CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
WCRFBU-MWS-CX02
9.9.26
SER lappg0pa
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CLN
13-Mar-2008 15:22 EST
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2007
Commission file number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0492262
(I.R.S. Employer
Identification Number)
3240 Bayshore Blvd.
Brisbane, California 94005
(415) 657-5500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share
The NASDAQ Stock Market, LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No È
Indicate by check mark 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 than the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ‘ Accelerated filer È Non-accelerated filer (Do not check if a smaller reporting company) ‘
Smaller reporting company ‘
Indicate by check mark whether
registrant
is a shell company (as defined in Rule 12b-2 of
the Exchange
Act). Yes ‘ No È
The aggregate market value of the registrant’s common stock, held by non-affiliates of the registrant as of June 30, 2007 (which
is the last business day of registrant’s most recently completed second fiscal quarter) based upon the closing price of such stock on
the NASDAQ Global Market on that date, was $338 million. For purposes of this disclosure, shares of common stock held by
entities and individuals who own 5% or more of the outstanding common stock and shares of common stock held by each officer and
director have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the Rules and
Regulations of the Securities Exchange Act of 1934. This determination of affiliate status is not necessarily conclusive.
The number of shares of Registrant’s common stock issued and outstanding as of February 29, 2008 was 12,742,303.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2008 Annual
DOCUMENTS INCORPORATED BY REFERENCE
Meeting of Stockholders.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
START PAGE
SERFBU-MWS-CX02
9.9.26
SER saruc0pa
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6*
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11-Mar-2008 19:12 EST
TABLE OF CONTENTS
Business
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
3
19
33
33
33
33
34
36
37
51
52
82
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83
84
84
84
84
84
Exhibits and Financial Statement Schedules
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
START PAGE
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=MNF2D8W6Š
2*
1C
44641 TX 3
PMT
PS
1D36CR9=MNF2D8W
CLN
07-Mar-2008 07:55 EST
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ITEM 1. BUSINESS
PART I
We are a global medical device company headquartered in Brisbane, California specializing in the design,
development, manufacture, marketing and servicing of laser and other light-based aesthetics systems for
practitioners worldwide. We offer easy-to-use products based on three platforms—CoolGlide®, Xeo® and
Solera®—which enable physicians and other qualified practitioners to perform safe and effective aesthetic
procedures for their customers.
• CoolGlide- Our first product platform, CoolGlide, was launched in March 2000. This product offers
laser applications for hair removal, treatment of a range of vascular lesions, including leg and facial
veins, and Laser Genesis—a skin rejuvenation procedure that reduces fine lines, reduces pore size and
improves skin texture.
• Xeo-
In 2003, we introduced the Xeo platform, which can combine pulsed light and laser applications
in a single system. The Xeo is a fully upgradeable platform on which a customer can use every
application that we offer to remove unwanted hair, treat vascular lesions and rejuvenate the skin by
treating discoloration, improving texture, reducing pore size and treating fine lines and laxity.
•
Solera-
In 2004, we introduced our Solera platform—a compact tabletop system designed to support a
single technology platform. Solera systems use either infrared (Solera Titan) or pulsed light (Solera
Opus) and can be used to remove unwanted hair, treat vascular lesions and rejuvenate the skin. The
Solera Opus can support one or more pulsed light applications in a single system.
Each of our products consists of one or more hand pieces and a console that incorporates a universal graphic user
interface, a laser or other light-based module, control system software and high voltage electronics. However,
depending on the application, the laser or light-based module is sometimes instead contained in the hand piece. A
description of each of our hand pieces, and the aesthetic conditions they are designed to treat, are contained in the
section entitled “Products,” below.
We offer our customers the ability to select the systems and applications that best fit their practice and to
subsequently upgrade their systems to add new applications. This upgrade path allows our customers to cost-
effectively build their aesthetic practice and provides us with a source of recurring revenue.
The Structure of Skin and Conditions that Affect Appearance
The skin is the body’s largest organ and is comprised of layers called the epidermis and dermis. The epidermis is
the outer layer, and serves as a protective barrier for the body. It contains cells that determine pigmentation, or
skin color. The underlying layer of skin, the dermis, contains hair follicles and large and small blood vessels that
are found at various depths below the epidermis. Collagen, also found within the dermis, provides strength and
flexibility to the skin.
Many factors, such as age, smoking and sun damage, can result in aesthetically unpleasant changes in the
appearance of the skin. These changes can include:
• Undesirable hair growth;
•
Enlargement or swelling of blood vessels due to circulatory changes that become visible at the skin’s
surface in the form of unsightly veins;
• Deterioration of collagen, which weakens the skin, leading to uneven texture, increased pore size,
wrinkles and laxity; and
• Uneven pigmentation or sun spots due to long-term sun exposure.
People with unwanted hair or any of the above-mentioned skin conditions often seek aesthetic treatments to
improve their appearance.
3
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZYSFJWÅŠ
1*
1C
44641 TX 4
IFV
PS
1D36CR9=6ZYSFJW
CLN
05-Mar-2008 10:53 EST
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The Market for Non-Surgical Aesthetic Procedures
The market for non-surgical aesthetic procedures has grown significantly over the past several years. The
American Society of Plastic Surgeons estimates that in 2006 there were 9.1 million minimally-invasive aesthetic
procedures performed, an 8% increase over 2005 and a 66% increase over 2000. We believe there are several
factors contributing to the growth of these aesthetic procedures, including:
•
•
Aging of the U.S. Population- The “baby boomer” demographic segment, ages 43 to 61 in calendar
2007, represented approximately 26% of the U.S. population as of July 1 2005. The size of this aging
segment, and its desire to retain a youthful appearance, has driven the growth for aesthetic procedures.
Broader Range of Safe and Effective Treatments- Technical developments have led to safe, effective,
easy-to-use and low-cost treatments with fewer side effects, resulting in broader adoption of aesthetic
procedures by practitioners. In addition, technical developments have enabled practitioners to offer a
broader range of treatments. These technical developments have reduced the required treatment and
recovery times, which in turn have led to greater patient demand.
