Document:

exv10w37

 

Exhibit 10.37

CYBERONICS, INC.

OFFICER STOCK OPTION PLAN AGREEMENT

	I.	 	NOTICE OF STOCK OPTION GRANT

     William Steven Jennings

     You have been granted a Nonstatutory Stock Option to purchase Common Stock of the Company,
subject to the terms and conditions of this Agreement, as follows:

	 	 	 	 	 
	 

	 	Date of Grant
	 	June 2, 2003
	 
	 	 	 	 
	 

	 	Vesting Commencement Date
	 	June 2, 2003
	 
	 	 	 	 
	 

	 	Exercise Price per Share
	 	$18.94
	 
	 	 	 	 
	 

	 	Total Number of Shares Granted
	 	150,000
	 
	 	 	 	 
	 

	 	Total Exercise Price
	 	$2,841,000
	 
	 	 	 	 
	 

	 	Term/Expiration Date:
	 	August 23,2011
	 
	 	 	 	 
	 

	 	Vesting Schedule:	 	 

     This Option shall vest and may be exercised, in whole or in part, in accordance with the
following schedule:

     1/60th of the Shares subject to the Option shall vest each month after the Vesting
Commencement Date, so that the Option shall be fully vested five (5) years from the Date of Grant,
subject to the Optionee continuing to be a Service Provider on such dates.

     Termination Period

     This Option may be exercised for ninety (90) days after Optionee ceases to be a Service
Provider in accordance with Section 7 of this Agreement. Upon the death or Disability of the
Optionee, this Option may be exercised for twelve (12) months after the Optionee ceases to be a
Service Provider in accordance with Sections 8 and 9 of this
Agreement. In no event shall this
Option be exercised later than the Term/Expiration Date provided.

 

 

	II.	 	AGREEMENT

     1. Definitions. As used herein, the following definitions shall apply:

          (a) “Agreement” means this stock option agreement between the Company and
Optionee evidencing the terms and conditions of this Option.

          (b) “Applicable Laws” means the requirements relating to the administration of stock
options under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any
stock
exchange or quotation system on which the Common Stock is listed or quoted and the applicable
laws of any foreign country or jurisdiction that may apply to this Option.

          (c) “Board” means the Board of Directors of the Company or any committee of the
Board that has been designated by the Board to administer this
Agreement.

          (d) “Code” means the Internal Revenue Code of 1986, as amended.

          (e)
“Common Stock” means the common stock of the Company.

          (f) “Company” means Cyberonics, Inc., a Delaware
corporation.

          (g) “Consultant” means any person, including an advisor, engaged by the Company or a
Parent or Subsidiary to render services to such entity.

          (h)
“Director” means a member of the Board.

          (i) “Disability” means total and permanent disability as defined in Section 22(e)(3)
of the Code.

          (j) “Employee” means any person, including Officers and Directors, employed by the
Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an
Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any Subsidiary, or any successor.
Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient
to constitute “employment” by the Company.

          (k)
“Exchange Act” means the Securities Exchange Act of 1934, as amended.

          (l) “Fair Market Value” means, as of any date, the value of Common Stock determined
as follows:

                    (1) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National Market or The Nasdaq
SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or
system on the day of determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;

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                    (2) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the mean between the
high bid and low asked prices for the Common Stock on the day of determination; or

                    (3) In the absence of an established market for the Common Stock, the
Fair Market Value thereof shall be determined in good faith by the
Board.

          (m) “Nonstatutory Stock Option” means an Option not intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.

          (n) “Notice of Grant” means a written notice, in Part I of this Agreement, evidencing
certain the terms and conditions of this Option grant. The Notice of Grant is part of the Option
Agreement.

          (o) “Officer” means a person who is an officer of the Company within the meaning of
Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

          (p) “Option” means this stock option.

          (q) “Optioned Stock” means the Common Stock subject to this Option.

          (r) “Optionee” means the person named in the Notice of Grant or such person’s
successor.

          (s) “Parent” means a “parent corporation,” whether now or hereafter existing, as
defined in Section 424(e) of the Code.

          (t) “Service Provider” means an Employee, Director or Consultant.

          (u) “Share” means a share of the Common Stock, as adjusted in accordance with Section
10 of this Agreement.

          (v) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing,
as defined in Section 424(f) of the Code.

