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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended: June 30, 1999
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 0-19806
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CYBERONICS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0236465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
16511 SPACE CENTER BLVD., #600, HOUSTON, TEXAS 77058-2072
(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (281) 228-7200
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of August 31, 1999, was, based upon the last sales price
reported for such date on the Nasdaq National Market, approximately $223
million. For purposes of this disclosure, shares of Common Stock held by persons
who hold more than 5% of the outstanding shares of Common Stock and shares held
by officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
At August 31, 1999, registrant had outstanding 17,614,983 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference herein.
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<TABLE>
TABLE OF CONTENTS
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PART I............................................................................................................... 1
ITEM 1. BUSINESS............................................................................................ 1
ITEM 2. PROPERTIES.......................................................................................... 12
ITEM 3. LEGAL PROCEEDINGS................................................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................. 13
PART II.............................................................................................................. 13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................... 13
ITEM 6. SELECTED FINANCIAL DATA............................................................................. 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 23
PART III............................................................................................................. 23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................. 23
ITEM 11. EXECUTIVE COMPENSATION............................................................................. 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................... 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................... 29
PART IV.............................................................................................................. 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................... 29
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PART I
ITEM 1 BUSINESS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, please refer to the Business section below, the financial
statement line item discussions and the Factors Affecting Future Operating
Results set forth in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
OUR COMPANY
We design, develop, manufacture and market the NeuroCybernetic
Prosthesis, or NCP(R) System, an implantable medical device for the treatment of
epilepsy and other debilitating neurological disorders. On July 16, 1997, we
received approval from the United States Food and Drug Administration, also
referred to as the FDA, to market the NCP System in the United States as an
adjunctive therapy for reducing the frequency of seizures in patients over
twelve years of age with partial onset seizures that are refractory or resistant
to antiepileptic drugs. We have also received regulatory approval to sell the
NCP System in Canada, Europe and certain countries in the Far East with the
broader indication of refractory epilepsy and without discrimination to patient
age. We have completed a total of seven clinical studies, including five
controlled acute phase studies involving over 450 patients, a long-term
multi-year follow-up study involving 253 patients and a mortality study. To
date, over 4,500 patients have accumulated in excess of 3,000 patient years of
treatment experience with the NCP System.
EPILEPSY OVERVIEW
Epilepsy is a disorder of the brain characterized by recurrent
seizures. Epileptic seizures are categorized as either partial or generalized at
onset. Generalized seizures, known as "grand mal" seizures, involve the entire
brain from the onset, result in the loss of consciousness and are typically
manifested by convulsions. Partial onset seizures initiate in a localized region
of the brain, and may or may not result in the loss of consciousness. Partial
onset seizures can also develop into generalized seizures. Patients who continue
to have unsatisfactory seizure control or intolerable side effects after
treatment with appropriate antiepileptic therapies for a reasonable period of
time are said to suffer from refractory epilepsy. For reasons that are not
clear, partial onset seizures are generally more refractory to existing
therapies than generalized seizures.
It is estimated that over 1.8 million individuals are currently being
treated for epilepsy in the United States, with over 117,000 new cases diagnosed
each year, and that there are in excess of three million individuals being
treated for epilepsy in Western Europe and Japan, with over 210,000 new cases
diagnosed each year. In addition, it is estimated that approximately 50% of
patients with epilepsy suffer from partial onset seizures and that over 20% of
these patients continue to suffer from seizures in spite of treatment with
antiepileptic drugs. The medical, psychological, sociological and financial
implications of refractory epilepsy can be profound for individuals and their
families. Seizures can be severely debilitating and may result in major
irreversible morbidity which consist of lasting complications or side effects.
Medical consequences may include brain damage from recurrent seizures, injuries
and accidents associated with the loss or impairment of consciousness, and death
as the result of severe seizures. Personal implications of epilepsy may include
suffering the side effects of antiepileptic drugs, strained personal and family
relations, and the inability to obtain and hold meaningful employment or a
driver's license.
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Societal implications of epilepsy include the loss or underutilization
of potentially productive citizens and the cost of long-term public assistance
for those disabled by epilepsy. Epilepsy patients, in general, and refractory
patients, to a greater extent, experience a significantly higher mortality rate
than the general population.
TRADITIONAL EPILEPSY THERAPIES
Traditionally, there have been two courses of treatment available to
persons suffering from epilepsy: drug therapy and surgery. The efficacy of these
treatments depends in part upon the type of seizures from which a patient
suffers. The efficacy of drugs and surgery for patients suffering from partial
onset seizures is highly variable.
Drug Therapy. Antiepileptic drugs serve as a first-line treatment and
are prescribed for virtually all individuals being treated for epilepsy. There
are ten drugs predominately used for the treatment of epilepsy which are used
either alone or in combination. Lack of patient compliance, which is typical of
chronic drug therapy, inherently reduces the efficacy of a drug therapy regimen.
In addition, side effects are common with antiepileptic drugs. Side effects
range from debilitating central nervous system conditions such as drowsiness,
confusion and cognitive impairment to life-threatening hematologic reactions or
liver failure. Women taking antiepileptic drugs are more likely to bear infants
with birth defects than the general population. Children receiving antiepileptic
drug therapy often experience learning difficulties. Six of the ten
antiepileptic drugs have received FDA approval since 1993. While each of these
newer antiepileptic drugs demonstrates some efficacy or tolerability benefits
when compared with older antiepileptic drugs, we believe that none of these
newer antiepileptic drugs appear to provide significantly improved clinical
outcomes.
Surgical Treatment. When drug therapy is not effective, the other
traditional treatment alternative has been surgical removal of the portion of
the brain where seizures originate. Surgical treatment of epilepsy has been
proven safe and beneficial for a limited number of patients. Only approximately
2,000 epilepsy surgeries are performed per year in the United States. We believe
that the low number of surgeries is attributable to several factors, including:
the extensive evaluation and testing required to screen candidates for surgery
and to localize the source of the seizures; the risks of morbidity and mortality
associated with brain surgery; the uncertainty of long-term benefits; the
non-reversible nature of the procedure; and the cost of evaluation, testing and
surgery, which is reported to be approximately $60,000 in many cases.
THE CYBERONICS SOLUTION
Our FDA approved NCP System is the only currently approved medical
device alternative for treating epilepsy. The NCP System delivers an electrical
signal through an implantable lead to the left cervical vagus nerve in the
patient's neck on a chronic, intermittent basis. Stimulation may also be
initiated by the patient (or caregiver) with a hand held magnet.
We believe that a successful new therapy for refractory epilepsy should
be clinically proven as effective, provide significant seizure control, be safe
and tolerable with few side effects, provide long-term benefits and be easy for
the physician to prescribe and for the patient to use. Based on the results of
our preclinical studies, mechanism of action research and seven human clinical
trials, we believe that the NCP System meets these criteria as described below.
Clinically Proven. To date over 4,500 patients have accumulated in
excess of 3,000 patient years of treatment experience with the NCP System. On
July 16, 1997, the NCP System was approved by the FDA for use as an adjunctive
therapy in reducing the frequency of seizures in adults and adolescents over
twelve years
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of age with partial onset seizures that are refractory to antiepileptic drugs.
The product is approved for the broader indication of refractory epilepsy in
Canada, the European Union and other Asian markets.
Significant Seizure Control. In our two randomized, parallel, double
blind active control studies, the treatment groups reported a mean seizure
reduction of approximately 24% and 28% during the three month acute phase of the
studies. Additionally, many patients, including some who reported no change or
an increase in seizure frequency, also reported a reduction in seizure severity.
Well-tolerated Side Effects. The side effects associated with the NCP
System are generally mild, localized and related to the period of time in which
stimulation is activited. They include hoarseness, coughing, a feeling of
shortness of breath and throat pain. The NCP System has not been associated with
the debilitating central nervous system side effects which frequently accompany
antiepileptic drugs. Additionally, over time, a significant percentage of
patients continued to use the therapy attesting to its tolerability.
Long-term Efficacy. Long-term follow-up data, although derived from an
uncontrolled protocol, on the 253 patients in our first four studies suggest
that efficacy is maintained and, for many patients, improves over time when the
NCP System is used as an adjunctive therapy with drugs as part of a patient's
optimized long-term treatment regimen. Analysis of this pooled data showed that
the median percent seizure reduction increased from 17% in the first three
months to 44% after 18 months of treatment. We believe that this data supports
other anecdotal evidence of long-term efficacy.
Easy to Use. The implantation procedure is a straightforward, fully
reversible procedure which takes between 30 minutes and two hours, does not
involve the brain and has been performed by surgeons with a variety of
specializations. Additionally, the NCP System does not interact with existing
therapies and, because the NCP System provides therapy without patient (or
caregiver) administration, full compliance is assured. Moreover, a patient can
use a magnet to temporarily override the pre-programmed stimulation cycle to
activate on-demand therapy if the patient senses the onset of a seizure. The NCP
System implantation is fully reversible for patients who elect to discontinue
treatment.
VAGUS NERVE STIMULATION WITH OUR NCP SYSTEM
The NCP System is a proprietary, integrated system consisting of an
implantable device that delivers an electrical signal to an implantable lead
which is attached to the left vagus nerve. The vagus nerve is the longest of the
cranial nerves, extending from the brain stem through the neck to organs in the
chest and abdomen. The left vagus nerve has been shown to have influence over
numerous areas of the brain. Preclinical studies and mechanism of action
research suggest that intermittent stimulation of the left vagus nerve in the
neck activates a number of structures and increases blood flow bilaterally in
several areas of the brain. These studies have also shown that stimulation of
the left cervical vagus nerve is effective in blocking seizures and results in
persistent or carryover antiepileptic effects which increase with chronic
intermittent stimulation.
The NCP System consists of the NCP Pulse Generator, the Bipolar Lead,
the programming wand and software and the tunneling tool. The NCP Pulse
Generator and Bipolar Lead are surgically implanted in a procedure which takes
from 30 minutes to two hours, during which time the patient is under general or
local anesthesia. The NCP Pulse Generator is surgically implanted in a
subcutaneous pocket in the upper left chest. The Bipolar Lead is connected to
the NCP Pulse Generator and attached to the vagus nerve in the lower left side
of the patient's neck. The patient is generally admitted to the hospital the day
of surgery and discharged the same or following day.
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The NCP System delivers vagus nerve stimulation therapy on a chronic,
intermittent basis. The initial standard stimulation parameters that we
recommend are a 30 second period of stimulation which we refer to as ON time,
followed by a five minute period without stimulation which we refer to as OFF
time. To optimize patient treatment, the pulse width, output current, signal
frequency and stimulation duration and intervals of the NCP Pulse Generator can
be noninvasively programmed and adjusted by the treating physician with a
personal computer using our programming wand and software. In addition, the
patient can use a small, hand held magnet which is provided with the NCP Pulse
Generator to manually activate or deactivate stimulation. On-demand therapy can
be useful for those patients who sense an oncoming seizure and has been reported
by a number of patients to abort or reduce the severity or duration of seizures.
NCP Pulse Generator. The NCP Pulse Generator is an implantable,
programmable, cardiac pacemaker-like signal generator designed to be coupled
with the bipolar lead to deliver electrical signals to the vagus nerve. The NCP
Pulse Generator employs a battery which has an expected life of approximately
six years at standard stimulation parameters. Upon expiration of the battery,
the NCP Pulse Generator is removed and a new generator is implanted in a short,
out-patient procedure using local anesthesia.
Bipolar Lead. We have licensed a proprietary nerve lead to convey the
electrical signal from the NCP Pulse Generator to the vagus nerve. The lead
incorporates patented electrodes which are self-sizing and flexible, minimizing
mechanical trauma to the nerve and allowing body fluid interchange within the
nerve structure. The lead's two electrodes and anchor tether wrap around the
vagus nerve and the connector end is tunneled subcutaneously to the chest where
it is attached to the NCP Pulse Generator. The leads are available in two sizes
of inner spiral diameter to ensure optimal electrode placement on different size
nerves.
Programming Wand and Software. Our proprietary programming wand and
software are used to transmit programming information from a personal computer
to the NCP Pulse Generator via electromagnetic signals. These products are
compatible with both Pentium and non-Pentium based platform personal computers.
Programming capabilities include modification of the NCP Pulse Generator's
programmable parameters (pulse width, output current, signal frequency and
stimulation duration and interval), and storage and retrieval of telemetry data.
The NCP programming wand can be connected to a standard personal computer using
a serial connector.
Tunneling Tool. The tunneling tool is a single use disposable surgical
tool designed to be used during surgical placement of the Bipolar Lead. The tool
is used for subcutaneous tunneling of the lead assembly between the nerve site
in the neck and the NCP Pulse Generator site in the chest.
Accessory Pack. On December 18, 1998, we received market clearance from
the FDA and its European Notified Body, or KEMA, for the Model 500 NCP Accessory
Pack, which includes one Pulse Generator resistor assembly used to test the
function of the device prior to implantation, four NCP Bipolar Lead tie-downs,
one hex screwdriver, two setscrews and setscrew plugs.
The NCP System implant procedure, including device costs, hospital
charges and physician fees, costs between $13,000 and $30,000. The current list
price for the NCP System is approximately $9,100.
STRATEGY
Our objective is to transition vagus nerve stimulation from being
considered a revolutionary new therapy into being considered a primary
adjunctive standard of care for treating patients who suffer from refractory
partial seizures as well as to develop other indications for vagus nerve
stimulation covered by our method patents. Our strategies to achieve our
objective are as follows:
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Expand product acceptance in the United States
We market and sell the NCP System in the United States through a
multidisciplinary direct sales force that targets the physicians, nurse
clinicians, hospital administrators and payors providing care for, and patients
suffering from, epilepsy. In order to create physician awareness and patient
demand, we use a multi-faceted marketing approach that includes clinician
symposia, ongoing physician awareness and training programs, education and
support of patient advocacy groups such as the Epilepsy Foundation of America,
reimbursement hotline support, publication of peer-reviewed scientific articles
concerning the NCP System and our clinical trials, and dissemination of public
information regarding the benefits of the NCP System for patients suffering from
epilepsy.
Expand Reimbursement By Third-party Payors
We believe that significant market acceptance of the NCP System for the
treatment of epilepsy or other indications will require that the treatment be
eligible for reimbursement from government and private health care payors both
within and outside the United States. We have gained coverage recommendations
from Health Care Administration or HCFA, Blue Cross and Blue Shield,
CHAMPUS/Tricare, Kaiser, a number of State Medicaid agencies and numerous other
payors. We are also in the process of seeking additional coverage
recommendations and appropriate payment levels from these and other third party
payors. We believe that hospitals will gain adequate reimbursement for the NCP
System based on the compelling safety and efficacy of the NCP System, the
debilitating nature and annual cost of treating refractory epilepsy, and the
efficacy and cost of alternative treatments.
Expand Range of Treatable Indications
We believe that additional epilepsy types, as well as severe
neurological disorders outside the field of epilepsy, including movement
disorders such as essential tremor and Parkinson's disease, depression, chronic
pain and migraine headaches, may be amenable to treatment by vagus nerve
stimulation with the NCP System. We have been granted method patents relating to
the use of vagus nerve stimulation for the treatment of these and certain other
neurological disorders, and we plan to establish a program to discover and
develop new applications for the NCP System both within and outside the field of
epilepsy. During fiscal 1999, we launched a pilot safety and efficacy study of
vagus nerve stimulation using the NCP System in patients with refractory chronic
or recurrent severe depression. On July 26, 1999, the FDA granted expedited
review status for a future premarket application approval for our NCP System for
the treatment of major depression in patients with unipolar and bipolar
depressive disorder. We expect to expend considerable resources expanding and
completing the pilot study and launching a multicenter, pivotal safety and
efficacy study of the NCP System in patients with depression during fiscal 2000.
MARKETING AND SALES
United States. The NCP System was approved for sale in the United
States on July 16, 1997 for use as an adjunctive therapy in reducing the
frequency of seizures in adults and adolescents over twelve years of age with
partial onset seizures that are refractory to antiepileptic drugs. We market and
sell our products through a direct sales force in the United States. As of
August 31, 1999 our United States sales team consisted of three area directors,
sixteen territory managers, six sales representatives and seventeen clinical
specialists all of whom have significant medical device sales or epilepsy
clinical experience. As of August 31, 1999, the United States marketing team
consisted of a Vice President, Marketing, five corporate marketing personnel,
eight regional marketing personnel and eight reimbursement specialists.
