<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): SEPTEMBER 25, 2000
CYBERONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-19806 76-0236465
(State or other (Commission (IRS Employer
jurisdiction of file number) Identification No.)
incorporation)
16511 SPACE CENTER BOULEVARD, SUITE 600
HOUSTON, TEXAS 77058
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (281) 228-7200
<PAGE> 2
ITEM 5. OTHER EVENTS
The sole purpose of this Form 8-K is to file a presentation to
investors prepared by Cyberonics, Inc. The text of the presentation begins
on the following page as Appendix A.
The Registrant's filing of this report on Form 8-K should not be
deemed an admission as to the materiality of any information included in
Appendix A.
<PAGE> 3
APPENDIX A
CYBERONICS, INC.
PRESENTATION TO INVESTORS
SEPTEMBER 2000
================================================================================
<PAGE> 4
CYBERONICS, INC.
STAND ALONE VALUE PROPOSITION
FORWARD-LOOKING STATEMENTS
================================================================================
o This presentation includes forward-looking statements concerning:
- Potential timing, size, duration and outcome of clinical studies
- Developing Vagus Nerve Stimulation or VNS as a treatment for
depression, obesity and other indications
- Improving productivity and efficiencies
- Substantially increasing sales while only modestly increasing
operating expenses
- Forecasted results in sales, expenses, net income or cash flow,
including the Company's 7-Year business plan
o These predictions are based upon information presently available to
Cyberonics and assumptions that the Company believes to be reasonable
o Cyberonics is assuming no duty to update this information should facts
change or should Cyberonics no longer believe the assumptions to be
reasonable
o CYBERONICS' ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED
o Please refer to the Company's Annual Report on Form 10-K for the year ended
June 30, 1999 and the Company's Quarterly Reports on Form 10-Q for the
three months ended September 30, 1999, December 31, 1999 and March 31,
2000.
<PAGE> 5
CYBERONICS, INC.
TABLE OF CONTENTS
================================================================================
<TABLE>
<S> <C>
================================================================================
SECTION 1 Introduction and Overview
--------------------------------------------------------------------------------
SECTION 2 Stock Performance Review
--------------------------------------------------------------------------------
SECTION 3 Business Review
--------------------------------------------------------------------------------
SECTION 4 Stand Alone Value Proposition
================================================================================
</TABLE>
MORGAN STANLEY DEAN WITTER
<PAGE> 6
CYBERONICS, INC.
SECTION 1
INTRODUCTION AND OVERVIEW
================================================================================
<PAGE> 7
CYBERONICS, INC.
INTRODUCTION AND OVERVIEW
EXECUTIVE SUMMARY
================================================================================
o Cyberonics as a stand alone company is positioned to create greater value
for shareholders than the Medtronic proposal
o For Cyberonics shareholders, the stand alone value proposition is
straight-forward
- Cyberonics is a small company today with high growth potential over
many years
- Cyberonics has an unprecedented method patent neuro-stimulation
franchise
- Cyberonics has a proven track record in epilepsy and a validated
business model for profitably penetrating drug markets with a device
- The U.S. markets for new indications that are currently in clinical
trials total 75x the epilepsy market that is currently being served
- Taken as a whole, Cyberonics offers investors attractive upside
potential on a base epilepsy business that is currently reaching
profitability
o The Medtronic proposal does not give Cyberonics appropriate
sum-of-the-parts credit for its existing epilepsy business and its much
larger new indication opportunities in depression, obesity, and Alzheimer's
- The proposal was made when Cyberonics' stock was near its 52-week low
- Since Medtronic is a $59 billion equity market value company, a
business combination would provide Cyberonics shareholders with less
than 1% pro-forma ownership in a more slowly growing company, thereby
diluting shareholders' participation in the future growth of
Cyberonics' business
- Cyberonics shareholders also need to consider that Medronic has the
highest P/E to growth ratio among its publicly traded peers, thereby
positioning Medtronic stock as a relatively expensive currency
o Cyberonics has, through its patent position on stimulation of the vagus
nerve, the cranial nerve neurostimulation franchise and represents a unique
potential value opportunity for shareholders
- Investors who carefully consider Cyberonics' business prospects should
conclude that the way to maximize shareholder value is to implement
the Company's stand alone business plan
<PAGE> 8
CYBERONICS, INC.
SECTION 2
STOCK PERFORMANCE REVIEW
================================================================================
<PAGE> 9
CYBERONICS, INC.
