-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IgKyw28zKTx2W1KrA7en1tXa0LNztSeIgoLhnRxfFyLc4RQGTJmwu4r144oiew0V tWzxgi6bNhUU1NFxRFSCqw== 0000950134-02-004116.txt : 20020424 0000950134-02-004116.hdr.sgml : 20020424 ACCESSION NUMBER: 0000950134-02-004116 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020424 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED NEUROMODULATION SYSTEMS INC CENTRAL INDEX KEY: 0000351721 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 751646002 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10521 FILM NUMBER: 02619946 BUSINESS ADDRESS: STREET 1: 6501 WINDCREST DRIVE SUITE 100 CITY: PLANO STATE: TX ZIP: 75024 BUSINESS PHONE: 9723098000 MAIL ADDRESS: STREET 1: 6501 WINDCREST DRIVE SUITE 100 CITY: PLANO STATE: TX ZIP: 75024 FORMER COMPANY: FORMER CONFORMED NAME: QUEST MEDICAL INC DATE OF NAME CHANGE: 19920703 10-Q 1 d96263e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT 1934 FOR THE TRANSITION PERIOD FROM TO ------------ ------------ COMMISSION FILE NUMBER 0-10521 ADVANCED NEUROMODULATION SYSTEMS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) TEXAS 75-1646002 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 6501 WINDCREST DRIVE, PLANO, TEXAS 75024 --------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (972) 309-8000 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. NUMBER OF SHARES OUTSTANDING AT TITLE OF EACH CLASS APRIL 18, 2002 - ---------------------------- -------------------------------- COMMON STOCK, $.05 PAR VALUE 9,139,015 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION 2 Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) March 31, 2002 and December 31, 2001 3-4 Condensed Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 2002 and 2001 5 Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2002 and 2001 6 Condensed Consolidated Statements of Stockholders' Equity (Unaudited) For the Year Ended December 31, 2001 and the Three Months Ended March 31, 2002 7 Notes to Condensed Consolidated Financial Statements 8-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. OTHER INFORMATION 23 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24
1 PART I FINANCIAL INFORMATION 2 ITEM 1. FINANCIAL STATEMENTS ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, 2002 AND DECEMBER 31, 2001
MARCH 31, DECEMBER 31, ASSETS 2002 2001 ----------- ------------ Current assets: Cash and cash equivalents $ 8,394,778 $ 9,785,325 Marketable securities 2,424,348 2,151,722 Receivables: Trade accounts, less allowance for doubtful accounts of $113,216 in 2002 and $124,111 in 2001 7,435,606 6,493,772 Interest and other 297,763 235,594 ----------- ----------- Total receivables 7,733,369 6,729,366 ----------- ----------- Inventories: Raw materials 5,044,287 4,685,586 Work-in-process 2,087,593 1,723,419 Finished goods 3,322,367 3,339,840 ----------- ----------- Total inventories 10,454,247 9,748,845 ----------- ----------- Deferred income taxes 1,084,110 1,726,517 Current income tax receivable 1,353,832 678,341 Prepaid expenses and other current assets 541,517 685,169 ----------- ----------- Total current assets 31,986,201 31,505,285 ----------- ----------- Equipment and fixtures: Furniture and fixtures 3,505,890 3,400,909 Machinery and equipment 8,810,642 8,550,504 Leasehold improvements 1,596,978 1,610,810 ----------- ----------- 13,913,510 13,562,223 Less accumulated depreciation and amortization 6,895,709 6,353,920 ----------- ----------- Net property, plant and equipment 7,017,801 7,208,303 ----------- ----------- Goodwill, net of accumulated amortization of $3,404,427 in 2002 and $3,404,427 in 2001 7,407,237 7,407,237 Patents, net of accumulated amortization of $1,141,848 in 2002 and $1,045,106 in 2001 5,299,436 5,368,213 Purchased technology from acquisitions, net of accumulated amortization of $1,866,667 in 2002 and $1,800,000 in 2001 2,133,333 2,200,000 Trademarks, net of accumulated amortization of $874,984 in 2002 and $843,736 in 2001 1,630,609 1,656,264 Other assets, net of accumulated amortization of $425,172 in 2002 and $392,033 in 2001 574,388 519,783 ----------- ----------- $56,049,005 $55,865,085 =========== ===========
3 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, 2002 AND DECEMBER 31, 2001
MARCH 31, DECEMBER 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 ------------ ------------ Current liabilities: Accounts payable $ 1,489,881 $ 1,835,037 Accrued salary and employee benefit costs 1,195,461 2,112,127 Accrued tax abatement liability 969,204 969,204 Customer deposits 807,440 1,042,690 Warranty reserve 316,113 383,477 Other accrued expenses 228,041 204,151 Current maturities of long-term note payable 53,560 52,325 ------------ ------------ Total current liabilities 5,059,700 6,599,011 ------------ ------------ Deferred income taxes 2,283,505 2,316,796 Long-term note payable 123,468 137,397 Commitments and contingencies Stockholders' equity: Common stock of $.05 par value. Authorized 25,000,000 shares; issued and outstanding: 9,134,979 shares in 2002 and 9,071,868 in 2001 456,749 453,593 Additional capital 39,602,020 38,670,248 Retained earnings 8,546,266 7,709,290 Accumulated other comprehensive income (loss), net of tax benefit of $11,698 in 2002 and $10,949 in 2001 (22,703) (21,250) ------------ ------------ Total stockholders' equity 48,582,332 46,811,881 ------------ ------------ $ 56,049,005 $ 55,865,085 ============ ============
See accompanying notes to condensed consolidated financial statements. 4 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
THREE MONTHS ENDED MARCH 31, ------------------------------ 2002 2001 ------------ ------------ Net revenue $ 11,472,646 $ 8,340,810 Cost of revenue 4,514,160 3,572,789 ------------ ------------ Gross profit 6,958,486 4,768,021 ------------ ------------ Operating expenses: Research and development 1,292,703 1,147,530 Sales and marketing 2,895,890 2,056,978 Amortization of goodwill -- 139,151 Amortization of intangibles 227,796 173,169 General and administrative 1,302,872 918,429 ------------ ------------ 5,719,261 4,435,257 ------------ ------------ Income from operations 1,239,225 332,764 ------------ ------------ Other income (expenses): Acquisition related costs -- (483,766) Interest expense (4,306) (10,460) Interest and other income 73,506 148,302 ------------ ------------ 69,200 (345,924) ------------ ------------ Income (loss) before income taxes 1,308,425 (13,160) Income taxes (benefit) 471,449 (6,899) ------------ ------------ Net income (loss) $ 836,976 $ (6,261) ============ ============ ============ ============ Basic net income (loss) per share $ .09 $ (.00) ============ ============ ============ ============ Diluted net income (loss) per share $ .08 $ (.00) ============ ============
See accompanying notes to condensed consolidated financial statements. 5 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
THREE MONTHS ENDED MARCH 31, ---------------------------- 2002 2001 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 836,976 $ (6,261) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 769,585 762,286 Deferred income taxes 609,863 (33,292) Changes in operating assets and liabilities: Receivables (1,004,003) 99,483 Inventories (705,402) (908,046) Current income tax receivable (675,491) 359,953 Prepaid expenses and other assets 113,534 817,883 Customer deposits (235,250) (317,563) Income taxes payable 535,655 82,989 Accounts payable (345,156) 597,528 Accrued expenses (960,141) (700,345) ----------- ----------- Total adjustments (1,896,806) 760,876 ----------- ----------- Net cash provided by (used in) operating activities (1,059,830) 754,615 ----------- ----------- Cash flows from investing activities: Proceeds from certificates of deposits with maturities over 90 days -- 385,000 Purchases of marketable securities (830,964) (1,032,487) Proceeds from sales of marketable securities 556,136 500,000 Additions to patents and intangible assets (91,181) (424,961) Additions to equipment and fixtures (351,287) (778,118) ----------- ----------- Net cash used in investing activities (717,296) (1,350,566) ----------- ----------- Cash flows from financing activities: Payment of long-term obligations (12,694) (11,613) Exercise of stock options 399,273 129,936 ----------- ----------- Net cash provided by financing activities 386,579 118,323 ----------- ----------- Net decrease in cash and cash equivalents (1,390,547) (477,628) Net cash used by Hi-tronics in December 2000 (see Note 3) -- (672,444) Cash and cash equivalents at beginning of year 9,785,325 9,528,721 ----------- ----------- Cash and cash equivalents at March 31 $ 8,394,778 $ 8,378,649 =========== =========== Supplemental cash flow information is presented below: Income taxes paid $ -- $ -- =========== =========== Interest paid $ 4,306 $ 7,319 =========== =========== Non-cash activity: Stock issued for patents and intangible assets $ -- $ 2,426,662 =========== ===========
See accompanying notes to condensed consolidated financial statements. 6 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Other Total Common Stock Additional Retained Comprehensive Treasury Stockholders' Shares Amount Capital Earnings Income (Loss) Stock Equity --------- ------------ ------------ ------------ ------------- ------------ ------------- Balance at December 31, 2000 8,883,059 $ 444,153 $ 34,469,471 $ 6,539,223 $ (83,241) $ (927,793) $ 40,441,813 Net income -- -- -- 1,517,746 -- -- 1,517,746 Net loss of Hi-tronics for December 2000 (see Note 1) -- -- -- (347,679) -- -- (347,679) Adjustment to unrealized losses on marketable securities -- -- -- -- 61,991 -- 61,991 ------------ Comprehensive Income 1,232,058 ------------ Compensation expense resulting from changes to Hi-tronics stock options in December 2000 -- -- 37,029 -- -- -- 37,029 Issuance of shares for stock option exercises 188,809 9,440 995,474 -- -- -- 1,004,914 Tax benefit from employee stock option exercise -- -- 1,669,405 -- -- -- 1,669,405 Issuance of 119,100 shares from treasury for acquisition -- -- 1,498,869 -- -- 927,793 2,426,662 --------- ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2001 9,071,868 453,593 38,670,248 7,709,290 (21,250) -- 46,811,881 Net income -- -- -- 836,976 -- -- 836,976 Adjustment to unrealized losses on marketable securities -- -- -- -- (1,453) -- (1,453) ------------ Comprehensive Income 835,523 ------------ Issuance of shares for stock option exercises 63,111 3,156 396,117 -- -- -- 399,273 Tax benefit from stock option exercises -- -- 535,655 -- -- -- 535,655 --------- ------------ ------------ ------------ ------------ ------------ ------------ Balance at March 31, 2002 9,134,979 $ 456,749 $ 39,602,020 $ 8,546,266 $ (22,703) $ -- $ 48,582,332 ========= ============ ============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 7 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BUSINESS/NEW ACCOUNTING STANDARDS Advanced Neuromodulation Systems, Inc. (the "Company" or "ANS") designs, develops, manufactures and markets implantable neuromodulation devices used to manage chronic intractable pain and other disorders of the central nervous system. We also provide contract development and custom manufacturing for other medical device companies through our Hi-tronics Designs, Inc. ("HDI") subsidiary, which we acquired in January 2001. See Note 3. ANS neuromodulation revenues are derived primarily from sales throughout the United States, Europe and Australia while HDI revenues are derived within the United States. The research and development, manufacture, sale and distribution of medical devices are subject to extensive regulation by various public agencies, principally the Food and Drug Administration and corresponding state, local and foreign agencies. Product approvals and clearances can be delayed or withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing. In addition, ANS products are purchased primarily by hospitals and other users who then bill various third party payers including Medicare, Medicaid, private insurance companies and managed care organizations. These third party payers reimburse fixed amounts for services based on a specific diagnosis. The impact of changes in third party payer reimbursement policies and any amendments to existing reimbursement rules and regulations that restrict or terminate the eligibility of ANS products could have an adverse impact on the Company's financial condition and results of operations. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 and SFAS 142 are effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The Company adopted SFAS 141 and SFAS 142 on January 1, 2002 and eliminated amortization of goodwill as of such date. Amortization expense for goodwill for the three months ended March 31, 2001 was $139,151. The pro forma impact on net income (loss) and net income (loss) per share for the three months ended March 31, 2001 compared to the actual results for the three months ended March 31, 2002 is as follows:
THREE MONTHS ENDED MARCH 31, ------------------------ 2001 2002 --------- --------- Reported net income (loss).................. $ (6,261) $ 836,976 Goodwill amortization....................... 139,151 -- --------- --------- Adjusted net income (loss).................. $ 132,890 $ 836,976 ========= ========= Basic net income (loss) per share: Reported.................................. $ (.00) $ 0.09 Goodwill amortization..................... 0.01 -- --------- --------- Adjusted.................................. $ 0.01 $ 0.09 ========= ========= Diluted net income (loss) per share: Reported.................................. $ (.00) $ 0.08 Goodwill amortization..................... 0.01 -- --------- --------- Adjusted.................................. $ 0.01(A) $ 0.08 ========= =========
- ---------- (A) Pro forma diluted shares for the three months ended March 31, 2001 include 894,160 shares related to the effect of dilutive stock options.
