A Medical Device Daily

Embattled Cyberonics (Houston), maker of the vagus nerve stimulation therapy for the treatment of chronic depression and epilepsy, said it appointed three board members backed by dissident shareholders to its board of directors, just days before the company’s annual shareholder meeting.

Appointed to the board were Alfred Novak, Arthur Rosenthal and Jeffrey Schwarz, all of whom were nominated by Metropolitan Capital Advisors, which holds about a 7.3% stake in the troubled device company.

They replace Tony Coelho, Kevin Moore and Stanley Appel, who resigned, apparently seeing the writing on the wall.

Hugh Morrison was named chairman of the board.

Billionaire investor Carl Icahn, who owns about 9.8% of the company, had also supported Metropolitan’s board choices (Medical Device Daily, Jan. 25, 2006.

The company has been under fire for its executive compensation and stock options practices.

Because of these errors in the company’s stock option practices, CEO Skip Cummins and CFO Pam Westbrook resigned in November (MDD, Nov. 21, 2006). A review by the company’s audit committee discovered those flaws and the company must restate results for the fiscal years 2000 through 2005.

Another five incumbent directors remain on the ballot, and the company will host its annual meeting Feb. 1.

The company also acknowledged earlier this month that its financial statements for the fiscal year ended April 28, 2006, included in its annual report, contains a “going concern” modification to the audit opinion from its independent accounting firm, KPMG.

The going concern notice is based on Cyberonics’ recurring losses from operations, a notice of alleged acceleration of its $125 million senior subordinated convertible notes, and a potential default of its $40 million line of credit based on the alleged acceleration, the company acknowledged.

The board changes are effective immediately, and Cyberonics said in a statement that its board recommends shareholders vote for the current board members at the company’s annual meeting Feb. 1.

“With the proxy contest now behind us, we are eager to begin working cooperatively with all our directors for the benefit of Cyberonics’ stockholders, and we are resolutely focused on creating stockholder value,” Morrison said in a prepared statement.

Commenting on these developments, Schwarz and Karen Finerman, the CEO and President, respectively, of Metropolitan Capital said, “We have long believed the company has significant potential. We appreciate the board’s vote of confidence in our nominees and their ability to contribute to the company.”