STOCK PERFORMANCE REVIEW
HISTORICAL TRADING SUMMARY
LAST THREE YEARS
================================================================================
o CYBERONICS' STOCK WAS JUST RECOVERING FROM THE TRANSITION TO IBU REPORTING
WHEN THE MEDTRONIC PROPOSAL WAS MADE PUBLIC
- CYBX ROSE 20% IN THE MONTH PRIOR TO THE PUBLIC ANNOUNCEMENT
o BASED ON PROJECTED RESULTS OVER THE NEXT SEVERAL QUARTERS, THE COMPANY IS
WELL POSITIONED TO SUPPORT CONTINUED ACCELERATION IN ITS STOCK PRICE
[GRAPH OF HISTORICAL TRADING FOR THE LAST THREE YEARS, PLOTTING PRICE
IN US DOLLARS AND VOLUME IN MILLIONS OF SHARES AND NOTING THE
FOLLOWING EVENTS RELATIVE THERETO]
10/23/97 Announces FDA approval of enhancements in Neuro Cybernetic
Prosthesis
~JAN `98 Four months of commercial experience. Analysts raise
estimates for Q3/Q4 FY98 and all of FY99 significantly
~APRIL `98 Increased investment in sales force leads to downward revision
of near-term earnings estimates
07/26/99 FDA grants expedited review status for NCP System for
treatment of depression
10/4/99 Cyberonics reports strong Q1 results - U.S. sales up 70%
02/09/00 Cyberonics announces next generation 101 NCP, 91% longer life
battery
4/25/00 Cyberonics reports final Q3 results
6/30/00 Cyberonics reports preliminary Q4 results
7/17/00 CYBX receives first $26 per share written proposal from MDT
8/9/00 CYBX receives second $26 per share written proposal from MDT
09/11/00 Medtronic discloses proposal for Cyberonics at $26 per share
----------
Source FactSet Research Systems
<PAGE> 10
CYBERONICS, INC.
STOCK PERFORMANCE REVIEW
PREMIUM ANALYSIS
================================================================================
o THE MEDTRONIC PROPOSAL REPRESENTS A "NEGATIVE PREMIUM" TO CYBERONICS'
52-WEEK AND ALL-TIME HIGH STOCK PRICES
o THE MEDTRONIC PROPOSAL ALSO REPRESENTS A "NEGATIVE PREMIUM" TO RECENT
EQUITY RESEARCH PRICE TARGETS
o THE COMPANY BELIEVES THAT THE MEDTRONIC PROPOSAL IS NOT COMPELLING RELATIVE
TO WHERE CYBERONICS' STOCK HAS TRADED RECENTLY OR TO WHERE EQUITY RESEARCH
ANALYSTS EXPECT IT TO TRADE IN THE NEAR FUTURE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
OFFER
PRICE PREMIUM / (DISCOUNT)
ANALYSIS OF PREMIUM OFFERED $ %
----------------------------------------------------------------------------------------------
<S> <C> <C>
Medtronic Proposal 26.00 --
----------------------------------------------------------------------------------------------
LTM High (2/9/00) 28.25 (8.0)
----------------------------------------------------------------------------------------------
All Time High (3/30/98) 32.38 (19.7)
----------------------------------------------------------------------------------------------
First Union Securities 12-Month Price Target(1) 37.00 (29.7)
----------------------------------------------------------------------------------------------
Banc of America Securities 12-Month Price Target(2) 35.00 (25.7)
----------------------------------------------------------------------------------------------
</TABLE>
NOTES
1. Research report dated September 18, 2000
2. Research report dated September 14, 2000
<PAGE> 11
CYBERONICS, INC.
SECTION 3
BUSINESS REVIEW
================================================================================
<PAGE> 12
CYBERONICS, INC.
BUSINESS REVIEW
OVERVIEW
================================================================================
o Cyberonics is confident in its ability to derive significant value from
existing and new businesses
o The Company's 7-Year Plan assumes Epilepsy sales growth in line with
medical technology leaders, with excess cash being used to grow other
businesses
o Cyberonics is positioned to utilize experience from its Epilepsy IBU to
grow sales and achieve profitability more quickly in other IBUs
o By FY03, the Depression IBU is projected to generate significant revenues
- By FY07, significant revenues are expected to be generated from
indications in at least four treatment applications (Epilepsy,
Depression, Obesity, Alzheimer's)
o The 7-Year Plan does not fully reflect all potential opportunities for
Cyberonics in these markets
- Projections do not reflect improved Epilepsy sales levels that the
Company plans to realize from replacement unit sales and improved
product pricing
- The 7-Year Plan reflects a high level of R&D expenditures that may not
be necessary
<PAGE> 13
CYBERONICS, INC.