(2) CONDENSED FINANCIAL STATEMENTS The unaudited consolidated financial information contained in this report reflects all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of management, for a fair presentation of results for the interim periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 8 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2001 Annual Report on Form 10-K. The results of operations for the period ended March 31, 2002 are not necessarily indicative of operations for the full year. The consolidated financial statements include the accounts of Advanced Neuromodulation Systems, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (3) ACQUISITIONS On January 2, 2001, the Company acquired the assets of Implantable Devices Limited Partnership (IDP) and ESOX Technology Holdings, LLC (ESOX), two privately held Minnesota companies, for 119,100 shares of the Company's common stock. Based on the closing price of ANS common stock on December 29, 2000, the value of the stock issued to acquire the assets was $2.43 million. The assets purchased consisted primarily of intellectual property and technology for the fully implantable constant-rate infusion pump that ANS has developed. Prior to the acquisition, the Company had licensed rights to the technology only for pain and cancer therapy applications. Also on January 2, 2001, the Company completed the acquisition of Hi-tronics Designs, Inc. (HDI), a privately-held contract developer and original equipment manufacturer (O.E.M.) of electro-mechanical devices with headquarters in Budd Lake, New Jersey. The Company acquired all of HDI's outstanding stock through a merger in exchange for 1,104,725 shares of ANS common stock. The transaction was accounted for on a pooling of interests basis. HDI developed and manufactured the Company's totally implantable pulse generator (IPG) used in the treatment of chronic intractable pain and was also the O.E.M. manufacturer of the transmitter used with the Company's Renew radio-frequency spinal cord stimulation system. Prior to the Company's acquisition of HDI, HDI's fiscal year ended on November 30. Beginning in 2001, the fiscal year-ends have been conformed to December 31. As a result, the results of operations of HDI for the one-month period ending December 31, 2000 have been recorded directly to retained earnings in the Consolidated Statement of Stockholders' Equity for the period ended December 31, 2001 and are not reflected in the Consolidated Statements of Income. 9 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Summary operating results of HDI for this one-month period ending December 31, 2000, were as follows: Net revenue $ 119,481 Loss before income tax benefit $(591,600) Net loss $(347,679)
For the one-month period ended December 31, 2000, cash flows for HDI were as follows: Net cash used by operating activities $(647,210) Net cash used by investing activities $ (14,516) Net cash used by financing activities $ (10,718) --------- Net decrease in cash $(672,444) ---------
(4) NOTE PAYABLE In connection with the acquisition of HDI (see Note 3), the Company assumed responsibility for a note payable with a principal balance of $177,028 at March 31, 2002. The note was entered into during March 2000, has a five-year term, and bears interest at a fixed rate of 9 percent per annum. The monthly installments for principal and interest are $5,623. The loan is collateralized by the equipment purchased from the proceeds of the note and accounts receivable of HDI. Maturities of the note payable are as follows: $39,631 in 2002, $57,304 in 2003, $62,738 in 2004 and $17,355 in 2005. (5) MARKETABLE SECURITIES The following is a summary of available-for-sale securities at March 31, 2002:
Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- FNMA and Federal Home Loan Bank notes $ 951,451 $ -- $ 10,633 $ 940,818 Investment grade municipal bonds 1,409,616 177 12,888 1,396,905 Real estate investment trust 97,682 -- 11,057 86,625 ---------- ---------- ---------- ---------- $2,458,749 $ 177 $ 34,578 $2,424,348 ========== ========== ========== ==========
Estimated fair value for the real estate investment trust is determined by the closing price as reported on the New York Stock Exchange at each financial reporting period. In the case of the investment grade municipal bonds and FNMA and Federal Home Loan Bank notes, the brokerage firms holding such bonds and notes provide the values at each reporting period by utilizing a standard pricing service. At March 31, 2002, no individual security represented more than 20 percent of the total portfolio or 1 percent of total assets. The Company did not have any investments in derivative financial instruments at March 31, 2002. 10 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (6) COMMITMENTS AND CONTINGENCIES The Company entered into a sixty-three month lease agreement on its 40,000 square feet corporate headquarters and manufacturing facility in Plano, Texas during February 1999. The Company relocated its operations to the leased facility in May 1999 and the rental period under the lease commenced on June 1, 1999. Under the terms of the lease agreement, the Company received three months free rent and the monthly rental rate for the remaining term of the lease is $48,308. The monthly rental rate includes certain operating expenses such as property taxes on the facility, insurance, landscape and maintenance and janitorial services. The Company also has the first right of refusal to acquire the facility. The Company also leases facilities in New Jersey as a result of the January 2001 acquisition of HDI. One of the facilities, located in Budd Lake, New Jersey is 8,800 square feet of office space that is used for administration, design engineering, drafting, documentation and regulatory affairs. The lease expires on May 31, 2003 and has a monthly rental rate of $10,891.The Company also leases 15,000 square feet of space in Hackettstown, New Jersey used for the O.E.M. manufacturing operations. The Hackettstown lease, which expires on December 31, 2002, has a monthly rental rate of $9,636 and is renewable for two additional one-year periods. In addition, during January 2001, the Company leased 2,200 square feet of additional space in the Hackettstown facility adjacent to the 15,000 square feet of manufacturing space until June 30, 2002 at a monthly rental rate of $2,269. The Company leases transportation equipment under non-cancelable operating leases until May 2002 at a monthly rate of $1,472. The Company leases office equipment under non-cancelable operating leases expiring through 2004. Monthly payments on the office equipment leases are $3,600. The Company is a party to product liability claims related to ANS neurostimulation devices. Product liability insurers have assumed responsibility for defending the Company against these claims. While historically product liability claims for ANS neurostimulation devices have not resulted in significant monetary liability for the Company beyond its insurance coverage, there can be no assurances that the Company will not incur significant monetary liability to the claimants if such insurance is inadequate, and there can be no assurance that the Company's neurostimulation business and future ANS product lines will not be adversely affected by these product liability claims. 11 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Except for such product liability the Company is not currently a party to any other pending legal proceeding. The Company maintains general liability insurance against risks arising out of the normal course of business. (7) INCOME TAXES The Company recorded income tax expense during the three months ended March 31, 2002 of $471,449, an overall effective tax rate of 36.0%. This effective tax rate is higher than the U.S. statutory rate of 34% for corporations due to a provision for state taxes. During the three months ended March 31, 2001, the Company recorded a tax benefit of $6,899. The effective tax rate in 2001 of 52.4% was higher than the U.S. statutory rate of 34% because the Company's 2001 expense for goodwill is not deductible for tax purposes, and, when combined with a provision for state taxes, results in the higher effective tax rate. In addition, approximately $234,000 of the $484,000 of costs incurred in the acquisition of HDI recorded in the three month period ended March 31, 2001 are not deductible for tax purposes, which also contributed to the higher effective tax rate in 2001. As of December 31, 2001, the Company had a net operating loss carry forward of approximately $1.8 million which expires in years through 2022. As a result of the enactment of certain tax law changes during the first quarter, the Company will carry back approximately $1.6 million of net operating losses resulting in carry forwards which consist primarily of net operating losses acquired from HDI. This net operating loss carry forward may be subject to Section 382 of the Internal Revenue Code or other provisions which may limit the use of the net operating loss carry forward in any tax year. (8) NET INCOME PER SHARE Basic net income per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the additional dilutive effect, if any, of stock options and warrants using the treasury stock method based on the average market price of the stock during the period. The following table presents the reconciliation of basic and diluted shares:
Three Months Ended March 31, ---------------------------- 2002 2001 ---------- ---------- Weighted-average shares outstanding (basic shares) 9,107,985 8,894,785 Effect of dilutive stock options 1,184,962 -- ---------- ---------- Diluted shares 10,292,947 8,894,785 ========== ==========
For the three months ended March 31, 2002, the incremental shares used for dilutive income per share relate to stock options whose exercise price was less than the average market price in the underlying quarterly computations. For the three months ended March 31, 2002, all stock options were included in the computation of diluted income per share since all exercise prices were less than the average market price of the common shares for that three-month period. For the three months ended March 31, 2001, no options were included in the computation of diluted income per share because the effect would be antidilutive. 12 ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (9) COMPREHENSIVE INCOME Total comprehensive income for 2001 and for the three months ended March 31, 2002 is reported in the Condensed Consolidated Statements of Stockholders' Equity. Comprehensive loss for the three months ended March 31, 2001 is as follows:
Three Months Ended March 31, 2001 -------------------- Net loss $ (6,261) Net loss of Hi-tronics for December 2000 (see Note 3) (347,679) Other comprehensive income 26,818 --------- Comprehensive loss $(327,122) =========
(10) SEGMENT INFORMATION The Company operates in two business segments. The Neuro Products segment designs, develops, manufactures and markets implantable medical devices that are used to manage chronic intractable pain and other disorders of the central nervous system through the delivery of electrical current or drugs directly to targeted nerve fibers. The HDI O.E.M. segment provides contract development and O.E.M. manufacturing of electro-mechanical devices. Segment data for the three months ended March 31, 2002 is as follows:
Neuro HDI Intercompany Consolidated Products O.E.M. Eliminations Total ----------- ----------- ------------ ------------ Revenue from external customers $ 8,988,419 $ 2,484,227 $ -- $11,472,646 Intersegment revenues $ -- $ 1,135,360 $(1,135,360) $ -- Segment income from operations $ 757,717 $ 481,508 $ -- $ 1,239,225 Segment assets $52,674,926 $ 6,887,338 $(3,513,259) $56,049,005
Segment data for the three months ended March 31, 2001 is as follows:
Neuro HDI Intercompany Consolidated Products O.E.M. Eliminations Total ----------- ----------- ------------ ------------ Revenue from external customers $ 6,338,303 $ 2,002,507 $ -- $ 8,340,810 Intersegment revenues $ -- $ 397,992 $ (397,992) $ -- Segment income from operations $ 204,367 $ 128,397 $ -- $ 332,764 Segment assets $48,104,649 $ 6,547,082 $(3,437,637) $51,214,094
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements of the Company and the related Notes. OVERVIEW We design, develop, manufacture and market neuromodulation devices for patients suffering from chronic pain. Neuromodulation devices include implantable neurostimulation devices, which deliver electric current directly to targeted nerves, and implantable infusion pumps, which deliver small, precisely controlled doses of drugs directly to targeted sites within the body. We also provide contract development and custom manufacturing for other medical device companies through our Hi-tronics Designs, Inc. subsidiary, which we acquired in January 2001. See Note 3. The use of neuromodulation devices is growing rapidly. According to an independent industry study, the worldwide market for neuromodulation products was approximately $525 million in 2001, up 21% from the previous year. This study estimates that the market will grow to approximately $1.1 billion worldwide by 2005, based solely on currently approved treatment indications in the U.S. for neuromodulation devices. Our principal neurostimulation product in 2001 was Renew(R), our latest generation radio-frequency (RF) spinal cord stimulation device. We have sold Renew in the U.S. since June 1999 for treatment of chronic pain of the trunk and limbs. On November 21, 2001, the U.S. Food and Drug Administration (FDA) approved our Genesis(TM) totally implantable pulse generator (IPG) spinal cord stimulation device. We began selling Genesis in Europe in the first quarter of 2001 and in the U.S. and Australia in January 2002 for the treatment of chronic pain of the trunk and limbs. Until our launch of the Genesis IPG, only one other company marketed an approved IPG device in the United States. In 2000, we completed development of AccuRx, our constant rate implantable drug pump, in part using proprietary technology we licensed from Implantable Devices Limited Partnership (IDP). We initiated clinical trials of AccuRx under an Investigational Device Exemption (IDE) in the first quarter of 2001, and began selling AccuRx in certain international markets in the second quarter of 2001. On January 2, 2001, we strengthened our position in the neuromodulation market by acquiring the assets of IDP and ESOX Technology Holdings, LLC (ESOX) for 119,100 shares of our common valued at approximately $2.43 million. This acquisition provided us with intellectual property surrounding implantable drug pump technologies in all applications, including pain and cancer therapy. Also, on January 2, 2001, we completed the acquisition of Hi-tronics Designs, Inc. (HDI), a privately-held O.E.M. developer and manufacturer, for approximately 1.1 million shares of our common stock. We accounted for this acquisition using the pooling method and, accordingly, the financial information for all periods prior to the acquisition has been restated. Prior to the 14 acquisition, HDI developed and manufactured our Genesis IPG, as well as the transmitter for our Renew system. Acquiring HDI provided us with additional in-house expertise in the design and manufacture of highly sophisticated electromechanical devices. Combined with our capabilities in the design and manufacture of implantable leads, electronic device control and communication systems and implantable drug pumps, we believe HDI's expertise will allow us to develop more sophisticated products in less time. Additionally, HDI continues to provide contract development and manufacturing services to third parties, which we report as a separate segment for financial reporting purposes (the O.E.M. segment). In the quarter ended March 31, 2002, our O.E.M. segment provided $2.48 million or 21.7% of our total revenue. We expect our O.E.M. segment revenue to decrease as a percentage of our total revenue in the future, as we grow revenue from our proprietary neurostimulation systems and drug pumps and increasingly utilize HDI's research and development capabilities for internal product development. Our current neuromodulation product line includes our Genesis IPG system, Renew RF system and AccuRx constant rate drug pump. With the launch of Genesis, we now compete in 100% of the implantable neurostimulation market to treat chronic pain of the trunk and limbs. Although Renew and Genesis are targeted toward treatment of different chronic pain conditions, sales growth of Renew has slowed since the launch of Genesis. Though it is too early to accurately predict future sales trends, management believes it possible that sales of Renew may plateau or even decline modestly, at least in the near term. CRITICAL ACCOUNTING POLICIES AND ESTIMATES General Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, bad debts, inventories, intangible assets, warranty obligations and contingencies and litigation. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies involve its more significant judgments and estimates used in preparation of its consolidated financial statements. Revenue Recognition Revenue from the sale of our neuromodulation products and custom manufactured O.E.M. products is recognized when the goods are shipped to our customers. We record, as a reduction in revenue, a provision for estimated sales returns and allowances on these product 15 sales in the same period as the related revenue is recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be overstated. We also design and develop products under fixed price development agreements with third parties. Each development agreement reflects the terms and conditions of the project, including project objectives, product specifications, responsibilities for tasks, licenses and fields of use of intellectual properties, manufacturing rights and compensation, among other terms and conditions. A typical development project will take one to two years to complete and is undertaken in accordance with the FDA's Quality System Regulations, which address design controls and methods, facilities and quality assurance controls used in manufacturing medical devices, and similar international standards. We recognize revenue and profit under the development agreements using the percentage-of-completion method, which relies on estimates of total expected revenue and costs. We follow this method since reasonably dependable estimates of revenue and costs applicable to various stages of a development agreement can be made. If we do not accurately estimate the resources required or the scope of work to be performed under a development agreement, then future profit margins and results of operations may be negatively impacted. In certain cases, we will undertake a development project on a cost plus basis. In these cases, we invoice the customer for actual time and material expended on the project at predetermined hourly billing rates and mark ups. Bad Debt We are required to estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of the receivables including the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances or write-offs may be required. Inventory Our reserve for excess and obsolete inventory is based upon forecasted demand for our products. If the demand for our products is less favorable than those projected by management, additional inventory write-downs or write-offs may be required. Intangible Assets Goodwill associated with the excess purchase price over the fair value of assets acquired was amortized using the straight-line method through December 31, 2001 over the estimated life of 20 years. On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 141, "Business Combinations" and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Under the new accounting rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the statements. We determined that our 16 goodwill at December 31, 2001 was unimpaired and eliminated amortization of the goodwill effective January 1, 2002. Prior to adoption of these statements, our amortization expense for goodwill was $139,151 per quarter, or $556,604 on an annual basis. Other identifiable intangible assets, such as patents, purchased technology, trademarks and covenants not to compete, are currently amortized on the straight-line method over their estimated useful lives. In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. Warranty Obligations Our products are generally covered by a one-year warranty. We accrue a warranty reserve for estimated costs to provide warranty services. