Document:

exv10w39

 

Exhibit
10.39

CYBERONICS, INC, 

NOTICE OF
STOCK OPTION GRANT

Shawn Lunney

     You have been granted an option (the “Option”) to purchase Common Stock of
Cyberonics, Inc (the “Company”) as follows:

	 	 	 	 	 	 	 
	 

	 	Date of Grant:
	 	 	 	November 1, 1996
	 
	 	 	 	 	 	 
	 

	 	Exercise Price:
	 	 	 	$3,0625 per share
	 
	 	 	 	 	 	 
	 

	 	Number of Shares Subject
to Option:
	 	 	 	104,750 
	 
	 	 	 	 	 	 
	 

	 	Type of Option:
	 	 	 	___ Incentive Stock Option
	 

	 	 	 	 	 	___ Nonstatutory Stock Option
	 
	 	 	 	 	 	 
	 

	 	Vesting Start Date.
	 	 	 	November 1,1996
	 
	 	 	 	 	 	 
	 

	 	Expiration Date:
	 	 	 	Tenth Anniversary of Date of Grant
	 
	 	 	 	 	 	 
	 

	 	Exercise Schedule:
	 	 	 	The Option shall be exercisable at any time
prior to the Expiration Date or
earlier termination as to shares which
are vested in accordance with the
Vesting Schedule below.

     Vesting
Schedule: For so long as the Optionee shall continue to be a
Service Provider, this Option shall vest cumulatively as follows:

     A. 6/48ths of the Shares subject to the Option shall vest six months following
the Vesting Start Date set forth above, and l/48th of the Shares subject to the Option shall
vest on the first day of each month thereafter.

     B. In addition to the foregoing, vesting of this Option will accelerate, and
this Option will become exercisable, as follows:

          (i) in the event that the Food and Drug Administration (“FDA”) Panel
recommends approval of the Company’s pending Pre-Market Approval (“PMA”)
Application for indications and with labeling requirements substantially as
requested by the Company, then twenty-five percent (25%) of the Shares subject to
this Option shall automatically vest and become exercisable;

          (ii) in the event that the FDA grants final approval for the Company’s
pending Pre-Market Approval (“PMA”) Application for indications and with labeling
requirements substantially

 

 

as requested by the Company, then twenty-five percent (25%) of the Shares subject to this
Option shall automatically vest and become exercisable;

          (iii) For each month in calendar 1997 in which total net sales exceed Five Hundred Thousand
Dollars ($500,000), two percent (2%) of the Shares subject to this Option shall automatically vest
and become exercisable; and

          (iv) For each month in calendar 1998 in which total net sales exceed One Million Dollars
($1,000,000), two percent (2%) of the Shares subject to this Option shall automatically vest and
become exercisable.

     With respect to paragraphs (i) and (ii) above, any question as to whether the indications
covered in a PMA or labelling requirements imposed by the FDA are “substantially as requested by
the Company” shall be determined by the Board of Directors of the Company, whose determination
will be final and binding on the Company and the Optionee.

     Termination
Period. Option may be exercised for up to 90 days after termination of
employment or consulting relationship except as set out in Sections 7 and 8 of the Stock Option
Agreement (but in no event later than the Expiration Date).

     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS
EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE
ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER) OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN
WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO
CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH
OPTIONEE’S OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S EMPLOYMENT OR CONSULTANCY RELATIONSHIP
AT ANY TIME, WITH OR WITHOUT CAUSE.

     By your signature and the signature of the Company’s representative below, you and the
Company agree that this option is granted under and governed by the terms and conditions of the
Company’s 1988 Incentive Stock Plan and the Stock Option Agreement, all of which are attached and
made a part of this document.

	 	 	 	 	 	 	 	 	 	 	 
	OPTIONEE:	 	 	 	Cyberonics, Inc.	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	/s/ Shawn Lunney	 	 	 	By:	 	/s/ Robert P. Cummins	 	 
	 	 	 	 	 	 	 	 	 
	Shawn Lunney	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	Date:

	 	1/21/97
	 	 	 	Title:
	 	CEO	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Date:
	 	1/21/97	 	 

-2-

 

Cyberonics, Inc.

STOCK OPTION AGREEMENT

     1. Grant
of Option. Cyberonics, Inc., a Delaware corporation (the “Company”), hereby grants to the Optionee named in the Notice of Grant (the “Optionee”), an option
(the “Option”) to purchase a total number of shares of Common Stock (the “Shares”) 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, definitions and provisions of the Company’s 1988 Incentive Stock Plan
(the “Plan”) which is incorporated herein by reference Unless otherwise defined herein, the terms
defined in the Plan shall have the same defined meanings in this Option.