     2. Grant of Option. The Board hereby grants to the Optionee named in the Notice of
Grant attached as Part I of this Agreement the Option to purchase the number of Shares, as set
forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant
(the “Exercise Price”), subject to the terms and conditions
of this Agreement.

     3. Exercise of Option.

          (a) Right to Exercise. This Option is exercisable during its term in accordance with
the Vesting Schedule set out in the Notice of Grant and the applicable provisions of this
Agreement.

          (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice,
in the form attached as Exhibit A (the “Exercise Notice”), which shall state the
election to exercise

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the Option, the number of Shares in respect of which the Option is being exercised (the
“Exercised Shares”), and such other representations and agreements as may be required by the
Company. The Exercise Notice shall be completed by the Optionee and delivered to Secretary of the
Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to
all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of
such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

          (c) Legal Compliance. No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance,
for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on
the date the Option is exercised with respect to such Exercised Shares.

     4.
Method of Payment. Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:

          (a) cash or check;

          (b) promissory note;

          (c) consideration received by the Company under a cashless exercise program
implemented by the Company; or

          (d) surrender of other Shares, provided Shares acquired directly from the Company,
(i) have been owned by the Optionee for more than six (6) months on the date of surrender, and
(ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.

     5. Non-Transferability of Option. This Option may not be transferred in any manner
otherwise than by will or by the laws of descent or distribution and may be exercised during
the lifetime of Optionee only by the Optionee. The terms of this Agreement shall be binding upon
the executors, administrators, heirs, successors and assigns of the Optionee.

     6. Term of Option. This Option may be exercised only within the term set out in the
Notice of Grant, and may be exercised during such term only in accordance with the terms of this
Agreement.

     7. Termination of Relationship as a Service Provider. If the Optionee ceases to be a
Service Provider (other than for death or Disability), this Option may be exercised for a period of
ninety (90)
days after the date of such termination (but in no event later than the expiration date of
this Option as set forth in the Notice of Grant) to the extent that the Option is vested on the date of such
termination. To the extent that the Optionee does not exercise this Option within the time
specified herein, the Option shall terminate.

     8. Disability of Optionee. If the Optionee ceases to be a Service Provider as a result
of the Optionee’s Disability, this Option may be exercised for a period of twelve (12) months after
the date of such termination (but in no event later than the expiration date of this Option as set
forth in the Notice of Grant) to the extent that the Option is vested on the date of such termination. To
the extent

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that Optionee does not exercise this Option within the time specified herein, the Option
shall terminate.

     9. Death of Optionee. If the Optionee dies while a Service Provider, the Option may
be exercised at any time within twelve (12) months following the date of death (but in no event
later than the expiration date of this Option as set forth in the Notice of Grant), by the
Optionee’s estate or
by a person who acquired the right to exercise the Option by bequest or inheritance, but only
to the extent that the Optionee was entitled to exercise the Option at the date of death. If, after
death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or
inheritance does not exercise the Option within the time specified
herein, the Option shall terminate.

     10. Adjustments
Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

          (a) Changes in Capitalization. Subject to any required action by the stockholders of
the Company, the number of shares of Common Stock covered by this Option, as well as the price
per share of Common Stock covered by this Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or
any other increase or decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been “effected without receipt of consideration,”
Such adjustment shall be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or price of shares of
Common Stock subject to this Option.

          (b)
Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Board shall notify Optionee as soon as practicable prior to the effective
date of such proposed transaction, The Board in its discretion may provide for the Optionee to have
the right to exercise his or her Option until ten (10) days prior to such transaction as to all of
the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be
exercisable. To the extent it has not been previously exercised, the Option will terminate
immediately prior to the consummation of such proposed.

          (c) Merger or Asset Sale. In the event of a merger of the Company with or into
another corporation, or the sale of substantially all of the assets of the Company, the Option
shall be assumed or an equivalent option substituted by the successor corporation or a Parent or
Subsidiary of
the successor corporation. In the event that the successor corporation refuses to assume or
substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as
to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or
exercisable. If the Option becomes fully vested and exercisable in lieu of assumption or substitution in the
event of a merger or sale of assets, the Board shall notify the Optionee in writing or electronically
that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such
notice, and the Option shall terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option
confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately

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prior to the merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of Common Stock for
each Share held on the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger or sale of assets is
not solely common stock of the successor corporation or its Parent, the Administrator may, with the
consent of the successor corporation, provide for the consideration to be received upon the
exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common
stock of the successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or
sale of assets.