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Our sales and marketing plan focuses on creating widespread awareness
and demand for the NCP System among neurologists, surgeons and nurse clinicians
involved in the treatment of patients with epilepsy, third party payors who pay
for such treatment and patients and their families whose lives are affected by
epilepsy. To reach each of these groups, we are using a multidisciplinary sales
force consisting of territory managers experienced in medical device sales,
clinical specialists with nursing experience in epilepsy, reimbursement
specialists experienced in obtaining third party coverage and payments for new
medical technologies and regional marketing teams experienced in peer to peer
marketing programs. In addition to our direct selling activities, we facilitate
and support peer to peer interactions such as symposia, conference
presentations, journal articles and patient support groups to provide
experienced clinicians and patients the opportunity to share their perspectives
on the NCP System with others.
International. Although we obtained approval to CE Mark the NCP System
and to sell it in the member countries of the European Union in June 1994, in
the past, we focused our resources and efforts primarily on the clinical trials
necessary to gain FDA approval to sell the NCP System in the United States.
During fiscal 1998, we began to expand our international presence and as of
August 31, 1999, our international sales and marketing organization consisted of
eight full time employees and a number of independent distributors. In countries
where the NCP System has market approval, it is broadly approved for all types
of refractory epilepsy without discrimination based on age.
The NCP System is currently sold by a direct sales force in Germany,
France, Austria, Switzerland, Belgium and the United Kingdom. As of August 31,
1999, we had distribution agreements with independent distributors covering a
number of other countries, principally in Europe. The distribution agreements
generally grant the distributor exclusive rights for the particular territory
for a period of three years. The distributor generally assumes responsibility
for obtaining regulatory and reimbursement approvals for such territory and
agrees to certain minimum marketing and sales expenditures and purchase
commitments. We intend to seek additional regulatory and reimbursement approvals
in the future in those major markets where the NCP System is not yet approved.
The geographic areas initially targeted include South America and the Far East,
in particular, Japan. In Japan, we are working with an independent distributor
to obtain the appropriate regulatory and reimbursement approvals and to
ultimately distribute the NCP System if such approvals are obtained. The
Japanese clinical trial began in July 1993. In February 1998, our Japanese
distributor submitted the results of this study, along with our other clinical
trial data, to the Japanese Ministry of Health for regulatory approval.
Application for reimbursement approval will follow regulatory approval when and
if granted.
MANUFACTURING AND SOURCES OF SUPPLY
Our manufacturing operations are required to comply with the FDA's
Quality System Regulations, commonly referred to as QSR, which incorporates
the agency's former Good Manufacturing Practices regulations. QSR addresses the
design, controls, methods, facilities and quality assurance controls used in
manufacturing, packing, storing and installing medical devices. In addition,
certain international markets have quality assurance and manufacturing
requirements that may be more or less rigorous than those in the United States.
Specifically, we are subject to the compliance requirements of ISO 9001 and 9002
certification and CE Mark directives. We are audited on a semiannual basis for
such compliance.
The NCP Pulse Generator, which is similar in design and manufacture to
a cardiac pacemaker, is comprised of two printed circuit boards and a battery
which are hermetically sealed in a titanium case. Standard components are
assembled on printed circuit boards by a contract manufacturer using
surface-mount technology. The boards are then shipped to us for assembly and
testing. The assembled electronics are then placed in a titanium case which is
either laser welded by us or shipped to a third-party for laser welding and
returned to us. An epoxy header to which the Bipolar Lead connects is added to
all sealed cans
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at our facilities. All finished product is subject to final functional release
testing prior to being sterilized by a third party vendor.
We have a limited history of operations that, to date, has consisted
primarily of manufacturing limited quantities of the NCP System for clinical
investigations, for two years of commercial sales activities in the United
States and for commercial sales activities in international markets. We do not
have experience manufacturing the NCP System in the volumes that will be
necessary to support expected product demand. If we are unable to achieve
commercial-scale production capability on a timely basis with acceptable quality
and manufacturing yield and costs, to sustain such capacity, or to maintain FDA
and other governmental approvals, our ability to deliver products on a timely
basis could be significantly impaired.
We currently rely upon sole source suppliers for certain of the key
components, materials and contract services used in manufacturing the NCP
System. We periodically experience discontinuation or unavailability of
components, materials and contract services which may require qualification of
alternative sources or, if no such alternative sources are identified, product
design changes. We believe that pursuing and qualifying alternative sources
and/or redesigning specific components of the NCP System, when necessary, could
consume significant resources. In addition, such changes generally require
regulatory submissions and approvals. Although we believe that any such changes
will be made without disruption, any extended delays in or inability to secure
alternative sources for these or other components, materials and contract
services could result in product supply and manufacturing interruptions. Any
supply or manufacturing interruption could significantly harm our business.
PRODUCT DEVELOPMENT
Our product development efforts are directed toward improving the NCP
System and developing new products which provide additional features and
functionality. Product development programs that are underway include ongoing
improvements to the NCP Pulse Generator, such as reduced size and increased
battery life. These and other longer term development activities are expected to
be technically challenging and may not result in marketable products. We will be
required to file for the appropriate United States and international regulatory
approvals, and may require clinical trials, in connection with the introduction
of improved and new products.
COMPETITION
We believe that in the field of refractory epilepsy existing and future
antiepileptic drugs are and will continue to be the primary competition for our
NCP System. We may also face competition from other medical device companies for
the treatment of partial seizures. Medtronic, Inc., for example, continues to
clinically assess an implantable signal generator used with an invasive deep
brain probe, or thalamic stimulator, for the treatment of neurological disorders
and has received FDA approval for the device for the treatment of essential
tremor, including that associated with Parkinson's disease. We could also face
competition from other large medical device companies which have the technology,
experience and capital resources to develop alternative devices for the
treatment of epilepsy. Many of our competitors have substantially greater
financial, manufacturing, marketing and technical resources than us and have
obtained third-party reimbursement approvals. In addition, the health care
industry is characterized by extensive research efforts and rapid technological
progress. Our competitors may develop technologies and obtain regulatory
approval for products that are more effective in treating epilepsy than our
current or future products. In addition, advancements in surgical techniques
could make surgery a more attractive therapy for epilepsy. The development by
others of new treatment methods with novel antiepileptic drugs, medical devices
or surgical techniques for epilepsy could render the NCP System non-competitive
or obsolete.
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We believe that the primary competitive factors within the epilepsy
treatment market are the efficacy and safety of the treatment relative to
alternative therapies, physician and patient acceptance of the product and
procedure, availability of third-party reimbursement and product reliability. We
also believe that the NCP System compares favorably with competitive products as
to these factors.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Proprietary protection for our products is important to our business.
We maintain a policy of seeking method and device patents on our inventions,
acquiring licenses under selected patents of third parties, obtaining copyrights
on our software and other copyrightable materials and entering into invention
and proprietary information agreements with our employees and consultants with
respect to technology which we consider important to our business. We also rely
upon trade secrets, unpatented know-how and continuing technological innovation
to develop and maintain our competitive position.
We entered into an exclusive license agreement with Jacob Zabara,
Ph.D., a co-founder of and consultant to us, pursuant to which we have licensed
three United States method patents (and such international counterparts as have
been or may be issued) covering the NCP System for vagus nerve and other cranial
nerve stimulation for the control of epilepsy and other movement disorders. The
License Agreement runs for the term of licensed patents. Pursuant to the license
agreement, we are obligated to pay Dr. Zabara a royalty equal to 3% of net sales
for the remaining term of the licensed patents.
We entered into a license agreement with Huntington Medical Research
Institute pursuant to which we have licensed two United States patents
(including their international counterparts, if and when issued) covering two
lead designs. The license agreement provides a license to the licensor's lead
designs for the field-of-use of vagus nerve stimulation for control of epilepsy
and other movement and our patented disorders. Pursuant to the license
agreement, we are obligated to pay the licensor a royalty of 1% of net sales of
NCP Systems using the licensor's standard lead (which includes our bipolar lead)
and 1.75% of net sales of NCP Systems which include the licensor's bidirectional
lead. We also agreed to pay minimum royalties of $35,000 for each fiscal year
for the life of the licensed patents.
In addition to the license agreements, as of August 31, 1999, we had
United States patents and patent applications pending covering various aspects
of the NCP Pulse Generator circuits, electrode designs, methods of automatic
seizure detection and various therapeutic applications of vagus nerve
stimulation. In addition to movement disorders, other method patents cover the
fields of eating disorders, endocrine disorders, migraine headaches, dementia,
neuropsychiatric disorders, including depression, motility disorders, sleep
disorders, coma, chronic pain, cardiac disorders and hypertension. In September
1997, we filed for a limited extension of the term of one of the medical device
and method patents under which it is licensed from Dr. Zabara. As a result of
that filing, the expiration date for the epilepsy and movement patent has been
determined to be 2010. We have filed a Request for Revision of Regulatory Review
with the FDA to extend the patent an additional year. We have filed counterparts
of certain of our key United States patent applications in certain key
international jurisdictions.
We cannot assure you that patents will be issued from any of the
remaining applications or, that if patents are issued, that they will be of
sufficient scope or strength to provide meaningful protection of our technology.
In addition, we can not assure you that any patents issued to us will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or commercial advantage to us.
Notwithstanding the scope of the patent protection available to us, a competitor
could develop other methods of controlling epilepsy by stimulation which do not
involve the vagus or other cranial nerves, the stimulation of which is patent
protected, or which use electrodes which are not covered by the licensed
patents.
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We believe that the licenses described above provide us with protection
in the United States in the field of cranial nerve stimulation, including vagus
nerve stimulation for the control of epilepsy, depression, movement disorders,
including Parkinson's disease and essential tremor, and additional indications
for which method patents have been issued. The protection offered by the
licensed international patents is not as strong as that offered by the licensed
United States patents due to differences in patent laws. In particular, the
European Patent Convention prohibits patents covering methods for treatment of
the human body by surgery or therapy. In addition, there has been substantial
litigation regarding patent and other intellectual property rights in the
medical device industry. We may need to engage in litigation to enforce patents
issued or licensed to us, to protect our trade secrets or know-how or to defend
us against claims of infringement of the rights of others and to determine the
scope and validity of the proprietary rights of others. Litigation could be
costly and divert our attention from other functions and responsibilities.
Adverse determinations in litigation could subject us to significant liabilities
to third parties, could require us to seek licenses from third parties and could
prevent us from manufacturing, selling or using the NCP System, any of which
could severely harm our business. We are not currently a party to any patent
litigation or other litigation regarding proprietary rights and are not aware of
any challenge to our patents or proprietary rights.
GOVERNMENT REGULATION
The preclinical and clinical testing, manufacturing, labeling, sale,
distribution and promotion of the NCP System are subject to extensive and
rigorous regulation in the United States by federal agencies, primarily the FDA,
and by comparable state agencies. In the United States, the NCP System is
regulated as a medical device and is subject to FDA's premarket approval
requirements. Under the Food, Drug, and Cosmetic Act, all medical devices are
classified into three classes, class I, II or III. New class III devices, such
as the NCP System, are subject to the most stringent FDA review, and require
submission and approval of a premarket application before commencement of
marketing, sales and distribution in the United States.
In July 1997, we received FDA approval to market the NCP System in the
United States for use as an adjunctive therapy in reducing the frequency of
seizures in adults and adolescents over 12 years of age with partial onset
seizures that are refractory to antiepileptic drugs. While we have satisfied
FDA's requirements to commence domestic sales of our product, we continue to be
subject to FDA's ongoing requirements to maintain regulatory compliance.
Additionally, pursuant to the post-market surveillance conditions specified as
part of our FDA marketing approval, we are required to conduct clinical
follow-up on a total of 50 patients during the first five years of stimulation
and to monitor the safety and tolerability of the NCP System. In addition, we
have been required by the FDA to continue to provide information about which
patients benefit most from the device as well as information on any deaths that
occur in patients who have the device implanted. The FDA may raise additional
concerns in the future, accordingly, our business is critically dependent upon
ongoing compliance with FDA regulations and requirements.
In July 1999, the FDA granted Expedited Review status for a future
premarket application for our NCP System for the treatment of major depression
in patients with unipolar and bipolar depressive disorder. We expect to expand
and complete a pilot study and launch a pivotal safety and efficacy study of
the NCP System in patients with depression late in fiscal 2000 or early fiscal
2001. We may not be granted the necessary approvals to conduct our planned
studies on a timely basis or at all, and delays in receipt or failure of the
necessary approvals could harm our ability to market our NCP System for this
indication, which could harm our business, financial condition and results of
operations.
We will be required to obtain FDA approval of a new premarket
application or premarket application supplement before making any change to the
NCP System affecting the safety or effectiveness of the device including, but
not limited to, new indications for use of the device, changes in the device's
performance or design specifications and device modifications and future
generation products. New premarket applications and premarket application
supplements generally require submission of information needed to support the
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<PAGE> 12
proposed change and often require additional clinical data. If clinical data is
required for a new indication, the FDA can additionally require review of the
results of a clinical study by one of their Advisory Panels. If the clinical
testing required to obtain the information necessary to support the change
places research subjects at risk, we could be required to obtain the FDA's
approval of an investigational device exemption, or IDE, before beginning such
testing. We intend to sponsor additional clinical trials of the NCP System in
the United States, for additional epilepsy indications and for non-epilepsy
central nervous system disorders. We believe that we will be required to conduct
these additional clinical trials under one or more FDA-approved IDEs and under
the auspices of one or more independent institutional review boards, also
referred to as IRBs, established pursuant to FDA regulations. We may be unable
to obtain any required FDA or IRB approvals for such clinical trials, or to
complete the studies in a timely manner. Further, the information obtained may
not be sufficient to support the filing of a new premarket application or
premarket application supplement for the proposed changes. Any of these events
would prevent us from obtaining approvals to market our product for the
indications which could harm our business.
We are required to register, and have registered, as a medical device
manufacturer with the FDA and state agencies and to list our products with the
FDA. Our facilities are subject to inspection on a routine basis by the FDA for
compliance with the FDA's QSR and other applicable regulations. QSR imposes
procedural and documentation requirements upon us with respect to product
designs, manufacturing, testing, control, process validation and similar
activities. As of August 31, 1999, we have been the subject of an FDA
pre-approval and three post-approval site inspections, all of which were
completed with no deficiencies noted. Additionally, we have voluntarily agreed
to participate as a pilot site for FDA's new Hazard Analysis and Critical
Control Points inspection process. As part of this process, and in addition to
requirements for routine inspections, we have undergone two separate inspections
by the FDA, neither of which resulted in any adverse finding against us.
However, future inspections could result in adverse findings which could harm
our ability to manufacture and market our NCP System, which would significantly
harm our business.
In addition, our products are covered by FDA regulations for
implantable medical devices that require us to comply with certain specific
record keeping, reporting, product testing, design, safety and product labeling
requirements. Under these regulations, we are required to file Medical Device
Reports with the FDA for product malfunctions or where our device causes or
contributes to a death or serious injury. Through August 31, 1999, we have filed
nineteen such reports, eight of which were filed during fiscal 1999. New
regulations governing such matters as device tracking and post-market
surveillance also apply to the NCP System. The FDA also actively enforces
regulations prohibiting marketing of products for non-indicated uses. The
advertising of most FDA-regulated products, including our NCP System, is also
subject to Federal Trade Commission jurisdiction and we are also subject to the
Occupational Safety and Health Administration and other governmental entities.
Clinical testing, manufacture and sale of our products outside of the
United States are subject to regulatory approval by other jurisdictions which
may be more or less rigorous than in the United States, and which vary from
country to country. In order to market and sell our product internationally, we
must obtain ISO 9001 and 9002 certification, which is similar to the FDA's QSR,
and comply with CE Mark directives. We are audited on a semiannual basis for
compliance with these certifications and directives. We have obtained several
foreign governmental approvals, including the approval to use the European Union
CE Mark, and have applied for additional approvals. However, we may not be
granted the necessary approvals, including approval of new premarket
applications or supplements to existing premarket applications for the NCP
System, on a timely basis or at all. Delays in receipt or failure to receive
these approvals, or the withdrawal of previously received approvals, could harm
our international operations and our business.
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<PAGE> 13
Changes in existing requirements or the adoption of new requirements
could significantly harm our ability to comply with regulatory requirements.
Failure to comply with applicable regulatory requirements can result in, among
other things, fines, suspensions or withdrawal of approvals, confiscations or
recalls of products, operating restrictions and criminal prosecutions.
THIRD-PARTY REIMBURSEMENT
Our ability to commercialize the NCP System successfully will depend in
part on whether third-party payors, including private health care insurers,
managed care plans, the United States government's Medicare and Medicaid
programs and others, agree both to cover the NCP System, and associated
procedures and services, and to provide reimbursement at adequate levels for the
costs of the NCP System and the related services.