• Changing Practitioner Economics- Managed care and government payer reimbursement restrictions in
the United States, and similar payment related constraints outside the United States, are motivating
practitioners from all specialties to establish or expand their elective aesthetic practices with procedures
that are paid for directly by patients. As a result,
in addition to the traditional users such as
dermatologists and plastic surgeons, many other non-core practitioners, such as gynecologists, primary
care physicians, physicians offering aesthetic treatments in spa environments, and other qualified
practitioners are performing aesthetic procedures.
Non-Surgical Aesthetic Procedures for Improving the Skin’s Appearance and Their Limitations
Many alternative therapies are available for improving a person’s appearance by treating specific structures
within the skin. These procedures utilize injections or abrasive agents to reach different depths of the dermis and
the epidermis. In addition, non-invasive and minimally-invasive treatments have been developed that employ
laser and other light-based technologies to achieve similar therapeutic results. Some of these more common
therapies and their limitations are described below.
Hair Removal- Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis and
laser and other light-based hair removal. The only techniques that provide a long-lasting solution are electrolysis
and light-based hair removal. Electrolysis is usually painful, time-consuming and expensive for large areas, but is
the most common method for removing light-colored hair. During electrolysis, an electrologist inserts a needle
directly into a hair follicle and activates an electric current in the needle. Since electrolysis only treats one hair
follicle at a time, the treatment of an area as small as an upper lip may require numerous visits and many hours of
treatment. In addition, electrolysis can cause blemishes and infection related to needle use.
Leg and Facial Veins- The current aesthetic treatment methods for leg and facial veins include sclerotherapy
and laser and other light-based treatments. With these treatments, patients seek to eliminate visible veins and
improve overall skin appearance. Sclerotherapy requires a skilled practitioner to inject a saline or detergent-based
solution into the target vein, which breaks down the vessel causing it to collapse and be absorbed into the body.
The need to correctly position the needle on the inside of the vein makes it difficult to treat smaller veins, which
limits the treatment of facial vessels and small leg veins. The American Society of Plastic Surgeons estimates
that over 607,000 sclerotherapy procedures were performed in 2006.
Skin Rejuvenation- Skin rejuvenation treatments include a broad range of popular alternatives, including
Botox and collagen injections, chemical peels, microdermabrasions, radiofrequency treatments and lasers and
other light-based treatments. With these treatments, patients hope to improve overall skin tone and texture,
reduce pore size, and remove other signs of aging, including mottled pigmentation, diffuse redness and wrinkles.
All of these procedures are temporary solutions and must be repeated within several weeks or months to sustain
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6Z=031W(Š
1*
1C
44641 TX 5
IFV
PS
1D36CR9=6Z=031W
CLN
05-Mar-2008 10:53 EST
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their effect, thereby increasing the cost and inconvenience to patients. For example, the body absorbs Botox and
collagen and patients require supplemental injections every three to six months to maintain the benefits of these
treatments.
Some skin rejuvenation treatments, such as chemical peels and microdermabrasions, can have undesirable side
effects. Chemical peels use acidic or caustic solutions to peel away the epidermis, and microdermabrasion
generally utilizes sand crystals to resurface the skin. These techniques can lead to stinging, redness, irritation and
scabbing. In addition, more serious complications, such as changes in skin color, can result from deeper chemical
peels. Patients that undergo these deep chemical peels are also advised to avoid exposure to the sun for several
months following the procedure. The American Society of Plastic Surgeons estimates that in 2006, 4.1 million
injections of Botox and over 1.2 million injections of collagen and other soft-tissue fillers were administered, and
1 million chemical peels and over 800,000 microdermabrasion procedures were performed.
In radiofrequency tissue tightening, energy is applied to heat the dermis of the skin with the goal of shrinking and
tightening the collagen fibers. This approach may result in a more subtle and incremental change to the skin than
a surgical facelift. Drawbacks to this approach may include surface irregularities that may resolve over time, and
the risk of burning the treatment area.
Laser and other light-based non-surgical treatments for hair removal, veins and skin rejuvenation are discussed in
the following section and in the section entitled “Our Applications and Procedures,” below.
Laser and Other Light-Based Aesthetic Treatments
Laser and other light-based aesthetic treatments can achieve therapeutic results by affecting structures within the
skin. The development of safe and effective aesthetic treatments has created a well-established and growing
market for these procedures.
Ablative skin resurfacing is a method of improving the appearance of the skin by removing the outer layers of the
skin. Ablative skin resurfacing procedures are considered invasive or minimally invasive, depending on how
much of the epidermis is removed during a treatment. Non-ablative skin resurfacing is a method of improving the
appearance of the skin by treating the underlying structure of the skin without damaging the outer layers of the
skin. Practitioners can use laser and other light-based technologies to selectively target hair follicles, veins or
collagen in the dermis, as well as cells responsible for pigmentation in the epidermis, without damaging
surrounding tissue. They can also use these technologies to safely remove portions of the epidermis and deliver
heat to the dermis as a means of generating new collagen growth.
Safe and effective laser and other light-based treatments require an appropriate combination of the following four
parameters:
•
•
•
Energy Level-
the amount of light emitted to heat a target;
Pulse Duration-
the time interval over which the energy is delivered;
Spot Size-
the diameter of the energy beam, which affects treatment depth and area; and
• Wavelength-
delivered.
the color of light, which impacts the effective depth and absorption of the energy
For example, in the case of hair removal, by utilizing the correct combination of these parameters, a practitioner
can use a laser or other light source to selectively target melanin within the hair follicle to absorb the laser energy
and destroy the follicle, without damaging other delicate structures in the surrounding tissue. Wavelength and
spot size permit the practitioner to target melanin in the base of the hair follicle, which is found in the dermis.
The combination of pulse duration and energy level may vary, depending upon the thickness of the targeted hair
follicle. A shorter pulse length with a high energy level is optimal to destroy fine hair, whereas coarse hair is best
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6=0BV7W5Š
1*
1C
44641 TX 6
IFV
PS
1D36CR9=6=0BV7W
CLN
05-Mar-2008 10:53 EST
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treated with a longer pulse length with lower energy levels. If treatment parameters are improperly set,
non-targeted structures within the skin may absorb the energy thereby eliminating or reducing the therapeutic
effect. In addition, improper setting of the treatment parameters or failure to protect the surface of the skin may
cause burns, which can result in blistering, scabbing and skin discoloration.