          (d) Change of Control. In the event of a Change of Control (as defined below), the
Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or exercisable, and any
Company reacquisition option applicable to any Shares acquired upon exercise of an Option shall
lapse as to all such Shares. If an Option becomes fully vested and exercisable as the result of a
Change of Control, the Administrator shall notify the Optionee in writing or electronically prior
to the Change of Control that the Option shall be fully vested and exercisable for a period of
fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration
of such period. For purposes of this Plan, a “Change of Control” means the happening of any of the
following events:

                    (1) When any “person,” as such term is used in Sections 13(d) and
14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or a Company
employee benefit plan, including any trustee of such plan acting as trustee, is or becomes the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing fifty percent (50%) or more of the combined voting power of
the Company’s then outstanding securities entitled to vote generally in the election of directors;
or

                    (2) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the shareholders of the Company approve an
agreement for the sale or disposition by the Company of all or substantially all the Company’s
assets; or

                    (3) A change in the composition of the Board of Directors of the
Company, as a result of which fewer than a majority of the directors are Incumbent Directors.
“Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the
date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to
the Board of Directors of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not include an individual
whose election or nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company).

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     11. Notices. Any notice to be given to the Company hereunder shall be in
writing and shall
be addressed to the Company at its then current principal executive office or to such other
address as
the Company may hereafter designate to the Optionee by notice as provided in this Section. Any
notice to be given to the Optionee hereunder shall be addressed to the Optionee at the address
set
forth beneath his signature hereto, or at such other address as the Optionee may hereafter
designate
to the Company by notice as provided herein. A notice shall be deemed to have been duly given
when personally delivered or mailed by registered or certified mail to the party entitled to
receive it.

     12. Withholding Taxes. Optionee agrees to make appropriate arrangements with the
Company (or the Parent or Subsidiary employing or retaining Optionee) for the satisfaction of
all federal, state, and local income and employment tax withholding requirements applicable to the
Option exercise. Optionee acknowledges and agrees that the Company may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not delivered at the
time of exercise.

     13. Entire Agreement; Governing Law. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter hereof and supersedes in its entirety all prior
undertakings and agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee’s interest except by means of a
writing signed by the Company and Optionee. This agreement is governed by the internal substantive
laws, but not the choice of law rules, of Texas.

     14. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE
VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A
SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED
AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS
AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUES ENGAGEMENT AS A SERVICE PROVIDER FOR THE
VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE
COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

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     By your signature and the signature of the Company’s representative below, you and the
Company agree that this Option is granted under and governed by the
terms and conditions of this
Agreement. Optionee has reviewed this Agreement in its entirety, has had an opportunity to obtain
the advice of counsel prior to executing this Agreement and fully understands all provisions of
this Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions relating to this
Agreement. Optionee further agrees
to notify the Company upon any change in the residence address indicated below.

	 	 	 	 	 
	OPTIONEE

	 	 	 	CYBERONICS, INC.
	 
	 	 	 	 
	/s/ William Steven Jennings

	 	 	 	 
	 

	 	 	 	 
	Signature

	 	 	 	Robert P. Cummins
	 
	 	 	 	 
	 
	 	 	 	/s/ Robert P. Cummins
	 

	 	 	 	 
	William Steven Jennings

	 	 	 	Chairman & Chief Executive Officer
	 
	 	 	 	 
	 

Residence Address

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 

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EXHIBIT A

CYBERONICS, INC.

EXERCISE NOTICE

Cyberonics, Inc.

16511 Space Center Boulevard #600

Houston, Texas 77062

Attention:

     1. Exercise
of Option. Effective as of
today,                                        
, 20        , the undersigned
(“Purchaser”) hereby elects to purchase
                     shares (the “Shares”) of the Common
Stock of Cyberonics, Inc. (the “Company”) under and pursuant to the Stock Option Agreement dated
[                                        ]
(the “Option Agreement”). The purchase price for the Shares shall be
[$                     ], as required by the Option Agreement.

     2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase
price for the Shares.

     3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received,
read and understood the Option Agreement and agrees to abide by and be bound by their terms
and conditions.