In deciding to cover a new therapy, third-party payors base their
initial coverage decisions on several factors including, but not limited to, the
status of the FDA's review of the product, the product's safety and efficacy,
the number of studies performed and peer-reviewed articles published with
respect to the product and how the product and therapy compares to alternative
therapies. We have implemented a program to provide third-party payors with the
clinical and regulatory information that they will need to reach coverage
decisions, both by sending materials directly to the payors and by assisting
hospitals and physicians in their interactions with the payor. However, these
third-party payors may stop viewing us and our NCP System as favorably as in the
past with respect to any of the above factors, which may impede us from
obtaining favorable coverage decisions on a timely basis, or at all. A failure
to continue to receive favorable coverage decisions for the NCP System in a
timely manner could deter patients and their physicians from using our products
and could significantly harm our business.
Once a favorable coverage determination is made with respect to a
product, payors must determine the level of reimbursement for the product and
related therapy and procedures. In making decisions about reimbursement amounts,
third-party private payors typically reimburse for the costs of newly covered
devices and services using the standard methods they employ for other products
and services already covered. Many private insurers and managed care plans use a
variety of payment mechanisms including, but not limited to, discounted charges,
per diem amounts, resource-based payment scales and reimbursed costs. Those
mechanisms have provided payment levels for many other implantable devices that
have been adequate to allow device use and commercial success. Assuming that
most payors determine to cover the NCP System and related services, we have
found that many of these same payment mechanisms have provided reimbursement
levels for the NCP System and related services that physicians and hospitals
view as adequate to support use of the NCP System.
We believe that a significant number of epilepsy patients in the United
States are either eligible for benefits under the Medicare program or are
uninsured. The Medicare program uses different payment mechanisms to reimburse
for procedures performed in different settings. For outpatient implants,
Medicare uses a system that reimburses hospitals based on their costs. We
believe that those payments generally are adequate. For in-patient implants,
Medicare uses a fixed-payment method which is based on Diagnosis Related Groups
or DRGs. Under current DRG groupings, hospital inpatient procedures for
implanting the NCP System are assigned to one of two different DRGs based on
whether or not the patient has complications or coexisting severe medical
problems, also referred to as comorbidities. The DRG grouping that would include
implantation of the NCP System for patients without complications or
comorbidities pays hospitals less than the costs of purchasing and implanting
the NCP System. We believe that this DRG grouping would apply to most of the
epilepsy patients covered by Medicare. Medicare uses a resource-based relative
value scale to pay for physicians' services. We believe that the relative value
scales for the surgeons and physicians involved in the implantation and
interrogation and reprogramming of the NCP System provide adequate reimbursement
for these physicians' services.
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<PAGE> 14
We have growing experience in seeking and successfully obtaining
coverage and payment approvals from third-party payors, but we cannot be certain
that we will be successful in achieving or maintaining coverage or adequate
reimbursement levels. If we are unsuccessful in achieving coverage or adequate
reimbursement levels or if hospitals or physicians view their payments as
inadequate, then patients, physicians and hospitals could be deterred from using
the NCP System, which could severely harm our business.
In June 1994, we were granted approval to use the CE Mark and to market
the NCP System in the European Union. We are continuing to pursue appropriate
reimbursement approvals in European Union member countries. We believe that
significant sales volume will be difficult to generate without appropriate
reimbursement approvals. We cannot be certain when or whether such reimbursement
will be obtained in any of the European Union countries or, if obtained, whether
the levels of reimbursement will be sufficient to enable us to sell the NCP
System on a profitable basis.
PRODUCT LIABILITY AND INSURANCE
The manufacture and sale of our products entail the risk of product
liability claims. Although we maintain product liability insurance, coverage
limits may not be adequate. Product liability insurance is expensive and in the
future may not be available on acceptable terms, if at all. A successful claim
brought against us in excess of our insurance coverage could severely harm our
business, results of operations and financial condition.
EMPLOYEES
As of August 31, 1999, we had 240 full-time employees, including 10 in
engineering or product development, 15 in clinical and regulatory affairs, 117
in manufacturing and quality assurance, 62 in sales and marketing and 36 in
administration. We believe that the success of our business depends, in part, on
our ability to attract and retain qualified personnel. We believe our
relationship with our employees is good. However, we cannot assure you that we
will be successful in hiring or retaining qualified personnel. The loss of key
personnel, or the inability to hire or retain qualified personnel, could
significantly harm our business.
CAUTIONARY FACTORS
A number of statements contained in this document and other written and
oral statements made from time to time by us do not relate strictly to
historical or current facts. Accordingly, they are considered "forward-looking"
statements which indicate current expectations of future events. These
statements can generally be identified by the use of terminology such as
"expect", "may", "will", "intend", "anticipate", "believe", "estimate", "could",
"possible", "plan", "project", "forecast", and similar expressions. Our
forward-looking statements generally relate to our growth strategies, financial
results, reimbursement programs, product acceptance programs, regulatory
approval programs, manufacturing processes and sales and marketing programs.
Forward-looking statements should be carefully considered as involving a variety
of risks and uncertainties. Consequently, no forward-looking statements can be
guaranteed and actual outcomes may vary materially.
ITEM 2 PROPERTIES
We lease approximately 55,000 square feet of office and manufacturing
space in Houston, Texas through December 2002, approximately 13,500 square feet
of manufacturing space in Webster, Texas through October 1999, and a sales
office in Brussels, Belgium through October 1999. We are currently in the
process of negotiating a lease in Brussels which will terminate in 2001. We
believe that these leased facilities will be adequate to meet our needs at least
through June 30, 2000.
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<PAGE> 15
ITEM 3 LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the Nasdaq National Market under the
symbol "CYBX." The high and low sale prices for our Common Stock during fiscal
1999 and 1998 are set forth below. Price data reflect actual transactions, but
do not reflect mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................................ $ 16.50 $ 5.88
Second Quarter........................................................... $ 16.50 $ 10.25
Third Quarter............................................................ $ 32.63 $ 13.50
Fourth Quarter........................................................... $ 32.88 $ 9.88
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter............................................................ $ 17.00 $ 5.63
Second Quarter........................................................... $ 14.38 $ 4.50
Third Quarter............................................................ $ 13.63 $ 7.13
Fourth Quarter........................................................... $ 14.94 $ 7.31
</TABLE>
The stock market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. Like the stock prices of other medical device companies,
the market price of our Common Stock has in the past been, and may in the future
be, subject to significant volatility. Factors such as reports on the clinical
efficacy and safety of the NCP System, product and component supply issues,
government approval status, fluctuations in our operating results, announcements
of technological innovations or new products by our competitors, changes in
estimates of our performance by securities analysts, failure to meet securities
analysts' expectations, developments with respect to patents or proprietary
rights, public concern as to the safety of products developed by us or others
may have a significant effect on the market price of the Common Stock. In
addition, the price of our stock could be affected by stock price volatility in
the medical device industry or the capital markets in general without regard to
our operating performance.
As of August 31, 1999, there were 274 stockholders of record.
We currently intend to retain future earnings to fund the development
and growth of our business and, therefore, do not anticipate paying cash
dividends within the foreseeable future. Any future payment of dividends will be
determined by our Board of Directors and will depend on our financial condition,
results of operations and other factors deemed relevant by our Board of
Directors.
ITEM 6 SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data and is
qualified by reference to, and should be read in conjunction with, Consolidated
Financial Statements and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein. The selected
consolidated financial data as of June 30, 1999 and 1998 and for each of the
years in the three-year period
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<PAGE> 16
ended June 30, 1999 are derived from consolidated financial statements that have
been audited by Arthur Andersen LLP, independent public accountants, which are
included elsewhere herein. The selected financial data as of June 30, 1997,
1996, and 1995 and for the years ended June 30, 1996 and 1995 are derived from
audited financial statements not included herein.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
------------ ------------ ---------- ---------- ---------
1999 1998 1997 1996 1995
------------ ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 29,927,476 $ 14,912,868 $ 1,372,005 $ 1,416,965 $ 966,989
Cost of sales............................. 7,736,137 3,902,468 372,180 411,562 347,457
------------ ------------ ------------ ------------ -----------
Gross profit.............................. 22,191,339 11,010,400 999,825 1,005,403 619,532
Operating expenses:
Selling, general and administrative.... 29,585,570 19,781,268 5,933,852 3,420,111 2,906,589
Research and development............... 6,724,106 7,391,426 6,549,474 8,024,502 5,678,024
------------ ------------ ------------ ------------ -----------
Total operating expenses............. 36,309,676 27,172,694 12,483,326 11,444,613 8,584,613
Interest income, net...................... 1,465,549 1,976,792 436,813 423,044 688,909
Other (expense) income, net............... 115,236 10,790 (198,143) (97,084) 37,362
------------ ------------ ------------ ------------ -----------
Net loss.................................. $(12,537,552) $(14,174,712) $(11,244,831) $(10,113,250) $(7,238,810)
------------ ------------ ------------ ------------ -----------
Basic and diluted net loss per share........ $ (0.72) $ (0.88) $ (0.93) $ (1.06) $ (0.79)
------------ ------------ ------------ ------------ -----------
Shares used in computing basic and
diluted net loss per share................ 17,503,169 16,104,922 12,030,171 9,513,038 9,218,008
CONSOLIDATED BALANCE SHEET DATA (AS OF YEAR END):
Cash, cash equivalents and marketable securities $ 24,920,694 $ 38,037,343 $ 8,123,456 $ 2,201,962 $11,852,619
Working capital........................... 25,975,079 39,246,128 7,763,480 1,042,396 8,988,373
Total assets.............................. 39,783,153 52,615,294 10,249,737 3,948,043 13,560,593
Accumulated deficit....................... (75,879,266) (63,341,714) (49,167,002) (37,922,171) (27,808,921)
Common stockholders' equity............... $ 33,448,445 $ 44,698,719 $ 8,421,472 $ 1,465,050 $11,443,555
</TABLE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis together with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and the notes to those statements included elsewhere in this Form 10-K. This
discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those indicated in these forward-looking
statements as a result of certain factors, as more fully described under the
heading "Factors Affecting Future Operating Results" and in the "Business"
section and elsewhere in this Form 10-K. Cyberonics undertakes no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
SUMMARY
Cyberonics was founded in 1987 to design, develop and bring to market
medical devices which provide a unique therapy, vagus nerve stimulation, for the
treatment of epilepsy and other debilitating central nervous disorders. Clinical
trials of the NCP System began with the first patient implant in November 1988
under an IDE from the FDA. We received FDA approval to market the NCP System in
the United States in July 1997 for use as an adjunctive therapy in reducing the
frequency of seizures in adults and adolescents over twelve years of age with
partial onset seizures that are refractory to antiepileptic drugs.
We were granted regulatory approval in 1994 to market and sell the NCP
System in the member countries of the European Union and we also have permission
to sell in certain other international markets. However, through fiscal 1996, we
devoted only limited resources to marketing and sales activities
internationally, and have been expanding our international presence through
fiscal 1999. International sales of the NCP System have been limited to date.
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<PAGE> 17
We are engaged in obtaining and expanding reimbursement approvals from
the various health care provider systems in the United States and in key
international markets. To date, the NCP System has been reimbursed by several
payors in the United States and by a number of payment authorities in a limited
number of international markets. We do not expect continued sales growth unless
additional reimbursement approvals are obtained for the NCP System.
From inception through July 1997, our primary focus was on obtaining
FDA approval for the NCP System. Since inception, we have incurred substantial
expenses, primarily for research and development activities which includes
product and process development and clinical trials and related regulatory
activities, sales and marketing activities and manufacturing start-up. We have
also made significant investments in recent periods in connection with the
United States market launch of the NCP System and, to a lesser extent, in
connection with efforts to expand our presence in international markets. We have
not been profitable to date, and we expect to remain unprofitable through at
least calendar 1999.
For the period from inception through June 30, 1999, we incurred a
cumulative net deficit of approximately $75.9 million. Moreover, we expect to
continue to devote considerable financial resources to sales, marketing,
administration and clinical programs through fiscal 2000 in an effort to promote
market awareness and acceptance of the NCP System, establish corporate
infrastructure and develop applications for the NCP System. We expect that there
will be delays between the initiation of higher spending levels and increased
revenues that may result from this increased spending. Moreover, once initiated,
many of these expenses will be fixed in nature. As a result, if revenues do not
increase substantially over the levels achieved in recent periods, we will
continue to experience substantial operating losses, potentially at levels
exceeding the levels experienced in recent periods, and the point at which we
achieve profitability would be delayed beyond the current expectations of
securities analysts. Furthermore, even if the levels of revenues increase
substantially, we may still not achieve profitability when expected to do so or
at all. Even if we become profitable, we may not be able to remain so in future
periods.
RESULTS OF OPERATIONS
Net Sales. Net sales for the fiscal year ended June 30, 1999 increased
to $29.9 million from $14.9 million and $1.4 million for the years ended June
30, 1999, 1998 and 1997, respectively. International sales were $3.6 million,
$2.3 million and $1.3 million in fiscal 1999, 1998 and 1997, respectively, while
domestic sales were $26.3 million, $12.6 million and $24,000 in the respective
periods.
The doubling of net sales in fiscal 1999 is primarily due to growth in
the United States market. Prior to receiving FDA approval to market the NCP
System in the United States in July 1997, the substantial majority of sales were
derived from international markets where we had regulatory approval to sell the
NCP System. Domestic sales in 1997 were limited exclusively to reimbursements
related to our clinical trial activities. Sales in 1998 increased significantly
due to the FDA approval and resulting U.S. launch of the NCP System. While we
expect to conduct additional clinical trial activities in the United States and
internationally and may seek reimbursement in connection with these studies, we
do not expect reimbursement amounts to be significant in future periods. Future
increases in net sales will depend upon increased market acceptance for the NCP
System and upon expanding our reimbursement from third-party payors. We are
devoting substantial resources to increasing the awareness and market acceptance
of the NCP System, particularly in the United States. We believe, however, that
there will be delays between sales and marketing activities and any resulting
increase in sales. Furthermore, we expect to achieve lower, if any,
quarter-to-quarter revenue growth in the first quarter of fiscal 2000 than
experienced in recent quarters. We also cannot assure you that sales levels in
subsequent periods will increase at the rates experienced in recent periods or
at all.
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<PAGE> 18
Gross Profit. Cost of sales consist primarily of direct labor,
allocated manufacturing overhead, third-party contractor costs, royalties and
the acquisition cost of raw materials and components. Our gross margin was 74.2%
for the year ended June 30, 1999, compared to 73.8% and 72.9% for fiscal 1998
and 1997, respectively. The increase in gross margin in fiscal 1999 is
attributable primarily to the increase in net sales in the United States, which
have higher gross margins than net sales in international markets. We are
obligated to pay royalties at a rate of approximately 4% of net sales in future
periods. Gross margins can be expected to fluctuate in future periods based upon
the mix between direct and international sales, direct and distributor sales,
the NCP System's selling price, applicable royalty rates and the levels of
production volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $29.6 million, or 98.9% of net sales, during the
year ended June 30, 1999, as compared to $19.8 million, or 132.7% of net sales,
during fiscal 1998 and $5.9 million, or 432.5% of net sales, during fiscal 1997.
The increase in the absolute dollars of selling, general and administrative
expenses in each year compared to the prior year was primarily due to sales and
marketing activities focused on the United States market launch for the NCP
System and to a lesser extent to the continued expansion of corporate
infrastructure in response to the recent business expansion and movement of our
headquarters to a new location. We began expanding our sales and marketing staff
in late calendar 1996 to more actively pursue international sales and in early
1997 in anticipation of FDA approval and commercial sales activities in the
United States. By the end of fiscal 1999, we had over 60 sales and marketing
personnel up from 45 at the end of fiscal 1998 and 24 at the end of fiscal 1997.
We also expect to continue to add administrative personnel in response to the
recent and potential future business expansion, although at a much lower rate
than fiscal 1999. Furthermore, we expect improvements in spending efficiencies
which should reduce the rate of the year-to-year increase in future selling,
general and administrative expenses as compared to the year-to-year increase
experienced during fiscal 1999. However, we cannot assure you that we will
achieve spending efficiencies or that selling, general and administrative
expenses will not, in fact, continue to increase at a faster rate in fiscal
2000.