Technology and Design of Our Systems
Our unique CoolGlide, Xeo and Solera platforms provide the long-lasting benefits of laser and other light-based
aesthetic treatments. Our technology allows for a combination of a wide variety of applications available in a
single system. Key features of our solutions include:
• Multiple Applications Available in a Single System- Our multi-application systems enable
practitioners to perform multiple aesthetic procedures using a single device. These procedures include
hair
including the treatment of
discoloration, laxity, fine lines and uneven texture. Because practitioners can use our systems for
multiple indications, the cost of a unit may be spread across a potentially greater number of patients and
procedures, and therefore may be more rapidly recovered.
treatment of unsightly veins and skin rejuvenation,
removal,
•
Technology and Design Leadership- We offer innovative and advanced laser and other light-based
solutions for the aesthetic market. Our laser technology combines long wavelength, adjustable energy
levels, variable spot sizes and a wide range of pulse durations, allowing practitioners to customize
treatments for each patient and condition. Our proprietary pulsed light hand pieces for the treatment of
discoloration, hair removal and vascular treatments optimize the wavelength used for treatments and
incorporate a monitoring system to increase safety. Our Titan hand pieces utilize a novel light source
that had not been previously used for aesthetic treatments. And our Pearl hand piece, with proprietary
YSGG technology, represents the first application of the 2790 nm wavelength for a minimally invasive
cosmetic dermatology.
• Upgradeable Platform- We design our products to allow our customers to cost-effectively upgrade to
our multi-application systems, which provides our customers with the option to add additional
applications to their existing systems and provides us with a source of recurring revenue. We believe
that product upgradeability allows our customers to take advantage of our latest product offerings and
provide additional treatment options to their patients, thereby expanding the opportunities for their
aesthetic practices.
•
Treatments for Broad Range of Skin Types and Conditions- Our products remove hair safely and
effectively on patients of all skin types, including harder-to-treat patients with dark or tanned skin. In
addition, the wide parameter range of our systems allows practitioners to effectively treat patients with
both fine and coarse hair. Practitioners may use our products to treat spider and reticular veins, which
are unsightly small veins in the leg, as well as small facial veins. And they can treat color, texture, pore
size, fine lines and wrinkles on any type of skin with our skin rejuvenation systems. The ability to
customize treatment parameters enables practitioners to offer safe and effective therapies to a broad base
of their patients.
• Ease of Use- We design our products to be easy to use. Our proprietary hand pieces are lightweight
and ergonomic, minimizing user fatigue, and allow for clear views of the treatment area, reducing the
possibility of unintended damage and increasing the speed of application. Our control console contains a
universal graphic user interface with three simple, independently adjustable controls from which to
select a wide range of treatment parameters to suit each patient’s profile. The clinical navigation user
interface on the Xeo platform provides recommended clinical treatment parameter ranges based on
patient criteria entered. And our Pearl hand piece includes a scanner with multiple scan patterns to allow
simple and fast treatments of the face. Risks involved in the use of our products include risks common
to other laser and other light-based aesthetic procedures, including the risk of burns, blistering and skin
discoloration.
6
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CRB0PQNZRLWFŠ
3*
1C
44641 TX 7
PMT
PS
1D36CRB0PQNZRLW
CLN
13-Mar-2008 04:37 EST
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Strategy
Our mission is to maintain and expand our position as a leading, worldwide provider of light-based aesthetic
devices by executing the following strategies:
• Continuing to Develop New Products- We have introduced at least one new product every year since
2000. In 2007, we introduced Pearl—a minimally invasive, 2790 nm YSGG laser for treating fine lines,
uneven texture and dyschromia. We plan to continue developing our existing technology platforms and
develop other platforms with the intent of offering new applications for our customers.
•
•
•
•
Increasing Sales of Existing Products in the United States- We believe that the U.S. market for
aesthetic systems is continuing to grow. In 2007 we expanded our U.S. direct sales force and continued
to leverage our relationship with PSS World Medical Shared Services, Inc., or PSS, a wholly-owned
subsidiary of PSS World Medical, that operates medical supply distribution service centers with over
700 sales representatives serving physician offices throughout the United States.
Expanding our International Presence- We believe that the international market continues to be a
significant growth opportunity for us. As such, we are focused on increasing our international market
penetration and building global brand-recognition. In 2007, we increased our direct international sales
force and expanded our distributor territories to approximately 34 countries in 2007. We plan on
continuing to hire additional international direct sales employees, distributors and support staff to
increase sales and strengthen customer relationships in the international markets.
Broadening our Customer Base- We believe we have an opportunity for significant growth targeting
non-traditional aesthetic practitioners. Dermatologists and plastic surgeons had generally been regarded
as the traditional customers for laser and other light-based aesthetic equipment. However, in the United
States, in 2007 and 2006, approximately 79% and 78%, respectively, of the number of our orders were
received from non-traditional aesthetic practitioners, which include gynecologists, primary care
physicians, physicians offering aesthetic treatments in a spa environment, and other qualified
practitioners.
Leveraging our Installed Base with Sales of Upgrades- Each time we have introduced a major new
product, we have designed it to allow existing customers to upgrade their previously purchased systems
to offer additional capabilities. We believe that providing upgrades to our existing installed base of
customers continues to represent a significant opportunity for recurring revenue. We also believe that
our upgrade program aligns our interest in generating revenue with our customers’ interest in improving
the return on their investment by expanding the range of applications that can be performed by their
existing systems.