          If designated an Incentive Stock Option, this Option is intended to qualify
as an Incentive Stock Option as defined in Section 422 of the
Code.

     2. Adjustments for Stock Splits,Recapitalization.

          (a) The Exercise Price and number of Shares subject to this Option (as set forth on the Notice of Grant) shall be subject to adjustment as follows: If the
Company at any time (i) sub-divides (by any stock split, stock dividend or otherwise) the Common Stock into
a greater number of shares, the Exercise Price in effect immediately prior to such subdivision
will be proportionately reduced and the number of Shares issuable shall be proportionately increased,
and (ii) if the Company at any time combines (by reverse stock split or otherwise) the Common Stock into
a smaller number of shares, the Exercise Price in effect immediately prior to such combination
will be proportionately increased and the number of Shares issuable
shall be proportionately decreased.

          (b) If at any time while this Option is outstanding there shall be any
reclassification or conversion of the Common Stock into another class of securities (other than a
subdivision or combination of shares provided for in the preceding paragraph), the Optionee
shall thereafter be entitled to receive, during the term hereof and upon payment of the Exercise
Price, the number of shares of stock to which a holder of the Common Stock would have been entitled
upon such reclassification or conversion had the Optionee exercised this Option immediately
prior to such reclassification or conversion,

     3. Exercise of Option. This Option shall be exercisable during its
term in accordance with the Exercise Schedule set out in the Notice of Grant and
with the provisions of Section 8(b) of the Plan as follows.

          (a) Right to Exercise 

               (i) This
Option may not be exercised for a fraction of a share.

               (ii) In the event of Optionee’s death, disability or other termination of
employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below

 

 

               (iii) In no event may this Option be exercised after the Expiration Date
of this Option as set forth in the Notice of Grant.

          (b)
Method of Exercise. This Option shall be exercisable by execution
and delivery of the Exercise Notice and Stock Purchase Agreement (the “Exercise
Notice”) in the form attached as Exhibit A Such written notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the Secretary
of the Company. The written notice shall be accompanied by payment of the Exercise
Price. This Option shall be deemed to be exercised upon receipt by the Company of
such written notice accompanied by the Exercise Price.

     4. Method
of Payment.  Payment of the Exercise
Price shall be by:

          (i) cash; or

          (ii) check, or

          (iii) delivery of a properly executed exercise notice together with such other
documentation as the Administrator and the broker, if applicable, shall require to
effect an exercise of the Option and immediate sale of the shares through a broker
which provides for delivery to the Company from the sale or loan proceeds of the
exercise price; or

          (iv) any combination of the foregoing methods of payment.

     5. Restrictions
on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of consideration for such
shares would constitute a violation of any applicable federal or state securities or other
law or regulation, including the requirements of any stock exchange upon which the Shares may then be listed
and including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation
G”) as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the Company as may
be required by any applicable law or regulation.

     6. Termination of Relationship. In the event of termination of
Optionee’s consulting relationship or Continuous Status as an Employee, Optionee may, to the extent
otherwise so entitled at the date of such termination (the “Termination Date”), exercise this Option
during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not
entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this
Option within the time specified herein, the Option shall terminate.

     7. Disability
of Optionee. Notwithstanding the provisions of Section 6 above, in the event of termination of an Optionee’s consulting relationship or Continuous
Status as an Employee as a result of total and permanent disability (as defined in Section 22(e)(3) of
the Code), Optionee may, but only within twelve (12) months from the date of termination of
employment (but in no event later than the Expiration Date of this Option as set forth in the Notice of
Grant), exercise the Option to the extent otherwise so entitled at the date of such termination To the
extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee
does not exercise such

-2-

 

Option (to the extent otherwise so entitled) within the time specified herein, the
Option, shall terminate.

     8. Death of Optionee. In the event of the death of Optionee during the
term of this Option and while an Employee or Consultant or within ninety (90) days
following termination of Optionee’s employment/consultancy relationship with the
Company, this 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), by
Optionee’s estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent the Optionee could exercise the
Option at the date of death.

     9. 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 him. The terms of this Option
shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.

     10. Term of Option. This Option may be exercised only prior to the
Expiration Date set out in the Notice of Grant, and may be exercised during such
term only in accordance with the Plan and the terms of this Option. The limitations
set out in Section 7 of the Plan regarding Options designated as Incentive Stock
Options and Options granted to more than ten percent (10%) shareholders shall apply
to this Option.