Research and Development Expenses. Research and development expenses
are comprised of both expenses related to our product and process development
efforts, design efforts and expenses associated with conducting clinical trials
and related regulatory activities. Research and development expenses were $6.7
million, or 22.5% of net sales, during the year ended June 30, 1999, compared to
$7.4 million, or 49.6% of net sales, during fiscal 1998 and $6.5 million, or
477.4% of net sales, during fiscal 1997. The decrease in research and
development spending in absolute dollars in fiscal 1999 as compared to fiscal
1998 is the result of improved absorption of production costs during fiscal
1999. This offsets additional costs associated with heightened levels of product
design and development activity, manufacturing process improvement efforts and
expanded clinical and regulatory activity. The increase in research and
development spending in absolute dollars in fiscal 1998 as compared to fiscal
1997 reflects heightened levels of product design and development activity,
manufacturing process improvement efforts and increased clinical and regulatory
staffing in preparation for future clinical study activities. The significant
decrease in these expenses as a percent of sales in each year is primarily the
result of the increase in sales for the same periods. We intend to conduct
further clinical trials of the NCP System for additional indications both within
and outside the field of epilepsy. Accordingly, we expect research and
development expenses to increase in future periods depending primarily upon the
level and timing of our clinical trial activity.
Interest Income, Net. Net interest income totaled $1.5 million, $2.0
million and $437,000 during the years ended June 30, 1999, 1998 and 1997,
respectively. Interest income decreased from fiscal 1998 to fiscal 1999 as a
result of lower average cash and investment balances on hand. Interest income
increased from fiscal 1997 to fiscal 1998 due to investment of the proceeds from
a private placement of Common Stock completed in March 1997 and from our
follow-on public equity offering completed in October 1997. We
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<PAGE> 19
expect interest and other income to gradually decline in absolute dollars in
future periods as we utilize our resources to fund future working capital
requirements.
Other (Expense) Income, Net. Other income (expense) totaled $115,000,
$11,000 and $(198,000) during the years ended June 30, 1999, 1998 and 1997,
respectively. For each of these years, other income (expense) consisted
primarily of net gains and losses resulting from foreign currency fluctuations.
We expect other income (expense) to fluctuate in future periods depending upon
the mix between international and domestic business activities and upon
fluctuations in currency exchange rates.
Income Taxes. At June 30, 1999, we had net operating loss carryforwards
for federal income tax purposes of approximately $61.7 million which expire
during the years 2003 through 2019, and tax credit carryforwards of
approximately $1.9 million for federal income tax purposes which expire during
the years 2006 through 2019. Due to our net operating loss history, to date we
have established a valuation allowance to fully offset our deferred tax assets,
including those related to our carryforwards, resulting in no income tax benefit
for financial reporting purposes. Current federal income tax regulations with
respect to changes in ownership could limit the utilization of our net operating
loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
public and private placements of our securities. We had no short-or long-term
borrowings outstanding at June 30, 1999, and had no credit facilities available
at that time.
During fiscal 1999, we used approximately $14.7 million in cash in
operating activities. During the fiscal year, inventories increased to $5.2
million at June 30, 1999 from $2.1 million at June 30, 1998 as we built
inventory levels in support of higher levels of manufacturing and sales volume.
We also used approximately $1.7 million to purchase capital equipment for our
administrative and expanded manufacturing facility. We received proceeds of
approximately $1.4 million and $2.7 million in 1999 and 1998, respectively,
related to the issuance of our shares in the form of stock options. During
fiscal 1998, we raised approximately $47.7 million from the sale of Common Stock
in a public equity offering. Our liquidity will continue to be reduced as
amounts are expended to support continued growth in sales and manufacturing,
continuing clinical trials and related regulatory affairs, product and process
development and infrastructure development. Although we have no firm
commitments, we expect to make capital expenditures of approximately $2.7
million during fiscal 2000, primarily to expand manufacturing capabilities and
to enhance general infrastructure and facilities.
We believe that our current resources will be sufficient to fund our
operations at least through June 30, 2001, although there can be no assurance of
this as this estimate is based on a number of assumptions, which may not hold
true. The availability of financing either before or after that time will depend
upon a number of important factors, including the state of the United States
capital markets and economy in general and the health care and medical device
segments in particular, the status of our international and domestic sales
activities and the status of our clinical and regulatory activities. We may not
be able to raise additional capital when needed on terms favorable to us.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements for a
discussion of the impact of new accounting pronouncements.
-17-
<PAGE> 20
IMPACT OF YEAR 2000
Many currently installed computer systems and software products were
coded using two digits rather than four to define the applicable year. As a
result these computer systems and software products have time-sensitive software
that recognize a date using "00" as the year 1900 rather than the year 2000.
This could cause a system failure or miscalculations, causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, to send invoices, or to engage in similar normal business
activities. Some computers may also not properly roll from year 1999 to year
2000, resulting instead with arbitrary dates such as January 4, 1980. Finally,
computer systems and software products may fail to process accurately the leap
year logic associated with the Year 2000.
STATE OF READINESS AND CONTINGENCY PLANS
We believe that the adverse impact of Year 2000 issues on our internal
computer systems will not be material. Most of the personal computers and
computer systems we use have been installed in the past three years as we have
been growing our organization. We have also moved the remainder of our
organization to a new facility in Houston, Texas, and have installed new
equipment in connection with the relocation. We recently initiated a
comprehensive review of all of our equipment and software, and found the
incidence potential of Year 2000 issues to be minimal but not non-existent. We
are in the process of defining and resolving all Year 2000 issues, which we
expect to complete by the end of November 1999. We have also contacted each of
our key material vendors and suppliers to determine if they have any Year 2000
compliance issues that have not been resolved, or may not be resolved in a
timely manner. The results of these inquiries will lead into supplier
contingency planning efforts during the last quarter of calendar 1999.
Additionally, we recently contacted our major customers and informed them of our
Year 2000 readiness plans and processes. All of our products are fully Year 2000
compliant with the exception of the programming software, which does not use
dating in its processing calculations, but does use dating in its reporting
functions. These reporting functions include a few non-therapy related reports
that may produce more information than expected when database dates span the
millennium. These reports in no way affect the programming of the implanted
device, and are easily interpreted by users of the programming system. As such,
the programming software has been designated Year 2000 ready, and no software
updates are planned to address the small anomalies.
In the past, we have, as a service to our customers, provided laptop
computers which may be used to host the NCP System programming software. A
variety of computer models have been shipped over several years, some of which
are not compliant. During the last calendar quarter of 1999, we intend to
initiate a program to communicate to our customers how they may test their
laptops to determine their compliance state, and how they may reset internal
dates or upgrade them if necessary.
We plan to have an independent assessment of our Year 2000 plans,
progress and documentation early in the last quarter of calendar 1999. The
results of this independent assessment will be used to identify any remaining
issues and assign resources as needed to ensure our readiness.
COSTS OF YEAR 2000 COMPLIANCE
We do not expect expenditures for upgrades and testing for Year 2000
issues of software used on internal systems to be material. To date, any such
costs incurred have been in connection with the implementation of systems at our
new facility and the purchase of equipment and software for our growing employee
base. We estimate that we may need to upgrade some of our manufacturing
databases and replace a small number of our older pieces of manufacturing test
equipment. The costs of such activities are estimated to be under $100,000,
including the independent assessment of our Year 2000 program. We expect to
complete our testing, and any required upgrades by early fourth quarter calendar
1999. We also do
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<PAGE> 21
not expect diversion of resources from other management information systems or
manufacturing projects to significantly harm our business.
RISKS OF YEAR 2000 NON-COMPLIANCE AND CONTINGENCY PLANS
In the event of a failure of any software or other electronic devices
used for our internal systems, we believe any resulting business disruption
would not significantly impact our business because we believe alternative, less
technologically advanced, systems are available.
The costs of the modifications and the date on which we believe we will
complete the Year 2000 modifications, if any, are based on management's
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, we cannot assure you that these estimates will be achieved, and actual
results could differ from those anticipated.
FACTORS AFFECTING FUTURE OPERATING RESULTS
In addition to the factors described above in this section and in the
section of this Annual Report on Form 10-K entitled "Business", the following
additional factors could effect our future results.
We rely on only one product for our revenues and if sales of this
product are not achieved, our operating results will be severely harmed. We have
only one product, the NCP System, which has been approved by the FDA only for a
single indication: as an adjunctive therapy in reducing the frequency of
seizures in adults and adolescents over twelve years of age with partial onset
seizures that are refractory to antiepileptic drugs. We do not expect to have
any other product or approved indication for the NCP System in the United States
for at least the next three years. Although sales of our NCP System have been
increasing, we cannot assure you that sales will continue to increase at the
same rate or at all. We are currently requesting approval for the use of the NCP
System for the treatment of major depression in patients with unipolar and
bipolar depressive disorder. We do not yet have approvals necessary to
commercialize the NCP System for the treatment of depression. We cannot assure
you that any approvals for the treatment of depression with the NCP System will
be granted, nor can we assure you that even if the approval is granted, we will
be successful in commercializing the NCP System for the treatment of depression
or any other indications. Our inability to commercialize successfully the NCP
System will severely harm our business.
We may not achieve market acceptance of the use of our NCP System to
treat epilepsy, which could cause our sales to decrease. Continued market
acceptance of our NCP System will depend on our ability to convince the medical
community of the clinical efficacy and safety of vagus nerve stimulation and the
NCP System. While the NCP System has been used in approximately 4,500 patients
through June 30, 1999, many physicians are still unfamiliar with this form of
therapy. We believe that existing antiepileptic drugs and surgery are the only
other approved and currently available therapies competitive with the NCP System
in the treatment of epileptic seizures. These therapies may be more attractive
to patients or their physicians than the NCP System in terms of efficacy, cost
or reimbursement availability. We cannot assure you that the NCP System will
achieve market acceptance for the treatment of epilepsy or for any other
indication. Failure of the NCP System to gain market acceptance would severely
harm our business, financial condition and results of operations.
Our quarterly operating results may fluctuate in the future, which may
cause our stock price to decline. Our results of operations may fluctuate
significantly from quarter to quarter and may be below the expectations of
security analysts. If so, the market price of our shares may decline. Our
quarterly revenues, expenses and operating results may vary significantly from
quarter to quarter for several reasons including the extent to which our NCP
System gains market acceptance, the timing of obtaining marketing approvals
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<PAGE> 22
for our NCP System for other indications, the timing of any approvals for
reimbursement by third-party payors, the rate and size of expenditures incurred
as we expand our clinical, manufacturing, sales and marketing efforts and the
availability of key components, materials and contract services, which may
depend on our ability to forecast sales.
Our current and future expense estimates are based, in large part, on
estimates of future sales, which are difficult to predict. We may be unable to,
or may elect not to, adjust spending quickly enough to offset any unexpected
sales shortfall. If our expenses were not accompanied by increased sales, our
results of operations and financial condition for any particular quarter would
be harmed.
We may be unable to obtain adequate third-party reimbursement on our
product. Our ability to commercialize the NCP System successfully depends in
part on whether third-party payors, including private health care insurers,
managed care plans, the United States government's Medicare and Medicaid
programs and others, agree both to cover the NCP System and associated
procedures and services and to reimburse at adequate levels for the costs of the
NCP System and the related services we have in the United States or
internationally. If we fail to achieve or expand favorable coverage decisions
for the NCP System in a timely manner, patients and their physicians could be
deterred from using the NCP System which could reduce our sales and severely
harm our business.
We may not be successful in our marketing and sales efforts, which
could severely harm our business. We have only recently expanded our marketing
and sales force for the United States market, and we cannot assure you that this
expanded direct marketing and sales force will succeed in promoting the NCP
System to patients, health care providers or third-party payors on a broad
basis. In addition, due to limited market awareness of the NCP System, we
believe that the sales process could be lengthy, requiring us to continue to
educate patients, health care providers and third-party payors regarding the
clinical benefits and cost-effectiveness of the NCP System. In certain
international territories, we rely, and intend to continue to rely, upon
independent distributors. We may not be able to recruit and retain skilled
marketing and sales personnel or foreign distributors to support our marketing
and sales efforts. Our failure to successfully market and sell our NCP System
would severely impair our sales and our business.
We have limited manufacturing experience and may not be able to ramp up
our manufacturing to meet anticipated product demand. Our manufacturing
activities to date have consisted primarily of manufacturing limited quantities
of the NCP System for clinical investigations, for two years of commercial sales
activities in the United States and for commercial sales activities in
international markets. We do not have experience manufacturing the NCP System in
the volumes that will be necessary to achieve significant commercial sales. We
may encounter difficulties in scaling up production of the NCP System, in
procuring the necessary supply of materials, components and contract services,
or in hiring and training additional manufacturing personnel to support domestic
and international demand. In addition, our manufacturing facilities must
continue to comply with the FDA's QSR and with ISO 9001 and 9002 standards,
which impose certain procedural and documentation requirements with respect to
device design, development, manufacturing and quality assurance activities. If
we are unable to achieve commercial-scale production capability on a timely
basis with acceptable quality and manufacturing yield and costs, to sustain such
capacity, or to maintain FDA and other governmental approvals, our ability to
deliver products on a timely basis could be impaired which could severely harm
our business.
If our sole suppliers and manufacturers are unable to meet our demand
for materials, components and contract services, we may be forced to qualify
new vendors or change our product design which would impair our ability to
deliver products to our customers on a timely basis. We rely upon sole source
suppliers for certain of the key components, materials and contract services
used in manufacturing the NCP System. We periodically experience discontinuation
or unavailability of components, materials and contract services which may
require us to qualify alternative sources or, if no such alternative sources are
identified, change
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<PAGE> 23
our product design. We believe that pursuing and qualifying alternative sources
and/or redesigning specific components of the NCP System, when necessary, could
consume significant resources. In addition, such changes generally require
regulatory submissions and approvals. Any extended delays in or an inability to
secure alternative sources for these or other components, materials and contract
services could result in product supply and manufacturing interruptions, which
could significantly harm our business.
Our products may be found to have significant defects that could harm
the human body and result in product recalls. The NCP System includes a complex
electronic device and lead designed to be implanted in the human body. Component
failures, manufacturing or shipping errors or design defects could result in an
unsafe condition in patients. The occurrence of such problems or other adverse
reactions could result in a recall of our products, possibly requiring removal
and potentially reimplantation of the NCP System or a component of the NCP
System. For example, in 1991, a failure of an NCP System caused permanent
paralysis of one patient's left vocal cord. In addition, several patients
experienced bipolar lead failures which, although not harmful to the patient,
reduced the efficacy of the treatment and required lead replacement. Since the
occurrence of these failures, changes have been made to our product designs and
no similar failures have been reported. However in the future, we may experience
similar or other product problems or may be required to recall products. Any
product recall could severely harm our business, financial condition and results
of operations.
We may not be able to protect our technology from unauthorized use,
which could diminish the value of our products and impair our ability to
compete. Our success depends upon our ability to obtain and maintain patent and
other intellectual property protection for the NCP System and its improvements,
and for vagus nerve stimulation therapy. To that end, we have acquired licenses
under certain patents and have patented and intend to continue to seek patents
on our own inventions used in our products and treatment methods. The process of
seeking patent protection can be expensive and time consuming and we cannot
assure you that patents will issue from our currently pending or future
applications or that, if patents are issued, they will be of sufficient scope or
strength to provide meaningful protection of our technology, or any commercial
advantage to us. Further, the protection offered by the licensed international
patents is not as strong as that offered by the licensed United States patents
due to differences in patent laws. In particular, the European Patent Convention
prohibits patents covering methods for treatment of the human body by surgery or
therapy.
We may have to engage in litigation to protect our proprietary rights,
or defend against infringement claims by third parties, causing us to suffer
significant expenses or prevent us from selling our products. There has been
substantial litigation regarding patent and other intellectual property rights
in the medical device industry. Litigation, which could result in substantial
cost to and diversion of effort by us, may be necessary to enforce patents
issued or licensed to us, to protect trade secrets or know-how owned by us or to
defend ourselves against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Adverse
determinations in litigation could subject us to significant liabilities to
third parties, could require us to seek licenses from third parties and could
prevent us from manufacturing, selling or using the NCP System, any of which
could severely harm our business.
Intense competition and rapid technological changes could reduce our
ability to market our products and achieve sales. We believe that existing and
future antiepileptic drugs will continue to be the primary competition for our
NCP System. We may also face competition from other medical device companies
that have the technology, experience and capital resources to develop
alternative devices for the treatment of epilepsy. Many of our competitors have
substantially greater financial, manufacturing, marketing and technical
resources than we do and have obtained third-party reimbursement approvals for
their therapies.
In addition, the health care industry is characterized by extensive
research efforts and rapid technological progress. Our competitors may develop
technologies and obtain regulatory approval for
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<PAGE> 24
products that are more effective in treating epilepsy than our current or future
products. In addition, advancements in surgical techniques may make surgery a
more attractive therapy for epilepsy. The development by others of new treatment
methods with novel antiepileptic drugs, medical devices or surgical techniques
for epilepsy could render the NCP System non-competitive or obsolete. We may not
be able to compete successfully against current and future competitors,
including new products and technology, which could severely harm our business,
financial condition or results of operations.