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase resulting in decreased gross profit. Contingencies We are subject to proceedings, lawsuits and other claims related to our products and business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy, in dealing with these matters. Currently, product liability claims are the only litigation to which we are a party. While historically our product liability claims have not resulted in significant monetary liability beyond our insurance coverage, an adverse judgment beyond our insurance coverage could have a material adverse impact on our results of operations and financial condition. RESULTS OF OPERATIONS Comparison of the Three Months Ended March 31, 2002 and 2001 We reported net income of $837,000, or $.08 per diluted share, for the three months ended March 31, 2002, compared to a net loss of $6,300 or $.00 per diluted share in the same 2001 period. Results for the first quarter of 2002 reflect the U.S. launch of our Genesis IPG system. The net loss during the 2001 period included $484,000 of expense for costs associated with our acquisition of HDI in January 2001. These costs were expensed instead of capitalized because the acquisition is accounted for under the pooling of interests method. Excluding such acquisition related costs, on a pro forma basis, net income was $269,000, or $.03 per diluted share, for the three-month period ended March 31, 2001. 17 Net revenue increased 37.5% to $11.47 million for the three months ended March 31, 2002, compared to $8.34 million in the comparable 2001 period. Net revenue of our neuromodulation products increased 41.8% to $9.00 million in 2002 from $6.34 million in 2001 due to the U.S. launch of our Genesis IPG system. Net revenue from our O.E.M. business increased 24.1% to $2.48 million in 2002 from $2.00 million in 2001 due to higher volume of O.E.M. product sales and contract engineering fees. Gross profit increased to $6.96 million during the three months ended March 31, 2002 from $4.77 million in 2001, principally due to the increase in net revenue discussed above. Additionally, gross profit margins increased to 60.7% in 2002, compared to 57.2% in 2001, due to higher sales of our neuromodulation products, which contribute higher margins than O.E.M. product sales, and operational efficiencies from higher manufacturing volumes. Total operating expenses increased to $5.72 million for the three months ended March 31, 2002 from $4.44 million in the same period during 2001. However, as a percentage of net revenue, these expenses decreased to 49.9% in 2002 from 53.2% in 2001 due to elimination of goodwill amortization and leveraging of research and development expense. Research and development expense increased to $1.29 million, or 11.3% of net revenue, during the three months ended March 31, 2002, from $1.15 million, or 13.8% of net revenue, during the same period in 2001. This increase in the absolute dollar amount in 2002 compared to 2001 was the result of higher salary and benefit expense from staffing additions, annual salary increases, and higher test material expense. Our development efforts continue to be focused on next-generation IPG stimulation systems, next-generation RF stimulation systems, an IPG stimulation systems for deep brain stimulation to address essential tremor and Parkinson's Disease, next generation drug pumps, and clinical trials of our AccuRx. Sales and marketing expense, as a percentage of net revenue, increased to 25.2% during the three months ended March 31, 2002 from 24.7% in the same 2001 period, and the absolute dollar amount increased to $2.90 million in 2002 from $2.06 million during 2001. This increase in the absolute dollar amount during 2002 compared to 2001 was principally attributable to higher salary and benefit expense from staffing additions in direct sales, reimbursement and sales support positions, annual salary increases, higher commission expense from increased product sales, and higher sample and promotional expense in support of the Genesis IPG launch. General and administrative expense, as a percentage of net revenue, increased to 11.4% during the three months ended March 31, 2002 from 11.0% in the same 2001 period, and the absolute dollar amount increased to $1.30 million in 2002 from $918,000 during 2001. This increase in the absolute dollar amount of $384,000 during 2002 compared to 2001 was principally attributable to higher salary expense from staffing additions, annual salary increases, higher employee benefit costs and increased legal costs. No amortization expense of goodwill was recorded during the three months ended March 31, 2002 due to the adoption of Statement of Financial Accounting Standards No. 141 and Statement of Financial Accounting Standards No. 142 on January 1, 2002. For the three months ended March 31, 2001, we recorded $139,000 of amortization expense for goodwill. 18 Amortization of other intangibles increased to $228,000 during the three months ended March 31, 2002 from $173,000 in the same period in 2001, due to additional patent amortization. Other income increased to $69,000 during the three months ended March 31, 2002 from an expense of $346,000 during the three months ended March 31, 2001 primarily as a result of the $484,000 of expense associated with the acquisition of HDI. Income tax expense increased to $471,000 during the three months ended March 31, 2002 from a tax benefit of $6,900 for the same period in 2001. The 2001 period reflects a loss before income taxes of $13,000 due to the costs associated with the acquisition of HDI recorded in the first quarter of 2001. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002 our working capital increased to $26.93 million from $24.91 million at December 31, 2001. The ratio of current assets to current liabilities was 6.32:1 at March 31, 2002, compared to 4.77:1 at December 31, 2001. Cash, cash equivalents and marketable securities totaled $10.82 million at March 31, 2002 compared to $11.94 million at December 31, 2001. We increased our investment in inventories to $10.45 million at March 31, 2002, from $9.75 million at December 31, 2001. This increase from year-end 2001 was primarily additional inventory to support our market launch of the Genesis IPG including consignment inventory for additional sales agents to whom we provide approximately $30,000 in consignment inventory each. We spent $351,000 during the three months ended March 31, 2002 for capital expenditures for additional equipment and fixtures. These expenditures consisted primarily of additional tooling, molds and test equipment for new parts and products we developed, and furniture and data processing equipment for new personnel we have hired. We expect capital expenditures for the remainder of fiscal 2002 to approximate $2.1 million. We received $399,000 of cash during the three months ended March 31, 2002 from the exercise of 63,111 stock options. We believe our current cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to fund our current operating needs and capital expenditures for the foreseeable future. We currently have no credit facilities in place. If we decide to acquire complementary businesses, product lines or technologies, or enter into joint ventures or strategic alliances that require substantial capital, we intend to finance those activities by the most attractive alternative available, which could include bank borrowings, or the issuance of debt or equity securities. On April 24, 2002, we filed a registration statement with the Securities and Exchange Commission to register for issuance and sale by us through underwriters of up to 2,875,000 shares of common stock, which includes 375,000 shares subject to an over-allotment option granted to the underwriters. This registration statement has not yet become effective. The securities may not be sold, nor may offers to buy be accepted, prior to the time the 19 registration statement becomes effective. We plan to use the net proceeds from this offering, if and when completed, to expand our worldwide sales and marketing resources, to fund development of new technologies, products and applications for existing products, to pursue regulatory approvals, and to invest in product lines, businesses, companies, services or technologies that complement our current business through mergers, acquisitions, joint ventures or otherwise, as well as for working capital and other general purposes. CASH FLOWS Net cash used by operations was $1.06 million for the three months ended March 31, 2002, while operating activities provided cash of $755,000 during the same period in 2001. Although we reported net earnings of $837,000 during the 2002 period compared to a net loss of $6,300 in the 2001 period, we used cash in our operating activities during 2002 primarily for increases in accounts receivable and inventories of $1.0 million and $705,000, respectively, and for reducing our current liabilities by nearly $1.54 million. Net cash used in investing activities was $717,000 for the three months ended March 31, 2002, as compared to $1.35 million for the same period in 2001, a decrease of $633,000. This decrease in the use of cash in investing activities during the 2002 period compared to 2001 was the result of a $761,000 reduction in additions to patents and intangible assets and capital expenditures for equipment and fixtures. Net cash provided by financing activities was $387,000 for the three months ended March 31, 2002, as compared to $118,000 for the same period in 2001. During the first quarter of 2002, we used $13,000 to reduce certain debt obligations, while we received $399,000 from the exercise of stock options. During the first quarter of 2001, we used $12,000 to reduce our obligations under certain debt agreements, while we received $130,000 from the exercise of stock options. CURRENCY FLUCTUATIONS Substantially all of our international sales are denominated in U.S. dollars. Fluctuations in currency exchange rates in other countries could reduce the demand for our products by increasing the price of our products in the currency of the countries in which the products are sold, although we do not believe currency fluctuations have had a material effect on the Company's results of operations to date. 20 OUTLOOK AND UNCERTAINTIES The following is a "safe harbor" statement under the Private Securities Litigation Reform Act of 1995: The matters discussed in this Quarterly Report on Form 10-Q contain statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words "expect", "estimate", "anticipate", "predict", "believe", "plan", "will", "should", "intend", "potential", "new market", "potential market applications" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this Quarterly Report on Form 10-Q and include statements regarding our intent, belief or current expectations with respect to, among other things: (i) trends affecting our financial condition or results of operations; (ii) our financing plans; and (iii) our business growth strategies. We caution our readers that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. These risks and uncertainties include the following: o failure of our Genesis IPG to gain market acceptance would adversely affect our revenue growth and profitability o because our main competitor has significantly greater resources than we do and new competitors may enter the neuromodulation market, it may be difficult for us to compete in this market o if pain management specialists do not recommend and endorse our products, our sales could be negatively impacted and we may be unable to increase our revenues and profitability o the launch of Genesis and other market factors could impede growth in or reduce sales of Renew, which would adversely affect our revenues and profitability o if patients choose less invasive or less expensive alternatives to our products, our sales could be negatively impacted o any adverse changes in coverage or reimbursement amounts by Medicare and Medicaid, private insurance companies and managed care organizations, or workers' compensation programs could limit our ability to market and sell our products o if we fail to protect our intellectual property rights, our competitors may take advantage of our ideas and compete directly against us o other parties may sue us for infringing their intellectual property rights o failure to obtain necessary government approvals for new products or for new applications for existing products would mean we could not sell those new products, or sell our existing products for those new applications o modification of any marketed device could require a new 510(k) clearance or PMA or require us to cease marketing or recall the modified device until we obtain this clearance or approval o we will be unable to sell our products if we fail to comply with manufacturing regulations o our products are subject to product recalls even after receiving FDA clearance or approval, which would negatively affect our financial performance and could harm our reputation o we are subject to potential product liability claims and we may not have the insurance or other resources to cover the cost of any successful claim 21 o we are subject to substantial government regulation and our failure to comply with all applicable government regulations could subject us to numerous penalties, any of which could adversely affect our business o our reliance on single suppliers for critical components used in our main products could adversely affect our ability to deliver products on time o two distributors currently account for a significant percentage of our revenue from our neuromodulation products segment, and several of our competitors currently account for a significant percentage of our revenue from our O.E.M. segment o we are dependent upon the success of neuromodulation technology; our inability to continue to develop innovative neuromodulation products, or the failure of the neuromodulation market to develop as we anticipate, would adversely affect our business o our success will depend on our ability to attract and retain key personnel and scientific staff o if we choose to acquire complementary business, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or to successfully integrate an acquired business, product or technology in a cost-effective and non-disruptive manner o we are subject to additional risks associated with international operations o our operations are conducted at three locations, and a disaster at any of these facilities could result in a prolonged interruption of our business o general economic risks o other risks detailed from time to time in our SEC public filings Consequently, if our assumptions prove to be incorrect or such risks or uncertainties materialize, anticipated results could differ materially from those forecasted in forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For the period ended March 31, 2002, the Company did not experience material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 22 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 3.1- Articles of Incorporation, as amended and restated (1) Exhibit 3.2- ByLaws (1) Exhibit 4.1- Rights Agreement dated as of August 30, 1996, between Quest Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights Agent (2) Exhibit 4.2- Amendment to Rights Agreement dated as of January 25, 2002, between Advanced Neuromodulation Systems, Inc and Computershare Investor Services LLC (formerly KeyCorp Shareholder Services, Inc.) (3) Exhibit 10.16- Employment Agreement dated as of April 1, 2002, between Christopher G. Chavez and Advanced Neuromodulation Systems, Inc.(4) Exhibit 10.17- Employment Agreement dated as of April 1, 2002, between Kenneth G. Hawari and Advanced Neuromodulation Systems, Inc.(4) Exhibit 10.18- Special Termination Agreement dated as of April 1, 2002, between Christopher G. Chavez and Advanced Neuromodulation Systems, Inc.(4) Exhibit 10.19- Special Termination Agreement dated as of April 1, 2002, between Kenneth G. Hawari and Advanced Neuromodulation Systems, Inc.(4) (b) The Company filed a report on Form 8-K on January 30, 2002, to report certain amendments adopted by the Board of Directors on January 25, 2002 to the existing Rights Agreement between the Registrant and Computershare Investor Services LLC dated as of August 30, 1996. - ---------- (1) Filed as an Exhibit to the report of the Company on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. (2) Filed as an Exhibit to the report of the Company on Form 8-K dated September 3, 1996, and incorporated herein by reference. (3) Filed as an Exhibit to the report of the Company on Form 8-K dated January 30, 2002, and incorporated herein by reference. (4) Filed herewith. 23 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADVANCED NEUROMODULATION SYSTEMS, INC. Date: April 24, 2002 By: /s/ F. Robert Merrill III ------------------------------------- F. Robert Merrill III Executive Vice President, Finance Chief Financial Officer and Treasurer 24 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Articles of Incorporation, as amended and restated (1) 3.2 ByLaws (1) 4.1 Rights Agreement dated as of August 30, 1996, between Quest Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights Agent (2) 4.2 Amendment to Rights Agreement dated as of January 25, 2002 between Advanced Neuromodulation Systems, Inc and Computershare Investor Services LLC (formerly KeyCorp Shareholder Services, Inc.) (3) 10.16 Employment Agreement dated as of April 1, 2002, between Christopher G. Chavez and Advanced Neuromodulation Systems, Inc.(4) 10.17 Employment Agreement dated as of April 1, 2002, between Kenneth G. Hawari and Advanced Neuromodulation Systems, Inc.(4) 10.18 Special Termination Agreement dated as of April 1, 2002, between Christopher G. Chavez and Advanced Neuromodulation Systems, Inc.(4) 10.19 Special Termination Agreement dated as of April 1, 2002, between Kenneth G. Hawari and Advanced Neuromodulation Systems, Inc.(4)