     11. Tax
Consequences. Set forth below is a brief summary as of the
date of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND
THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

          (a) Exercise of ISO. If this Option qualifies as an ISO, there will be no
regular federal income tax liability upon the exercise of the Option, although the
excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will
be treated as an adjustment to the alternative minimum tax for federal tax purposes and may
subject the Optionee to the alternative minimum tax in the year of
exercise.

          (b)
Exercise of Nonqualified Stock Option. If this Option does not
qualify as an ISO, there may be a regular federal income tax liability upon the exercise of
the Option. The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over
the Exercise Price. If Optionee is an employee, the Company will be required to
withhold from Optionee’s compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.

          (c) Disposition of Shares. In the case of an NSO, if Shares are held for
at least one year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferred
pursuant to the Option are held for at least one year after exercise and are disposed of at least two years
after the Date of Grant,

-3-

 

any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and income tax purposes If Shares purchased under an ISO
are disposed of within such one-year period or within two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if any, of the fair
market value of the Shares on the date of exercise over the Exercise Price.

          (d)
Notice of Disqualifying Disposition of ISO Shares. If this Option
is an ISO, and if Optionee sells or otherwise disposes of any of the Shares
acquired pursuant to this Option on or before the later of (1) the date two years
after the Date of Grant, or (2) the date one year after exercise of this Option,
the Optionee shall immediately notify the Company in writing of such
disposition. Optionee agrees that Optionee may be subject to income tax withholding by the
Company on the compensation income recognized by the Optionee from the early
disposition by payment in cash or out of the current earnings paid to the Optionee.

     12. Change
of Control. In the event of a Change of Control (as defined
below), this Option shall be exercisable as in accordance with the following
notwithstanding anything to the contrary set forth elsewhere herein:

          (a) In the event that Options under the Plan are not Assumed, as defined below, by the successor corporation (or the parent or subsidiary of such successor),
this Option shall be exercisable as to all shares, whether or not vested as provided in the Notice of
Grant attached hereto.

          (b) In the event of a Change of Control in which (i) the Option is Assumed (or
the parent or a subsidiary of the successor) this option shall be exercisable as to
a number of shares equal to 2.5 times the number of shares actually vested as of the date of closing of
the Change of Control (but in no event as to a number of shares greater than the number of shares set
forth on the Notice of Grant)

          (c) For purposes of this Section 12, “Change of Control” shall mean a corporate reorganization of the Company which results in the then current shareholders of
the Company owning less than 50% of the equity securities of the surviving company, or the sale of
all or substantially all of the assets of the Company.

          (d) For purposes of this Section 12, an Option granted under the Plan shall be
deemed to be Assumed if, following a Change of Control, the Option confers the right to
purchase, for each Share subject to the Option immediately prior to the Change of Control, the
consideration (whether stock, cash or other securities or property) received in the Change of Control
by holders of Common Stock for each Share held on the effective date of the transaction (and if such
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 Change of Control was not solely Common Stock of the successor corporation or its parent, the
Board may, with the consent of the successor corporation and the participant, provide for the
consideration to be received upon exercise of 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 Change of Control.

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     13. Certain
Business Combinations. In the event it is determined by
the Board of Directors, upon receipt of a written opinion of the Company’s
independent public accountants, that the enforcement of any Section or subsection
of this Agreement, including, but not limited to, Section 12 hereof, which allows
for the acceleration of vesting of options to purchase shares of the Company’s
common stock in connection with a Change of Control, would preclude accounting for
any proposed business combination of the corporation involving a Change of Control
as a pooling of interests, and the Board otherwise desires to approve such a
proposed business transaction which requires as a condition to the closing of such
transaction that it be accounted for as a pooling of interests, that any such
Section or subsection of this Agreement shall be null and void.

     OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF
THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING
IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED
HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO
CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN
ANY WAY WITH HIS OR HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS OR HER
EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

-5-

 

EXHIBIT A 

EXERCISE NOTICE AND STOCK PURCHASE AGREEMENT

Cyberonics, Inc.

17448 Highway 3, Suite 100

Webster, Texas 77598

Attention: Secretary

     1. Exercise of Option. Effective as of today,     
           
        
               
        
  , 19    
 , the undersigned (“Optionee”) hereby elects to exercise Optionee’s
option to purchase      
       
      
   shares of the
Common Stock (the “Shares”) of Cyberonics, Inc. (the
“Company”) under
and pursuant to the Company’s 1988 Incentive Stock Plan, as
amended (the “Plan”) and the [  
    ] Incentive [      ] Nonqualified Stock
Option Agreement dated         
            
(the
“Option Agreement”).