If we fail to effectively manage our growth, our ability to maintain
our costs or capture new business could suffer. In connection with the
commercialization of the NCP System in the United States, we have begun and
intend to continue to significantly expand the scope of our operations, in
particular in manufacturing and in marketing and sales. Such activities have
placed, and may continue to place, a significant strain on our resources and
operations. Our ability to effectively manage such growth will depend upon our
ability to attract, hire and retain highly qualified employees and management
personnel. We compete for such personnel with other companies, academic
institutions, government entities and other organizations and we may not be
successful in hiring or retaining qualified personnel. Our success will also
depend upon the ability of our officers and key employees to continue to
implement and improve our operational, management information and financial
control systems. If we fail to manage our growth effectively, our business would
suffer.
We are subject to claims of product liability and we may not have the
resources or insurance to cover the cost for losses under these claims. As an
implantable medical device, the manufacture and sale of the NCP System entails
the risk of product liability claims. Our product liability coverage may not be
adequate to cover any of these claims. Product liability insurance is expensive
and in the future may not be available on acceptable terms, if at all. A
successful claim brought against us in excess of our insurance coverage could
significantly harm our business and financial condition.
If we do not continue to comply with changing government regulations,
we could lose our ability to market and sell our product. The preclinical and
clinical testing, manufacturing, labeling, sale, distribution and promotion of
the NCP System are subject to extensive and rigorous regulation in the United
States by federal agencies, primarily the FDA, and by comparable state agencies.
In the future, it will be necessary for us to obtain additional government
approvals for other applications of the NCP System and for modified or
future-generation products. Commercial distribution in certain foreign countries
is also subject to obtaining regulatory approvals from the appropriate
authorities in such countries. The process of obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory
approvals may include regulatory restrictions on the indicated uses for which a
product may be marketed. Failure to comply with applicable regulatory
requirements can result in, among other things, fines, suspension or withdrawal
of approvals, confiscations or recalls of products, operating restrictions and
criminal prosecution. Furthermore, changes in existing regulations or adoption
of new regulations could prevent us from obtaining, or affect the timing of,
future regulatory approvals. We may not be able to obtain additional future
regulatory approvals on a timely basis or at all. Delays in receipt of or
failure to receive such future approvals, suspension or withdrawal of previously
received approvals, or recalls of the NCP System could severely harm our ability
to market and sell our current and future products and improvements.
Our international operations are subject to risks not generally
associated with commercialization efforts in the United States. We have recently
begun to focus our marketing and sales activities in international markets. We
may not be successful in increasing our international market sales or in
obtaining reimbursement or any regulatory approvals required in foreign
countries. The anticipated international nature of our business is also expected
to subject us and our representatives, agents and distributors to laws and
regulations of the foreign jurisdictions in which we operate or where the NCP
System is sold. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to
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<PAGE> 25
develop and new laws or regulations may impair our ability to market and sell
our products in those jurisdictions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to
the Consolidated Financial Statements set forth on pages F-1 through F-16
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of Cyberonics, their ages as of
August 31, 1998, and certain additional information about them, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -------------------------------------------------------------
<S> <C> <C>
Robert P. Cummins........................ 45 President and Chief Executive Officer
Reese S. Terry, Jr....................... 57 Chairman of the Board, Executive Vice President and Secretary
Pamela B. Westbrook...................... 41 Vice President, Finance and Administration and Chief
Financial Officer
William H. Duffell, Jr., Ph.D............ 39 Vice President, Clinical and Regulatory Affairs
Shawn P. Lunney.......................... 36 Vice President, Marketing
Stanley H. Appel, M.D.................... 66 Director
Tony Coelho.............................. 57 Director
Thomas A. Duerden, Ph.D.................. 69 Director
Michael J. Strauss, M.D.................. 46 Director
Alan J. Olsen............................. 52 Director
</TABLE>
Mr. Cummins became a director of Cyberonics in June 1988. He was
appointed President and Chief Executive Officer of Cyberonics 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. Until July 1998, Mr.
Cummins was also a director of Sigma Circuits Inc., a manufacturer of electronic
interconnect products.
Mr. Terry co-founded Cyberonics in December 1987 and served as a
Director and Chief Executive Officer of Cyberonics until February 1990, when he
became Chairman of the Board and Executive Vice President. Mr. Terry has also
served as Secretary of Cyberonics from its inception and as President of
Cyberonics 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.
Ms. Westbrook joined Cyberonics as Vice President, Finance and
Administration and Chief Financial Officer in October 1998. From April 1998 to
October 1998, she served as Chief Financial Officer
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for Physicians Resource Group, an ophthalmic physician practice management
company. Prior to that, from November 1986 to March 1998, Ms. Westbrook worked
for SulzerMedica, a leading manufacturer of implantable medical devices
including pacemakers, heart valves and orthopedic implants. Most recently, Ms.
Westbrook was Vice President, Finance for SulzerMedica, and Vice President,
Controller for Sulzer Cardiovascular Prosthesis Division.
Dr. Duffell joined Cyberonics as Vice President, Regulatory and
Clinical Affairs in May 1995. Prior to joining Cyberonics, Dr. Duffell held the
position of Director, Regulatory Affairs and Quality Assurance with
Bristol-Myers Squibb Companies from April 1991 until May 1995, where his
responsibilities included the areas of regulatory affairs, quality assurance and
clinical research in both corporate and divisional capacities. From March 1987
to March 1989, Dr. Duffell served as Senior Manager, Regulatory Affairs and
Clinical Research with Dornier Medical, Inc., a manufacturer of extracaporial
shock-wave lithotriptors and related gastrointestinal and urological products.
Mr. Lunney joined Cyberonics in April 1991 and served in various sales,
marketing and reimbursement planning positions until May 1996, when he became
Vice President, Marketing. Prior to joining Cyberonics, Mr. Lunney held the
position of Sales and Marketing Manager with Perceptive Systems, Inc., a
hospital laboratory medical instrument manufacturer from December 1985 to April
1991.
Dr. Appel has been a director of Cyberonics 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 Department of Neurology, Baylor College
of Medicine.
Mr. Coelho has been a director of Cyberonics since March 1997 and an
independent business consultant since June 1998. From October 1996 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 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
from California from 1979 to 1989, and served as House Majority Whip from 1986
to 1989. Mr. Coelho is also on the Board of Directors of Pinnacle Global Group,
Inc., a public holding company, Service Corporation International, a funeral
service corporation, and IFC Kaiser International, an engineering and project,
construction, and program management service provider.
Dr. Duerden has been a director of Cyberonics since March 1989 and an
independent business consultant since January 1990. Since 1997, Dr. Duerden has
been a non-executive Director of PathSource, a privately held company which is
bringing together formerly independent laboratories. 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 Cyberonics since March 1997. He is
an internist and health policy consultant. In 1988, Dr. Strauss co-founded
Health Technology Associates, Inc., now known as Covance Health Economics and
Outcomes Services Inc., a consulting and research services firm specializing in
third-party payor issues, and currently serves as Executive Vice President. He
also is on the Board of Directors of Endocare, Inc. and on the Medicare Coverage
Advisory Committee.
Mr. Olsen has been a director of Cyberonics since June 1999. He has
over twenty-five years of medical device sales and marketing experience at Smith
& Nephew Richards, Danek Medical and Sofamor Danek Group. He was founder and
President of Danek Medical, a pioneer in the spinal fixation device market which
later became part of Sofamor Danek Group. He served as a Director of Sofamor
Danek Group from 1985 to 1993. He is currently an independent business
consultant, which he has been for more than the past five years, and serves on
the boards of several private and charitable organizations.
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<PAGE> 27
BOARD COMPOSITION
Pursuant to a letter agreement dated March 28, 1997, the Clark Estates
is entitled to designate one person to serve on our 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.
BOARD MEETINGS AND COMMITTEES
Our Board of Directors held a total of eight (8) meetings and acted by
written consent two (2) times during the fiscal year ended June 30, 1999. 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 consists of Thomas A. Duerden and Michael J.
Strauss, M.D., held seven (7) meetings during the fiscal year ended June 30,
1999. This Committee recommends engagement of our independent public accountants
and is primarily responsible for approving the services performed by such
accountants and for reviewing and evaluating our accounting principles and our
system of internal accounting controls.
The Compensation Committee, which consists of Tony Coelho and Stanley
H. Appel, held three (3) meetings and acted by written consent 36 times during
the fiscal year ended June 30, 1999. This Committee establishes salary and
incentive compensation of our executive officers and administers employee
benefit plans.
During the fiscal year ended June 30, 1999, all current directors
attended at least seventy five percent of the meetings of the Board of Directors
and the number of meetings held by committees on which the director served,
except Dr. Appel who attended five (5) meetings of the Board of Directors and
three (3) meetings of the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our 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 Securities Exchange Act of 1934 requires our
officers and directors, and persons who own more than ten percent of a
registered class of our 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 SEC rules to furnish us with copies of all Section 16(a) forms they
file.
Based solely on our review of the copies of such forms received we
believe that, for the fiscal year ended June 30, 1999, all Section 16(a) filing
requirements applicable to our officers, directors and ten-percent stockholders
were complied with, except as follows: Dr. Stanley H. Appel did not file two
Form 4's for a sale of shares and a gift of shares in February and March 1998; a
Form 4 was filed in January 1999 for these transfers; and Mr. Shawn Lunney did
not file a Form 4 for the sale of shares in May 1999; a Form 5 was filed in
August 1999 for this sale.
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<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the
compensation paid by us for the year ended June 30, 1999 to the Chief Executive
Officer and each of our other most highly compensated executive officers whose
total compensation exceeded $100,000. These officers are referred to as the
named executive officers:
<TABLE>
<CAPTION>
Securities
Underlying
Options (#)
------------
Long-term
Fiscal Salary ($) Bonus ($) Compensation All Other
Name and Principal Position Year Annual Compensation Awards Compensation
- ---------------------------------------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Robert P. Cummins(1) .................. 1999 $200,000 $ 50,000 100,000 $ 420(2)
President and Chief Executive Officer 1998 200,000 56,000 250,000 253(2)
1997 196,596 68,530 356,000 294(2)
Reese S. Terry, Jr .................... 1999 $147,000 $ 36,750 -- $ 4,214(2)
Chairman of the Board and Executive 1998 147,000 41,160 -- 4,114(2)
Vice President 1997 146,693 32,596 63,500 6,705(2)
William H. Duffell, Jr., Ph.D ......... 1999 $157,500 $ 39,375 -- $ 363(2)
Vice President, Clinical and Regulatory 1998 157,500 44,100 51,235 257(2)
Affairs 1997 157,356 32,963 90,000 13,952(3)
Shawn P. Lunney ....................... 1999 $144,231 $ 87,500(4) 25,000 $ 25,294(5)(2)
Vice President, Marketing 1998 125,000 37,500 104,750 126(2)
1997 112,000 63,189 50,000 126(2)
Stephen D. Ford(6) .................... 1999 $141,231 $ 37,500 -- 323(2)
Vice President, Manufacturing 1998 119,423 36,435 85,000 130(2)
1997 112,141 33,600 50,000 130(2)
</TABLE>
(1) Mr. Cummins became an executive officer of Cyberonics in fiscal 1996.
(2) Represents premiums paid by Cyberonics for term life insurance (except as
set forth below).
(3) Represents $332 paid by Cyberonics for term life insurance and $13,650 paid
to Dr. Duffell for expenses related to relocation to Houston.
(4) During fiscal 1999, Mr. Lunney also performed the duties of Area Sales
Director for which he earned an additional bonus of $50,000.
(5) Also includes $25,000 paid to Mr. Lunney for sales awards.
(6) Mr. Ford resigned from his position with Cyberonics in September 1999.
Option Grants in Last Fiscal Year. The following table sets forth each
grant of stock options made during the year ended June 30, 1999 to each of the
named executive officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM($)(2)
---------------------------------------------------------- ---------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(1) PRICE ($/SH) DATE 5% 10%
- -------------------------------- ---------- -------------- ------------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert P. Cummins............... 100,000 7% $8.00 3/6/2009 $503,116 $1,274,994
Reese S. Terry, Jr. ............ -- -- -- -- -- --
William H. Duffell, Jr., Ph.D... -- -- -- -- -- --
Shawn P. Lunney................. 25,000 2% 8.00 3/6/2009 125,779 318,748
Stephen D. Ford(3).............. -- -- -- -- -- --
</TABLE>
(1) Total number of shares subject to options granted to employees in
fiscal 1999 was 1,519,450 which number includes options granted to
employee directors.
(2) Potential realizable value is based on an assumption that the stock price
appreciates at the annual rate shown (compounded annually) from the date of
grant until the end of the ten-year option term. These numbers are
calculated based on the requirements promulgated by the SEC and do not
reflect our estimate of future stock price growth.
(3) Mr. Ford resigned from his position with Cyberonics in September 1999.
-26-
<PAGE> 29
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end
Values. The following table sets forth, for each of the named executive
officers, each officer's exercise of stock options during the fiscal year ended
June 30, 1999 and the year-end value of unexercised options:
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-money Options at Fiscal
On Realized Options at Fiscal Year-end Year-end Exercisable/
Name Exercise(#) ($)(1) Exercisable/unexercisable(#)(2) unexercisable($)(3)
- --------------------------------- ----------- -------- ------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Robert P. Cummins................ -- -- $438,335/261,665 $3,325,625/427,500
Reese S. Terry, Jr............... -- -- 44,500/10,000 419,969/94,375
William H. Duffell, Jr., Ph.D.... -- -- 116,902/44,335 982,506/101,769
Shawn P. Lunney.................. -- -- 141,167/65,583 1,164,297/177,656
Stephen D. Ford(4)............... -- -- 156,667/43,333 1,321,250/94,375
</TABLE>
(1) Represents market value of underlying securities at date of exercise less
option exercise price.
(2) Options granted by Cyberonics 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 or five year periods and 1/60th of the
optioned shares vest each month until fully vested.
(3) Market value of underlying securities at fiscal year-end ($12.50/per share)
minus the exercise price.
(4) Mr. Ford resigned from his position with Cyberonics in September 1999.
BOARD COMPENSATION
Directors do not receive any cash compensation for their services as
members of the Board of Directors. Non-employee directors are eligible for
discretionary option grants under our 1996 Option Plan. During fiscal 1999, each
non-employee director, excluding Mr. Olsen, was granted an option to purchase
25,000 shares of Common Stock with an exercise price equal to the fair market
value of the Common Stock on the date of grant. Mr. Olsen was appointed a
director in June 1999 and was granted an option to purchase 50,000 shares of
Common Stock with an exercise price equal to the fair market value of the Common
Stock on the date of grant.
-27-
<PAGE> 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of August 31, 1999 certain
information with respect to the beneficial ownership of our Common Stock (i) by
each person known by us to own beneficially more than five percent of the
outstanding shares of our Common Stock, (ii) by each of our directors, (iii) by
each of the named executive officers and (iv) by all directors and executive
officers as a group. Except as otherwise noted below, we are not aware of any
agreements among our stockholders which relate to voting or investment of our
shares of our Common Stock.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME OF BENEFICIAL OWNER OWNED(1) SHARES OWNED(1)
- ------------------------- ------------ ---------------
<S> <C> <C>
The Clark Estates(2)................................................... 1,426,208 8.1%
30 Wall Street
New York, NY 10005
RHO Management Partners, L.P........................................... 1,066,386 6.1%
124 Dune Road
Quque, NY 11959
St. Jude Medical, Inc.(3).............................................. 1,051,818 8.1%
One Lillehei Plaza
St. Paul, MN 55117-9983
FMR Corp............................................................... 1,045,300 6.0%
82 Devonshire Street
Boston, MA 02109
Reese S. Terry, Jr.(4)................................................. 715,500 4.1%
Robert P. Cummins(5)................................................... 634,368 3.5%
William H. Duffell, Jr., Ph.D.(6)...................................... 169,483 1.0%
Shawn P. Lunney(7)..................................................... 153,466 *
Stephen D. Ford(8)..................................................... 162,468 *
Stanley H. Appel, M.D.(9).............................................. 127,550 *
Thomas A. Duerden, Ph.D.(10)........................................... 65,250 *
Tony Coelho(11)........................................................ 60,850 *
Michael J. Strauss, M.D.(12)........................................... 51,250 *
Alan J. Olsen (13)..................................................... 6,808 *
All executive officers and directors as a group (10 persons)(14)....... 2,150,993 11.5%
</TABLE>
- ---------------
*Less than 1%
(1) Based on total shares outstanding of 17,614,983 at August 31, 1999.