     4. Rights
as Shareholder. Until the issuance (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the Company) of the Shares,
no right to vote or receive dividends or any other rights as a stockholder shall exist with
respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be
issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to the date of issuance, except as
provided in Section 10 of the Option Agreement.

     5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser’s purchase or disposition of the Shares. Purchaser
represents
that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection
with
the purchase or disposition of the Shares and that Purchaser is not relying on the Company for
any
tax advice.

     6. Successors and Assigns. The Company may assign any of its rights under this
Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the
benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set
forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.

 

 

     7. Interpretation. Any dispute regarding the interpretation of this Exercise Notice
shall be submitted by Optionee or by the Company forthwith to the Board which shall review such
dispute at its next regular meeting. The resolution of such a dispute by the Board shall be final and
binding on all parties.

     8. 
Entire Agreement; Governing Law. The Option Agreement is incorporated herein by
reference. This Agreement, and the Option Agreement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not
be modified adversely to the Purchaser’s interest except by means of a writing signed by the
Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of
law rules, of Texas.

	 	 	 	 	 
	Submitted by:

	 	 	 	Accepted by:
	 
	 	 	 	 
	OPTIONEE

	 	 	 	CYBERONICS, INC.
	 
	 	 	 	 
	 

	 	 	 	 
	Signature
	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	Print Name
	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	Address

	 	 	 	Address
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	Date
Received:
 

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Exhibit 10.38

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”), entered into effective as of June
15, 2006 (the “Effective Date”), by and between Cyberonics, Inc. (the “Company”)
and W. Steven Jennings (“Employee”).

W1TNESSETH:

     WHEREAS, the Company desires to secure the experience, abilities and service
of Employee by employing Employee upon the terms and conditions specified herein;
and

     WHEREAS, Employee is willing to enter into this Agreement upon the terms and
conditions specified herein;

     NOW, THEREFORE, in consideration of the premises, terms and provisions set
forth herein, the mutual benefits to be gained by the performance thereof and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

     SECTION 1. Employment. The Company hereby employs Employee, and
Employee hereby accepts such employment, all upon the terms and conditions set
forth herein.

     SECTION 2. Term. Subject to the terms and conditions of this
Agreement, unless sooner terminated pursuant to Section 5 of this Agreement,
Employee shall be employed by the Company commencing on the Effective Date and
terminating on June 1, 2009 (the “Term”). Termination of this Agreement shall not
alter or impair any rights of Employee (or his beneficiaries or heirs) with respect
to payments, benefits or other rights provided by the terms of this Agreement,
arising before or after the end of the Term.

     SECTION 3. Duties. Responsibilities and Location.

     A. Capacity. Employee shall serve as the Vice President,
Sales of the Company and shall report to the Chief Executive Officer of the
Company.

     B. Full-Time Duties. Employee shall devote his full business
time, attention and energies to the business of the Company.
Notwithstanding anything herein to the contrary, Employee shall be allowed to (i) manage
Employee’s personal investments and affairs and, (ii) with the written consent
of the Chief Executive Officer of the Company, serve on boards or committees of
civic or charitable organizations or trade associations, provided that such
activities do not materially interfere with his performance of the duties and
responsibilities of his position specified in Section 3.A.

     C. Offices. Employee’s primary place of work shall be at the
principle executive offices of the Company located in the greater Houston,
Texas metropolitan area, but Employee shall be required to travel on a
basis consistent with his position.

 

 

     SECTION 4. Compensation.

     A. Base Salary During the Term, Employee shall receive an
annual salary of $260,000 (the “Base Salary”) payable in accordance with
the Company’s general payroll practices. Employee’s Base Salary shall be
reviewed prior to the beginning of each fiscal year of the Company for
increase in the discretion of the Compensation Committee of the Board of
Directors (“Compensation Committee”); provided, however, that the Base
Salary, as it may be increased at any time, may not thereafter be
decreased.,

     B. Annual Incentive Bonus. During the Term, Employee
shall be eligible to participate in the Annual CEO Direct Reports Bonus
Plan, with a target bonus of 50% of Employee’s annual Base Salary. A bonus, if
earned, shall be payable as soon as reasonably practical following the completion of
the applicable fiscal year. Bonuses for Employee shall be based on the
achievement of such Company, departmental and/or individual performance goals that may
be established for the applicable bonus year by the Compensation
Committee.