• Generating Revenue from Services and Disposables- Our Titan product
includes a disposable
component, which provides us with a source of recurring revenue from our existing customers. We offer
post-warranty services to our customers either through extended service contracts to cover preventive
maintenance or replacement parts and labor, or through direct billing for parts and labor. These post-
warranty services serve as additional sources of recurring revenue.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6=2Y6ZWtŠ
1*
1C
44641 TX 8
IFV
PS
1D36CR9=6=2Y6ZW
CLN
05-Mar-2008 10:53 EST
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Products
Our CoolGlide, Xeo and Solera platforms allow for the delivery of multiple laser and other light-based aesthetic
applications from a single system. With our Xeo and Solera platforms, practitioners can purchase customized
systems with a variety of our multi-technology applications. The following table lists our products and each
checked box represents the incremental applications that were added to the respective platforms in the years
noted.
Applications:
System
Platforms:
Products:
CoolGlide CV
Xeo:
Solera
Excel
Vantage
Nd:YAG
OPS600
LP560
Titan S
ProWave 770
AcuTip 500
Titan V / XL
LimeLight
Pearl
Titan S
ProWave 770
OPS 600
LP560
AcuTip 500
Titan V / XL
LimeLight
Hair
Removal:
Vascular
Lesions:
Skin Rejuvenation
Dyschromia:
Texture,
Fine
Lines:
Skin
Laxity:
x
x
x
x
Year:
2000
2001
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2004
2005
2005
2005
2005
2006
2006
Energy
Source:
a
a
a
a
b
b
c
b
b
c
b
d
c
b
b
b
b
c
b
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Energy Source: a. 1064nm Nd:YAG laser. b. flashlamp. c. Infrared laser and, d. 2790 nm YSGG laser
Each of our products consists of a control console and one or more hand piece, depending on the model.
Control Console
Our control console includes a universal graphic user interface, control system software and high voltage
electronics. All CoolGlide systems, and some models of the Xeo platform, include our laser module which
consists of electronics, a visible aiming beam, a focusing lens, a flashlamp and an Nd:YAG laser that functions at
wavelengths that permit penetration over a wide range of depths and is effective across all skin types. The
interface allows the practitioner to set the appropriate laser or flashlamp parameters for each procedure through a
user-friendly format. The control system software ensures that
the operator’s instructions are properly
communicated from the graphic user interface to the other components within the system. Our high voltage
electronics produce over 10,000 watts of peak laser energy, which permits therapeutic effects at short pulse
durations. Our Solera console platform comes in two configurations—Opus and Titan—both of which include a
universal graphic user interface, control system software and high voltage electronics. The Solera Opus console
is designed specifically to drive our flashlamp hand piece while the Solera Titan console is designed specifically
to drive the Titan hand pieces. The control system software is designed to ensure that the operator’s instructions
are properly communicated from the graphical user interface to the other components within the system and
includes real-time calibration to control the output energy as the pulse is being delivered during the treatment.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=L9WXNMWNŠ
2*
1C
44641 TX 9
PMT
PS
1D36CR9=L9WXNMW
CLN
07-Mar-2008 03:22 EST
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Hand Pieces
1064 nm Nd:YAG Hand piece- Our 1064nm Nd:YAG hand piece delivers laser energy to the treatment area
for hair removal, leg and facial vein treatment, and skin rejuvenation procedures to treat skin texture and fine
lines, and reduce pore size. The 1064nm Nd:YAG hand piece consists of an energy-delivery component,
consisting of an optical fiber and lens, and a copper cooling plate with imbedded temperature monitoring. The
hand piece weighs approximately 14 ounces, which is light enough to be held with one hand. The lightweight
nature and ergonomic design of the hand piece allows the operation of the device without user fatigue. Its design
allows the practitioner an unobstructed view of the treatment area, which reduces the possibility of unintended
damage to the skin and can increase the speed of treatment. The 1064nm Nd:YAG hand piece also incorporates
our cooling system, providing integrated pre and post cooling of the treatment area through a temperature-
controlled copper plate to protect the outer layer of the skin. The hand piece is available in either a fixed 10
millimeter spot size, for our CoolGlide CV system, or a user-controlled variable 3, 5, 7 or 10 millimeter spot size,
for our CoolGlide Excel and CoolGlide Vantage systems.
Pulsed Light Hand Pieces- The LP560, ProWave 770, AcuTip 500 and LimeLight hand pieces are designed to
produce a pulse of light over a wavelength spectrum to treat discoloration, including pigmented lesions, such as
age and sun spots, hair removal and superficial facial vessels. The hand pieces each consist of a custom
flashlamp, proprietary wavelength filter, closed-loop power control and embedded temperature monitor, and
weigh approximately 13 ounces. The filter in the AcuTip 500 eliminates long and short wavelengths, transmitting
only the therapeutic range required for safe and effective treatment. The filter in the LP560, ProWave 770 and
LimeLight eliminates short wavelengths, allowing longer wavelengths to be transmitted to the treatment area. In
addition, the wavelength spectrum of the ProWave 770 and the LimeLight can be shifted based on the setting of
the control console. Our power control includes a monitoring system to ensure that the desired energy level is
delivered. The hand pieces protect the epidermis by regulating the temperature of the hand piece window through
the embedded temperature monitor. These hand pieces are available on the Xeo and Solera platforms.
Titan Hand Pieces- The Titan hand pieces are designed to produce a sustained pulse of light over a wavelength
spectrum tailored to provide heating in the dermis to treat skin laxity (although it is cleared in the United States
by the U.S. Food and Drug Administration, or FDA, only for deep dermal heating). The hand piece consists of a
custom light source, proprietary wavelength filter, closed-loop power control, sapphire cooling window and
embedded temperature monitor, and weighs approximately three pounds. The temperature of the epidermis is
controlled by using a sapphire window to provide cooling before, during and after the delivery of energy to the
treatment site. We offer two different Titan hand pieces—Titan V and Titan XL.
Titan V- Titan V has a treatment tip that extends beyond the hand piece housing to provide enhanced visibility
of the skin’s surface to effectively treat delicate areas such as the skin around the eyes and nose.
Titan XL- Titan XL, like the Titan V, has a treatment tip that extends beyond the housing for improved
visibility. It also has a larger treatment spot size to treat larger body areas faster, such as the arms, abdomen and
legs.