BUSINESS REVIEW
7-YEAR PLAN PROJECTED SALES BY IBU
================================================================================
o THE 7-YEAR PLAN PROJECTS A SIGNIFICANT DIVERSIFICATION OF THE COMPANY'S
REVENUE BASE THROUGH EXPANSION INTO PATENT PROTECTED NEW INDICATIONS
o PRESENCE IN NON-EPILEPSY TREATMENT AREAS YIELDS A PROJECTED IMPLIED TOTAL
SALES CAGR OF 57.4% FOR THE FY03-FY07 PERIOD
o BY FY07, EPILEPSY IS EXPECTED TO BE LESS THAN 20% OF TOTAL SALES,
CONSISTENT WITH THE EXPERIENCE OF THE MARKET LEADER FOR ANTI-EPILEPTIC
DRUGS
SALES
$MM
<TABLE>
<CAPTION>
EPILEPSY DEPRESSION OTHER (OBESITY AND ALZHEIMER'S) TOTAL
-------- ---------- ------------------------------- ---------
<S> <C> <C> <C>
FY00 47.9 0 0 47.9
FY01 66.3 0 0 66.3
FY02 85.0 2.9 0 87.9
FY03 106.5 135.1 0 241.6
FY04 133.4 342.6 0 476.0
FY05 165.5 515.4 0 680.9
FY06 198.2 695.8 0 894.0
FY07 235.6 870.7 375.6 1,481.8
</TABLE>
<PAGE> 14
CYBERONICS, INC.
BUSINESS REVIEW
SUMMARY PROJECTED CONSOLIDATED FINANCIAL PLAN
7-YEAR PLAN
================================================================================
o THE COMPANY'S 7-YEAR PLAN PROJECTS 70% COMPOUND ANNUAL SALES GROWTH OVER
THE NEXT FIVE YEARS AND 63% OVER THE NEXT SEVEN YEARS
<TABLE>
<CAPTION>
ACTUAL PROJECTED
FYE 6/30 ----------------------------- ------------------------------------------------
($MM) 1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales
--------------------------------------------------------------------------------------------------------------
Epilepsy $ 29.9 $ 47.9 $ 66.3 $ 85.0 $ 106.5
--------------------------------------------------------------------------------------------------------------
Depression -- -- -- 2.9 135.1
--------------------------------------------------------------------------------------------------------------
Obesity/Alzheimer's -- -- -- -- --
--------------------------------------------------------------------------------------------------------------
TOTAL SALES $ 29.9 $ 47.9 $ 66.3 $ 87.9 $ 241.6
--------------------------------------------------------------------------------------------------------------
% Growth 100.5% 60.0% 38.4% 32.6% 174.7%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
EBITDA $ (11.4) $ (3.8) $ (4.6) $ 1.9 $ 46.3
--------------------------------------------------------------------------------------------------------------
% Margin (38.0)% (7.9)% (6.9)% 2.2% 19.2%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
EBIT $ (14.1) $ (5.3) $ (8.6) $ (1.5) $ 38.7
--------------------------------------------------------------------------------------------------------------
% Margin (47.2)% (11.0)% (12.9)% (1.7)% 16.0%
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
NET INCOME $ (12.5) $ (3.1) $ (8.0) $ (1.0) $ 39.7
--------------------------------------------------------------------------------------------------------------
% Growth N.M. N.M. N.M. N.M. N.M.
--------------------------------------------------------------------------------------------------------------
% Margin (41.9)% (6.4)% (12.1)% (1.1)% 16.4%
--------------------------------------------------------------------------------------------------------------
<CAPTION>
PROJECTED
FYE 6/30 -------------------------------------------------------------- 5-YEAR 7-YEAR
($MM) 2004 2005 2006 2007 CAGR CAGR
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales
-------------------------------------------------------------------------------------------------------------------------------
Epilepsy $ 133.4 $ 165.5 $ 198.2 $ 235.6
-------------------------------------------------------------------------------------------------------------------------------
Depression 342.6 515.4 695.8 870.7
-------------------------------------------------------------------------------------------------------------------------------
Obesity/Alzheimer's -- -- -- 375.6
-------------------------------------------------------------------------------------------------------------------------------
TOTAL SALES $ 476.0 $ 680.9 $ 894.0 $ 1,481.8 70.0% 63.3%
-------------------------------------------------------------------------------------------------------------------------------
% Growth 97.0% 43.1% 31.3% 65.7%
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
EBITDA $ 123.5 $ 205.4 $ 280.5 $ 599.6 N/M N/M
-------------------------------------------------------------------------------------------------------------------------------
% Margin 26.0% 30.2% 31.4% 40.5%
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
EBIT $ 114.5 $ 194.9 $ 268.3 $ 585.7
-------------------------------------------------------------------------------------------------------------------------------
% Margin 24.1% 28.6% 30.0% 39.5%
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 86.5 $ 121.5 $ 169.3 $ 366.0 N/M N/M
-------------------------------------------------------------------------------------------------------------------------------
% Growth 117.9% 40.5% 39.3% 116.2%
-------------------------------------------------------------------------------------------------------------------------------
% Margin 18.2% 17.8% 18.9% 24.7%
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
CYBERONICS, INC.
