Cyberonics (Houston), developer of vagus nerve stimulation technology to treat epilepsy and depression, already pummeled by criticisms of its technology and challenges to its management — including the recent ouster of its CEO Skip Cummins and other top executives — reported still more difficulties last week.
The company late Friday acknowledged that its financial statements for the fiscal year ended April 28, 2006, included in its annual report, contain a “going concern” modification to the audit opinion from its independent accounting firm, KPMG.
The result was a slump in the company’s share value of about 3%.
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.
Because of errors in the company’s stock option practices, CEO Skip Cummins and CFO Pam Westbrook resigned in November (Medical Device Daily, Nov. 21, 2006). A review by the company’s audit committee discovered those flaws and the errors mean that the company must restate results for the fiscal years 2000 through 2005.
In late December, the company reported receiving a third staff determination letter from the Nasdaq indicating that it fails to comply with the filing requirement for continued listing as a result of the delay in filing its report for its fiscal quarter ended Oct. 27, 2006, and that its securities are subject to delisting (MDD, Dec. 20, 2007).
Still another problem is the filing of shareholder lawsuits related to its stock option problems and the impact on its share price.
Additionally, Cyberonics is fending off attempts to replace some of its board members at its upcoming Feb. 1 annual meeting, an effort fueled by criticisms of the company’s management over the past year.
On Monday, it sent a letter to stockholders urging them to vote to reelect what it called its “highly qualified nominees” to the board, Stanley Appel, MD; Tony Coelho; Guy Jackson; Kevin Moore; Hugh Morrison; Alan Olsen; Michael Strauss MD, MPH; and Reese Terry Jr.
The letter says that it fears stockholders have received materials from the dissident stockholder group, “The Committee for Concerned Cyberonics, Inc. Stockholders.” And it urges stockholders to discard the proxy card from those dissidents.
The dissidents, according to Cyberonics “present no plan or vision . . . but they do repeat a series of false and misleading statements about three valued members of your Board — Chairman Tony Coelho and directors Stanley Appel and Kevin Moore — that we cannot allow to go unchallenged.”
The letter states: “The dissidents are distorting the truth: you should know that any allegations that Mr. Coelho and Dr. Appel received below-market stock options prior to their board service are simply false, the result of the dissidents’ irresponsible reliance on a poorly researched and erroneous newspaper article written late last year. These claims were carefully examined by the independent counsel to the Audit Committee of the Board and were found to be completely without merit. We had informed the dissidents that the allegations are false, yet they chose to repeat them without bothering to ask us for an explanation.”
The letter goes on to detail what it believes are the strong qualifications of its board nominees and the weak qualifications of the dissident nominees.
It continues: “Despite the fact that the dissident nominees lack appropriate qualifications, we have attempted on a number of occasions to talk with the dissidents about their concerns and thereby avoid a costly, divisive, and distracting proxy contest.
The board agreed to consider reasonable compromises related to the board’s structure, but the dissidents refused to negotiate a reasonable solution. In fact, they literally walked out of our last meeting. Moreover, despite a number of opportunities, the dissidents have never suggested — either to our board or to our stockholders — that they have any specific plan to maximize stockholder value.
“Instead they have chosen to wage this proxy contest and have even made it clear that, if elected, they plan to force our stockholders to cover the entire expense of their proxy solicitation, without ever seeking your approval. The dissidents would probably like you to think that it can’t hurt to elect their nominees to the board, but we believe that the election of a self-serving slate of unqualified nominees who want to spend your money to get elected is directly harmful to your interests.”