- ---------- (1) Filed as an Exhibit to the report of the Company on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. (2) Filed as an Exhibit to the report of the Company on Form 8-K dated September 3, 1996, and incorporated herein by reference. (3) Filed as an Exhibit to the report of the Company on Form 8-K dated January 30, 2002, and incorporated herein by reference. (4) Filed herewith. EX-10.16 3 d96263ex10-16.txt EMPLOYMENT AGREEMENT - CHRISTOPHER CHAVEZ EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered to be effective as of April 1, 2002, by and between Advanced Neuromodulation Systems, Inc. (the "Company" or "ANS") and Christopher G. Chavez ("Employee"). RECITALS The Company has special expertise in its business that has enabled it to provide unique career opportunities for its employees. The Company's growth depends, to a significant degree, on its possession of more and better information than that available to its competitors concerning a number of matters, including but not limited to, research, systems, development, marketing, management and other information not generally known to others in the Company's industry. To obtain such information and use it successfully, the Company has made significant investments in research, business development, customer satisfaction methods and techniques, business process improvements and other developments in marketing methods and providing services to its customers. This unique and special expertise in pooling this information has enabled the Company to conduct its business successfully and thus provide potential employment opportunities for its employees. The parties acknowledge that Employee has his own valuable knowledge and training in certain of the areas in which the Company conducts its business but that his knowledge will be enhanced by this employment. Employee recognizes that unless the Company imparts to him its special expertise, he would be less effective and of less benefit to the Company. Employee further acknowledges that without the additional knowledge to be imparted to him by the Company, he will be less valuable than would otherwise be the case in its business. Employee understands and acknowledges that a covenant not to compete and a restriction on disclosure of confidential information is essential to the continued growth and stability of the Company's business and to the continuing viability of its business in the event the Employee's employment is terminated as expressly permitted under the terms and limitations of this Agreement. The Employee desires employment as an employee of the Company under the terms and conditions of this Agreement and further desires to be given access to the Company's proprietary information. The Company desires to employ Employee under the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, the parties agree as follows: 1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company employs Employee, and Employee hereby accepts such employment by the Company. 2. Duties of Employee. (a) Employee shall serve in the capacities of Chief Executive Officer and President of ANS, and shall be subject to supervision by the Board of Directors of ANS. In such capacities, Employee shall have all necessary powers to discharge his responsibilities. Employee shall have all powers granted by the Bylaws of the Company to the President, and Employee shall report to the Board of Directors of the Company. For so long as Employee serves in the foregoing capacities, the Company shall nominate and support the election of Employee as a member of the Board of Directors. (b) During the term of this Agreement, and thereafter so long as Employee is employed by the Company, Employee shall devote his full business time and effort to the performance of his duties and responsibilities as an officer of the Company. Notwithstanding the foregoing, Employee may spend reasonable amounts of time on personal civic and charitable activities that do not interfere with the performance of his duties and responsibilities to the Company. In addition, Employee may, subject to prior approval by the Board of Directors of the Company, spend reasonable amounts of time serving on boards of directors for other companies, provided that such service does not, in the sound discretion of the Board of Directors of the Company, constitute or create a conflict of interest. (c) Employee shall observe and comply with the written rules and regulations of the Company respecting its business and shall carry out and perform the directives and policies of the Company as they may from time to time be stated to Employee in writing by the Chairman of the Board of Directors. (d) Employee shall maintain accurate business records as may from time to time be required by the Company. Such records may be examined by the Company, at all reasonable times after written request is delivered to Employee. Any such document shall be delivered to the Company promptly upon request. (e) Employee agrees not to solicit or receive any income or other compensation from any third party in connection with his employment with the Company. Employee agrees, upon written request by the Company, to render an accounting of all transactions relating to his business endeavors during the term of this employment hereunder. 3. Term. The term of this Agreement (the "Term") shall commence effective as of April 1, 2002 (the "Effective Date") and continue until the third anniversary of the Effective Date, unless Employee's employment is earlier terminated in accordance with Section 10 of this Agreement; provided, however, that, on the third and subsequent anniversary dates of this Agreement or any extension, this Agreement will automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversary date, the Company shall have given written notice to the Employee that it does not wish to extend the Term. Upon expiration of the term of this Agreement, Employee shall remain an "at will" employee of the Company but shall still be subject to and bound by the terms of this Agreement. 4. Salary. Commencing on the Effective Date, the Company will pay Employee a minimum base annual salary during the term of this Agreement for his services as an officer of $253,500, which shall be payable in accordance with the Company's standard payroll practice, but not less than monthly. Such base salary will not include any benefits made available to Employee or any contributions or payments made on his behalf pursuant to any employee benefit plan or program of the Company, including any health, disability or life insurance plan or program, 401-K plan, cash bonus plan, stock incentive plan, retirement plan or similar plan or program of any nature. The Company shall review Employee's salary on an annual basis, and shall increase the annual salary of Employee from time to time as may be warranted in accordance with the Company's compensation policies. 5. Bonus Compensation. The Company shall pay Employee an annual cash bonus in accordance with Company policy established by the Board from time to time, as described in Exhibit "A" to this Agreement. 6. Stock Options: The Company will grant Employee non-transferable stock options to purchase shares of the Company Common Stock in number and on such terms and conditions as the Company's Compensation Committee determines. 7. Executive Allowances and other Fringe Benefits: The Company will provide Employee an annual executive allowance to cover the cost of Employee's personal tax planning and country club dues. 8. Other Employee Benefits. During the term of this Agreement, the Company will provide Employee with all benefits made available from time to time by the Company to its executive officers and /or other employees, such benefits to be in accordance with the Company's policies, except that if Employee's employment with the Company is terminated, Employee's cash severance payments shall be in accordance with Section 10 of this Agreement, in lieu of cash severance payments provided by the policies of the Company. Specifically, Employee's benefits shall include participation in medical, dental and vision plans or programs (providing coverage for Employee's immediate family); disability insurance; 401-K plan; life insurance payable to Employee's designated beneficiary; executive car allowance; and paid vacation (up to four weeks). In the event that Employee's employment with the Company is terminated, the Company agrees to pay in full all premiums associated with Employee's election to continue health benefits provided hereunder for a period of two years following the date of termination. 9. Reimbursement of Expenses. The Company shall reimburse Employee for all expenses actually and reasonably incurred by him in the business interests of the Company. Such reimbursement shall be made to Employee upon appropriate documentation of such expenditures in accordance with the Company's written policies. 10. Early Termination. It is the desire and expectation of each party that the employer-employee relationship shall continue for the full term specified herein and be a pleasant and rewarding experience for the parties hereto. The Company shall, however, be entitled to terminate Employee's employment at any time before or after the Effective Date with or without Cause (as defined in this Section 10). Termination shall require approval by majority vote of the board of directors of the Company. If Employee's employment is terminated without Cause (as defined in this Section 10), the Company shall pay Employee severance compensation pursuant to the following formulas: (a) In the event of a termination without Cause during the term of this Agreement, Employee shall receive a lump sum amount equal to 200% of the sum of (A) the highest annual salary of Employee in effect at any time during the Term or the salary of Employee in effect immediately prior to the termination without Cause, whichever is the larger amount, plus (B) the amount of the bonus or incentive compensation targeted for payment to the Employee for the fiscal year during which the termination without Cause occurs. (b) In the event of a termination without Cause at any time during the term of this Agreement, Employee shall also receive a job search lump sum payment of $25,000. (c) However, if the termination without Cause is the result of a "Change in Control" as that term is defined in the Special Termination Agreement between the Company and the Employee dated as of April 1, 2002, then Employee will not be entitled to any payments under the preceding subparagraphs (a) and (b), and the Company's severance compensation obligations to Employee shall be governed by the terms of that Special Termination Agreement. If Employee dies, is unable to perform his duties and responsibilities as a result of disability that continues for 90 consecutive days or more ("Disability"), voluntarily resigns from the Company, or is terminated for "Cause," the Company shall pay Employee (or his estate, executor or legal representative, as appropriate) any salary and bonus that has accrued to the date employment ceases, and the Company's obligations to pay additional salary or cash compensation or benefits shall terminate as of such date. "Cause," for the purpose of this Agreement, shall mean the occurrence of any of the following events: (a) Performance by Employee of illegal or fraudulent acts, criminal conduct or willful misconduct relating to the activities of the Company; (b) A conviction of or nolo contendere plea by Employee for any criminal acts involving moral turpitude having or reasonably likely to have a material adverse effect upon the Company, including, without limitation, upon its profitability, reputation or goodwill; (c) Willful or grossly negligent failure by Employee to perform his duties in a manner consistent with the Company's best interests; (d) Willful refusal by Employee to carry out reasonable written instructions of the Company's Board of Directors not inconsistent with the provisions of this Agreement; (e) Violation by Employee of any of Employee's covenants and agreements contained in Sections 11, 12 or 13 of this Agreement; or (f) Any other material breach of Employee's obligations hereunder, which he fails to cure within thirty days after receiving written notice thereof. 11. Non-Competition Agreement. (a) Employee understands and the Company promises that during the course of his employment by the Company, Employee will have access to and the benefit of the information referred to in the Recitals above, specifically Trade Secrets and Confidential Information, and will represent the Company and develop contacts and relationships with other persons and entities, including but not limited to customers, potential customers and other employees of such entities. To protect the Company's interest in preserving its Trade Secrets, Confidential and other protected information and in the Business Good Will generated by new contacts and relationships, and as a direct inducement and consideration for the Company's promises to provide new Trade Secrets, new Confidential Information and new contacts, the Employee agrees and covenants to the duties and obligations created by this covenant not to compete. (b) The Employee agrees that all duties assumed by this covenant not to compete include any actions taken by the Employee directly or indirectly, either as an individual or as an employee, partner, officer, director, shareholder, advisor, or consultant or in any other capacity whatsoever, of any person (other than ownership of less than 1% of the issued and outstanding voting securities of a publicly held corporation). (c) Employee covenants he: (1) will not recruit, hire, assist others in recruiting or hiring, discuss employment with, or refer to others for employment any person who is, or within the 12 month period immediately preceding the date of any such activity was, an employee of either Company or any of its Affiliates; (2) Employee agrees that during the term of his employment with the Company and for a period of two years thereafter, without regard to the party terminating such employment or the reason for termination, if any, Employee will not, without prior written approval by the Board of Directors for the Company, in the United States or in any foreign country in which either Company is then marketing its products or services, directly or indirectly engage in or own or control an interest in (except as to those investments held at the effective date of this agreement or as a passive investor in publicly held Company, i.e., Employee and Employee's relatives do not own of record, or beneficially, an aggregate of more than one percent of any class of outstanding securities) or act as an officer, director, or employee of, or consultant or adviser to, any firm, corporation, institution or entity, directly or indirectly in competition with or engaged in a business substantially similar to that of Employer, including the research, development, manufacture, sale or marketing of products, devices, instruments, methods or techniques (or any related services or activities) similar to any products, devices, instruments, methods or techniques which either Company is engaged in the research of, development of, manufacture, selling, or marketing, or has under consideration to do the same (whether or not such products, devices, instruments, methods or techniques or the technology related thereto were obtained from Employee), during the term of the Employee's employment. This provision 11(c)(2) is not intended to, and shall not be construed in such a manner as to, prevent Employee from securing gainful employment within the health care industry except with those entities whose products, devices, instruments, methods or techniques (or any related services or activities) substantially compete with those of the Company. (d) It is understood and agreed that the scope of the foregoing covenant is reasonable as to time, scope and geography and is necessary to protect the legitimate business interests of the Company, in the Confidential Information and Trade Secrets the Company have promised to share with Employee. It is further agreed that such covenant will be regarded as divisible and will be operative as to time, area and persons to the extent that it may be so operative, and if any part of such covenant is declared invalid, unenforceable, or void as to time, area or persons, the validity and enforceability of the remainder will not be affected. (e) If Employee violates the restrictive covenants of this Section 11 and the Company brings legal action for injunctive or other relief, neither Company shall be deprived of the benefit of the full period of the restrictive covenant, as a result of the time involved in obtaining the relief. Accordingly, to the extent allowed by law, the Employee agrees that the restricted period following the term of employment shall have a duration of one year, and the regularly scheduled expiration date of such covenant shall be extended by the same amount of time that Employee is determined to have violated such covenant. 12. Confidentiality. Employee acknowledges that he has learned and will learn Confidential Information (as defined herein) relating to the business conducted and to be conducted by the Company. The Company promises to provide all needed Confidential Information to the Employee. Employee agrees that he will not during the term of employment with the Company or at any time after the termination of such employment, without regard to the party terminating such employment, except in the normal and proper course of his duties hereunder, disclose or use or authorize any third party to disclose or use any such Confidential Information, without prior written approval of the Company. As used in this Section 12, "Confidential Information" shall mean information disclosed to or known to Employee as a direct or indirect consequence of or through his employment with the Company, about the Company's business, methods, business plans Company, operations, products, processes, and services, including, but not limited to, information relating to research, development, inventions, recommendations, programs, systems, and systems analyses, flow charts, finances, and financial statements, marketing plans, Company and strategies, merchandising, pricing strategies, merchandise sources, client sources, system designs, procedure manuals, automated data programs, financing methods, financial projections, terms and conditions of arrangements of any business, computer software, terms and conditions of business arrangements with customers or suppliers, reports, personnel procedures, supply and services resources, names and addresses of clients, the Company's contacts, names of professional advisors, and all other information pertaining to customers and suppliers, including, but not limited to assets, business interests, personal data and all other information pertaining to the Company, clients or suppliers whatsoever, including all accompanying documentation therefor. All information disclosed to Employee, or to which Employee has access during the period of his employment, for which there is any reasonable basis to be believed is, or which appears to be treated by the Company as Confidential Information, shall be presumed to be Confidential Information hereunder. Confidential Information shall not, however, include information that (i) is publicly known or becomes publicly known through no fault of Employee, or (ii) is generally or readily obtainable by the public, or (iii) constitutes general skills, knowledge and experience acquired by Employee before and/or during his employment with the Company. Employee agrees that all documents of any nature pertaining to activities of the Company or its Affiliates, or that include any Confidential Information, in his possession now or at any time during the term of his employment, including without limitation, memoranda, notebooks, notes, data sheets, records and computer programs, are and shall be the property of such entity and that all copies thereof shall be surrendered to the appropriate entity upon termination of his employment. 