BUSINESS REVIEW
EPILEPSY BUSINESS PLAN
================================================================================
o Presented with the challenge of selling a revolutionary device based
approach to medical doctors, Cyberonics achieved $45 million in annual
revenues and its first quarter of profitability in 3 years post FDA
approval, versus Minimed, who required 11 years
o Cyberonics' epilepsy procedure is gaining continued acceptance as an
optimal treatment for its targeted condition
o For FYE June 30, 2000, the Epilepsy IBU saw 62% U.S. sales growth, 47%
international sales growth, and 93% reduction in pre-tax losses
o Projections imply a seven-year sales CAGR of 25.5%
o Projections imply a 4 year sales CAGR of 29.2% through FY04, the first full
year of projected Depression sales
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PROJECTED FOR FYE
EPILEPSY FINANCIAL PLAN ---------------------------------------------------------------
($MM) 2001 2002 2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales 66.3 85.0 106.5 133.4 165.5 198.2 235.6
----------------------------------------------------------------------------------------------------
% Growth 38.4% 28.2% 25.3% 25.3% 24.1% 19.7% 18.8%
----------------------------------------------------------------------------------------------------
COGS 15.1 17.0 18.1 21.3 21.5 23.8 25.9
----------------------------------------------------------------------------------------------------
Gross Profit 51.2 68.0 88.4 112.0 144.0 174.4 209.6
----------------------------------------------------------------------------------------------------
% margin 77.2% 80.0% 83.0% 84.0% 87.0% 88.0% 89.0%
----------------------------------------------------------------------------------------------------
SGA 36.8 45.3 54.5 63.5 78.3 93.4 110.6
----------------------------------------------------------------------------------------------------
R&D 9.2 10.5 10.8 13.1 15.9 18.7 21.9
----------------------------------------------------------------------------------------------------
Operating Income 5.1 12.2 23.1 35.4 49.8 62.3 77.1
----------------------------------------------------------------------------------------------------
Non-operating income / (expense) 0.6 0.5 1.0 3.4 7.6 13.8 24.2
----------------------------------------------------------------------------------------------------
Net Income before taxes 5.7 12.7 24.0 38.8 57.5 76.1 101.3
----------------------------------------------------------------------------------------------------
Net Income 5.7 12.7 24.0 33.4 34.5 45.7 60.8
----------------------------------------------------------------------------------------------------
% Growth N.M. 122.6% 89.7% 38.9% 3.4% 32.5% 33.1%
----------------------------------------------------------------------------------------------------
% Margin 8.6% 14.9% 22.6% 25.0% 20.8% 23.1% 25.8%
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
CYBERONICS, INC.
REPLACEMENT UNIT AND NEW PRICING SALES ANALYSIS
FOR U.S. EPILEPSY MARKET
================================================================================
o THE 7-YEAR PLAN WAS DRIVEN BY ESTIMATED PENETRATION AND PRICING ASSUMPTIONS
WITHOUT THE BENEFIT OF REPLACEMENT SALES OR IMPROVED PRODUCT PRICING
o ADJUSTING ESTIMATED SALES FOR HIGHER PRICING RELATED TO IMPROVED PRODUCTS
AND FOR REPLACEMENT SALES ILLUSTRATES THAT FEWER NEW GENERATOR UNITS WOULD
NEED TO BE SOLD IN ORDER TO MEET THE COMPANY'S STATED U.S. EPILEPSY SALES
PROJECTIONS
o U.S. EPILEPSY SALES CAGR THROUGH FY04, THE FIRST PROJECTED YEAR OF
DEPRESSION SALES, IS 12.3% WITHOUT REPLACEMENT SALES AND NEW GENERATOR
SALES; WITH REPLACEMENT SALES AND NEW GENERATOR SALES, IT IS 27.2%
<TABLE>
<CAPTION>
ACTUAL PROJECTED
--------------------- ------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005
<S> <C> <C> <C> <C> <C> <C> <C>
EPILEPSY SALES UNDER CURRENT 7-YEAR PLAN
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Sales $ 29.9 $ 42.5 $ 60.1 $ 74.2 $ 90.7 $111.3 $ 140.1
-----------------------------------------------------------------------------------------------------------------------------------
% Growth 42.3% 41.3% 23.5% 22.2% 22.7% 25.9%
-----------------------------------------------------------------------------------------------------------------------------------
Units 2,875 4,251 5,300 6,480 7,920 9,720 12,240
-----------------------------------------------------------------------------------------------------------------------------------
% Growth 47.9% 24.7% 22.3% 22.2% 22.7% 25.9%