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 of the person holding such options
but are not deemed outstanding for computing the percentage 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 our 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.
(3) In connection with the acquisition of these shares, St. Jude also entered
into a Stockholders' Agreement which provides, among other things, that St.
Jude will not acquire additional shares of Common Stock.
(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 October 30, 1999.
-28-
<PAGE> 31
(5) Includes 10,000 shares held in trust for the benefit of Mr. Cummins'
children of which Mr. Cummins serves as trustee. Also includes 461,668
shares subject to options exercisable on or before October 30, 1999.
(6) Includes 108,235 shares subject to options exercisable on or before
October 30, 1999.
(7) Includes 146,166 shares subject to options exercisable on or before
October 30, 1999.
(8) Includes 160,000 shares subject to options exercisable on or before
October 30, 1999. Mr. Ford resigned from his position in September 1999.
(9) Includes 83,750 shares subject to options exercisable on or before
October 30, 1999.
(10) Includes 43,750 shares subject to options exercisable on or before
October 30, 1999.
(11) Includes 53,750 shares subject to options exercisable on or before
October 30, 1999.
(12) Includes 33,750 shares subject to options exercisable on or before
October 30, 1999.
(13) Includes 3,333 shares subject to options exercisable on or before
October 30, 1999.
(14) Includes 1,142,402 shares subject to options held by executive officers
and directors, which options are exercisable on or before October 30,
1999. Also includes shares which may be determined to be beneficially owned
by executive officers and directors. See Notes 4 through 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of our stockholders, 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 held by them.
As of June 30, 1998, Rick L. Amos, formerly our Vice President, Sales
owed us $100,000 under a loan for such amount provided to Mr. Amos in fiscal
1998 to cover certain relocation expenses. The loan bore interest at 8 1/2% per
annum, and was secured by the shares of our common stock held by or underlying
options held by Mr. Amos. All principal and interest on the loan was paid in
January 1999.
Covance Health Economics and Outcomes Services, Inc. provides health
care reimbursement consulting services to us. We paid to Covance $693,844,
$511,459 and $0 for such services in fiscal 1999, 1998 and 1997, respectively.
Dr. Strauss, one of our directors, is the Executive Vice President of Covance.
Our Bylaws provide that we are required to indemnify our officers and
directors to the fullest extent permitted by Delaware law, including those
circumstances in which indemnification would otherwise be discretionary, and
that we are required to advance expenses to our officers and directors as
incurred. Further, we have entered into indemnification agreements with our
officers and directors. We believe that our charter and bylaw provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. All future transactions between us and our 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 us than could be obtained from unaffiliated third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. Financial Statements. The following consolidated financial
statements of Cyberonics, Inc. and subsidiary, and the Report of
Independent Public Accountants are included at pages F-1 through F-18
of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
DESCRIPTION NO.
- ----------- ----
<S> <C>
Report of Independent Public Accountants.................................................................. F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998.................................................. F-3
Consolidated Statements of Operations and Comprehensive Income
for the Three Years Ended June 30, 1999.............................................................. F-4
</TABLE>
-29-
<PAGE> 32
<TABLE>
<S> <C>
Consolidated Statements of Stockholders' Equity for the Three Years Ended June 30, 1999................... F-5
Consolidated Statements of Cash Flows for the Three Years Ended June 30, 1999............................. F-6
Notes to Consolidated Financial Statements................................................................ F-7
</TABLE>
2. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Restated Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
4.1(2) Preferred Shares Rights Agreement, dated as of March 4, 1997
between Cyberonics, Inc. and First National Bank of Boston,
including the Certificate of Designation, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibit A, B and C, respectively.
10.2(8)* Amended 1991 Employee Stock Purchase Plan.
10.3(1) License Agreement dated March 15, 1988 between the Registrant
and Dr. Jacob Zabara.
10.4(1) Patent License Agreement effective as of July 28, 1989 between
the Registrant and Huntington Medical Research Institute.
10.5(3) Lease Agreement dated November 3, 1994 together with
amendments dated April 18, 1996 and April 30, 1997,
respectively, between the Registrant and Salitex II, Ltd.
10.6(1) Form of Indemnification Agreement.
10.7(1) Amended and Restated Stockholders Agreement dated
October 16, 1992.
10.8(4) Registration Rights Agreement dated March 28, 1997.
10.9(5)* Amended and Restated 1996 Stock Option Plan.
10.10(3) Stockholders' Agreement dated April 8, 1996 between the
Registrant and St. Jude Medical, Inc.
10.11(3) Letter Agreement dated March 28, 1997 between the Clark Estates
and the Registrant.
10.12(6) Lease Agreement dated August 19, 1997 between the Registrant
and Space Assets II, Inc.
10.13(7)* 1997 Stock Plan.
10.14(9) 1998 Stock Option Plan.
21.1(3) List of Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Reg. No. 33-45118) declared effective February 10, 1993.
(2) Incorporated by reference to Registrant's Registration Statement on Form
8-A (Commission File No. 000-19806) filed on March 6, 1997.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended June 30, 1997.
(4) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
(5) Incorporated by reference to Registrant's Registration Statement on
Form S-8 (Reg. No. 333-19785) filed on April 29, 1998.
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended June 30, 1997.
(7) Incorporated by reference to Registrant's Report on Form 14A filed on
November 26, 1997.
(8) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Reg. No. 333-66689) filed on November 3, 1998.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-66691) filed on November 3, 1998.
* Document indicated is a compensatory plan.
(b) Reports on Form 8-K.
Not Applicable
(c) Exhibits
See Item 14(a)(2) above
-30-
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Registrant
CYBERONICS, INC.
By: /s/ Pamela B. Westbrook
------------------------------------------
Pamela B. Westbrook
Vice President of Finance and
Administration and Chief Financial Officer
September 24, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert P. Cummins and Pamela B.
Westbrook, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that each of said attorneys-in-fact, or his
substitute or substitutes, any do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<S> <C> <C>
/s/ Reese S. Terry, Jr.
- -----------------------------------------
Reese S. Terry, Jr. Chairman of the Board and Executive Vice President September 24, 1999
/s/ Robert P. Cummins
- -----------------------------------------
Robert P. Cummins President, Chief Executive Officer and Director September 24, 1999
(Principal Executive Officer)
/s/ Pamela B. Westbrook
- -----------------------------------------
Pamela B. Westbrook Vice President, Finance and Administration September 24, 1999
and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Stanley H. Appel, M.D.
- -----------------------------------------
Stanley H. Appel, M.D. Director September 24, 1999
/s/ Tony Coelho
- -----------------------------------------
Tony Coelho Director September 24, 1999
/s/ Thomas A. Duerden, Ph.D.
- -----------------------------------------
Thomas A. Duerden, Ph.D. Director September 24, 1999
/s/ Michael J. Strauss
- -----------------------------------------
Michael J. Strauss, M.D. Director September 24, 1999
/s/ Alan J. Olsen
- -----------------------------------------
Alan J. Olsen Director September 24, 1999
</TABLE>
-31-
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Restated Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
4.1(2) Preferred Shares Rights Agreement, dated as of March 4, 1997
between Cyberonics, Inc. and First National Bank of Boston,
including the Certificate of Designation, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibit A, B and C, respectively.
10.2(8) Amended 1991 Employee Stock Purchase Plan.
10.3(1) License Agreement dated March 15, 1988 between the Registrant
and Dr. Jacob Zabara.
10.4(1) Patent License Agreement effective as of July 28, 1989 between
the Registrant and Huntington Medical Research Institute.
10.5(3) Lease Agreement dated November 3, 1994 together with
amendments dated April 18, 1996 and April 30, 1997,
respectively, between the Registrant and Salitex II, Ltd.
10.6(1) Form of Indemnification Agreement.
10.7(1) Amended and Restated Stockholders Agreement dated
October 16, 1992.
10.8(4) Registration Rights Agreement dated March 28, 1997.
10.9(5)* Amended and Restated 1996 Stock Option Plan.
10.10(3) Stockholders' Agreement dated April 8, 1996 between the
Registration and St. Jude Medical, Inc. 10.11(3) Letter
Agreement dated March 28, 1997 between the Clark Estates and
the Registrant.
10.12(6) Lease Agreement dated August 19, 1997 between the Registrant
and Space Assets II, Inc.
10.13(7)* 1997 Stock Plan.
10.14(9) 1998 Stock Option Plan.
21.1(3) List of Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Reg. No. 33-45118) declared effective February 10, 1993.
(2) Incorporated by reference to Registrant's Registration Statement on Form
8-A (Commission File No. 000-19806) filed on March 6, 1997.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997.
(4) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
(5) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Reg. No. 333-19785) filed on April 29, 1998.
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997.
(7) Incorporated by reference to Registrant's Report on Form 14A filed on
November 26, 1997.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-66689 filed on November 3, 1998.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-66691) filed on November 3, 1998.
* Document indicated is a compensatory plan.
-32-
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS
CONTENTS
Report of Arthur Andersen LLP, Independent Public Accountants............ F-2
Consolidated Balance Sheets ............................................. F-3
Consolidated Statements of Operations and Comprehensive Income .......... F-4
Consolidated Statements of Stockholders' Equity ......................... F-5
Consolidated Statements of Cash Flows ................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
F-1
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cyberonics, Inc.
We have audited the accompanying consolidated balance sheets of Cyberonics, Inc.
(a Delaware corporation), and subsidiary as of June 30, 1999 and 1998, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cyberonics, Inc.,
and subsidiary as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 30, 1999
F-2
<PAGE> 37
CYBERONICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,606,613 $ 1,695,385
Securities held to maturity 19,222,590 36,341,958
Accounts receivable, net 5,450,003 5,858,634
Inventories 5,195,114 2,103,603
Prepaid expenses 835,467 1,163,123
-------------- --------------
Total Current Assets 32,309,787 47,162,703
Securities held to maturity 4,091,491 2,106,716
Property and equipment, net 3,272,960 3,152,983
Other assets, net 108,915 192,892
-------------- --------------
$ 39,783,153 $ 52,615,294
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,704,095 $ 3,690,295
Accrued liabilities 4,630,613 4,226,280
-------------- --------------
Total Current Liabilities 6,334,708 7,916,575
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value per share; 2,500,000 shares authorized;
no shares issued and outstanding -- --
Common Stock, $.01 par value per share; 25,000,000 shares
authorized; 17,562,000 and 17,266,433 shares issued and
outstanding at June 30, 1999 and 1998, respectively 175,620 172,664
Additional paid-in capital 109,280,567 107,757,504
Accumulated other comprehensive income (128,476) 110,265
Accumulated deficit (75,879,266) (63,341,714)
-------------- --------------
Total Stockholders' Equity 33,448,445 44,698,719
-------------- --------------
$ 39,783,153 $ 52,615,294
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 38
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 29,927,476 $ 14,912,868 $ 1,372,005
Cost of sales 7,736,137 3,902,468 372,180
------------ ------------ ------------
Gross Profit 22,191,339 11,010,400 999,825
Operating Expenses:
Selling, general and administrative 29,585,570 19,781,268 5,933,852
Research and development 6,724,106 7,391,426 6,549,474
------------ ------------ ------------
Total operating expenses 36,309,676 27,172,694 12,483,326
------------ ------------ ------------
Loss From Operations (14,118,337) (16,162,294) (11,483,501)
Interest income, net 1,465,549 1,976,792 436,813
Other income (expense), net 115,236 10,790 (198,143)
------------ ------------ ------------
Net Loss $(12,537,552) $(14,174,712) $(11,244,831)
============ ============ ============
Basic and Diluted Net Loss Per Share $ (.72) $ (.88) $ (.93)
============ ============ ============
Shares Used In Computing Basic and
Diluted Net Loss Per Share 17,503,169 16,104,922 12,030,171
============ ============ ============
Comprehensive Income:
Net Loss $(12,537,552) $(14,174,712) $(11,244,831)
Foreign currency translation adjustment (238,741) (69,881) 145,838
------------ ------------ ------------
Comprehensive Income (Loss) $(12,776,293) $(14,244,593) $(11,098,993)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 39
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Shares Amount
-------------- --------------
<S> <C> <C>
Balance at June 30, 1996 9,577,115 $ 95,771
Issuance of Common Stock in corporate relationship 2,181,818 21,818
Issuance of Common Stock in private placement 1,534,374 15,344
Stock options exercised 10,734 108
Issuance of Common Stock under Employee Stock Purchase Plan 18,134 181
Deferred compensation relating to issuance of certain stock options -- --
Amortization of deferred compensation and expenses related to certain stock options -- --
Translation adjustment -- --
Net loss -- --
-------------- --------------
Balance at June 30, 1997 13,322,175 133,222
Issuance of Common Stock in public equity offering, net of offering costs 3,225,000 32,250
Stock options and warrants exercised 709,121 7,091
Issuance of Common Stock under Employee Stock Purchase Plan 10,137 101
Deferred compensation relating to issuance of certain stock options -- --
Amortization of deferred compensation and expenses related to certain
stock options -- --
Translation adjustment -- --
Net loss -- --
-------------- --------------
Balance at June 30, 1998 17,266,433 172,664
Stock options exercised 262,214 2,622
Issuance of Common Stock under Employee Stock Purchase Plan 33,353 334
Issuance of options for consultant services -- --
Translation adjustment -- --
Net loss -- --
-------------- --------------
Balance at June 30, 1999 17,562,000 $ 175,620
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Deferred
Capital Compensation
-------------- --------------
<S> <C> <C>
Balance at June 30, 1996 $ 39,261,602 $ (4,460)
Issuance of Common Stock in corporate relationship 11,154,663 --
Issuance of Common Stock in private placement 6,768,599 --
Stock options exercised 13,914 --
Issuance of Common Stock under Employee Stock Purchase Plan 47,423 --
Deferred compensation relating to issuance of certain stock options 76,500 (76,500)
Amortization of deferred compensation and expenses related to certain stock options 16,155 17,210
Translation adjustment -- --
Net loss -- --
-------------- --------------
Balance at June 30, 1997 57,338,856 (63,750)
Issuance of Common Stock in public equity offering, net of offering costs 47,624,220 --
Stock options and warrants exercised 2,665,309 --
Issuance of Common Stock under Employee Stock Purchase Plan 55,973 --
Deferred compensation relating to issuance of certain stock options 73,146 (73,146)
Amortization of deferred compensation and expenses related to certain
stock options -- 136,896
Translation adjustment -- --
Net loss -- --
-------------- --------------
Balance at June 30, 1998 107,757,504 --
Stock options exercised 1,136,919 --
Issuance of Common Stock under Employee Stock Purchase Plan 308,134 --
Issuance of options for consultant services 78,010 --
Translation adjustment -- --
Net loss -- --
-------------- --------------
Balance at June 30, 1999 $ 109,280,567 $ --
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated
Income Deficit
-------------- --------------
<S> <C> <C>
Balance at June 30, 1996 $ 34,308 $ (37,922,171)
Issuance of Common Stock in corporate relationship -- --
Issuance of Common Stock in private placement -- --
Stock options exercised -- --
Issuance of Common Stock under Employee Stock Purchase Plan -- --
Deferred compensation relating to issuance of certain stock options -- --
Amortization of deferred compensation and expenses related to certain stock options -- --
Translation adjustment 145,838 --
Net loss -- (11,244,831)
-------------- --------------
Balance at June 30, 1997 180,146 (49,167,002)
Issuance of Common Stock in public equity offering, net of offering costs -- --
Stock options and warrants exercised -- --
Issuance of Common Stock under Employee Stock Purchase Plan -- --
Deferred compensation relating to issuance of certain stock options -- --
Amortization of deferred compensation and expenses related to certain
stock options -- --
Translation adjustment (69,881) --
Net loss -- (14,174,712)
-------------- --------------
Balance at June 30, 1998 110,265 (63,341,714)
Stock options exercised -- --
Issuance of Common Stock under Employee Stock Purchase Plan -- --
Issuance of options for consultant services -- --
Translation adjustment (238,741) --
Net loss -- (12,537,552)
-------------- --------------
Balance at June 30, 1999 $ (128,476) $ (75,879,266)
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 40
CYBERONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net loss $(12,537,552) $(14,174,712) $(11,244,831)
Noncash items included in net loss:
Depreciation 1,515,273 697,420 253,615
Loss on asset disposals 102,064 -- --
Expense related to certain stock options 78,010 136,896 33,365
Change in operating assets and liabilities:
Accounts receivable 408,631 (5,310,092) (75,504)
Inventories (3,091,511) (1,098,247) (333,520)
Prepaid expenses 327,656 (1,036,324) 131,786
Accounts payable and accrued liabilities (1,581,867) 6,088,310 (654,728)
Other 83,977 (109,641) (73,510)
------------ ------------ ------------
Net Cash Used In Operating Activities (14,695,319) (14,806,390) (11,963,327)
Cash Flow From Investing Activities:
Purchases of property and equipment (1,737,314) (3,488,070) (283,067)
Purchases of marketable securities (45,991,718) (75,229,726) (11,614,676)
Maturities of marketable securities 61,126,311 44,122,869 4,352,891
------------ ------------ ------------
Net Cash Provided By (Used in)
Investing Activities 13,397,279 (34,594,927) (7,544,852)
Cash Flow From Financing Activities:
Proceeds from issuance of Common Stock 1,448,009 50,384,944 18,022,050
------------ ------------ ------------
Net Cash Provided By Financing
Activities 1,448,009 50,384,944 18,022,050
Effect of exchange rate changes on cash and cash equivalents (238,741) (69,881) 145,838
------------ ------------ ------------
Net Increase (Decrease) In Cash and
Cash Equivalents (88,772) 913,746 (1,340,291)
Cash and cash equivalents at beginning of year 1,695,385 781,639 2,121,930
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,606,613 $ 1,695,385 $ 781,639
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 41
CYBERONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
Nature of Operations. Cyberonics, Inc. ("Cyberonics" or the "Company"), designs,
develops, manufactures and markets medical devices which deliver a unique
therapy, vagus nerve stimulation (VNS(TM)), for the treatment of epilepsy and
other debilitating neurological disorders. In July 1997, Cyberonics' sole
product, its proprietary implantable device, the NCP(R) System, was approved by
the United States Food and Drug Administration ("FDA") for commercial
distribution in the United States, where the Company presently markets it using
its own employee-based direct sales organization. In addition, the NCP System is
marketed internationally (principally in Europe) using a combination of the
Company's own direct sales organization and independent distributors. Cyberonics
is headquartered in Houston, Texas.