13. Inventions; Developments. Employee agrees to notify the Company of any discovery, invention, innovation, or improvement which is related to the Business or to the business of any customer or supplier (collectively called "Developments") conceived or developed by Employee during the term of the Employee's employment. Developments shall include, without limitation, developments in computer software, logical systems, algorithms, and any or all other intellectual properties related to the Business. All Developments, including but not limited to all written documents pertaining thereto, shall be the exclusive property of the Company or the Company, as the case may be, and shall be considered Confidential Information subject to the terms of this Agreement. Employee agrees that when appropriate, and upon written request of the Company or the Company, the Employee will acknowledge that Developments are "works for hire" and will file for patents or copyrights with regard to any or all Developments and will sign documentation necessary to evidence ownership of Developments in the Company. 14. Exit Interview. To insure a clear understanding of this Agreement, including but not limited to the protection of the Company's business interests, Employee agrees, at no additional expense to the Company, to engage in an exit interview with the Company prior to Employee's departure from the Company at a time and place designated by the Company. In the event that the exit interview takes place in a location outside of the Dallas/Fort Worth metropolitan area, the Company agrees to reimburse Employee for reasonable expenses associated with his travel to and from said exit interview. 15. Right of Setoff. the Company shall be entitled, at its option and not in lieu of any other remedies to which they may be entitled, to set off any amounts due Employee or any Affiliate of Employee against any amount due and payable by Employee or any Affiliate of Employee to the Company ("Set-Offs") pursuant to this Agreement or otherwise, provided that the Set-Offs are set forth in detail in writing with supporting evidence to substantiate each Set-Off. 16. Notice Provision. Any notice, demand or request required or permitted to be given or made under this Agreement shall be in writing and shall be deemed given or made when delivered in person, when sent by United States registered or certified mail, or postage prepaid, or when telecopied to a party at its address or telecopy number specified below: If to the Company: Advanced Neuromodulation Systems, Inc. 6501 Windcrest Drive, Suite 100 Plano, Texas 75024 Telecopy number: (972) 309-8150 If to Employee: Christopher G. Chavez 2900 Cedar Ridge Dr. McKinney, Texas 75070 The parties to this Agreement may change its addresses for notice in the manner provided above. 17. Headings Non-binding. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions hereof. 18. Words to have Contextual Meaning. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Additionally, the words "and" and "or" shall be given its contextual meaning and not be interpreted blindly as being solely conjunctive or disjunctive, as the case may be. 19. Execution of Agreement. The parties shall execute all documents, provide all information and take or refrain from taking all actions as may be reasonably necessary or appropriate to achieve the purposes of this Agreement. 20. Partial Assignment Clause. This Agreement shall be binding upon and inure to the benefit of the parties hereto, its representatives and permitted successors and assigns. Employee's duties hereunder are personal services and are not assignable. Except for the provisions of Sections 11, 12 and 13 of this Agreement, which are intended to benefit the Company and the Company's Affiliates as third party beneficiaries, or as otherwise expressly provided in this Agreement, nothing in this Agreement, express or implied, is intended to confer upon any person other than the parties to this Agreement, its respective representatives and permitted successors and assigns, any rights, remedies or obligations under or by reason of this Agreement. 21. Limitation of Benefits Clause. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the parties, except as otherwise expressly provided herein. 22. Non-waiver Provision. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. 23. Multiple Originals. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. 24. CHOICE OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. 25. Subject Claims; Initiation of Binding Arbitration. The matters, claims, rights, and obligations subject to these arbitration provisions include all rights, claims and obligations arising out of or relating to this Agreement or to the employee's employment and/or its termination, including, without limitation, any and all claims, rights or causes of action which may ever arise or be asserted under any federal, state, local or foreign statutory, regulatory or common law, and including, without limitation, claims of discrimination, wrongful discharge or termination, breach of contract, tort (such as intentional infliction of emotional distress, libel, slander, wrongful invasion of privacy or personal injury), workers compensation or unemployment compensation. All of the foregoing types of matters, claims, rights and obligations subject to these arbitration provisions are herein called "Subject Claims". In the event of a dispute relating to any Subject Claim, then, upon notice by any party to the other parties (an "Arbitration Notice") and to American Arbitration Association ("AAA"), Dallas, the controversy or dispute shall be submitted to a sole arbitrator who is independent and impartial, for binding arbitration in Dallas, Texas, in accordance with AAA's National Rules for the Resolution of Employment Disputes (the "Rules") as modified or supplemented hereby. The parties agree that they will faithfully observe this agreement and the Rules and that they will abide by and perform any award rendered by the arbitrator. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 116 (or by the same principles enunciated by such Act in the event it may not be technically applicable). The award or judgment of the arbitrator shall be final and binding on all parties and judgment upon the award or judgment of the arbitrator may be entered and enforced by any court having jurisdiction. If any party becomes the subject of a bankruptcy, receivership or other similar proceeding under the laws of the United States of America, any state or commonwealth or any other nation or political subdivision thereof, then, to the extent permitted or not prohibited by applicable law, any factual or substantive legal issues arising in or during the pendency of any such proceeding shall be subject to all of the foregoing mandatory mediation and arbitration provisions and shall be resolved in accordance therewith. The agreements contained herein have been given for valuable consideration, are coupled with an interest and are not intended to be executory contracts. The fees and expenses of the arbitrator will be shared equitably (as determined by the arbitrator) by all parties engaged in the dispute or controversy. Selection of Arbitrator. Promptly after the Arbitration Notice is given, AAA will select five possible arbitrators, to whom AAA will give the identities of the parties and the general nature of the controversy. If any of those arbitrators disqualifies himself or declines to serve, AAA shall continue to designate potential arbitrators until the parties have five to select from. After the panel of five potential arbitrators has been completed, a two-page summary of the background of each of the potential arbitrators will be given to each of the parties, and the parties will have a period of 10 days after receiving the summaries in which to attempt to agree upon the arbitrator to conduct the arbitration. If the parties are unable to agree upon an arbitrator, then one of the parties shall notify AAA and the other party, and AAA will notify each party that it has five days from the AAA notice to strike two names from the list and advise AAA of the two names stricken. After expiration of the strike period, if all but one candidate has been stricken, the remaining one will be the arbitrator, but, if two or more have not been stricken, AAA shall select the arbitrator from one of those not stricken. The decision of AAA with respect to the selection of the arbitrator will be final and binding in such case. No Litigation; Damages Limitation. Unless and only to the extent mandatory arbitration is validly prohibited or limited by applicable statute or regulation, no litigation or other proceeding may ever be instituted at any time in any court or before any administrative agency or body for the purpose of adjudicating, interpreting or enforcing any of the rights, duties, liabilities or obligations of the parties hereto or any rights, duties, liabilities or obligations relating to any Subject Claim, whether or not covered by the express terms of this Agreement, or for the purpose of adjudicating a breach or determination of the validity of this Agreement, or for the purpose of appealing any decision of an arbitrator, except a proceeding instituted (i) for the purpose of having the award or judgment of an arbitrator entered and enforced or (ii) to seek an injunction or restraining order (but not damages in connection therewith) in circumstances where such relief is available. Unless and only to the extent a limitation of damages is validly prohibited or limited by applicable statute or regulation, no punitive, exemplary or consequential damages may ever be awarded by the arbitrator or anyone else, and each of the parties hereby waives any and all rights to make, claim or recover any such damages. Arbitration Hearing. Within 20 days after the selection of the arbitrator, the parties and its counsel will appear before the arbitrator at a place and time designated by the arbitrator for the purpose of each party making a one hour or less presentation and summary of the case. Thereafter, the arbitrator will set dates and times for additional hearings in accordance with the Rules until the proceeding is concluded. The desire and goal of the parties is, and the arbitrator will be advised that his goal should be, to conduct and conclude the arbitration proceeding as expeditiously as possible. If any party or his counsel fails to appear at any hearing, the arbitrator shall be entitled to reach a decision based on the evidence that has been presented to him by the parties who did appear. 26. Severability and Reformation. If any provision of this Agreement is declared or found to be illegal, unenforceable, or void, in whole or in part, then the parties shall be relieved of all obligations arising under such provision, but only to the extent that it is illegal, unenforceable or void, it being the intent and agreement of the parties that this Agreement shall be deemed amended by modifying such provision to the extent necessary to make it legal and enforceable while preserving its intent or, if that is not possible, by substituting therefor another provision that is legal and enforceable and achieves the same objectives. 27. Written Amendments Provision. No supplement, modification or amendment of this agreement or waiver of any provision of this Agreement shall be binding unless executed in writing by all parties to this Agreement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement (regardless of whether similar), nor shall any such waiver constitute a continuing wavier unless otherwise expressly provided. 28. Actions to Enforce Non-Compete, Confidentiality or Inventions. Employee acknowledges and agrees that the Company and the Company would be irreparably harmed by any violation of Employee's obligations under Sections 11, 12 and 13 hereof and that, in addition to all other rights or remedies available at law or in equity, the Company and the Company will be entitled to injunctive and other equitable relief to prevent or enjoin any such violation. Additionally, both parties agree that irrespective of its agreement to arbitrate, either party may seek to have its rights under Sections 11, 12 or 13 of this agreement enforced by legal or equitable action in a Court of Competent jurisdiction. The provisions of Sections 11, 12 and 13 hereof will survive any termination of this Agreement, in accordance with its terms. 29. Written Consent for Assignment. No party may assign this Agreement or any rights or benefits thereunder without the written consent of the other parties to this Agreement. 30. Choice of Forum. Any action initiated pursuant to paragraph 28 must proceed in a Texas District Court in Collin County, Texas. If such an action cannot proceed in District Court due to jurisdictional limitations, then it shall proceed in any State or County court of competent jurisdiction in Collin County, Texas. EXECUTED as of the date first above written. ADVANCED NEUROMODULATION SYSTEMS, INC. By: /s/ Hugh M. Morrison ---------------------------------- Hugh M. Morrison Chairman of the Board /s/ Christopher G. Chavez -------------------------------------- Christopher G. Chavez EXHIBIT A Annual Bonus In addition to the base salary described in Section 4 of this Agreement, Employee shall be eligible for an annual performance-based cash bonus. Employee's standard bonus percentage would be 60% of his annual base salary, to be earned by meeting certain objectives to be determined by mutual agreement of Employee and the Board of Directors, such that Employee will receive the full 60% bonus amount if all such objectives are fully met. In the event that the Company's performance or Employee's performance exceeds the objectives established by Employee and the Board of Directors, Employee shall be eligible for a bonus in an amount larger than the standard bonus percentage stated above. In the event that Employee's performance falls short of the objectives established by Employee and the Board of Directors, Employee may receive less than the full bonus percentage. EX-10.17 4 d96263ex10-17.txt EMPLOYMENT AGREEMENT - KENNETH G. HAWARI EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered to be effective as of April 1, 2002, by and between Advanced Neuromodulation Systems, Inc. (the "Company" or "ANS") and Kenneth G. Hawari ("Employee"). RECITALS The Company has special expertise in its business that has enabled it to provide unique career opportunities for its employees. The Company's growth depends, to a significant degree, on its possession of more and better information than that available to its competitors concerning a number of matters, including but not limited to, research, systems, development, marketing, management and other information not generally known to others in the Company's industry. To obtain such information and use it successfully, the Company has made significant investments in research, business development, customer satisfaction methods and techniques, business process improvements and other developments in marketing methods and providing services to its customers. This unique and special expertise in pooling this information has enabled the Company to conduct its business successfully and thus provide potential employment opportunities for its employees. The parties acknowledge that Employee has his own valuable knowledge and training in certain of the areas in which the Company conducts its business but that his knowledge will be enhanced by this employment. Employee recognizes that unless the Company imparts to him its special expertise, he would be less effective and of less benefit to the Company. Employee further acknowledges that without the additional knowledge to be imparted to him by the Company, he will be less valuable than would otherwise be the case in its business. Employee understands and acknowledges that a covenant not to compete and a restriction on disclosure of confidential information is essential to the continued growth and stability of the Company's business and to the continuing viability of its business in the event the Employee's employment is terminated as expressly permitted under the terms and limitations of this Agreement. The Employee desires employment as an employee of the Company under the terms and conditions of this Agreement and further desires to be given access to the Company's proprietary information. The Company desires to employ Employee under the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, the parties agree as follows: 1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company employs Employee, and Employee hereby accepts such employment by the Company. 2. Duties of Employee. (a) Employee shall serve in the capacities of General Counsel and Executive Vice President - Corporate Development of ANS, and shall be subject to supervision by the Chief Executive Officer of ANS. In such capacities, Employee shall have all necessary powers to discharge his responsibilities, including general supervision of the legal affairs of the Company and active participation in its corporate development activities. Employee shall have all powers granted by the Bylaws of the Company to a Vice President, and Employee shall report to the Chief Executive Officer of the Company. (b) During the term of this Agreement, and thereafter so long as Employee is employed by the Company, Employee shall devote his full business time and effort to the performance of his duties and responsibilities as an officer of the Company. Notwithstanding the foregoing, Employee may spend reasonable amounts of time on personal civic and charitable activities that do not interfere with the performance of his duties and responsibilities to the Company. In addition, Employee may, subject to prior approval by the Board of Directors of the Company, spend reasonable amounts of time serving on boards of directors for other companies, provided that such service does not, in the sound discretion of the Board of Directors of the Company, constitute or create a conflict of interest. (c) Employee shall observe and comply with the written rules and regulations of the Company respecting its business and shall carry out and perform the directives and policies of the Company as they may from time to time be stated to Employee in writing by the Chief Executive Officer or the Chairman of the Board of Directors. (d) Employee shall maintain accurate business records as may from time to time be required by the Company. Such records may be examined by the Company, at all reasonable times after written request is delivered to Employee. Any such document shall be delivered to the Company promptly upon request. (e) Employee agrees not to solicit or receive any income or other compensation from any third party in connection with his employment with the Company. Employee agrees, upon written request by the Company, to render an accounting of all transactions relating to his business endeavors during the term of this employment hereunder. 3. Term. The term of this Agreement (the "Term") shall commence effective as of April 1, 2002 (the "Effective Date") and continue until the third anniversary of the Effective Date, unless Employee's employment is earlier terminated in accordance with Section 10 of this Agreement; provided, however, that, on the third and subsequent anniversary dates of this Agreement or any extension, this Agreement will automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversary date, the Company shall have given written notice to the Employee that it does not wish to extend the Term. Upon expiration of the term of this Agreement, Employee shall remain an "at will" employee of the Company but shall still be subject to and bound by the terms of this Agreement. 