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
IMPACT OF HIGHER ASP GENERATORS (M102/M103)
-----------------------------------------------------------------------------------------------------------------------------------
Sales $ 5.4 $ 12.5 $ 25.8 $ 32.4
-----------------------------------------------------------------------------------------------------------------------------------
Units 468 1,091 2,250 2,833
-----------------------------------------------------------------------------------------------------------------------------------
US MODEL 100 GENERATOR REPLACEMENT SALES:
-----------------------------------------------------------------------------------------------------------------------------------
Sales $ 4.9 $ 15.2 $ 17.8 $ 7.6
-----------------------------------------------------------------------------------------------------------------------------------
Units 515 1,582 1,854 787
-----------------------------------------------------------------------------------------------------------------------------------
NEW GENERATOR SALES REQUIRED TO MEET 7-YEAR PLAN
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Sales $ 29.9 $ 42.5 $ 60.1 $ 63.9 $ 63.0 $ 67.7 $ 100.2
-----------------------------------------------------------------------------------------------------------------------------------
% Growth 42.3% 41.3% 6.3% (1.4%) 7.5% 47.9%
-----------------------------------------------------------------------------------------------------------------------------------
Units 2,875 4,251 5,300 5,497 5,247 5,616 8,620
-----------------------------------------------------------------------------------------------------------------------------------
% Growth 47.9% 24.7% 3.7% (4.6%) 7.0% 53.5%
===================================================================================================================================
<CAPTION>
PROJECTED
--------------------
2006 2007
<S> <C> <C>
EPILEPSY SALES UNDER CURRENT 7-YEAR PLAN
-------------------------------------------------------------------------
U.S. Sales $ 169.0 $ 202.0
-------------------------------------------------------------------------
% Growth 20.6% 19.5%
-------------------------------------------------------------------------
Units 14,760 17,640
-------------------------------------------------------------------------
% Growth 20.6% 19.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
IMPACT OF HIGHER ASP GENERATORS (M102/M103)
-------------------------------------------------------------------------
Sales $ 39.1 $ 46.7
-------------------------------------------------------------------------
Units 3,416 4,083
-------------------------------------------------------------------------
US MODEL 100 GENERATOR REPLACEMENT SALES:
-------------------------------------------------------------------------
Sales
-------------------------------------------------------------------------
Units
-------------------------------------------------------------------------
NEW GENERATOR SALES REQUIRED TO MEET 7-YEAR PLAN
-------------------------------------------------------------------------
U.S. Sales $ 129.9 $ 155.2
-------------------------------------------------------------------------
% Growth 29.7% 19.5%
-------------------------------------------------------------------------
Units 11,344 13,557
-------------------------------------------------------------------------
% Growth 31.6% 19.5%
=========================================================================
</TABLE>
<PAGE> 17
CYBERONICS, INC.
BUSINESS REVIEW
NEW INDICATIONS DEVELOPMENT PLAN
===============================================================================
[GRAPH PROJECTING WHEN, OVER THE COURSE OF THE NEXT SEVEN FISCAL YEARS, THE
ACUTE STUDY PERIOD AND LONG-TERM FOLLOW-UP PERIOD WILL BEGIN AND END FOR EACH OF
THE FOLLOWING PROGRAMS]
DEPRESSION PILOT
DEPRESSION EUROPE
DEPRESSION PIVOTAL
DEPRESSION OTHERS
TREMOR STUDY
OBESITY PILOT
OBESITY PIVOTAL
OBESITY EUROPEAN
ALZHEIMER'S PIVOTAL
NEW PILOT STUDIES AVERAGE OF 1.5 NEW PILOTS EACH FY BEGINNING FY02
NEW PILOT STUDIES AVERAGE OF 1 NEW PIVOTAL EACH FY BEGINNING FY04
o THE 7-YEAR PLAN ASSUMES R&D EXPENSES AT 9% TO 12% OF SALES IN THE PLAN'S
LATER YEARS
- REPRESENTS A "TOP-DOWN" ASSUMPTION
- TRANSLATES INTO A $132 MILLION EXPENDITURE IN FY07
o MANAGEMENT HAS ALSO PROJECTED R&D EXPENSES RELATING TO SPECIFIC PROGRAMS
CONSISTENT WITH THE COMPANY'S EXPERIENCE IN EPILEPSY
- IMPLIES LOWER R&D EXPENDITURES NEEDED TO SUPPORT PLAN
- SUGGESTS FY07 R&D EXPENDITURE OF $66 MILLION
<PAGE> 18
CYBERONICS, INC.