The Company's future success is dependent upon a number of factors which
include, among others, achieving market acceptance and generating sufficient
sales volume, obtaining and maintaining regulatory and reimbursement approvals
for its products, the possibility of competition and technological changes,
developing its sales, marketing and corporate infrastructures, maintaining an
uninterrupted supply of certain sole source components and materials, adding
sufficient manufacturing capacity to meet future possible product demand,
possible product liability or recall, and reliance on key personnel.
Consolidation. The accompanying consolidated financial statements include the
Company and its wholly-owned subsidiary, Cyberonics Europe, S.A. All significant
inter-company accounts and transactions have been eliminated.
Use of Estimates. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation. The assets and liabilities of Cyberonics Europe
S.A. are generally translated into U.S. dollars at exchange rates in effect on
reporting dates, while capital accounts and certain obligations of a long-term
nature payable to the parent company are translated at historical rates. Income
statement items are translated at average exchange rates in effect during the
financial statement period. Gains and losses resulting from foreign currency
transactions denominated in currency other than the functional currency are
included in other income and expense.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents.
F-7
<PAGE> 42
Marketable Securities. At June 30, 1999 and 1998, the Company's investment
portfolios consisted of securities held to maturity that are reported at
amortized cost. Securities held to maturity are primarily corporate bonds,
commercial paper and United States (US) treasury obligations with various
maturity dates ranging up to approximately 30 months and have a fair market
value of approximately $23,200,000 and $38,260,000, as of June 30, 1999 and
1998, respectively. At June 30, 1999 and 1998, the Company's investment
portfolio consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Fair Market Carrying Fair Market Carrying
Value Value Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Securities held to maturity-
Current-
Corporate bonds and commercial paper $ 18,761,000 $ 18,845,853 $ 34,391,000 $ 34,862,020
US treasury obligations 375,000 376,737 -- --
International treasury obligations -- -- 1,460,000 1,479,938
------------ ------------ ------------ ------------
19,136,000 19,222,590 35,851,000 36,341,958
Non-current-
Asset-backed investments -- -- 2,409,000 2,106,716
Corporate bonds and commercial paper 1,625,000 1,630,620 -- --
US treasury obligations 2,439,000 2,460,871 -- --
------------ ------------ ------------ ------------
4,064,000 4,091,491 2,409,000 2,106,716
------------ ------------ ------------ ------------
Total $ 23,200,000 $ 23,314,081 $ 38,260,000 $ 38,448,674
============ ============ ============ ============
</TABLE>
Inventories. Cyberonics states its inventories at the lower of cost, first-in,
first-out (FIFO) method, or market. Cost includes the acquisition cost of raw
materials and components, direct labor and overhead.
Property and Equipment. Property and equipment are carried at cost, less
accumulated depreciation. Maintenance, repairs and minor replacements are
charged to expense as incurred; significant renewals and betterments are
capitalized. For financial reporting purposes, the Company computes depreciation
using the double declining balance method over useful lives ranging from three
to seven years.
Long-Lived Assets. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, the Company evaluates the
recoverability of property and equipment and intangible assets if facts and
circumstances indicate that any of those assets might be impaired. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is necessary. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
Stock Options. The Company has adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, which disclosures are
presented in Note 6, "Stock Incentive and Purchase Plans." Because of this
election, the Company continues to account for its employee stock-based
compensation plans under Accounting Principles Board (APB) Opinion No. 25 and
the related interpretations. Accordingly, deferred compensation is recorded for
stock-based compensation grants based on the excess of the market value of the
common stock on the measurement date over the exercise price. The deferred
compensation is amortized over the vesting period of each unit of stock-based
compensation. If the exercise price of the stock-based compensation grant is
equal to the market price of the Company's stock on the date of grant, no
compensation expense is recorded.
Revenue Recognition. Revenue from product sales is generally recognized upon
shipment to the customer, net of estimated returns and allowances. United States
sales activities prior to the Company's July 1997 receipt of FDA approval
depended entirely upon the Company conducting clinical trial activities under
arrangements with certain investigational centers.
F-8
<PAGE> 43
Accounts Receivable. The Company's allowance for doubtful accounts totaled
$495,662 and $505,560 at June 30, 1999 and 1998, respectively.
Research and Development. All research and development costs are expensed as
incurred.
Warranty Expense. The Company provides at the time of shipment for the estimated
costs which may be incurred under its product warranties.
License Agreements. The Company has executed licensing agreements under which it
has secured the rights provided under certain patents. License fees and
royalties, payable under the terms of these agreements, are expensed as
incurred.
Income Taxes. Cyberonics accounts for income taxes in accordance with the
liability method. Under this method, deferred income taxes reflect the impact of
temporary differences between financial accounting and tax bases of assets and
liabilities. Such differences relate primarily to the Company's election to
defer the deduction of certain start-up costs for federal income tax purposes,
the deductibility of certain accruals and reserves and the effect of tax loss
and tax credit carryforwards not yet utilized. Deferred tax assets are evaluated
for realization based on a more-likely-than-not criteria in determining if a
valuation allowance should be provided.
Net Loss Per Share. In accordance with FASB No. 128 Earnings Per Share, the
Company's net loss per share is based on the weighted average number of common
shares outstanding. Common equivalent shares, consisting of the effect of stock
options and warrants, are excluded from the per share calculations, as the
effect of their inclusion is antidilutive.
Comprehensive Income. The Company adopted SFAS No. 130, Reporting Comprehensive
Income, effective July 1, 1998. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive
income is the total of net income and all other non-owner changes in equity. A
reconciliation of reported net earnings to comprehensive income is included in
the consolidated statement of operations and comprehensive income.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials and components $ 2,837,599 $ 976,737
Work-in-process 794,410 549,885
Finished goods 1,563,105 576,981
------------ ------------
$ 5,195,114 $ 2,103,603
============ ============
</TABLE>
F-9
<PAGE> 44
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Manufacturing equipment $ 1,708,654 $ 1,201,943
Computer equipment 1,523,760 1,425,150
Furniture and fixtures 1,188,572 757,113
Leasehold improvements 1,181,140 554,560
Construction in progress 162,670 1,495,524
Office equipment 80,591 77,408
------------ ------------
$ 5,845,387 5,511,698
Accumulated depreciation (2,572,427) (2,358,715)
------------ ------------
$ 3,272,960 $ 3,152,983
============ ============
</TABLE>
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Payroll and other compensation $ 2,086,849 $ 2,330,449
Clinical costs 1,161,291 270,472
Royalties 398,800 206,992
Warranties 375,000 375,000
Sales returns and allowances 205,400 317,080
Professional services 129,600 334,000
Marketing activities 50,250 196,794
Other 223,423 195,493
------------ ------------
$ 4,630,613 $ 4,226,280
============ ============
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
Preferred Stock. The Company has 2,500,000 shares of undesignated Preferred
Stock authorized and available for future issuance, of which none have been
issued through June 30, 1999. With respect to the shares authorized, the
Company's Board of Directors, at its sole discretion, may determine, fix and
alter dividend rights, dividend rates, conversion rights, voting rights, terms
of redemption, redemption prices, liquidation preferences and the number of
shares constituting any such series, and may determine the designation, terms
and conditions of the issuance of any such shares.
Common Stock. During the year ended June 30, 1997, stock option exercises and
issuances of Common Stock under the Company's Employee Stock Purchase Plan
increased the number of common shares by 10,734 and 18,134, respectively. During
the year ended June 30, 1998, stock option and warrant exercises and issuances
of Common Stock under the Company's Employee Stock Purchase Plan increased the
number of common shares by 709,121 and 10,137, respectively. During the year
ended June 30, 1999, stock option exercises and issuances of Common Stock under
the Company's Employee Stock Purchase Plan increased the number of common shares
by 262,214 and 33,353, respectively.
F-10
<PAGE> 45
In March 1997, the Company completed a private equity financing, issuing
1,534,374 new shares of the Company's Common Stock in exchange for $4.44 per
share, providing additional proceeds to the Company of approximately $6,800,000
after offering costs.
In September 1997, the Company issued 3,000,000 shares of its Common Stock in a
follow-on public equity offering for $15.88 per share and, in October 1997,
subsequently issued an additional 225,000 shares at the same price per share
upon the exercise of a portion of the related underwriter's overallotment
option. Proceeds from the combined issuances totaled approximately $47.7 million
after deducting commissions and offering costs.
Preferred Share Purchase Rights. In January 1997, the Company's Board of
Directors declared a dividend distribution of one Preferred Share Purchase Right
("Right") on each outstanding share of the Company's Common Stock to
stockholders of record on March 10, 1997. The Rights will become exercisable
following the tenth day after a person or group announces an acquisition of 20
percent or more of the Company's Common Stock or announces commencement of a
tender offer, the consummation of which would result in ownership by the persons
or group of 20 percent or more of the Common Stock. As amended in April 1998,
each Right entitles stockholders to buy 1/1000 of a share of the Company's
Series A Participating Preferred Stock at an exercise price of $150. The Company
will be entitled to redeem the Rights at $.01 per Right at any time on or before
the tenth day following acquisition by a person or group of 20 percent or more
of the Company's Common Stock. If, prior to redemption of the Rights, a person
or group acquires 20 percent or more of the Company's Common Stock, each Right
not owned by a holder of 20 percent or more of the Common Stock will entitle its
holder to purchase, at the Right's then current exchange price, that number of
shares of Common Stock of the Company (or, in certain circumstances as
determined by the Board, cash, other property or other securities) having a
market value at that time of twice the Right's exercise price. If, after the
tenth day following acquisition by a person or group of 20 percent or more of
the Company's Common Stock, the Company sells more than 50 percent of its assets
or earning power or is acquired in a merger or other business combination, the
acquiring person must assume the obligations under the Rights and the Rights
will become exercisable to acquire Common Stock of the acquiring person at the
discounted price. At any time after an event triggering exercisability of the
Rights at a discounted price and prior to the acquisition by the acquiring
person of 50 percent or more of the outstanding Common Stock, the Board of
Directors of the Company may exchange the Rights (other than those owned by the
acquiring person or its affiliates) for the Common Stock of the Company at an
exchange ratio of one share of Common Stock per Right.
NOTE 6. STOCK INCENTIVE AND PURCHASE PLANS
Stock Options. Cyberonics has reserved an aggregate of 6,550,000 shares of its
Common Stock through June 30, 1999, for issuance pursuant to its Amended 1988
Incentive Stock Option Plan, its 1996 Stock Option Plan, its 1997 Stock Option
Plan and its 1998 Stock Option Plan (the "Stock Option Plans"). Options granted
under the Stock Option Plans generally vest ratably over four or five years
following their date of grant. The vesting of certain options occurs up to 10
years from the grant date but can accelerate based upon the achievement of
specific milestones related to regulatory approvals and the achievement of
Company sales objectives. In June 1997, 446,147 shares vested upon receipt of
FDA panel recommendation and, in July 1997, an additional 356,156 shares vested
upon FDA approval. During fiscal 1999, 9,250 shares vested upon certain sales
milestone achievements. Options granted under the Stock Option Plans have
maximum terms of 10 years. The Amended 1988 Incentive Stock Option Plan and the
1997 Stock Plan allow issuance of either nonstatutory or incentive stock
options, while the 1996 Stock Option Plan provides for issuance of nonstatutory
stock options exclusively.
F-11
<PAGE> 46
The following is a summary of the Company's stock option activity for the three
years ended June 30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------ -----------------------------
Weighted Weighted
Average Average
Shares Exercise Exercise
Reserved Shares Price Shares Price
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 606,775 719,552 $ 4.20 293,605 $ 4.74
Shares reserved 2,000,000
Granted (1,893,388) 1,893,388 3.11
Options becoming exercisable 762,269
Exercised (10,734) 1.31 (10,734)
Canceled or forfeited 396,816 (396,816) 5.05
------------ ------------ ------------
Balance at June 30, 1997 1,110,203 2,205,390 3.13 1,045,140 3.04
Shares reserved 1,750,000
Granted (2,740,154) 2,740,154 12.73
Options becoming exercisable 1,341,962
Exercised (708,482) 3.79 (708,482)
Canceled or forfeited 181,291 (181,291) 10.67
------------ ------------ ------------
Balance at June 30, 1998 301,340 4,055,771 9.16 1,678,620 4.72
Shares Reserved 800,000
Granted (1,529,450) 1,529,450 6.98
Options becoming exercisable 659,510
Exercised (262,214) 4.35 (262,214)
Canceled or forfeited 675,343 (675,343) 9.95
------------ ------------ ------------
Balance at June 30, 1999 247,233 4,647,664 $ 8.62 2,075,916 $ 6.56
============ ============ ============
</TABLE>
For certain options granted, the Company recognizes as compensation or other
expense the excess of the deemed value for accounting purposes of the Common
Stock on the date the options were granted over the aggregate exercise price of
such options. Compensation expense is amortized ratably over the vesting period
of each option. The Company recognized compensation or other expense totaling
$78,010 during fiscal 1999, $136,896 during fiscal 1998 and $33,365 during
fiscal 1997. The Company also recognized adjustments totaling $71,076 during
fiscal 1997 to reduce deferred compensation balances as a result of employee
terminations.
The fair values of each option grant and purchase plan discounts are estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal years 1999 and 1998: risk-free interest
rate of 5 percent and 5.5 percent, respectively, expected life of five years for
options and restricted stock, expected life of six months for purchase plan
shares, expected volatility of 290 percent and 100 percent, respectively, and no
expected dividend yields. The weighted average fair value of options granted at
prices equal to the Company's market value in fiscal years 1999, 1998 and 1997
was $8.05, $9.76 and $2.20, respectively, and was $2.12 for options granted
below the Company's market value during fiscal 1997.
F-12
<PAGE> 47
Had the compensation cost for these plans been determined pursuant to the
alternative method under SFAS No. 123, the Company's net loss and loss per share
would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net loss-
As reported $ (12,537,552) $ (14,174,712)
Pro forma (19,320,345) (19,252,232)
Loss per share-
As reported $ (.72) $ (.88)
Pro forma (1.10) (1.20)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost may not
be representative of that to be expected in future years. Additionally, the pro
forma amounts include $67,393 and $57,963 related to the purchase discount
offered under the Company's Employee Stock Purchase Plan during fiscal 1999 and
1998, respectively. The weighted average fair values of shares granted to
employees were $9.25 and $5.53 during fiscal 1999 and 1998, respectively.