4. Salary. Commencing on the Effective Date, the Company will pay Employee a minimum base annual salary during the term of this Agreement for his services as an officer of $200,000.00, which shall be payable in accordance with the Company's standard payroll practice, but not less than monthly. Such base salary will not include any benefits made available to Employee or any contributions or payments made on his behalf pursuant to any employee benefit plan or program of the Company, including any health, disability or life insurance plan or program, 401-K plan, cash bonus plan, stock incentive plan, retirement plan or similar plan or program of any nature. The Company shall review Employee's salary on an annual basis, and shall increase the annual salary of Employee from time to time as may be warranted in accordance with the Company's compensation policies. 5. Bonus Compensation. The Company shall pay Employee an annual cash bonus in accordance with Company policy established by the Board from time to time, as described in Exhibit "A" to this Agreement. 6. Stock Options: The Company will grant Employee non-transferable stock options to purchase shares of the Company Common Stock in number and on such terms and conditions as the Company's Compensation Committee determines. 7. Executive Allowances and other Fringe Benefits: Employee will be entitled to an $800 per month car allowance. In addition, the Company will provide Employee a separate annual executive allowance of $6,000 to cover the cost of Employee's personal tax planning and country club dues. 8. Other Employee Benefits. During the term of this Agreement, the Company will provide Employee with all benefits made available from time to time by the Company to its executive officers and /or other employees, such benefits to be in accordance with the Company's policies, except that if Employee's employment with the Company is terminated, Employee's cash severance payments shall be in accordance with Section 10 of this Agreement, in lieu of cash severance payments provided by the policies of the Company. Specifically, Employee's benefits shall include participation in medical, dental and vision plans or programs (providing coverage for Employee's immediate family); disability insurance; 401-K plan; life insurance payable to Employee's designated beneficiary; executive car allowance; and paid vacation (up to four weeks). In the event that Employee's employment with the Company is terminated, the Company agrees to pay in full all premiums associated with Employee's election to continue health benefits provided hereunder for a period of two years following the date of termination. 9. Reimbursement of Expenses. The Company shall reimburse Employee for all expenses actually and reasonably incurred by him in the business interests of the Company. Such reimbursement shall be made to Employee upon appropriate documentation of such expenditures in accordance with the Company's written policies. 10. Early Termination. It is the desire and expectation of each party that the employer-employee relationship shall continue for the full term specified herein and be a pleasant and rewarding experience for the parties hereto. The Company shall, however, be entitled to terminate Employee's employment at any time before or after the Effective Date with or without Cause (as defined in this Section 10). Termination shall require approval by majority vote of the board of directors of the Company. If Employee's employment is terminated without Cause (as defined in this Section 10), the Company shall pay Employee severance compensation pursuant to the following formulas: (a) In the event of a termination without Cause occurring prior to the first anniversary of this Agreement, Employee shall receive a lump sum amount equal to 299% of the sum of (A) the highest annual salary of Employee in effect at any time during the Term or the salary of Employee in effect immediately prior to the termination without Cause, whichever is the larger amount, plus (B) the amount of the bonus or incentive compensation targeted for payment to the Employee for the fiscal year during which the termination without Cause occurs. (b) In the event of a termination without Cause occurring at any time after the first anniversary of this Agreement, Employee will receive 200% of the sum of the amounts referred to in Section 10(a)(A) and (B). (c) In the event of a termination without Cause at any time during the term of this Agreement, Employee shall also receive a job search lump sum payment of $25,000. (d) However, if the termination without Cause is the result of a "Change in Control" as that term is defined in the Special Termination Agreement between the Company and the Employee dated as of April 1, 2002, then Employee will not be entitled to any payments under the preceding sub-paragraphs (a) (b) and/or (c), and the Company's severance compensation obligations to Employee shall be governed by the terms of that Special Termination Agreement. If Employee dies, is unable to perform his duties and responsibilities as a result of disability that continues for 90 consecutive days or more ("Disability"), voluntarily resigns from the Company, or is terminated for "Cause," the Company shall pay Employee (or his estate, executor or legal representative, as appropriate) any salary and bonus that has accrued to the date employment ceases, and the Company's obligations to pay additional salary or cash compensation or benefits shall terminate as of such date. "Cause," for the purpose of this Agreement, shall mean the occurrence of any of the following events: (a) Performance by Employee of illegal or fraudulent acts, criminal conduct or willful misconduct relating to the activities of the Company; (b) A conviction of or nolo contendere plea by Employee for any criminal acts involving moral turpitude having or reasonably likely to have a material adverse effect upon the Company, including, without limitation, upon its profitability, reputation or goodwill; (c) Willful or grossly negligent failure by Employee to perform his duties in a manner consistent with the Company's best interests; (d) Willful refusal by Employee to carry out reasonable written instructions of the Chief Executive Officer or the Company's Board of Directors not inconsistent with the provisions of this Agreement; (e) Violation by Employee of any of Employee's covenants and agreements contained in Sections 11, 12 or 13 of this Agreement; or (f) Any other material breach of Employee's obligations hereunder, which he fails to cure within thirty days after receiving written notice thereof. 11. Non-Competition Agreement. (a) Employee understands and the Company promises that during the course of his employment by the Company, Employee will have access to and the benefit of the information referred to in the Recitals above, specifically Trade Secrets and Confidential Information, and will represent the Company and develop contacts and relationships with other persons and entities, including but not limited to customers, potential customers and other employees of such entities. To protect the Company's interest in preserving its Trade Secrets, Confidential and other protected information and in the Business Good Will generated by new contacts and relationships, and as a direct inducement and consideration for the Company's promises to provide new Trade Secrets, new Confidential Information and new contacts, the Employee agrees and covenants to the duties and obligations created by this covenant not to compete. (b) The Employee agrees that all duties assumed by this covenant not to compete include any actions taken by the Employee directly or indirectly, either as an individual or as an employee, partner, officer, director, shareholder, advisor, or consultant or in any other capacity whatsoever, of any person (other than ownership of less than 1% of the issued and outstanding voting securities of a publicly held corporation). (c) Employee covenants he: (1) will not recruit, hire, assist others in recruiting or hiring, discuss employment with, or refer to others for employment any person who is, or within the 12 month period immediately preceding the date of any such activity was, an employee of either Company or any of its Affiliates; (2) Employee agrees that during the term of his employment with the Company and for a period of two years thereafter, without regard to the party terminating such employment or the reason for termination, if any, Employee will not, without prior written approval by the Board of Directors for the Company, in the United States or in any foreign country in which either Company is then marketing its products or services, directly or indirectly engage in or own or control an interest in (except as to those investments held at the effective date of this agreement or as a passive investor in publicly held Company, i.e., Employee and Employee's relatives do not own of record, or beneficially, an aggregate of more than one percent of any class of outstanding securities) or act as an officer, director, or employee of, or consultant or adviser to, any firm, corporation, institution or entity, directly or indirectly in competition with or engaged in a business substantially similar to that of Employer, including the research, development, manufacture, sale or marketing of products, devices, instruments, methods or techniques (or any related services or activities) similar to any products, devices, instruments, methods or techniques which either Company is engaged in the research of, development of, manufacture, selling, or marketing, or has under consideration to do the same (whether or not such products, devices, instruments, methods or techniques or the technology related thereto were obtained from Employee), during the term of the Employee's employment. This provision 11(c)(2) is not intended to, and shall not be construed in such a manner as to, prevent Employee from securing gainful employment within the health care industry except with those entities whose products, devices, instruments, methods or techniques (or any related services or activities) substantially compete with those of the Company. (d) It is understood and agreed that the scope of the foregoing covenant is reasonable as to time, scope and geography and is necessary to protect the legitimate business interests of the Company, in the Confidential Information and Trade Secrets the Company have promised to share with Employee. It is further agreed that such covenant will be regarded as divisible and will be operative as to time, area and persons to the extent that it may be so operative, and if any part of such covenant is declared invalid, unenforceable, or void as to time, area or persons, the validity and enforceability of the remainder will not be affected. (e) If Employee violates the restrictive covenants of this Section 11 and the Company brings legal action for injunctive or other relief, neither Company shall be deprived of the benefit of the full period of the restrictive covenant, as a result of the time involved in obtaining the relief. Accordingly, to the extent allowed by law, the Employee agrees that the restricted period following the term of employment shall have a duration of one year, and the regularly scheduled expiration date of such covenant shall be extended by the same amount of time that Employee is determined to have violated such covenant. 12. Confidentiality. Employee acknowledges that he has learned and will learn Confidential Information (as defined herein) relating to the business conducted and to be conducted by the Company. The Company promises to provide all needed Confidential Information to the Employee. Employee agrees that he will not during the term of employment with the Company or at any time after the termination of such employment, without regard to the party terminating such employment, except in the normal and proper course of his duties hereunder, disclose or use or authorize any third party to disclose or use any such Confidential Information, without prior written approval of the Company. As used in this Section 12, "Confidential Information" shall mean information disclosed to or known to Employee as a direct or indirect consequence of or through his employment with the Company, about the Company's business, methods, business plans Company, operations, products, processes, and services, including, but not limited to, information relating to research, development, inventions, recommendations, programs, systems, and systems analyses, flow charts, finances, and financial statements, marketing plans, Company and strategies, merchandising, pricing strategies, merchandise sources, client sources, system designs, procedure manuals, automated data programs, financing methods, financial projections, terms and conditions of arrangements of any business, computer software, terms and conditions of business arrangements with customers or suppliers, reports, personnel procedures, supply and services resources, names and addresses of clients, the Company's contacts, names of professional advisors, and all other information pertaining to customers and suppliers, including, but not limited to assets, business interests, personal data and all other information pertaining to the Company, clients or suppliers whatsoever, including all accompanying documentation therefor. All information disclosed to Employee, or to which Employee has access during the period of his employment, for which there is any reasonable basis to be believed is, or which appears to be treated by the Company as Confidential Information, shall be presumed to be Confidential Information hereunder. Confidential Information shall not, however, include information that (i) is publicly known or becomes publicly known through no fault of Employee, or (ii) is generally or readily obtainable by the public, or (iii) constitutes general skills, knowledge and experience acquired by Employee before and/or during his employment with the Company. Employee agrees that all documents of any nature pertaining to activities of the Company or its Affiliates, or that include any Confidential Information, in his possession now or at any time during the term of his employment, including without limitation, memoranda, notebooks, notes, data sheets, records and computer programs, are and shall be the property of such entity and that all copies thereof shall be surrendered to the appropriate entity upon termination of his employment. 13. Inventions; Developments. Employee agrees to notify the Company of any discovery, invention, innovation, or improvement which is related to the Business or to the business of any customer or supplier (collectively called "Developments") conceived or developed by Employee during the term of the Employee's employment. Developments shall include, without limitation, developments in computer software, logical systems, algorithms, and any or all other intellectual properties related to the Business. All Developments, including but not limited to all written documents pertaining thereto, shall be the exclusive property of the Company or the Company, as the case may be, and shall be considered Confidential Information subject to the terms of this Agreement. Employee agrees that when appropriate, and upon written request of the Company or the Company, the Employee will acknowledge that Developments are "works for hire" and will file for patents or copyrights with regard to any or all Developments and will sign documentation necessary to evidence ownership of Developments in the Company. 14. Exit Interview. To insure a clear understanding of this Agreement, including but not limited to the protection of the Company's business interests, Employee agrees, at no additional expense to the Company, to engage in an exit interview with the Company prior to Employee's departure from the Company at a time and place designated by the Company. In the event that the exit interview takes place in a location outside of the Dallas/Fort Worth metropolitan area, the Company agrees to reimburse Employee for reasonable expenses associated with his travel to and from said exit interview. 15. Right of Setoff. the Company shall be entitled, at its option and not in lieu of any other remedies to which they may be entitled, to set off any amounts due Employee or any Affiliate of Employee against any amount due and payable by Employee or any Affiliate of Employee to the Company ("Set-Offs") pursuant to this Agreement or otherwise, provided that the Set-Offs are set forth in detail in writing with supporting evidence to substantiate each Set-Off. 16. Notice Provision. Any notice, demand or request required or permitted to be given or made under this Agreement shall be in writing and shall be deemed given or made when delivered in person, when sent by United States registered or certified mail, or postage prepaid, or when telecopied to a party at its address or telecopy number specified below: If to the Company: Advanced Neuromodulation Systems, Inc. 6501 Windcrest Drive, Suite 100 Plano, Texas 75024 Telecopy number: (972) 309-8150 If to Employee: Kenneth G. Hawari 3605 Edgestone Plano, Texas 75093 Telecopy number: 972-378-0661 The parties to this Agreement may change its addresses for notice in the manner provided above. 17. Headings Non-binding. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions hereof. 18. Words to have Contextual Meaning. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Additionally, the words "and" and "or" shall be given its contextual meaning and not be interpreted blindly as being solely conjunctive or disjunctive, as the case may be. 19. Execution of Agreement. The parties shall execute all documents, provide all information and take or refrain from taking all actions as may be reasonably necessary or appropriate to achieve the purposes of this Agreement. 20. Partial Assignment Clause. This Agreement shall be binding upon and inure to the benefit of the parties hereto, its representatives and permitted successors and assigns. Employee's duties hereunder are personal services and are not assignable. Except for the provisions of Sections 11, 12 and 13 of this Agreement, which are intended to benefit the Company and the Company's Affiliates as third party beneficiaries, or as otherwise expressly provided in this Agreement, nothing in this Agreement, express or implied, is intended to confer upon any person other than the parties to this Agreement, its respective representatives and permitted successors and assigns, any rights, remedies or obligations under or by reason of this Agreement. 21. Limitation of Benefits Clause. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the parties, except as otherwise expressly provided herein. 22. Non-waiver Provision. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. 23. Multiple Originals. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. 