     C. Annual Overachievement Bonus. During the Term, Employee
shall be eligible to participate in the Annual CEO Direct Reports
Overachievement Bonus Plan as determined by the Compensation Committee,
Overachievement Bonuses shall be based on the Company’s overachievement of such
Company, departmental and/or individual performance goals that may be
established for the applicable bonus year by the Compensation Committee.

     D. Equity Compensation. Employee will be eligible for
grants of Company stock options (the “Options”) and other equity awards in
the discretion of the Compensation Committee.

     E. General Benefits. Upon satisfying applicable eligibility requirements, if any, Employee will be eligible to participate in
the Company’s qualified 401(k) plan, group health, group life insurance, accidental death and dismemberment, travel accident, long-term disability and short-term
disability plans and other welfare and similar plans and vacation policies
under terms generally applicable to other similarly situated employees of the
Company and shall be eligible to receive all perquisites and other benefits
provided or made available by the Company to other similarly situated executives of
the Company.

     F. Reimbursements. Employee shall be entitled to receive
prompt reimbursement by the Company in accordance with its business
reimbursement policy in effect from time to time for ail reasonable,
out-of-pocket business expenses incurred by him in performing his duties under this
Agreement upon the submission by Employee of such accounts and records as may be
reasonably required under the Company’s business reimbursement policy.

     SECTION 5. Termination of Employment. Notwithstanding the provisions
of Section 2, Employee’s employment hereunder may terminate under any of the
following conditions:

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     A. Death. Employee’s employment under this Agreement
shall terminate automatically upon his death.

     B. Disability. Employee’s employment under this Agreement
may be terminated due to his Disability. “Disability” shall mean Employee’s
inability to substantially perform his duties hereunder for any period of at
least 180 consecutive days due to a physical or mental incapacity. The date of
termination due to Disability shall be the date Employee elects to terminate his
employment service due to such Disability or, if earlier, the date the Board
determines that Employee has met the definition of Disability and given written
notice of such termination to Employee.

     C. Termination by Company Without Cause. The Company may
terminate Employee’s employment hereunder without Cause (as
hereinafter defined) on 30 days’ prior written notice to Employee.

     D. Termination by Company for Cause. Employee’s employment
hereunder may be terminated for Cause by the Company. For purposes
of this Agreement, “Cause” shall mean (i) the willful and continued failure
by Employee to substantially perform Employee’s duties with the Company (other
than any such failure resulting from Employee’s incapacity due to physical or
mental illness), (ii) an act or acts of dishonesty taken by Employee and
intended to result in personal enrichment of Employee at the expense of the Company,
(iii) willful violation by Employee of Employee’s material obligations under this
Agreement, (iv) willful violation by Employee of a material policy of the
Company, including its policies regarding professional and ethical conduct,
(v) Employee’s commission of one or more acts that constitute a felony, (vi)
Employee is publicly censured by the Securities Exchange Commission, or (vii) Employee
commits one or more acts of fraud as regards the Company. For purposes of clause
(i) of this definition, no act, or failure to act, on Employee’s part shall be
deemed “willful” unless done, or omitted to be done, by Employee not in good faith and
without reasonable belief that Employee’s act, or failure to act, was in the
best interest of the Company. The determination of whether Cause exists must be
made by a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board of Directors of the Company.

     E. Termination by Employee. Employee may terminate
his employment hereunder at any time on 30 days’ prior written notice to
the Board.

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     SECTION 6. Payments Upon Termination.

     A. Upon termination of Employee’s employment for any reason prior
to the expiration of the Term, the Company shall be obligated to pay,
and Employee shall be entitled to receive:

     1. all accrued and unpaid Base Salary to the date of termination;

     2. any earned, but unpaid, bonuses for the bonus year ending
prior to the date of termination;

     3. all incurred but unreimbursed business expenses for which
Employee is entitled to reimbursement; and

     4. any benefits to which he is entitled under the terms of
any applicable employee benefit plan or program, or applicable
law.