BUSINESS REVIEW
SUMMARY CONSOLIDATED FINANCIAL PLAN
UPSIDE CASE
================================================================================
o LOWER R&D EXPENSE REPRESENTS PLANNED BOTTOM-LINE UPSIDE BEGINNING IN 2003
o NET INCOME MARGINS WOULD IMPROVE AS A RESULT, WITH FY07 NET MARGIN
INCREASING FROM 24.7% TO 27.4%
- REPRESENTS $39 MILLION IN ADDITIONAL AFTER-TAX INCOME IN FY07
<TABLE>
<CAPTION>
FYE 6/30 Actual Projected
----------------- ----------------------------------------------------------------------------------------
($MM) 1999 2000 2001 2002 2003 2004 2005 2006 2007
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL SALES $ 29.9 $ 47.9 $ 66.3 $ 87.9 $ 241.6 $ 476.0 $ 680.9 $ 894.0 $1,481.8
------------------------------------------------------------------------------------------------------------------------------
% Growth 60.0% 38.4% 32.6% 174.7% 97.0% 43.1% 31.3% 65.7%
------------------------------------------------------------------------------------------------------------------------------
R&D $ 6.7 $ 8.0 $ 22.8 $ 25.7 $ 43.3 $ 46.1 $ 48.8 $ 53.7 $ 66.3
------------------------------------------------------------------------------------------------------------------------------
% of Sales 22.5% 16.8% 34.4% 29.3% 17.9% 9.7% 7.2% 6.0% 4.5%
------------------------------------------------------------------------------------------------------------------------------
EBITDA $ (11.4) $ (3.8) $ (4.6) $ 1.7 $ 49.8 $ 141.4 $ 238.9 $ 327.2 $ 665.1
------------------------------------------------------------------------------------------------------------------------------
% Margin (38.0%) (7.9%) (6.9%) 2.0% 20.6% 29.7% 35.1% 36.6% 44.9%
------------------------------------------------------------------------------------------------------------------------------
EBIT $ (14.1) $ (5.3) $ (8.6) $ (1.7) $ 42.2 $ 132.3 $ 228.4 $ 315.1 $ 651.3
------------------------------------------------------------------------------------------------------------------------------
% Margin (47.2%) (11.0%) (12.9%) (1.9%) 17.5% 27.8% 33.5% 35.2% 44.0%
------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ (12.5) $ (3.1) $ (8.0) $ (1.2) $ 43.1 $ 95.9 $ 141.6 $ 197.3 $ 405.3
------------------------------------------------------------------------------------------------------------------------------
% Growth N.M. N.M. N.M. N.M. N.M. 122.3% 47.7% 39.4% 105.4%
------------------------------------------------------------------------------------------------------------------------------
% Margin (41.9%) (6.4%) (12.1%) (1.3%) 17.9% 20.1% 20.8% 22.1% 27.4%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
7-Year Plan Projected
-------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCOME $ (8.0) $ (1.0) $ 39.7 $ 86.5 $ 121.5 $ 169.3 $366.0
% Growth N.M. N.M. N.M. 117.9% 40.5% 39.3% 116.2%
% Margin (12.1%) (1.1%) 16.4% 18.2% 17.8% 18.9% 24.7%
R&D MANAGEMENT CASE $ 22.8 $ 25.5 $ 46.8 $ 64.0 $ 82.3 $ 100.4 $131.8
% of Sales 34.4% 29.1% 19.4% 13.4% 12.1% 11.2% 8.9%
</TABLE>
<PAGE> 19
CYBERONICS, INC.
BUSINESS REVIEW
DEPRESSION BUSINESS PLAN
================================================================================
o The Depression IBU is targeted to become the next significant growth engine
for the Company
o The depression opportunity is significantly larger than the epilepsy
opportunity
- Treatment resistant depression patients outnumber medically refractory
epilepsy patients by 4.6x
- Annual "first time" electric shock therapy patients in depression
outnumber annual epilepsy surgeries by 40x
o During FY00, the Depression IBU:
- Completed an encouraging 60 patient pilot study in which 40% of
patients reported at least 50% improvement and 26% of patients were
depression free after 9 months of VNS
- Completed encouraging preliminary fMRI mechanism of action studies
- Receive FDA expedited review status and approval for 20 center / 210
patient pivotal study
- Pivotal study underway and ahead of schedule
- 15 key opinion leader centers; 29 patients enrolled; 10 patients
implanted
o Cyberonics anticipates its U.S. depression sales beginning in Q3 of FY03,
and projects a 4-year sales CAGR of 59.3%
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Depression Financial Plan Projected for FYE
------------------------------------------------------------------------------------------
($MM) 2001 2002 2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Sales 2.9 135.1 342.6 515.4 695.8 870.7
---------------------------------------------------------------------------------------------------------------------
% Growth N.M. 153.6% 50.4% 35.0% 25.1%
---------------------------------------------------------------------------------------------------------------------
COGS 0.6 23.0 54.8 67.0 83.5 95.8
---------------------------------------------------------------------------------------------------------------------
Gross Profit 2.4 112.1 287.8 448.4 612.3 774.9
---------------------------------------------------------------------------------------------------------------------
% margin 80.0% 83.0% 84.0% 87.0% 88.0% 89.0%
---------------------------------------------------------------------------------------------------------------------
SGA 0.2 0.8 60.0 157.3 236.5 324.1 414.5
---------------------------------------------------------------------------------------------------------------------
R&D 10.5 10.0 16.0 30.8 46.4 61.7 76.5
---------------------------------------------------------------------------------------------------------------------
Operating Income (10.7) (8.5) 36.2 99.6 165.6 226.5 284.0
---------------------------------------------------------------------------------------------------------------------
Net Income before taxes (10.7) (8.5) 36.2 99.6 165.6 226.5 284.0
---------------------------------------------------------------------------------------------------------------------
Net Income (10.7) (8.5) 36.2 85.7 99.3 135.9 170.4
---------------------------------------------------------------------------------------------------------------------
% Growth N.M. N.M. N.M. 137.0% 15.9% 36.8% 25.4%
---------------------------------------------------------------------------------------------------------------------
% Margin N.M. N.M. 26.8% 25.0% 19.3% 19.5% 19.6%
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
CYBERONICS, INC.
