</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, 1998 to the Chief
Executive Officer of the Company and each of the other most highly compensated
executive officers of the Company whose total compensation exceeded $100,000
(collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
Securities
Underlying
Options(#)
------------
Salary ($) Bonus ($) Long-term
Fiscal --------------- -------------- Compensation All Other
Name and Principal Position Year Annual Compensation Awards Compensation
- -------------------------------------------------- -------- -------------------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Robert P. Cummins(1) . . . . . . . . . . . . . . 1998 $ 200,000 $ 56,000 250,000 $ 253(2)
President and Chief Executive Officer 1997 196,596 68,530 356,000 294(2)
1996 140,758 32,930 50,000 8,194(2)(3)
Reese S. Terry, Jr. . . . . . . . . . . . . . . . 1998 $ 147,000 $ 41,160 -- $ 4,114(2)
Chairman of the Board and Executive 1997 146,693 32,596 63,500 6,705(2)
Vice President 1996 130,880 32,950 -- 5,321(2)
William H. Duffell, Jr., Ph.D.(4) . . . . . . . . 1998 $ 157,500 $ 44,100 51,235 $ 257(2)
Vice President, Clinical and Regulatory 1997 157,356 32,963 90,000 13,952(5)
Affairs 1996 150,000 27,886 -- 27,881(6)
John K. Bakewell(7) . . . . . . . . . . . . . . . 1998 $ 135,000 $ 37,800 50,000 $ 213(2)
Vice President Finance and Administration 1997 131,187 29,527 135,000 263(2)
and Chief Financial Officer 1996 105,502 27,537 -- 225(2)
Rick L. Amos(8) . . . . . . . . . . . . . . . . . 1998 $ 140,769 $ 165,427(9) 175,000 $ 5,831(2)(10)
Vice President, Sales
</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.
(3) Also includes $7,900 paid to Mr. Cummins in fiscal 1996 as a travel/auto
allowance.
(4) Dr. Duffell joined the Company in 1995. Dr. Duffell's bonus in fiscal 1996
includes a $10,000 bonus related to Dr. Duffell's relocation to Houston.
(5) Represents $332 paid by the Company for term life insurance and $13,620
paid to Dr. Duffell for expenses related to relocation to Houston.
(6) Represents $315 paid by the Company for term life insurance and $27,566
paid to Dr. Duffell for expenses related to relocation to Houston.
(7) Mr. Bakewell resigned from his position with the Company in July 1998.
(8) Mr. Amos joined the Company as Area Sales Director-Midwest Region in July
1997, and served as Vice President, Sales from April 1998 to October 1998.
(9) Includes $158,427 in sales commissions based on Mr. Amos' performance as an
Area Sales Director.
(10) Also includes an $5,631 Area Sales Director automobile allowance.
8
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth each
grant of stock options made during the year ended June 30, 1998 to each of the
Named Executive Officers:
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------------------- Value at Assumed
Percent of Annual Rates of Stock
Number of Total Options Price Appreciation
Securities Granted to for Option Term($)(2)
Underlying Employees in Exercise ----------------------------
Options Fiscal Price Expiration
Name Granted(#) Year(2) ($/sh) Date 5% 10%
- ---------------------------------- -------------- ------------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Cummins . . . . . . . . . 250,000 5.5% $15.125 10/13/2007 $2,378,008 $6,026,339
Reese S. Terry, Jr. . . . . . . . . -- -- -- -- -- --
John K. Bakewell (3) . . . . . . . . 50,000 1.1% $15.125 10/13/2007 475,602 1,205,268
William H. Duffell, Jr., Ph.D. . . . 50,000 1.1% $15.125 10/13/2007 475,602 1,205,268
1,235 * $ 9.56 02/09/2008 7,425 18,817
Rick L. Amos . . . . . . . . . . . 75,000 1.7% $ 7.25 07/15/2007 341,961 866,597
100,000 2.2% $ 13.75 05/19/2008 864,730 2,191,396
</TABLE>
- --------------------
* Less than 0.1%
(1) Total number of shares subject to options granted to employees in fiscal
1998 was 4,518,154 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 Securities and
Exchange Commission and do not reflect the Company's estimate of future
stock price growth.
(3) Mr. Bakewell resigned from his position with the Company in July 1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES.
The following table sets forth, for each of the Named Executive Officers, each
exercise of stock options during the fiscal year ended June 30, 1998 and the
year-end value of unexercised options:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Value Underlying Unexercised In-the-money
Acquired Realized Options at Fiscal Year-end Options at Fiscal Year-end
Name On Exercise(#) ($)(1) Exercisable/unexercisable(#)(2) Exercisable/unexercisable($)(3)
- ------------------------------- -------------- ---------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Robert P. Cummins . . . . . . . 8,000 $ 80,625 383,334/216,666 $ 2,646,875/$0
Reese S. Terry, Jr . . . . . . 9,000 65,813 44,500/10,000 $ 336,531/$75,625
John K. Bakewell (4) . . . . . -- -- 169,665/55,335 $1,223,399/$88,789
William H. Duffell, Jr., Ph.D.. 64,998 1,378,958 94,901/66,336 $ 696,690/$169,640
Rick L. Amos . . . . . . . . . 14,000 336,000 4,853/156,147 $ 10,756/$195,119
</TABLE>
- --------------------
(1) Represents market value of underlying securities at date of exercise less
option exercise price.
(2) Options granted by the Company 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 ($10.625/per
share) minus the exercise price.
(4) Mr. Bakewell resigned from his position with the Company in July 1998.
9
<PAGE>
REPORT ON EXECUTIVE COMPENSATION
The following Report of the Compensation Committee of the Board of
Directors (the "Compensation Committee") 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, 1998.