The Company's outstanding options are segregated into the following four
categories in accordance with SFAS No. 123:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Range of Average Remaining
Outstanding Exercisable Exercise Exercise Contractual
Shares Shares Prices Price Life
- ---------------- ------------ ------------- -------- -----------
<S> <C> <C> <C> <C>
3,950 3,950 $ 0.67 $ 0.67 2.4 years
2,489,122 1,452,866 3.00 - 8.25 3.60 7.5 years
2,103,995 589,428 3.31 -16.13 12.88 8.4 years
50,597 29,672 16.25 -29.88 25.54 8.4 years
</TABLE>
In November 1996, Cyberonics canceled outstanding stock options for the purchase
of 354,800 shares of the Company's Common Stock with a weighted average exercise
price of $5.20 per share and in exchange granted stock options for the same
number of shares and with the same vesting provisions following a halt on
exercisability until the sooner of 14 months expired or FDA advisory panel
approval was received for the Company's product, at an exercise price of $3.06
per share, which equaled the Company's market value per share on the date of
reissuance.
Stock Purchase Plan. Under the Cyberonics, Inc. Employee Stock Purchase Plan
(the Stock Purchase Plan), 200,000 shares of the Company's Common Stock have
been reserved for issuance. Subject to certain limits, the Stock Purchase Plan
allows eligible employees to purchase shares of the Company's Common Stock
through payroll deductions of up to 15 percent of their respective current
compensation at a price equaling the lesser of 85 percent of the fair market
value of the Company's Common Stock on (a) the first business day of the
purchase period or (b) the last business day of the purchase period. Purchase
periods, under provisions of the Stock Purchase Plan, are six months in length
and begin on the first business days of June and December. At June 30, 1999,
66,647 shares remain available for future issuances under the Stock Purchase
Plan.
F-13
<PAGE> 48
Stock Recognition Program. In May 1992, the Company's Board of Directors
established the Cyberonics Employee Stock Recognition Program. Since its
inception, a total of 8,600 shares of the Company's Common Stock has been
reserved for issuance as special recognition grants. The shares are granted to
employees for special performances and/or contributions at the discretion of the
Company's President, based on nominations made by fellow employees. At June 30,
1999, 4,030 shares remain available for future issuances under the program.
NOTE 7. INCOME TAXES
Components of the Company's loss before taxes are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Domestic $(10,697,153) $(10,142,530) $ (8,730,646)
Foreign (1,840,399) (4,032,182) (2,514,185)
------------ ------------ ------------
$(12,537,552) $(14,174,712) $(11,244,831)
============ ============ ============
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
U.S. statutory rate (34.0)% (34.0)% (34.0)%
Increase in deferred tax valuation allowance 37.7 37.3 35.1
Amortization of deferred compensation -- -- 0.1
Other, net (3.7) (3.3) (1.2)
------ ------ ------
0.0% 0.0% 0.0%
====== ====== ======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforwards $ 20,993,968 $ 17,853,619
Foreign net operating loss carryforwards 3,481,691 2,763,935
Tax credit carryforwards 1,945,542 1,590,215
Warranties 127,500 127,501
Depreciation 216,920 74,384
Clinical costs 285,851 110,357
Other, net 794,685 622,475
------------ ------------
Total deferred tax assets 27,846,157 23,142,486
Total deferred tax liabilities, net -- (23,514)
Deferred tax valuation allowance (27,846,157) (23,118,972)
------------ ------------
Net deferred tax assets and liabilities $ -- $ --
============ ============
</TABLE>
F-14
<PAGE> 49
At June 30, 1999, the Company has net operating loss carryforwards of
approximately $61.7 million for federal income tax purposes, which expire during
the years 2003 through 2019, and tax credit carryforwards of approximately $1.9
million for federal income tax purposes, which expire during the years 2006
through 2019. As the Company has had cumulative losses and there is no assurance
of future taxable income, a valuation allowance totaling $27.8 million has been
established as of June 30, 1999, to fully offset the Company's net deferred tax
assets, including those relating to its carryforwards. The valuation allowance
increased $4.7 million and $6.0 million for the years ended June 30, 1999 and
1998, respectively, due primarily to the Company's additional net operating
losses. Current federal income tax regulations with respect to changes in
ownership could limit the utilization of the Company's net operating loss and
tax credit carryforwards.
NOTE 8. EMPLOYEE RETIREMENT SAVINGS PLAN
Cyberonics sponsors an employee retirement savings plan (the Plan) which
qualifies under Section 401(k) of the Internal Revenue Code. The Plan is
designed to provide eligible employees with an opportunity to make regular
contributions into a long-term investment and savings program. Substantially all
U.S. employees are eligible to participate in the Plan beginning with the first
quarterly open enrollment date following start of employment. Employer
contributions are made solely at the Company's discretion. No employer
contributions were made to the Plan for the years ended June 30, 1999, 1998 and
1997.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Postmarket Clinical Surveillance. Pursuant to the postmarket surveillance
conditions specified as part of the Company's FDA marketing approval, the
Company is required to conduct clinical follow-up on a limited number of
patients from its most recent study in order to monitor the safety and
tolerability of the NCP(R) System on an extended basis. The Company expenses the
costs related to these long-term follow-up activities as they are incurred and
establishes accruals for such costs incurred but not paid as of the respective
balance sheet dates.
License Agreements. The Company has executed a license agreement which provides
Cyberonics with worldwide exclusive rights under three United States patents
(and their international counterparts) covering the method and devices of the
NCP System for vagus nerve and other cranial nerve stimulation for the control
of epilepsy and other movement disorders. The license agreement provides that
the Company will pay a royalty equal to the greater of $36,000 per year or at
the rate of 3 percent of sales during fiscal 1999 and through the remaining term
of the licensed patents. The license agreement runs for successive three-year
terms, renewable at the Company's election. The license agreement, and its
periods of extension, may not be terminated by the licensor without cause. The
Company's royalty payments pursuant to this agreement are ratably charged to
expense.
The Company has executed a license agreement for a specific application of lead
designs to be used in vagus nerve stimulation for the control of epilepsy and
other movement disorders. The licensor retains all rights to this patent for
applications outside the above specified use. Pursuant to the license agreement,
the Company has a limited-term option to expand the licensed field of use for
additional indications for a license fee of $15,000 per indication and has made
partial payments for certain such indications. In addition, the Company is
obligated to pay the licensor an earned royalty equal to the greater of $35,000
or at the rate of 1 percent of the Company's net sales price of implantable
systems incorporating the licenser's standard lead and 1.75 percent of net sales
incorporating the licenser's bi-directional lead for the life of the licensed
patents. Amounts due under this agreement are being charged to expense as
incurred.
F-15
<PAGE> 50
Lease Agreements. The Company leases offices, manufacturing and sales
distribution facilities as well as transportation and office equipment under
operating leases. Future minimum payments relating to these agreements at June
30, 1999, are as follows:
<TABLE>
<CAPTION>
Year ending June 30-
<S> <C>
2000 $1,196,278
2001 1,088,817
2002 1,027,501
2003 404,057
2004 and thereafter --
----------
$3,716,653
==========
</TABLE>
Other Commitments. At June 30, 1999, Cyberonics had approximately $963,000 in
noncancelable commitments related to domestic marketing programs planned for the
Company's NCP System during fiscal year 2000. At June 30, 1999, the Company has
prepaid approximately $483,000 related to such programs that are scheduled to
occur in the first quarter of fiscal year 2000.
The Company's rental expense for the years ended June 30, 1999, 1998 and 1997
amounted to $1,276,760, $800,640 and $144,000, respectively.
Year 2000 Issues. The Company has recently initiated a comprehensive review of
all of its equipment and software and found the incidence of Year 2000 to be
minimal, but not nonexistent. There can be no assurance, however, that, such
testing, undetected errors or defects will not exist that could cause a product
or system to fail to process Year 2000 data correctly. The Company is not aware
of any material operational issues or costs associated with Year 2000 compliance
of its own products or systems. The Company believes its products are fully Year
2000 compliant with the exception of the programming software, which does not
use dating in its processing calculations, but does use dating in its reporting
functions. These reporting functions, do not effect the programming of the
implanted device and are easily interpreted by users of the system. As such, the
programming software has been designated as Year 2000 ready, and no software
updates are planned to address the small anomalies.
NOTE 10. RELATED PARTY TRANSACTIONS
Covance Health Economics and Outcomes Services, Inc. (Covance) provides
healthcare reimbursement consulting services to the Company. Amounts paid for
such services in fiscal years 1999, 1998 and 1997 were $693,844, $511,459 and
$0, respectively. Dr. Strauss is a member of the Board of Directors of the
Company and the Executive Vice President of Covance.
NOTE 11. CONCENTRATIONS OF CREDIT RISK
The Company's cash equivalents, securities held to maturity and trade accounts
receivable represent potential concentrations of credit risk.
The Company minimizes potential concentrations of credit risk in cash
equivalents and marketable securities by placing investments in high quality
financial instruments and, as required by its corporate investment policy,
limiting the amount of investment in any one issuing party. At June 30, 1999,
management believes that the Company has no significant concentrations of credit
risk related to these assets and has incurred no material impairments in the
carrying values of its cash equivalents and securities held to maturity.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across a
number of geographic areas. However, essentially all trade receivables are
concentrated in the hospital and health care sectors in the United States and
several other countries and, accordingly, are exposed to their respective
business, economic and country-specific variables. Although the company does not
currently foresee a concentrated credit risk associated with these receivables,
repayment is dependent upon the financial stability of these industry sectors
and the respective countries' national economics and health care systems.
F-16
<PAGE> 51
NOTE 12. GEOGRAPHIC AREA INFORMATION
The Company's business activities are represented by a single industry segment,
the manufacturing and distribution of medical products. For management purposes,
the Company is segmented into two geographic areas: North America (which
includes sales in the United States and export sales to unaffiliated customers
in Canada and certain developing international markets) and Europe (which
includes export sales to unaffiliated customers in Europe, the Middle East,
Africa and Asia/Pacific). Sales between geographic areas are made at prices
which would approximate transfers to unaffiliated distributors. Because of the
interdependence of the Company's geographic areas, the operating loss as
presented below may not be representative of the geographic distribution which
would occur if the areas were not interdependent.
The Company's net sales, losses from operations and assets by geographic area
for the fiscal years that separate geographic business units have operated are
as follows:
<TABLE>
<CAPTION>
North
America Europe Eliminations Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1999
- -------------------------------------------------------------------------------------------
Customer sales $ 26,401,185 $ 3,526,291 $ -- $ 29,927,476
Inter-company sales 2,700,450 -- (2,700,450) --
------------ ------------ ------------ ------------
Total net sales $ 29,101,635 $ 3,526,291 $ (2,700,450) $ 29,927,476
============ ============ ============ ============
Loss from operations $(13,908,678) $ (2,055,084) $ 1,845,425 $(14,118,337)
============ ============ ============ ============
Identifiable assets $ 38,192,679 $ 1,699,374 $ (108,900) $ 39,783,153
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
North
America Europe Eliminations Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1998
- -------------------------------------------------------------------------------------------
Customer sales $ 12,785,391 $ 2,127,477 $ -- $ 14,912,868
Intercompany sales 2,076,800 -- (2,076,800) --
------------ ------------ ------------ ------------
Total net sales $ 14,862,191 $ 2,127,477 $ (2,076,800) $ 14,912,868
============ ============ ============ ============
Loss from operations $(16,183,842) $ (4,041,519) $ 4,063,067 $(16,162,294)
============ ============ ============ ============
Identifiable assets $ 52,008,112 $ 895,225 $ (288,043) $ 52,615,294
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
North
America Europe Eliminations Consolidated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1997
- -------------------------------------------------------------------------------------------
Customer sales $ 24,452 $ 1,347,553 $ -- $ 1,372,005
Intercompany sales 1,256,150 -- (1,256,150) --
------------ ------------ ------------ ------------
Total net sales $ 1,280,602 $ 1,347,553 $ (1,256,150) $ 1,372,005
============ ============ ============ ============
Loss from operations $(11,610,600) $ (2,314,614) $ 2,441,713 $(11,483,501)
============ ============ ============ ============
Identifiable assets $ 9,902,199 $ 1,135,011 $ (787,473) $ 10,249,737
============ ============ ============ ============
</TABLE>
F-17
<PAGE> 52
NOTE 13. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The tables below contain summarized unaudited quarterly data for the years ended
June 30, 1999 and 1998. The Company believes this information reflects all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of the quarterly information presented. The operating results
for any quarter presented are not necessarily indicative of the results that may
be expected for future periods.
<TABLE>
<CAPTION>
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Totals
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $ 5,335,757 $ 6,602,921 $ 8,054,457 $ 9,934,341 $ 29,927,476
Gross profit 3,919,758 4,970,631 5,933,809 7,367,141 22,191,339
Operating expenses 9,254,525 9,394,976 9,395,328 8,264,847 36,309,676
Net loss (4,674,265) (3,879,031) (3,223,443) (760,813) (12,537,552)
Net loss per share, basic and
diluted $ (.27) $ (.22) $ (.18) $ (.04) $ (.72)
Shares used in computing basic
and diluted net loss per share 17,269,372 17,409,296 17,425,185 17,529,549 17,503,169
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Totals
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1998
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,103,234 $ 3,335,496 $ 5,172,735 $ 5,301,403 $ 14,912,868
Gross profit 781,360 2,410,101 3,847,128 3,971,811 11,010,400
Operating expenses 5,935,757 5,466,198 6,045,037 9,725,702 27,172,694
Net loss (4,957,198) (2,458,127) (1,678,447) (5,080,940) (14,174,712)
Net loss per share, basic and
diluted $ (.36) $ (.15) $ (.10) $ (.30) $ (.88)
Shares used in computing basic
and diluted net loss per share 13,820,939 16,549,150 16,857,559 17,192,038 16,104,922
</TABLE>
Quarterly and annual loss per share are computed independently based upon the
applicable number of weighted average common shares and share equivalents for
each period.
F-18
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Restated Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
4.1(2) Preferred Shares Rights Agreement, dated as of March 4, 1997
between Cyberonics, Inc. and First National Bank of Boston,
including the Certificate of Designation, the form of Rights
Certificate and the Summary of Rights attached thereto as
Exhibit A, B and C, respectively.
10.2(8) Amended 1991 Employee Stock Purchase Plan.
10.3(1) License Agreement dated March 15, 1988 between the Registrant
and Dr. Jacob Zabara.
10.4(1) Patent License Agreement effective as of July 28, 1989 between
the Registrant and Huntington Medical Research Institute.
10.5(3) Lease Agreement dated November 3, 1994 together with
amendments dated April 18, 1996 and April 30, 1997,
respectively, between the Registrant and Salitex II, Ltd.
10.6(1) Form of Indemnification Agreement.
10.7(1) Amended and Restated Stockholders Agreement dated
October 16, 1992.
10.8(4) Registration Rights Agreement dated March 28, 1997.
10.9(5)* Amended and Restated 1996 Stock Option Plan.
10.10(3) Stockholders' Agreement dated April 8, 1996 between the
Registrant and St. Jude Medical, Inc. 10.11(3) Letter
Agreement dated March 28, 1997 between the Clark Estates and
the Registrant.
10.12(6) Lease Agreement dated August 19, 1997 between the Registrant
and Space Assets II, Inc.
10.13(7)* 1997 Stock Plan.
10.14(9) 1998 Stock Option Plan.
21.1(3) List of Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Reg. No. 33-45118) declared effective February 10, 1993.
(2) Incorporated by reference to Registrant's Registration Statement on Form
8-A (Commission File No. 000-19806) filed on March 6, 1997.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997.
(4) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997.
(5) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Reg. No. 333-19785) filed on April 29, 1998.
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997.
(7) Incorporated by reference to Registrant's Report on Form 14A filed on
November 26, 1997.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-66689) filed on November 3, 1998.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-66691) filed on November 3, 1998.
* Document indicated is a compensatory plan.
-32-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated July 30, 1999 included in this Form 10-K and
into the Company's previously filed Registration Statement File No. 333-77361,
File No. 333-66691, File No. 333-66689, File No. 333-66687 File No. 333-49905,
File No. 333-33725 and File No. 333-19785.
/s/ Arthur Andersen LLP
Houston, Texas
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS BEGINNING ON PAGE F-1 OF THIS FORM 10-K QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,606,613
<SECURITIES> 23,314,081
<RECEIVABLES> 5,945,665
<ALLOWANCES> (495,662)
<INVENTORY> 5,195,114
<CURRENT-ASSETS> 32,309,787
<PP&E> 5,845,387
<DEPRECIATION> (2,572,427)
<TOTAL-ASSETS> 39,783,153
<CURRENT-LIABILITIES> 6,334,708
<BONDS> 0
0
0
<COMMON> 109,456,187
<OTHER-SE> (76,007,742)
<TOTAL-LIABILITY-AND-EQUITY> 39,783,153
<SALES> 29,927,476
<TOTAL-REVENUES> 29,927,476
<CGS> 7,736,137
<TOTAL-COSTS> 7,736,137
<OTHER-EXPENSES> 36,309,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,537,552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,537,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,537,552)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