BUSINESS REVIEW
DEPRESSION BUSINESS UNIT ESTIMATES
COMPARISON TO EQUITY RESEARCH ESTIMATES
===============================================================================
SALES
$MM
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005 2006 2007
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Archie Smith / Piper Jaffray -- -- N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Andrew Jay / First Union Securities -- 1.0 25.0 90.0 N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Kurt Kruger / Banc of America Securities N/A N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Chad Simmer / John G. Kinnard & Co. -- 2.9 139.5 343.6 512.6 694.8 869.5
------------------------------------------------------------------------------------------------------------------------------
Matthew Dodds / SG Cowen -- 0.7 5.5 71.8 144.0 N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Jan Wald / George K. Baum & Co. N/A N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
CYBX 7-Year Plan -- 2.9 135.1 342.6 515.4 695.8 870.7
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OPERATING INCOME
$MM
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005 2006 2007
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Archie Smith / Piper Jaffray (9.3) (8.0) N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Andrew Jay / First Union Securities (10.7) (9.8) (16.0) 22.0 N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Kurt Kruger / Banc of America Securities N/A N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Chad Simmer / John G. Kinnard & Co. (10.7) (8.5) 35.5 95.9 148.0 210.6 274.9
------------------------------------------------------------------------------------------------------------------------------
Matthew Dodds / SG Cowen (10.7) (11.0) (19.5) 24.4 65.2 N/A N/A
------------------------------------------------------------------------------------------------------------------------------
Jan Wald / George K. Baum & Co. N/A N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
CYBX 7-Year Plan (10.7) (8.5) 36.2 99.6 165.6 226.5 284.0
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES
1. These estimates were taken from independent third party research reports
<PAGE> 21
CYBERONICS, INC.
BUSINESS REVIEW
OBESITY AND OTHER BUSINESS PLAN
================================================================================
o All indications not in pivotal study are grouped into the Obesity / Other
IBU
o Obesity is a huge opportunity
- 14 million morbidly obese Americans
- 6 subject animal study completed with encouraging results
- 30 patient pilot study underway in U.S.; 2 centers; 2 patients
implanted
- Although FDA approval is estimated for FY06, the Company expects
clarity on pilot safety and efficacy in Obesity within 12 months
o Alzheimer's pilot study is underway in Sweden
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Obesity and Other Financial Plan Projected for FYE
-----------------------------------------------------------------------------------------------
($MM) 2001 2002 2003 2004 2005 2006 2007
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------------
Sales - - - - - - 375.6
--------------------------------------------------------------------------------------------------------------------------------
COGS - - - - - - 41.3
--------------------------------------------------------------------------------------------------------------------------------
Gross Profit - - - - - - 334.3
--------------------------------------------------------------------------------------------------------------------------------
% Margin N.M. N.M. N.M. N.M. N.M. N.M. 89.0%
--------------------------------------------------------------------------------------------------------------------------------
SGA - 0.2 0.5 0.5 0.5 0.5 76.1
--------------------------------------------------------------------------------------------------------------------------------
R&D 3.0 5.0 20.0 20.0 20.0 20.0 33.5
--------------------------------------------------------------------------------------------------------------------------------
Operating Income (3.0) (5.2) (20.5) (20.5) (20.5) (20.5) 224.7
--------------------------------------------------------------------------------------------------------------------------------
Net Income before taxes (3.0) (5.2) (20.5) (20.5) (20.5) (20.5) 224.6
--------------------------------------------------------------------------------------------------------------------------------
Net Income (3.0) (5.2) (20.5) (17.6) (12.3) (12.3) 134.8
--------------------------------------------------------------------------------------------------------------------------------
% Margin N.M. N.M. N.M. N.M. N.M. N.M. 35.9%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
CYBERONICS, INC.
SECTION 4
STAND ALONE VALUE PROPOSITION
================================================================================
<PAGE> 23
CYBERONICS, INC.