The Titan hand pieces can be used on the Xeo and Solera platforms. The Titan hand piece requires a periodic
“refilling” process, which includes the replacement of the optical source, after a set number of pulses have been
used. This provides us with a source of recurring revenue.
Pearl Hand Piece- The Pearl hand piece, introduced in 2007, is designed to treat fine lines, uneven texture and
dyschromia through the application of proprietary YSGG laser technology. This hand piece can safely remove a
small portion of the epidermis, while coagulating the remaining epidermis, leading to new collagen growth. The
Pearl hand piece consists of a custom monolithic laser source, scanner and power monitoring electronics. The
scanner includes multiple scan patterns to allow simple and fast treatments of the face. The hand piece includes
an attachment for a smoke evacuator, allowing the practitioner to use one hand during treatment.
9
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZV4GLWJŠ
1*
1C
44641 TX 10
IFV
PS
1D36CR9=6ZV4GLW
CLN
05-Mar-2008 10:53 EST
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Our Applications and Procedures
Our products are designed to allow the practitioner to select an appropriate combination of energy level, spot size
and pulse duration for each treatment. The ability to manipulate the combinations of these parameters allows our
customers to treat the broadest range of conditions available with a single light-based system.
Hair Removal- Our laser technology allows our customers to treat all skin types and hair thicknesses. Our 1064
nm Nd:YAG laser permits energy to safely penetrate through the epidermis of any skin type and into the dermis
where the hair follicle is located. Using the universal graphic user interface on our control console, the
practitioner sets parameters to deliver therapeutic energy with a large spot size and variable pulse durations,
allowing the practitioner to treat fine or coarse hair. Our 1064nm Nd:YAG hand piece allows our customers to
treat all skin types, while our ProWave 770 hand piece, with its pulsed light technology, treats the majority of
skin types quickly and effectively.
To remove hair using a 1064nm Nd:YAG hand piece, the treatment site on the skin is first cleaned and shaved.
The practitioner then applies a thin layer of gel to glide across the skin, and next applies the hand piece directly
to the skin to cool the area to be treated and then delivers a laser pulse to the pre-cooled area. To remove hair
using the ProWave 770 hand piece, mineral oil is used instead of gel, and cooling is provided by a sapphire
window placed directly on the skin, allowing the pulse of light to be applied while the treatment area is being
cooled. In the case of both hand pieces, delivery of the energy destroys the hair follicles and prevents hair
re-growth. This procedure is then repeated at the next treatment site on the body, and can be done in a gliding
motion to increase treatment speed. Patients receive on average three to six treatments. Each treatment can take
between five minutes and one hour depending on the size of the area and the condition being treated. On average,
there are six to eight weeks between treatments.
Vascular Lesions- Our laser technology allows our customers to treat the widest range of aesthetic vein
conditions, including spider and reticular veins and small facial veins. Our 1064nm Nd:YAG hand piece’s
adjustable spot size of 3, 5, 7 or 10 millimeters allows the practitioner to control treatment depth to target
different sized veins. Selection of the appropriate energy level and pulse duration ensures effective treatment of
the intended target. Our AcuTip 500 hand piece, with its 6 millimeter spot size, uses pulsed-light technology and
is designed for the treatment of facial vessels.
The vein treatment procedure when using the 1064nm Nd:YAG hand piece is performed in a substantially similar
manner to the laser hair removal procedure. The laser hand piece is used to cool the treatment area both before
and after the laser pulse has been applied. With the AcuTip 500 hand piece, the pulse of light is delivered while
the treatment area is being cooled with the sapphire tip. The delivered energy damages the vein and, over time, it
is absorbed by the body. Patients receive on average between one and six treatments, with six weeks or longer
between treatments.
Skin Rejuvenation- Our laser and other light-based technologies allow our customers to perform non-invasive
and minimally-invasive treatments that reduce redness, pore size, fine lines and laxity, improve skin texture, and
treat other aesthetic conditions. Our products are each designed to minimize the risk of damage to the
surrounding tissue.
Texture; Fine Lines- When using a 1064nm Nd:YAG laser to improve skin texture, reduce pore size and treat
fine lines, cooling is not applied and the hand piece is held directly above the skin. A large number of pulses are
directed at the treatment site, repeatedly covering an area, such as the cheek. By delivering many pulses of laser
light to a treatment area, a gentle heating of the dermis occurs and collagen growth is stimulated to rejuvenate the
skin and reduce wrinkles. Patients typically receive four to six treatments for this procedure. The treatment
typically takes less than a half hour and there are typically two to four weeks between treatments.
When treating texture and fine lines with a Pearl hand piece, the hand piece is held at a controlled distance from
the skin and the scanner delivers a preset pattern of spots to the treatment area. Cooling is not applied to the
10
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZVBKXW2Š
1*
1C
44641 TX 11
IFV
PS
1D36CR9=6ZVBKXW
CLN
05-Mar-2008 10:53 EST
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epidermis during the treatment. The energy delivered by the hand piece ablates a portion of the epidermis while
leaving a coagulated portion that will gently peel off over the course of a few days. Heat is also delivered into the
dermis which can result in the production of new collagen. Treatment of the full face can usually be performed in
15 to 30 minutes. Patients receive on average between one and three treatments at monthly intervals.
Dyschromia- Our pulsed-light technologies allow our customers to safely and effectively treat red and brown
dyschromia, which is skin discoloration, pigmented lesions and rosacea. The practitioner delivers a narrow
spectrum of light to the surface of the skin through our LP560 or LimeLight hand pieces. These hand pieces
include one of our proprietary wavelength filters, which reduce the energy level required for therapeutic effect
and minimize the risk of skin injury.
In treating pigmented lesions with a pulsed-light technology, the hand piece is placed directly on the skin and
then the light pulse is triggered. The cells forming the pigmented lesion absorb the light energy, darken and then
flake off over the course of two to three weeks. Several treatments may be required to completely remove the
lesion. The treatment takes a few minutes per area treated and there are typically three to four weeks between
treatments.