     B. Upon termination of Employee’s employment pursuant to Section 5.C., the Company shall be obligated to pay or provide, and
Employee’s estate or beneficiary shall be entitled to receive:

     1. all of the amounts and benefits described in Section 6. A.; and

     2. either (a) a lump sum payment equal to 1.5 times the sum
of (i) Employee’s Base Salary, plus (ii) the most recent annual
bonus earned by Employee or (b) a lump sum payment equal to 1.5 times
Employee’s Base Salary and, solely for purposes of determining Employee’s
vesting under any Options, the number of shares that would become vested
under such Options during the 12-month period following Employee’s
termination date if Employee’s employment had continued during such
period shall become vested on his termination of employment date,
whichever of (a) or (b) is elected by Employee in writing to the Company within
five days of his termination date.

     C. In the event of any termination of employment under Section 5,
Employee shall be under no obligation to seek other employment and there
shall be no offset against amounts due Employee under this Agreement on
account of any remuneration attributable to any subsequent employment or
self-employment that he may obtain.

     D. The Company and Employee have previously or contemporaneously
with this Agreement entered into a Severance Agreement which provides
certain payments and benefits to Employee upon a qualified termination
of employment in connection with a change of control of the
Company. Notwithstanding anything in this Agreement to the contrary, to the
extent Employee is entitled to receive any severance payment or benefits
under the Severance Agreement any

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severance payment or benefits to which Employee is otherwise entitled
to receive under this Agreement shall be reduced or offset by the
severance payment or benefit payable under the Severance Agreement in
such manner as is appropriate, as determined in good faith by the
Board, to prevent a duplication of such payment and benefits.

     SECTION 7. Indemnification. The Company agrees to indemnify Employee
to the fullest extent permitted by applicable law with respect to any acts or
non-acts he may have committed during the period which he was an officer, director
and/or employee of the Company or any subsidiary or affiliate thereof, or of any
other entity of which he served as an officer, director or employee at the request
of the Company.

     SECTION 8. Covenants of Employee. Employee covenants as follows:

     A. Confidentiality. During and after his employment with
the Company and its affiliates, Employee will hold in confidence all
confidential information and will not disclose it to any person other
than in connection with the performance of his duties and obligations
hereunder, except with the specific prior written consent of the Board
of Directors or the Chief Executive Officer; provided, however, that
the parties agree that this Agreement does not prohibit the disclosure
of confidential information where applicable law requires, including,
but not limited to, in response of subpoenas and/or orders of a
governmental agency or court of competent jurisdiction. In the event
that Employee is requested or becomes legally compelled under the terms
of a subpoena or order issued by a court of competent jurisdiction or
by a governmental body to make any disclosure of confidential
information, Employee agrees that he will (i) immediately provide the
Company with written notice of the existence, terms and circumstances,
surrounding such request(s) so that the Company may seek an appropriate
protective order or other appropriate remedy, (ii) cooperate with the
Company in its efforts to decline, resist or narrow such requests and
(iii) if disclosure of such confidential information is required in the
opinion of counsel, exercise reasonable efforts to obtain an order or
other reliable assurance that confidential treatment will be accorded
to such disclosed information. “Confidential information” means any and
all intellectual property of the Company (or any of its affiliates),
including but not limited to: (a) trade secrets concerning the business
and affairs of the Company (or any of its affiliates), product
specifications, data, know-how, formulae, compositions, processes,
designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and development, current
and planned manufacturing or distribution methods and processes,
customer lists, current and anticipated customer requirements, price
lists, market studies, business plans, computer software and programs
(including object code and source code), computer software and database
technologies, systems, structures, and architectures (and related
formulae, compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented, that is a
trade secret under federal, state or other applicable law; and (b)
information concerning

-5-

 

the business and affairs of the Company (or any of its affiliates)
(which includes historical financial statements, financial projections
and budgets, historical and projected sales, capital spending budgets
and plans, the names and backgrounds of key personnel, personnel
training and techniques and materials), however documented; and notes,
analysis, compilations, studies, summaries, and other material prepared
by or for the Company (or any of its affiliates) containing or based, in
whole or in part, on any information included in the foregoing.

     B. Trade Secrets. Any trade secrets of the Company will be
entitled to all of the protections and benefits under the federal and
state trade secret and intellectual property laws and any other
applicable law. If any information that the Company deems to be a trade
secret is found by a court of competent jurisdiction not to be a trade
secret for purposes of this Agreement, such information will,
nevertheless, be considered confidential information for purposes of this
Agreement, so long as it otherwise meets the definition of confidential
information. Employee hereby waives any requirement that the Company
submit proof of the economic value of any trade secret or post a bond or
other security.