STAND ALONE VALUE PROPOSITION
VALUATION OVERVIEW
===============================================================================
o Medtronic's $26.00 proposal values Cyberonics at a CY00 sales multiple of
9.5x and a CY01 sales multiple of 7.0x
-- Does not give Cyberonics appropriate sum-of-the-parts credit for its
existing epilepsy business and its much larger new indication
opportunities in depression, obesity, and Alzheimer's
-- Values the Company in a change of control at multiples far lower than
where most high growth peer companies are currently trading
o Certain more mature medical technology companies such as Medtronic and
Guidant have maintained high Aggregate Value/Sales ratios
-- Market presence and investors' views of continued growth prospects
have sustained such valuations
CYBERONICS AND COMPARABLE COMPANIES
AGGREGATE VALUE / CY2001 SALES(1)
<TABLE>
<CAPTION>
DIGE MNMD NOVT ISRG OTEC CYTC CYBX(2) ARTC ASPM
---- ---- ---- ---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
14.6 13.1 12.6 9.1 9.1 7.2 7.0 5.0 3.7
</TABLE>
MEDTRONIC AND COMPARABLE COMPANIES
AGGREGATE VALUE / CY2001 SALES(1)
<TABLE>
<CAPTION>
MDT GDT STJ SM BSX
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
9.6 7.6 3.3 3.2 2.9
</TABLE>
NOTES
1. Prices as of 9/15/00
2. $26 share price, as per Medtronic proposal
<PAGE> 24
CYBERONICS, INC.
STAND ALONE VALUE PROPOSITION
CYBERONICS ANALYST COMMENTARY
POST MDT ANNOUNCEMENT
================================================================================
<TABLE>
<CAPTION>
SUMMARY OF EQUITY RESEARCH ANALYST RECOMMENDATIONS
Implied P/E
EPS Ratio
------------- ------------- 12 Month Premium 5 Year
Price at 2001E 2002E 2001E 2002E Price to Price Growth
Date Firm Recommendation Report $ $ x x Target at Report Rate
------- -------------------------- -------------- -------- ----- ----- ----- ----- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9/18/00 First Union Securities Buy $27.13 (0.45) (0.05) N/A N/A $37.00 36.4% 30.0%
9/14/00 Banc of America Securities Buy 27.06 (0.48) (0.31) N/A N/A 35.00 29.3% N/A
</TABLE>
--------------------------------------------------------------------------------
SELECTED EQUITY RESEARCH ANALYST COMMENTARY
o "We are becoming increasingly more confident in the new and improved
Cyberonics. A year ago Cyberonics was the `The Epilepsy Company,' now
however it has a stable of very promising new indications and is well
positioned for solid growth. This fact has not been lost on Medtronic... We
also believe the current offer of $26 is too low." Banc of America
Securities 9/14/00
o "Further off in the distance beyond depression is obesity. Obesity could
prove to be the biggest application yet for Cyberonics. An estimated 20
million Americans are morbidly obese." Banc of America Securities 9/14/00
o "We are raising our FY2003 and FY2004 depression revenue estimates to $25
and $90 million from $17 and $34 million based on impressive clinical
presentations and a discussion of management's extensive market penetration
plans." First Union Securities, 9/18/00
<PAGE> 25
CYBERONICS, INC.
STAND ALONE VALUE PROPOSITION
MEDTRONIC OVERVIEW
================================================================================
o MEDTRONIC'S FINANCIAL AND GROWTH CHARACTERISTICS, WHILE ATTRACTIVE, ARE NOT
SIGNIFICANTLY HIGHER THAN CERTAIN PEER COMPANIES
o MEDTRONIC, HOWEVER, TRADES AT A SUBSTANTIAL PREMIUM TO ITS PEERS, RESULTING
IN THE HIGHEST P/E TO GROWTH RATIO IN ITS PEER COMPANY UNIVERSE
CY2000E EBIT MARGIN (1)
%
<TABLE>
<CAPTION>
GDT MDT BSX STJ SM
--- --- --- --- --
<S> <C> <C> <C> <C>
33.8 33.1 24.9 19.4 18.5
</TABLE>
I/B/E/S 5-YEAR GROWTH
%
<TABLE>
<CAPTION>
GDT MDT BSX STJ SM
--- --- --- --- --
<S> <C> <C> <C> <C>
19.5 18.0 18.0 16.0 10.0
</TABLE>
CY2001 P/E (2)
x
<TABLE>
<CAPTION>
MDT GDT SM STJ BSX
--- --- -- --- ---
<S> <C> <C> <C> <C>
41.4 35.2 22.5 21.7 15.0
</TABLE>
CY2001 P/E / GROWTH RATIO(3)
[GRAPH PLOTTING P/E AND I/B/E/S 5-YEAR GROWTH (%) FOR SM, MDT, GDT, STJ AND BSX]
NOTE
1. Estimates for all comparables taken from MSDW Equity Research
2. Based on Prices as of 9/15/00 and I/B/E/S median P/E ratios
3. Based on Prices as of 9/15/00, I/B/E/S median P/E ratios and the I/B/E/S
median 5-Year growth consensus
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYBERONICS, INC.
/s/ PAMELA E. WESTBROOK
----------------------------------------
Pamela E. Westbrook
Vice President, Finance and Administration
and Chief Financial Officer
Date: September 25, 2000