Practitioners can also treat dyschromia and other skin conditions with our Pearl hand piece. During these
treatments, the heat delivered by the Pearl hand piece will remove the outer layer of the epidermis while
coagulating a portion of the epidermis. That coagulated portion will gently peel off over the course of a few days,
revealing a new layer of skin underneath. Treatment of the full face can usually be performed in 15 to 30
minutes. Patients receive on average between one and three treatments at monthly intervals.
Skin Laxity- Our Titan technology allows our customers to use deep dermal heating to tighten lax skin. The
practitioner delivers a spectrum of light to the skin through our Titan hand piece. This hand piece includes our
proprietary light source and wavelength filter which tailors the delivered spectrum of light to provide heating at
the desired depth in the skin.
In treating skin laxity, the hand piece is placed directly on the skin and then the light pulse is triggered. A
sustained pulse causes significant heating in the dermis. This heating can cause immediate collagen contraction
while also stimulating long-term collagen re-growth. Several treatments may be required to obtain the desired
degree of tightening of the skin. The treatment of a full face can take over an hour and there are typically four
weeks between treatments.
Our CE Mark allows us to promote the Titan in the European Union, Australia and certain other countries outside
the United States for the treatment of wrinkles through skin tightening. However, in the United States we have a
510(k) clearance for only deep dermal heating.
Product Upgrades
Our products are designed to allow our customers to cost-effectively upgrade to our newest technologies, which
provides our customers the option to add applications to their system and provides us with a source of recurring
revenue. When we introduce a new product, we notify our customers of the upgrade opportunity through a sales
call or mailing. In most cases, a field service representative can install the upgrade at the customer site in a
matter of hours, which results in very little downtime for practitioners. In some cases, where substantial upgrades
are necessary, the customer will receive a fully-refurbished system before sending their prior system back to our
headquarters.
Post-Warranty Service and Titan Hand piece Refills
Each Titan hand piece includes a disposable component, which provides us with a source of recurring revenue
from our existing customers. We offer post-warranty services to our customers either through extended service
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX02
9.9.26
SER saruc0pa
PAL
ˆ1D36CRB08XFRBFWBŠ
4*
1C
44641 TX 12
PMT
PS
1D36CRB08XFRBFW
CLN
11-Mar-2008 18:54 EST
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contracts to cover preventive maintenance or replacement parts and labor, or through direct billing for parts and
labor. These post-warranty services serve as additional sources of recurring revenue from our installed base.
Sales and Marketing
In the United States and Canada, we market and sell our products primarily through a combined North American
direct sales organization. We divide the U.S. and Canada markets into discreet sales territories, and generally
each direct sales employee in our North American sales organization is assigned a specific sales territory. The
number and size of North American sales territories vary from time to time according to business needs. Due to
attrition, recruiting efforts and other factors, the total number of North American sales territories at any given
time could be slightly higher than the total number of North American direct sales employees. As of
December 31, 2007, we had 60 North American sales territories, of which 5 were in Canada and 55 were in the
U.S. As of December 31, 2007, two of our U.S. sales territories were not staffed. In addition to direct sales
employees, we have a distribution relationship with PSS World Medical that operates medical supply distribution
service centers with over 700 sales representatives serving physician offices throughout the United States. For the
years ended December 31, 2007, 2006 and 2005, revenue from PSS was $14.6 million, $15.4 million and
$12.4 million, respectively.
International sales are generally made through a direct international sales force of 29 employees, which includes
five employees in Canada, as well as a worldwide distributor network in approximately 34 countries as of
December 31, 2007. As of December 31, 2007, we had direct sales offices located in Australia, Canada, France,
Japan, Spain, Switzerland and the United Kingdom. Our international revenue represented 37%, 31% and 28% of
total revenue for the years ended December 31, 2007, 2006 and 2005, respectively.
We also sell certain items like Titan hand piece refills and marketing brochures via the internet.
Although specific customer requirements can vary depending on applications, customers generally demand
quality performance, ease of use, and high productivity in relation to the cost of ownership. We have responded
to these customer demands by introducing new products focused on these requirements in the markets we serve.
Specifically, we believe that we differentiate our products from those of our competitors, by introducing new
products and applications that are innovative, address the specific aesthetic procedures in demand, and are
upgradeable on our customers’ existing systems. In addition, we provide attractive upgrade pricing to new
product families and are responsive to our customers’ financing preferences. To increase market penetration, in
addition to marketing to the core specialties of plastic surgeons and dermatologists, we remain focused on selling
to the non-core aesthetic practices consisting of gynecologists, primary care physicians, physicians offering
aesthetic treatments in spa environments and other qualified practitioners.
We seek to establish strong ongoing relationships with our customers through the upgradeability of our products,
sales of extended service contracts, the refilling of Titan hand pieces, and ongoing training and support. We
primarily target our marketing efforts to practitioners through office visits, workshops, trade shows, webinars and
trade journals. We also market to potential patients through brochures, workshops and our website. We offer
clinical forums with recognized expert panelists to promote advanced treatment techniques using the CoolGlide-,
Xeo- and Solera platforms to further enhance customer loyalty and uncover new sales opportunities.
Competition
Our industry is subject to intense competition. Our products compete against conventional non-light-based
treatments, such as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and
laser and other light-based products offered by public
sclerotherapy. Our products also compete against
companies, such as Candela, Cynosure, Elen (in Italy), Iridex, Palomar, Syneron and Thermage, as well as
private companies, including, Alma, Aesthera, Lumenis, Reliant, Sciton and several other companies.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351036
9.9.26
SER teppa0pa
PAL
ˆ1D36CR9=DLQQP4W†Š
2*
1C
44641 TX 13
PMT
PS
1D36CR9=DLQQP4W
CLN
06-Mar-2008 03:10 EST
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Competition among providers of laser and other light-based devices for the aesthetic market is characterized by
extensive research efforts and technology progress. While we attempt to protect our products through patents and
other intellectual property rights, there are few barriers to entry that would prevent new entrants or existing
competitors from developing products that would compete directly with ours. There are many companies, both
public and private, that are developing innovative devices that use both light-based and alternative technologies.