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 or the Exchange Act except to the extent that the
Company specifically incorporates it by reference into such filing.
TO THE STOCKHOLDERS:
The Compensation Committee of the Board of Directors, consisting of Dr.
Appel and Mr. Coelho, is responsible for establishing the compensation payable
to the Company's executive officers and other key employees, and for
administering the Company's stock plans.
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 based on their level of responsibility. 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. The increase in annual base salaries for non-officer employees
for fiscal 1998 were established by the Compensation Committee in October 1997,
and generally reflected increases of 3% to 7% over fiscal 1997 levels. With
respect to officers, the Compensation Committee determined that the primary
elements of officer compensation were to be base salaries together with bonus
plan earnings and equity participation through options. Base salaries for
specific executive officers were compared to salaries paid by companies
similarly situated to the Company as well as to the other executive officers'
salaries relative to the contribution to the Company by such officers. As a
result of this review, the base salary levels of officers remained unchanged
from the fiscal 1997 levels, except that two officers received an increase in
their base salaries based on their performance and contribution to the Company.
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 1998, maximum bonus levels were set at 30% of base
salary, the same as fiscal 1997. Bonus payout is generally tied to a number of
Company-wide performance goals. Based upon Company performance during fiscal
1998, executive officers were paid 100% of their potential bonuses.
10
<PAGE>
STOCK OPTION AWARDS
Because a substantial majority of the options held by officers of the
Company would have been fully vested by the end of fiscal 1998, the Compensation
Committee believed that it was critical to provide further options to executive
officers and other key employees, in order for such persons to continue to have
a stake in the long term success of the Company. Accordingly, the Board
evaluated the levels of options held by officers, and granted additional options
to the officers and certain key employees.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee believes that the compensation of the Chief
Executive Officer, Mr. Cummins, should be closely tied to the success of the
Company, and should provide Mr. Cummins with a stake in the future success of
the Company. Based upon Mr. Cummins' performance on behalf of the Company and
for the reasons stated above for the other executive officers of the Company,
Mr. Cummins' base salary remained unchanged from his fiscal 1997 base salary.
He was awarded a bonus equal to 30% of his base salary, which represented the
maximum bonus that could be paid. In addition, Mr. Cummins was granted an
option to purchase 250,000 shares of Common Stock at an exercise price equal to
the fair market value as of the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Company's Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act 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. Such officers, directors and ten-percent stockholders are also
required by Securities and Exchange Commission 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, 1998, all Section
16(a) filing requirements applicable to its officers, directors and ten-percent
stockholders were complied with except as follows: (1) William H. Duffell did
not file two Form 4s for option exercises in February and March 1998; a Form 5
was filed in August 1998 covering those option exercises; (2) Reese S. Terry did
not file a Form 4 for an option exercise in May 1998; a Form 5 was filed in
August 1998 reporting such option exercise; and (3) Rick L. Amos became a
reporting person on April 28, 1998, but did not file a Form 3 until August 1998.
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.
11
<PAGE>
As of June 30, 1998, Rick L. Amos, then Vice President, Sales of the
Company, owed the Company $100,000 under a loan provided to Mr. Amos in fiscal
1998 to cover certain relocation expenses. The loan bears interest at 81/2% per
annum, and is secured by the shares of Cyberonics Common Stock held by or
underlying options held by Mr. Amos. All principal and interest on the loan is
due on the earliest to occur of (i) the termination of Mr. Amos' employment with
the Company, regardless of the reason for such termination, (ii) the closing of
a merger or reorganization of the Company or the sale of all or substantially
all of the assets of the Company, and (iii) December 31, 2000, provided that if
Mr. Amos sells any shares of Cyberonics common stock held by him or issued to
him upon exercise of options held by him, the proceeds from such sale shall be
used to repay the principal and accrued interest in whole or in part even if
such sale occurs prior to the due date of the loan.
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.
12
<PAGE>
PROPOSAL TO RATIFY APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors 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, 1999. Arthur Andersen LLP has audited the
Company's financial statements since the fiscal year ended June 30, 1988.
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
13
<PAGE>
CBR32B DETACH HERE
- -------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CYBERONICS, INC.
ANNUAL MEETING OF STOCKHOLDERS - JANUARY 28, 1999
The undersigned stockholders 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 Pamela B. Westbrook, 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 28, 1999, 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 attorneys-in-fact hereunder.
- -------------------------------------------------------------------------------
--------------- ---------------
SEE REVERSE CONTINUED AND TO BE SIGNED SEE REVERSE
SIDE ON REVERSE SIDE SIDE
--------------- ---------------
<PAGE>
CBR32A DETACH HERE
- -------------------------------------------------------------------------------
PLEASE MARK
/X/ VOTES AS IN
THIS EXAMPLE.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
This proxy will be voted as directed or, if no contrary direction is indicated, will be voted FOR the election of Directors, 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.
1. ELECTION OF DIRECTORS. FOR AGAINST ABSTAIN
Nominees: Robert P. Cummins, Reese S. Terry, Jr., 2. Proposal to ratify the appointment
Thomas A. Duerden, Ph.D.; Stanley H. Appel, M.D.; of Arthur Andersen LLP as the / / / / / /
Tony Coelho; Michael J. Strauss, M.D. Company's independent public
accountant for the 1999 fiscal year.
FOR WITHHELD
ALL / / / / FROM ALL
NOMINEES NOMINEES
and upon such other matter or matters which may properly come
before the meeting or any adjournment or adjournments thereof.
/ / ----------------------------------------
For all nominees except as noted above.
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:
--------------------- ------------------- -------------------- --------------------------------
</TABLE>