24. CHOICE OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW. 25. Subject Claims; Initiation of Binding Arbitration. The matters, claims, rights, and obligations subject to these arbitration provisions include all rights, claims and obligations arising out of or relating to this Agreement or to the employee's employment and/or its termination, including, without limitation, any and all claims, rights or causes of action which may ever arise or be asserted under any federal, state, local or foreign statutory, regulatory or common law, and including, without limitation, claims of discrimination, wrongful discharge or termination, breach of contract, tort (such as intentional infliction of emotional distress, libel, slander, wrongful invasion of privacy or personal injury), workers compensation or unemployment compensation. All of the foregoing types of matters, claims, rights and obligations subject to these arbitration provisions are herein called "Subject Claims". In the event of a dispute relating to any Subject Claim, then, upon notice by any party to the other parties (an "Arbitration Notice") and to American Arbitration Association ("AAA"), Dallas, the controversy or dispute shall be submitted to a sole arbitrator who is independent and impartial, for binding arbitration in Dallas, Texas, in accordance with AAA's National Rules for the Resolution of Employment Disputes (the "Rules") as modified or supplemented hereby. The parties agree that they will faithfully observe this agreement and the Rules and that they will abide by and perform any award rendered by the arbitrator. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 116 (or by the same principles enunciated by such Act in the event it may not be technically applicable). The award or judgment of the arbitrator shall be final and binding on all parties and judgment upon the award or judgment of the arbitrator may be entered and enforced by any court having jurisdiction. If any party becomes the subject of a bankruptcy, receivership or other similar proceeding under the laws of the United States of America, any state or commonwealth or any other nation or political subdivision thereof, then, to the extent permitted or not prohibited by applicable law, any factual or substantive legal issues arising in or during the pendency of any such proceeding shall be subject to all of the foregoing mandatory mediation and arbitration provisions and shall be resolved in accordance therewith. The agreements contained herein have been given for valuable consideration, are coupled with an interest and are not intended to be executory contracts. The fees and expenses of the arbitrator will be shared equitably (as determined by the arbitrator) by all parties engaged in the dispute or controversy. Selection of Arbitrator. Promptly after the Arbitration Notice is given, AAA will select five possible arbitrators, to whom AAA will give the identities of the parties and the general nature of the controversy. If any of those arbitrators disqualifies himself or declines to serve, AAA shall continue to designate potential arbitrators until the parties have five to select from. After the panel of five potential arbitrators has been completed, a two-page summary of the background of each of the potential arbitrators will be given to each of the parties, and the parties will have a period of 10 days after receiving the summaries in which to attempt to agree upon the arbitrator to conduct the arbitration. If the parties are unable to agree upon an arbitrator, then one of the parties shall notify AAA and the other party, and AAA will notify each party that it has five days from the AAA notice to strike two names from the list and advise AAA of the two names stricken. After expiration of the strike period, if all but one candidate has been stricken, the remaining one will be the arbitrator, but, if two or more have not been stricken, AAA shall select the arbitrator from one of those not stricken. The decision of AAA with respect to the selection of the arbitrator will be final and binding in such case. No Litigation; Damages Limitation. Unless and only to the extent mandatory arbitration is validly prohibited or limited by applicable statute or regulation, no litigation or other proceeding may ever be instituted at any time in any court or before any administrative agency or body for the purpose of adjudicating, interpreting or enforcing any of the rights, duties, liabilities or obligations of the parties hereto or any rights, duties, liabilities or obligations relating to any Subject Claim, whether or not covered by the express terms of this Agreement, or for the purpose of adjudicating a breach or determination of the validity of this Agreement, or for the purpose of appealing any decision of an arbitrator, except a proceeding instituted (i) for the purpose of having the award or judgment of an arbitrator entered and enforced or (ii) to seek an injunction or restraining order (but not damages in connection therewith) in circumstances where such relief is available. Unless and only to the extent a limitation of damages is validly prohibited or limited by applicable statute or regulation, no punitive, exemplary or consequential damages may ever be awarded by the arbitrator or anyone else, and each of the parties hereby waives any and all rights to make, claim or recover any such damages. Arbitration Hearing. Within 20 days after the selection of the arbitrator, the parties and its counsel will appear before the arbitrator at a place and time designated by the arbitrator for the purpose of each party making a one hour or less presentation and summary of the case. Thereafter, the arbitrator will set dates and times for additional hearings in accordance with the Rules until the proceeding is concluded. The desire and goal of the parties is, and the arbitrator will be advised that his goal should be, to conduct and conclude the arbitration proceeding as expeditiously as possible. If any party or his counsel fails to appear at any hearing, the arbitrator shall be entitled to reach a decision based on the evidence that has been presented to him by the parties who did appear. 26. Severability and Reformation. If any provision of this Agreement is declared or found to be illegal, unenforceable, or void, in whole or in part, then the parties shall be relieved of all obligations arising under such provision, but only to the extent that it is illegal, unenforceable or void, it being the intent and agreement of the parties that this Agreement shall be deemed amended by modifying such provision to the extent necessary to make it legal and enforceable while preserving its intent or, if that is not possible, by substituting therefor another provision that is legal and enforceable and achieves the same objectives. 27. Written Amendments Provision. No supplement, modification or amendment of this agreement or waiver of any provision of this Agreement shall be binding unless executed in writing by all parties to this Agreement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement (regardless of whether similar), nor shall any such waiver constitute a continuing wavier unless otherwise expressly provided. 28. Actions to Enforce Non-Compete, Confidentiality or Inventions. Employee acknowledges and agrees that the Company and the Company would be irreparably harmed by any violation of Employee's obligations under Sections 11, 12 and 13 hereof and that, in addition to all other rights or remedies available at law or in equity, the Company and the Company will be entitled to injunctive and other equitable relief to prevent or enjoin any such violation. Additionally, both parties agree that irrespective of its agreement to arbitrate, either party may seek to have its rights under Sections 11, 12 or 13 of this agreement enforced by legal or equitable action in a Court of Competent jurisdiction. The provisions of Sections 11, 12 and 13 hereof will survive any termination of this Agreement, in accordance with its terms. 29. Written Consent for Assignment. No party may assign this Agreement or any rights or benefits thereunder without the written consent of the other parties to this Agreement. 30. Choice of Forum. Any action initiated pursuant to paragraph 28 must proceed in a Texas District Court in Collin County, Texas. If such an action cannot proceed in District Court due to jurisdictional limitations, then it shall proceed in any State or County court of competent jurisdiction in Collin County, Texas. EXECUTED as of the date first above written. ADVANCED NEUROMODULATION SYSTEMS, INC. By: /s/ Christopher Chavez ---------------------------------- Christopher Chavez Chief Executive Officer /s/ Kenneth G. Hawari -------------------------------------- Kenneth G. Hawari EXHIBIT A Annual Bonus In addition to the base salary described in Section 4 of this Agreement, Employee shall be eligible for an annual performance-based cash bonus. Employee's standard bonus percentage is 50% of his annual base salary, to be earned by satisfactorily performing his duties. Employee will receive the full 50% bonus amount if his duties are performed satisfactorily. In the event that Employee's performance exceeds this standard, Employee may be considered for a bonus in an amount larger than the standard bonus percentage stated above. In the event that Employee's performance falls short of this standard, Employee may receive less than the full bonus percentage. In addition, to the extent that other executive vice presidents and vice presidents of the Company earn bonuses under the Company's Bonus Plan for Vice Presidents for 1) net revenues exceeding 100% of plan, and/or 2) earnings from operations exceeding 100% of plan, Employee will earn a commensurate bonus. For calendar year 2002, reference is made to the Advanced Neuromodulation Systems 2002 Bonus Plan - Corporate Vice Presidents. EX-10.18 5 d96263ex10-18.txt SPECIAL TERMINATION AGREEMENT - CHRISTOPHER CHAVEZ EXHIBIT 10.18 SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into to be effective as of April 1, 2002, by and between Advanced Neuromodulation Systems, Inc., a Texas corporation (the "Company"), and Christopher G. Chavez (the "Executive") (together, referred to as the "parties"). The Executive is currently serving as the Company's President and Chief Executive Officer. The Executive possesses an intimate knowledge of the business and affairs of the Company, its policies, methods, personnel and plans for the future and has acquired contacts of considerable value to the Company. The Board of Directors of the Company (the "Board") recognizes that the Executive's contribution to the growth and success of the Company has been substantial and wishes to offer an inducement to the Executive to remain in the employ of the Company. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Term. The term of this Agreement shall continue until the earlier of (i) the expiration of the third anniversary of this Agreement, (ii) the Executive's death, or (iii) the Executive's earlier voluntary retirement; provided, however, that, on each anniversary date of this Agreement or any extension, this Agreement, the Term and the periods referenced in Section 3 shall automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversary date, the Company shall have given written notice to the Executive that it does not wish to have the term extended. 2. Definitions. (a) Acquiring Person: An "Acquiring Person" shall mean any person (as defined in Section 2(d)(iv) of this Agreement) that, together with all Affiliates and Associates of such person, is or becomes the beneficial owner of 50% or more of the outstanding Common Stock. The term "Acquiring Person" shall not include the Company, any subsidiary of the Company, any employee benefit plan of the Company or any subsidiary of the Company, or any person holding Common Stock for or pursuant to the terms of any such plan. For the purposes of this Agreement, a person who becomes an Acquiring Person by acquiring beneficial ownership of 50% or more of the Common Stock at any time after the date of this Agreement shall continue to be an Acquiring Person whether or not such person continues to be the beneficial owner of 50% or more of the outstanding Common Stock. (b) Affiliate and Associate. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act") in effect on the date of this Agreement. (c) Change in Control. A "Change in Control" of the Company shall have occurred if at any time during the term of this Agreement any of the following events shall occur: (i) any consolidation, merger or other reorganization of the Company in which the Company is merged, consolidated or reorganized into or with another corporation or other legal person or pursuant to which shares of the Company's stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger own more than 50% of the common stock of the surviving corporation or its ultimate parent immediately after the merger; (ii) any sale, lease, exchange or other transfer (or in one transaction or a series of related transactions) of all or substantially all of the assets of the Company and as a result of such transaction the holders of the Company's common stock immediately prior thereto own less than 50% of the common stock of such transferee or its ultimate parent immediately after such transaction; (iii) any liquidation or dissolution of the Company or any approval by the stockholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; (iv) any person (including any "person" as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), has become an Acquiring Person; (v) if at any time, the Continuing Directors then serving on the Board cease for any reason to constitute at least a majority thereof; (vi) any occurrence that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A or any successor rule or regulation promulgated under the Exchange Act; or (vii) such other events that cause a change in control of the Company; provided, however, that a Change in Control of the Company shall not be deemed to have occurred as the result of any transaction having one or more of the foregoing effects if such transaction is proposed by, and includes a significant equity participation (i.e., an aggregate of at least 50% of the then outstanding common equity securities of the Company immediately after such transaction which are entitled to vote to elect any class of Directors) of, the Executive officers of the Company as constituted immediately prior to the occurrence of such transaction or any Company employee stock ownership plan or pension plan. (d) Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) Continuing Director. A "Continuing Director" shall mean a Director of the Company who (i) is not an Acquiring Person, an Affiliate or Associate, a representative of an Acquiring Person or nominated for election by an Acquiring Person, and (ii) was either a member of the Board of Directors of the Company on the date of this Agreement or subsequently became a Director of the Company and whose initial election or initial nomination for election by the Company's stockholders was approved by at least two-thirds of the Continuing Directors then on the Board of Directors of the Company. (f) Severance Compensation. The "Severance Compensation" shall be a lump sum amount equal to 299% of the sum of (A) the highest annual salary of the Executive in effect at any time during the Term of this Agreement, or the salary of the Executive in effect immediately prior to the Change in Control, whichever is the larger amount, plus (B) the amount of the bonus or incentive compensation targeted for payment to the Executive for the fiscal year during which the Change in Control occurs. (g) Termination Date. The "Termination Date" shall be the date upon which the Change in Control occurs. 3. Rights of Executive Upon Change in Control. (a) Subject to paragraph 5 below, the Company shall pay the Severance Compensation to the Executive within ten days following the Termination Date in lieu of compensation to the Executive for periods subsequent to the Termination Date, but without affecting the other rights of the Executive at law or in equity. In addition, the Company shall pay the Executive a job search lump sum payment of $25,000 within ten days following the Termination Date. (b) If the amounts due to the Executive in connection with a Change in Control under this Agreement (considering amounts due under other agreements, plans or arrangements) would result in an "excess parachute payment" within the meaning of Section 280G of the Code, then the Company shall pay to Executive an additional amount of cash (a "Gross-Up Payment") equal to the amount necessary to cause the amount of the aggregate after-tax compensation and benefits received by the Executive here-under (after payment of the excise tax under Section 4999 of the Code with respect to any excess parachute payment, and any state and federal income and employment taxes with respect to the Gross-Up Payment) to equal the aggregate after-tax compensation and benefits the Executive would have received if Sections 280G and 4999 of the Code had not been enacted. A nationally recognized public accounting firm selected by the Company shall initially determine, at the Company's expense, whether an "excess parachute payment" will be made to Executive, and if so, the amount of the Gross-Up Payment. In the event of a subsequent claim by the Internal Revenue Service that, if successful, would result in Executive's liability for an excise tax under Section 4999 of the Code in excess of the amount covered by any previous Gross-Up Payment, the Executive shall promptly notify the Company in writing of such claim. If the Company elects to contest such claim, it shall so notify the Executive and shall bear and pay directly or indirectly all costs and expenses of contesting the claim (including additional interest and penalties incurred in connection with such action), and shall indemnify and hold Executive harmless, on an after-tax basis, for any excise, income, or employment tax, including interest and penalties with respect thereto, imposed as a result of the Company's payment of costs of the contest. Executive shall cooperate fully with the Company in the defense of any such IRS claim. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. In the event the IRS claim is finally determined to result in the imposition of additional excise tax under Section 280G of the Code on Executive, the Company shall make an additional Gross-Up Payment with respect to any such additional excise tax. (c) The payment of Severance Compensation by the Company to the Executive shall not affect any other rights and benefits of the Executive provided by the Company, whether currently or in the future, prior to the Termination Date, which rights shall be governed by the terms thereof. The Company shall provide to the Executive through his Termination Date group insurance benefits, retirement benefits, and other benefits substantially similar to those which the Executive was receiving or entitled to receive immediately prior to the Change of Control Date, subject to any changes required to comply with changes in the law, and subject to changes in carriers in the ordinary course of business. (d) The Company shall have no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment or benefit to or for the benefit of the Executive provided for in this Agreement. (e) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof on demand at an annualized rate of interest equal to 120% of the then applicable Federal short term rate determined under Section 1274(d) of the Code, compounded semi-annually (but in no event shall such interest exceed the highest lawful rate). 4. No Mitigation Required. In the event that the Company is required to pay the Severance Compensation under this Agreement, the Executive shall not be obligated to mitigate his damages nor the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and the acceptance of employment elsewhere after termination shall in no way reduce the amount of Severance Compensation payable hereunder. 5. Release. In consideration for the protection and benefits provided for under this Agreement, at the Company's request, Employee hereby agrees to execute a release of all claims against the Company or any of its affiliates, directors, officers, employees, agents and benefit plans, in form and substance satisfactory to the Company. Payment of the benefits under Section 3(a) is expressly conditioned on Employee's execution of such release if the Company so requests. 