Many of these competitors have greater financial and human resources than we do and have established
reputations, customers and products, as well as worldwide distribution channels that are comparable to or more
effective than ours. Additional competitors may enter the market, and we are likely to compete with new
companies in the future. To compete effectively, we have to demonstrate that our products are attractive
alternatives to other devices and treatments by differentiating our products on the basis of performance, brand
name, service and price. We have encountered and expect to continue to encounter potential customers who, due
to existing relationships with our competitors, are committed to, or prefer the products offered by these
competitors. Competitive pressures may result in price reductions and reduced margins over time for our
products.
Research and Development
Our research and development group develops new products to address unmet or underserved market needs. The
major focus of this group is to leverage our existing technology platforms for new aesthetic applications. As of
December 31, 2007, our research and development activities were conducted by a staff of 21 employees with a
broad base of experience in lasers and optoelectronics. We have developed relationships with outside contract
engineering and design consultants, giving our team additional technical and creative breadth. We work closely
with thought leaders and customers, both individually and through our sponsored seminars, to understand unmet
needs and emerging applications in aesthetic medicine. Research and development expenses for 2007, 2006 and
2005, were $7.2 million, $6.5 million and $5.4 million, respectively.
Service and Support
Our products are engineered to enable quick and efficient service and support. There are several separate
components of our products, each of which can easily be removed and replaced. We believe that quick and
effective delivery of service is important to our customers. As of December 31, 2007, we had a 37-person global
service department. Internationally, we provide direct service support through our Australia, Canada, France,
Japan, and Switzerland offices, and also through the network of distributors in approximately 34 countries and
third-party service providers. We provide initial warranties on our products to cover parts and service and offer
extended service plans that vary by the type of product and the level of service desired. Our standard warranty on
system sales covers parts and service for a standard period of one or two years. From time to time, we also have
promotions whereby we include a supplemental warranty with the sale of our products. Customers are notified
before their initial warranty expires and are able to choose from two different extended service plans covering
preventative maintenance or replacement parts and labor. One plan covers the cost of parts and labor, and the
second plan provides preventive maintenance, each for a fixed fee paid in advance. In the event a customer does
not purchase an extended service plan, we will offer to service the customer’s system and charge the customer
for time and materials. We have invested substantial financial and management resources to develop a worldwide
infrastructure to meet the service needs of our customers worldwide.
Manufacturing
We manufacture our products with components and subassemblies supplied by vendors. We assemble and test
each of our products at our Brisbane, California facility. Quality control, cost reduction and inventory
management are top priorities of our manufacturing operations.
We purchase certain components and subassemblies from a limited number of suppliers. We have flexibility with
our suppliers to adjust the number of components and subassemblies as well as the delivery schedules. The
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351036
9.9.26
SER teppa0pa
PAL
ˆ1D36CR9=DLW62=WÊ
2*
1C
44641 TX 14
PMT
PS
1D36CR9=DLW62=W
CLN
06-Mar-2008 03:10 EST
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forecasts we use are based on historical demands and sales projections. Lead times for components and
subassemblies may vary significantly depending on the size of the order, time required to fabricate and test the
components or subassemblies, specific supplier requirements and current market demand for the components and
subassemblies. We reduce the potential for disruption of supply by maintaining sufficient inventories and
identifying additional suppliers. The time required to qualify new suppliers for some components, or to redesign
them, could cause delays in our manufacturing. To date, we have not experienced significant delays in obtaining
any of our components or subassemblies.
We use small quantities of common cleaning products in our manufacturing operations, which are lawfully
disposed of through a normal waste management program. We do not forecast any material costs due to
compliance with environmental laws or regulations.
We are required to manufacture our products in compliance with the FDA’s Quality System Regulation, or QSR.
The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality
assurance, packaging, storage and shipping of our products. The FDA enforces the QSR through periodic
unannounced inspections. Our single manufacturing facility located in Brisbane, CA, was inspected by the FDA
in 2004. There were no significant findings as a result of this audit and our responses have been accepted by the
FDA. Our failure to maintain compliance with the QSR requirements could result in the shut down of our
manufacturing operations and the recall of our products, which would have a material adverse effect on business.
In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to
qualify a new supplier and could experience manufacturing delays as a result. We have opted to maintain quality
assurance and quality management certifications to enable us to market our products in the United States, the
member states of the European Union, the European Free Trade Association and countries which have entered
into Mutual Recognition Agreements with the European Union. Our manufacturing facility is ISO 9001 and ISO
13485 certified.
Patents and Proprietary Technology
laws, and non-disclosure,
We rely on a combination of patent, copyright,
confidentiality and invention assignment agreements to protect our
intellectual property rights. As of
December 31, 2007, we had nine issued U.S. patents and twenty-six pending U.S. patent applications. Cutera,
CoolGlide, Solera, Xeo, AcuTip, Limelight, Pearl, ProWave 770 and Titan are only some of our trademarks. We
have trademark rights in these and others trademarks in the United States and have registrations issued and
pending in the United States and other countries for these and others of our trademarks. We intend to file for
additional patents and trademarks to continue to strengthen our intellectual property rights.
trademark and trade secret
In conjunction with the settlement of our patent litigation with Palomar and Massachusetts General Hospital, or
MGH, in June 2006, Palomar—the exclusive licensee of the patents owned by MGH—granted us an irrevocable
sublicense to the patents for removing hair using lasers or pulsed-light technology. The patents are set to expire
in February 2015. The royalty rate for hair-removal-only systems is 7.5% of net revenue and for multi-
application systems containing hair-removal functionality it is either 3.75% or 5.25% of net revenue, depending
on whether there is one or more hair removal technologies included in the system, respectively. Our revenue
from systems that do not include hair-removal capabilities (such as our Titan) and revenue from service contracts
are not subject to royalties.