     C. Proprietary Items. Employee will not remove from the
Company’s premises (except to the extent such removal is for purposes of
the performance of Employee’s duties at home or while traveling, or
except as otherwise specifically authorized by the Company) any
document, record, notebook, plan, model, component, device, or computer
software or code, whether embodied in a disk or in any other form
belonging to the Company or used in the Company’s business
(collectively, the “Proprietary Items”). All of the Proprietary Items,
whether or not developed by Employee, are the exclusive property of the
Company. Upon termination of his employment, or upon the request of the
Company during the Term, Employee will return to the Company all of the
Proprietary Items and confidential information in Employee’s possession
or subject to Employee’s control, and Employee shall not retain any
copies, abstracts, sketches, or other physical embodiment, including
electronic or otherwise, of any of the Proprietary Items or confidential
information.

     D. Non-Competition and Non-Interference. During the period
of his employment with the Company or its affiliates and for the
one-year period after the termination of his employment with the Company
and its affiliates, Employee will not, directly or indirectly:

     1. without the express prior written consent of the Board of
Directors, own an interest in, manage, operate, join, control,
lend money or render financial or other assistance to or
participate in or be connected with, as an officer, employee,
partner, stockholder, consultant or otherwise, any person that
competes with the Company in the field of neurostimulation in a
matter covered by a patent assigned to or held by the Company;
provided, however, that following Employee’s termination of
employment with the Company the foregoing restriction shall apply
only

-6-

 

to those areas where the Company is actually doing business on
the date of such termination of employment; provided, further,
that Employee may purchase or otherwise acquire for passive
investment up to 3% of any class of securities of any such
enterprise if such securities are listed on any national or
regional securities exchange or have been registered under
Section 12(g) of the Securities Exchange Act of 1934;

     2. whether for Employee’s own account or for the account of
any other person, (except for the account of the Company and its
affiliates), solicit Business from any person known by Employee to be a
customer of the Company or its affiliates, whether or not Employee had
personal contact with such person during Employee’s employment with
the Company and its affiliates;

     3. whether for Employee’s own account or the account of any
other person, (i) solicit, employ, or otherwise engage
as an employee, independent contractor, or otherwise, any person who is an
employee of the Company or an affiliate, or in any manner induce, or
attempt to induce, any employee of the Company or its affiliate to terminate his
employment with the Company or its affiliate; or (ii) interfere with the
Company’s or its affiliate’s relationship with any person who at any time
during the Term, was an employee, contractor, supplier, or customer of
the Company or its affiliate; or

     4. at any time after the termination of his employment,
disparage the Company or its affiliates or any shareholders, directors,
officers, employees, or agents of the Company or any of its affiliates,
so long as the Company does not disparage Employee.

     E.
Acknowledgements. The Company acknowledges that it is
providing Employee with confidential information in order for Employee
to perform his duties under this Agreement. Employee acknowledges that
(a) the services to be performed by him under this Agreement are of a
special, unique, unusual, extraordinary, and intellectual character,
and (b) the provisions of this Section 8 are reasonable and necessary
to protect the confidential information, goodwill and other business
interests of the Company. If any covenant in this Section 8 is held to
be unreasonable, arbitrary, or against public policy, such covenant
will be considered to be divisible with respect to scope, time, and
geographic area, and such lesser scope, time, or geographic area, or
all of them, as a court of competent jurisdiction may determine to be
reasonable, not arbitrary, and not against public policy, will be
effective, binding, and enforceable against Employee. Employee hereby
agrees that this covenant is a material and substantial part of this
Agreement and that: (i) the geographic limitations are reasonable; (ii)
the term of the covenant is reasonable; and (iii) the covenant is not
made for the purpose of limiting competition per se and is reasonably
related to a protectable business interest of the Company. The period
of time applicable to any covenant in this Section 8 will be extended
by the duration of any violation

-7-

 

by Employee of such covenant. The provisions of this Section 8 shall
survive the termination of the Term of this Agreement.