6. Successors: Binding Agreement. (a) The Company will require any successor and any corporation or other legal person (including any "person" as defined in Section 2(d)(iv) of this Agreement) which is in control of such successor (as "control" is defined in Regulation 230.405 or any successor rule or regulation promulgated under the Securities Act of 1933, as amended) to all or substantially all of the business and/or assets of the Company (by purchase, merger, consolidation or otherwise), by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement by the Company. Notwithstanding the foregoing, any such assumption shall not, in any way, affect or limit the liability of the Company under the terms of this Agreement or release the Company from any obligation hereunder. As used in this Agreement, "Company" shall mean the Company and any successor to its business and/or all or part of its assets, which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive here under shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 7. Notice. The Company shall give written notice to Executive within thirty days after any Change in Control. Failure to give such notice shall constitute a material breach of this Agreement. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or received after being mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Christopher G. Chavez 2900 Cedar Ridge Dr. McKinney, Texas 75070 If to the Company: Advanced Neuromodulation Systems, Inc. 6501 Windcrest Drive, Suite 100 Plano, Texas 75024 or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of chance of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, unless specifically referred to herein with respect to the subject matter of this Agreement have been made be either party which are not set forth expressly in this agreement. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 9. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Employment Rights. Nothing implied in this Agreement shall create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to any Change in Control. Notwithstanding any other provision hereof to the contrary and subject to the terms of the Employment Agreement between the Company and the Executive dated as of April 1, 2002, the Executive may, at any time during the Term of this Agreement, upon the giving of 30 days prior written notice, terminate his employment hereunder. If this Agreement or the employment of the Executive is terminated under circumstances in which the Executive is not entitled to any Severance Compensation, the Executive shall have no further obligation or liability to the Company hereunder or otherwise with respect to his prior or any future employment by the Company. 12. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling; provided, however, that no withholding pursuant to Section 4999 of the Code shall be made unless, in the opinion of tax counsel selected by the Company's independent accountants and acceptable to the Executive, such withholding relates to payments which result in the imposition of an excise tax pursuant to Section 4999 of the Code. 13. Legal Fees and Expenses. It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive in this Agreement. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under the Agreement or in the event that the Company or any other person takes any action to declare the Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent the Executive in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company shall pay and be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by the Executive as a result of the Company's failure to perform this Agreement or any provision thereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof, up to $100,000 in the aggregate. 14. Rights and Remedies Cumulative. No right or remedy conferred upon or reserved to the Executive is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy under this Agreement, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year first above written. ADVANCED NEUROMODULATION SYSTEMS, INC.: By: /s/ F. Robert Merrill ---------------------------------- F. Robert Merrill Its: Executive Vice President and Chief Financial Officer EXECUTIVE: By: /s/ Christopher G. Chavez ----------------------------------- Christopher G. Chavez EX-10.19 6 d96263ex10-19.txt SPECIAL TERMINATION AGREEMENT - KENNETH G. HAWARI EXHIBIT 10.19 SPECIAL TERMINATION AGREEMENT THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into to be effective as of April 1, 2002, by and between Advanced Neuromodulation Systems, Inc., a Texas corporation (the "Company"), and Kenneth G. Hawari (the "Executive") (together, referred to as the "parties"). The Executive is currently serving as the Company's General Counsel and Executive Vice President - Corporate Development. The Executive possesses an intimate knowledge of the business and affairs of the Company, its policies, methods, personnel and plans for the future and has acquired contacts of considerable value to the Company. The Board of Directors of the Company (the "Board") recognizes that the Executive's contribution to the growth and success of the Company has been substantial and wishes to offer an inducement to the Executive to remain in the employ of the Company. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Term. The term of this Agreement shall continue until the earlier of (i) the expiration of the third anniversary of this Agreement, (ii) the Executive's death, or (iii) the Executive's earlier voluntary retirement; provided, however, that, on each anniversary date of this Agreement or any extension, this Agreement, the Term and the periods referenced in Section 3 shall automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversary date, the Company shall have given written notice to the Executive that it does not wish to have the term extended. 2. Definitions. (a) Acquiring Person: An "Acquiring Person" shall mean any person (as defined in Section 2(d)(iv) of this Agreement) that, together with all Affiliates and Associates of such person, is or becomes the beneficial owner of 50% or more of the outstanding Common Stock. The term "Acquiring Person" shall not include the Company, any subsidiary of the Company, any employee benefit plan of the Company or any subsidiary of the Company, or any person holding Common Stock for or pursuant to the terms of any such plan. For the purposes of this Agreement, a person who becomes an Acquiring Person by acquiring beneficial ownership of 50% or more of the Common Stock at any time after the date of this Agreement shall continue to be an Acquiring Person whether or not such person continues to be the beneficial owner of 50% or more of the outstanding Common Stock. (b) Affiliate and Associate. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act") in effect on the date of this Agreement. (c) Change in Control. A "Change in Control" of the Company shall have occurred if at any time during the term of this Agreement any of the following events shall occur: (i) any consolidation, merger or other reorganization of the Company in which the Company is merged, consolidated or reorganized into or with another corporation or other legal person or pursuant to which shares of the Company's stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger own more than 50% of the common stock of the surviving corporation or its ultimate parent immediately after the merger; (ii) any sale, lease, exchange or other transfer (or in one transaction or a series of related transactions) of all or substantially all of the assets of the Company and as a result of such transaction the holders of the Company's common stock immediately prior thereto own less than 50% of the common stock of such transferee or its ultimate parent immediately after such transaction; (iii) any liquidation or dissolution of the Company or any approval by the stockholders of the Company of any plan or proposal for the liquidation or dissolution of the Company; (iv) any person (including any "person" as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), has become an Acquiring Person; (v) if at any time, the Continuing Directors then serving on the Board cease for any reason to constitute at least a majority thereof; (vi) any occurrence that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A or any successor rule or regulation promulgated under the Exchange Act; or (vii) such other events that cause a change in control of the Company; provided, however, that a Change in Control of the Company shall not be deemed to have occurred as the result of any transaction having one or more of the foregoing effects if such transaction is proposed by, and includes a significant equity participation (i.e., an aggregate of at least 50% of the then outstanding common equity securities of the Company immediately after such transaction which are entitled to vote to elect any class of Directors) of, the Executive officers of the Company as constituted immediately prior to the occurrence of such transaction or any Company employee stock ownership plan or pension plan. (d) Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) Continuing Director. A "Continuing Director" shall mean a Director of the Company who (i) is not an Acquiring Person, an Affiliate or Associate, a representative of an Acquiring Person or nominated for election by an Acquiring Person, and (ii) was either a member of the Board of Directors of the Company on the date of this Agreement or subsequently became a Director of the Company and whose initial election or initial nomination for election by the Company's stockholders was approved by at least two-thirds of the Continuing Directors then on the Board of Directors of the Company. (f) Severance Compensation. The "Severance Compensation" shall be a lump sum amount equal to 299% of the sum of (A) the highest annual salary of the Executive in effect at any time during the Term of this Agreement, or the salary of the Executive in effect immediately prior to the Change in Control, whichever is the larger amount, plus (B) the amount of the bonus or incentive compensation targeted for payment to the Executive for the fiscal year during which the Change in Control occurs. (g) Termination Date. The "Termination Date" shall be the date upon which the Change in Control occurs. 3. Rights of Executive Upon Change in Control. (a) Subject to paragraph 5 below, the Company shall pay the Severance Compensation to the Executive within ten days following the Termination Date in lieu of compensation to the Executive for periods subsequent to the Termination Date, but without affecting the other rights of the Executive at law or in equity. In addition, the Company shall pay the Executive a job search lump sum payment of $25,000 within ten days following the Termination Date. (c) If the amounts due to the Executive in connection with a Change in Control under this Agreement (considering amounts due under other agreements, plans or arrangements) would result in an "excess parachute payment" within the meaning of Section 280G of the Code, then the Company shall pay to Executive an additional amount of cash (a "Gross-Up Payment") equal to the amount necessary to cause the amount of the aggregate after-tax compensation and benefits received by the Executive here-under (after payment of the excise tax under Section 4999 of the Code with respect to any excess parachute payment, and any state and federal income and employment taxes with respect to the Gross-Up Payment) to equal the aggregate after-tax compensation and benefits the Executive would have received if Sections 280G and 4999 of the Code had not been enacted. A nationally recognized public accounting firm selected by the Company shall initially determine, at the Company's expense, whether an "excess parachute payment" will be made to Executive, and if so, the amount of the Gross-Up Payment. In the event of a subsequent claim by the Internal Revenue Service that, if successful, would result in Executive's liability for an excise tax under Section 4999 of the Code in excess of the amount covered by any previous Gross-Up Payment, the Executive shall promptly notify the Company in writing of such claim. If the Company elects to contest such claim, it shall so notify the Executive and shall bear and pay directly or indirectly all costs and expenses of contesting the claim (including additional interest and penalties incurred in connection with such action), and shall indemnify and hold Executive harmless, on an after-tax basis, for any excise, income, or employment tax, including interest and penalties with respect thereto, imposed as a result of the Company's payment of costs of the contest. Executive shall cooperate fully with the Company in the defense of any such IRS claim. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. In the event the IRS claim is finally determined to result in the imposition of additional excise tax under Section 280G of the Code on Executive, the Company shall make an additional Gross-Up Payment with respect to any such additional excise tax. (c) The payment of Severance Compensation by the Company to the Executive shall not affect any other rights and benefits of the Executive provided by the Company, whether currently or in the future, prior to the Termination Date, which rights shall be governed by the terms thereof. The Company shall provide to the Executive through his Termination Date group insurance benefits, retirement benefits, and other benefits substantially similar to those which the Executive was receiving or entitled to receive immediately prior to the Change of Control Date, subject to any changes required to comply with changes in the law, and subject to changes in carriers in the ordinary course of business. (d) The Company shall have no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment or benefit to or for the benefit of the Executive provided for in this Agreement. (e) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof on demand at an annualized rate of interest equal to 120% of the then applicable Federal short term rate determined under Section 1274(d) of the Code, compounded semi-annually (but in no event shall such interest exceed the highest lawful rate). 4. No Mitigation Required. In the event that the Company is required to pay the Severance Compensation under this Agreement, the Executive shall not be obligated to mitigate his damages nor the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and the acceptance of employment elsewhere after termination shall in no way reduce the amount of Severance Compensation payable hereunder. 5. Release. In consideration for the protection and benefits provided for under this Agreement, at the Company's request, Employee hereby agrees to execute a release of all claims against the Company or any of its affiliates, directors, officers, employees, agents and benefit plans, in form and substance satisfactory to the Company. Payment of the benefits under Section 3(a) is expressly conditioned on Employee's execution of such release if the Company so requests. 6. Successors: Binding Agreement. (a) The Company will require any successor and any corporation or other legal person (including any "person" as defined in Section 2(d)(iv) of this Agreement) which is in control of such successor (as "control" is defined in Regulation 230.405 or any successor rule or regulation promulgated under the Securities Act of 1933, as amended) to all or substantially all of the business and/or assets of the Company (by purchase, merger, consolidation or otherwise), by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement by the Company. Notwithstanding the foregoing, any such assumption shall not, in any way, affect or limit the liability of the Company under the terms of this Agreement or release the Company from any obligation hereunder. As used in this Agreement, "Company" shall mean the Company and any successor to its business and/or all or part of its assets, which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive here under shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 7. Notice. The Company shall give written notice to Executive within thirty days after any Change in Control. Failure to give such notice shall constitute a material breach of this Agreement. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or received after being mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Kenneth G. Hawari 3605 Edgestone Drive Plano, Texas 75093 If to the Company: Advanced Neuromodulation Systems, Inc. 6501 Windcrest Drive, Suite 100 Plano, Texas 75024 or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of chance of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, unless specifically referred to herein with respect to the subject matter of this Agreement have been made be either party which are not set forth expressly in this agreement. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 9. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Employment Rights. Nothing implied in this Agreement shall create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to any Change in Control. Notwithstanding any other provision hereof to the contrary and subject to the terms of the Employment Agreement between the Company and the Executive dated April 1, 2002, the Executive may, at any time during the Term of this Agreement, upon the giving of 30 days prior written notice, terminate his employment hereunder. If this Agreement or the employment of the Executive is terminated under circumstances in which the Executive is not entitled to any Severance Compensation, the Executive shall have no further obligation or liability to the Company hereunder or otherwise with respect to his prior or any future employment by the Company. 12. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling; provided, however, that no withholding pursuant to Section 4999 of the Code shall be made unless, in the opinion of tax counsel selected by the Company's independent accountants and acceptable to the Executive, such withholding relates to payments which result in the imposition of an excise tax pursuant to Section 4999 of the Code. 13. Legal Fees and Expenses. It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive in this Agreement. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under the Agreement or in the event that the Company or any other person takes any action to declare the Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent the Executive in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company shall pay and be solely responsible for any and all reasonable attorneys' and related fees and expenses incurred by the Executive as a result of the Company's failure to perform this Agreement or any provision thereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof, up to $100,000 in the aggregate. 14. Rights and Remedies Cumulative. No right or remedy conferred upon or reserved to the Executive is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy under this Agreement, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year first above written. ADVANCED NEUROMODULATION SYSTEMS, INC.: By: /s/ F. Robert Merrill ---------------------------------- F. Robert Merrill Its: Executive Vice President and Chief Financial Officer EXECUTIVE: By: /s/ Kenneth G. Hawari ----------------------------------- Kenneth G.Hawari -----END PRIVACY-ENHANCED MESSAGE-----