     2. Representations
of Optionee.

          (a) Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms
and conditions.

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

     3. Rights as Shareholder. Subject to the terms and conditions of this
Agreement,
Optionee shall have all of the rights of a shareholder of the Company with
respect to the Shares from
and after the date that Optionee delivers full payment of the Exercise Price
until such time as Optionee disposes of the Shares.

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

     5. Arbitration. Any dispute or claim arising out of or in connection
with this Agreement shall be settled by binding arbitration. Any such arbitration shall be conducted
in accordance with the Rules of Conciliation and Arbitration of the American Arbitration
Association and shall take place
in Webster, Texas The arbitration shall be conducted by one arbitrator;
provided that if the parties cannot agree on a single arbitrator, then the arbitration shall be conducted by
a panel of three arbitrators, one selected by each party and the third selected by the other two
arbitrators. The determination of the arbitrator(s) shall be final
and binding upon the parties.

     6. Governing
Law; Severability. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE EXCLUDING THAT BODY OF LAW PERTAINING TO CONFLICTS OF

 

 

LAW. Should any provision of this Agreement be determined by a court of law to be
illegal or unenforceable, the other provisions shall nevertheless remain effective
and shall remain enforceable

     7. Notices. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and Fees prepaid,
addressed to the other party at its address as shown below beneath its signature,
or to such other address as such party may designate in writing from time to time
to the other party

     8. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.

     9. Delivery
of Payment. Optionee herewith delivers to the Company the
full Exercise Price for the Shares.

     10. Entire
Agreement. The Plan and Notice of Grant/Option Agreement
are incorporated herein by reference. This Agreement, the Plan and the Notice of
Grant/Option Agreement constitute the entire agreement of the parties and
supersede in their entirety ail prior undertakings and agreements of the company
and optionee with respect to the subject matter hereof.

	 	 	 	 	 	 	 	 	 
	Submitted by:	 	 	 	Accepted by:
	 
	 	 	 	 	 	 	 	 
	OPTIONEE:	 	 	 	Cyberonics, Inc
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	 	 	 
	 

Shawn Lunney

	 	 	 	 	 	 

	 	 
	 

	 	 	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Address:	 	 	 	Address:
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	17448 Highway 3, Suite 100
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Webster, Texas 77598
	 

	 	 	 	 	 	 	 	 

-2-exv10w40

 

Exhibit 10.40

Amendment to Stock Option Agreement and Notice

     This
Amendment to Stock Option Agreement (the “Amendment”) is
made on the
27th day of
December, 2006 by and between Cyberonics, Inc., a Delaware corporation (the “Company”) and Shawn P.
Lunney, an individual residing in Texas (“Optionee”).

     Whereas, the Company and Optionee entered into a Stock Option Agreement having a grant date of
November 1, 1996, which agreement includes a Notice of Stock Option Grant (the “Agreement”); and

     Whereas, the Company and Optionee previously agreed to amend the Agreement to extend the
period for Optionee to exercise the option granted under the Agreement (the “Option”) to December
31, 2006;

     Whereas, the Option is currently unexercisable because an exercise of such right would violate
applicable securities laws; and

     Whereas, the Company’s Board of Directors has authorized the Company to extend the period for
Optionee’s exercise of the Option to thirty (30) days after the exercise of such Option would no
longer violate applicable securities laws, all on the conditions set forth in this Agreement;

     Now, Therefore, for a good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:

     1. The paragraph entitled, “Termination Period,” under “Notice of Stock Option Grant” is
deleted in its entirety, and the following is substituted therefor:

“The Option may be exercised within thirty (30) days after the date on which the exercise of
such Option would no longer violate applicable securities laws.”

     2. This Amendment supersedes all prior agreements, amendments, understandings, negotiations,
and discussion, oral or written, related to such subject matter.

     3. Except as expressly amended herein, the terms of the Agreement remain unchanged.

	 	 	 	 	 	 	 
	OPTIONEE

	 	 	 	 	 	CYBERONICS, INC.
	 
	 	 	 	 	 	 
	/s/
Shawn P. Lunney
	 	 	 	By:	 	/s/ John A. Riccardi
	 

	 	 	 	 	 	 
	Shawn P. Lunney

	 	 	 	 	 	John A. Riccardi
	 

	 	 	 	 	 	Vice President, Finance

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