     SECTION 9. Injunctive Relief and Additional Remedy. Employee
acknowledges that the injury that would be suffered by the Company as a result of a
breach of the provisions of Section 8 of this Agreement would be irreparable and that
an award of monetary damages to the Company for such a breach would be an inadequate
remedy. Consequently, the Company will have the right, in addition to any other
rights it may have, to obtain a temporary restraining order and/or injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce any
provision of this Agreement. Employee waives any requirement for the Company’s
securing or posting of any bond in conjunction with any such remedies. Employee
further agrees to and hereby does submit to in personam jurisdiction before each and
every court for that purpose. Without limiting the Company’s rights under this
Section or any other remedies of the Company, if Employee breaches any of the
provisions of Section 8 and such breach is proven in a court of competent
jurisdiction, the Company will have the right to cease making any payments or
providing other benefits otherwise due Employee under this Agreement.

     SECTION 10. Amendment: Waiver. The terms and provisions of this
Agreement may be modified or amended only by a written instrument executed by each of
the parties hereto, and compliance with the terms and provisions hereof may be waived
only by a written instrument executed by each party entitled to the benefits thereof.
No failure or delay on the part of any party in exercising any right, power or
privilege granted hereunder shall constitute a waiver thereof, nor shall any single
or partial exercise of any such right, power or privilege preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
granted hereunder.

     SECTION 11. Entire Agreement. Except as contemplated herein, this
Agreement constitutes the entire agreement between the parties with respect to the
subject matter hereof and supersedes any and all prior or contemporaneous written or
oral agreements, arrangements or understandings between the Company and Employee.

     SECTION
12. Notices. All notices or communications hereunder shall be in
writing, addressed as follows or to any address subsequently provided to the other
party:

To the Company:

Cyberonics, Inc.

Attention: Vice President of Human Resources

100 Cyberonics Blvd., Suite 600

Houston, Texas 77058

-8-

 

To Employee:

W. Steven Jennings

3114 Scenic Elm

Houston, TX 77059

All such notices shall be conclusively deemed to be received and shall be
effective, (i) if sent by hand delivery or overnight courier,
upon receipt, (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission or (iii) if sent by registered or certified mail, on
the fifth day after the day on which such notice is mailed.

     SECTION 13. Severability. In the event that any term or provision of
this Agreement is found to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining terms and provisions hereof shall not
be in any way affected or impaired thereby, and this Agreement shall be construed
as if such invalid, illegal or unenforceable provision had never been contained
therein.

     SECTION 14. Binding Effect: Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns (it being understood and agreed that, except as expressly
provided herein, nothing contained in this Agreement is intended to confer upon
any other person or entity any rights, benefits or remedies of any kind or
character whatsoever). No rights or obligations of the Company under this
Agreement may be assigned or transferred by the Company except that
such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in which the Company is not the continuing entity, or the sale or liquidation of
all or substantially all of the assets of the Company, provided that the assignee
or transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee assumes the liabilities, obligations and
duties of the Company, as contained in this Agreement, either contractually or as
a matter of law. The Company further agrees that, in the event of a sale of assets
or liquidation as described in the preceding sentence, it shall take whatever
action it legally can in order to cause such assignee or transferee to expressly
assume the liabilities, obligations and duties of the Company hereunder.

     SECTION 15. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas (except that no effect
shall be given to any conflicts of law principles thereof that would require the
application of the laws of another jurisdiction).

     SECTION 16. Submission to Jurisdiction. EACH PARTY HEREBY IRREVOCABLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS
IN HARRIS
COUNTY, TEXAS, FOR THE PURPOSES OF ANY PROCEEDING ARISING OUT OF THIS AGREEMENT.

-9-

 

     SECTION
17. Headings. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.

     SECTION 18. Tax Withholdings. The Company shall withhold from all
payments hereunder all applicable taxes that it is required to withhold with respect
to payments and benefits provided under this Agreement.

     SECTION 19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the undersigned have executed this Agreement effective as of
the date set forth above.

	 	 	 	 	 
	 	 	CYBERONICS, INC.
	 
	 	 	 	 
	 

	 	By:
	 	/s/  Robert P. Cummins
	 

	 	 	 	 
	 

	 	 	 	Robert P. Cummins

Chairman of the Board of Directors

and Chief Executive Officer

	 
	 	 	 	 
	 	 	EMPLOYEE
	 
	 	 	 	 
	 	 	/s/  W.
Steven Jennings    6/16/2006
	 	 	 
	 	 	W. Steven Jennings

-10-

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