Our employees and technical consultants are required to execute confidentiality agreements in connection with
their employment and consulting relationships with us. We also require them to agree to disclose and assign to us
all inventions conceived in connection with the relationship. We cannot provide any assurance that employees
and consultants will abide by the confidentiality or assignability terms of their agreements. Despite measures
taken to protect our intellectual property, unauthorized parties may copy aspects of our products or obtain and
use information that we regard as proprietary.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351036
9.9.26
SER teppa0pa
PAL
ˆ1D36CR9=DLYZM0WÈŠ
2*
1C
44641 TX 15
PMT
PS
1D36CR9=DLYZM0W
CLN
06-Mar-2008 03:11 EST
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Government Regulation
Our products are medical devices subject to extensive and rigorous regulation by the U.S. Food and Drug
Administration, as well as other regulatory bodies. FDA regulations govern the following activities that we
perform and will continue to perform to ensure that medical products distributed domestically or exported
internationally are safe and effective for their intended uses:
•
•
•
•
•
•
Product design and development;
Product testing;
Product manufacturing;
Product safety;
Product labeling;
Product storage;
• Recordkeeping;
•
Pre-market clearance or approval;
• Advertising and promotion;
•
•
Production; and
Product sales and distribution.
FDA’s Pre-market Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will
require either prior 510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices
into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the
manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute
the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted from this
requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are
placed in class III, requiring pre-market approval. All of our current products are class II devices.
510(k) Clearance Pathway
When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed
device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not yet called for the submission of Pre-Market
Approval, or PMA, applications. By regulation, the FDA is required to clear or deny a 510(k), pre-market
notification within 90 days of submission of the application. As a practical matter, clearance often takes
significantly longer. The FDA may require further information, including clinical data, to make a determination
regarding substantial equivalence. Laser devices used for aesthetic procedures, such as hair removal, have
generally qualified for clearance under 510(k) procedures.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
WCRFBU-MWS-CX02
9.9.26
SER lappg0pa
PAL
ˆ1D36CRB0VPC2RLWÇŠ
2*
1C
44641 TX 16
PMT
PS
1D36CRB0VPC2RLW
CLN
13-Mar-2008 15:29 EST
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The following table details the indications for which we received a 510(k) clearance and when these clearances
were received.
FDA Marketing Clearances:
Laser-based products:
- treatment of vascular lesions
- hair removal
- permanent hair reduction
- treatment of benign pigmented lesions and pseudofolliculitis barbae, commonly
referred to as razor bumps, and for the reduction of red pigmentation in scars
- treatment of wrinkles
Pulsed-light technologies:
- treatment of pigmented lesions
- hair removal and vascular treatments
Date Received:
June 1999
March 2000
January 2001
June 2002
October 2002
March 2003
March 2005
Infrared Titan technology for deep dermal heating for the temporary relief of minor
February 2004
muscle and joint pain and for the temporary increase in local circulation where applied*
Solera tabletop console:
- for use with the Titan hand piece
- for use with our pulsed-light hand pieces
Pearl product for the treatment of wrinkles
October 2004
January 2005
March 2007
*
In May 2005, the FDA determined that our 510(k) application with respect to marketing our Titan product in the United States for
wrinkle reduction was not substantially equivalent to predicate devices for the treatment of wrinkles. We do not plan on submitting
any further applications for this clearance for Titan.
Pre-Market Approval (PMA) Pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A PMA must
be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing
and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
No device that we have developed has required pre-market approval, nor do we currently expect that any future
device or indication will require pre-market approval.
Product Modifications
We have modified aspects of our products since receiving regulatory clearance, but we believe that new 510(k)
clearances are not required for these modifications. After a device receives 510(k) clearance or a PMA, any
modification that could significantly affect its safety or effectiveness, or that would constitute a major change in
its intended use, will require a new clearance or approval. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s
determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance or PMA, the FDA
may retroactively require us to seek 510(k) clearance or pre-market approval. The FDA could also require us to
cease marketing and distribution and/or recall the modified device until 510(k) clearance or pre-market approval
is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
Clinical Trials
When FDA approval of a class I, class II or class III device requires human clinical trials, and if the device
presents a “significant risk,” as defined by the FDA, to human health, the device sponsor is required to file an
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZVXWVWÉŠ
1*
1C
44641 TX 17
IFV
PS
1D36CR9=6ZVXWVW
CLN
05-Mar-2008 10:53 EST
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A
Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior to
commencing the human clinical trial. If the device is considered a “non-significant” risk, IDE submission to the
FDA is not required. Instead, only approval from the Institutional Review Board, or IRB, overseeing the clinical
trial is required. Human clinical studies are generally required in connection with approval of class III devices
and may be required for class I and II devices. The IDE application must be supported by appropriate data, such
as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing
protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number of
patients. Clinical trials for a significant risk device may begin once the application is reviewed and cleared by the
FDA and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our products
may require that we submit and obtain clearance of an IDE from the FDA prior to commencing clinical trials.
The FDA, and the IRB at each institution at which a clinical trial is being performed, may suspend a clinical trial
at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health
risk.
Our clinical department continues to work with physicians and other experts in the medical aesthetic market to
gather additional data that may provide the basis for physician-authored white papers, the promotion of our
existing products, or seeking the approval for additional indications on our existing and any future products.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
• Quality system regulations, which require manufacturers, including third-party manufacturers, to follow
stringent design, testing, control, documentation and other quality assurance procedures during all
aspects of the manufacturing process;
•
Labeling regulations and FDA prohibitions against
unapproved or “off-label” uses;
the promotion of products for un-cleared,
• Medical device reporting regulations, which require that manufacturers report to the FDA if their device
may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if the malfunction were to recur; and
•
Post-market surveillance regulations, which apply when necessary to protect the public health or to
provide additional safety and effectiveness data for the device.
The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections
by the FDA and the Food and Drug Branch of the California Department of Health Services, or CDHS, to
determine our compliance with the QSR and other regulations, and these inspections may include the
manufacturing facilities of our subcontractors. In the past, our prior facility has been inspected, and observations
were noted. There were no findings that involved a material violation of regulatory requirements. Our responses
to these observations have been accepted by the FDA and CDHS, and we believe that we are in substantial
compliance with the QSR. Our current manufacturing facility has been inspected by the FDA but not by the
CDHS. The FDA noted observations, but there were no findings that involved a material violation of regulatory
requirements. Our responses to those observations have been accepted by the FDA.
We are also regulated under the Radiation Control for Health and Safety Act, which requires laser products to
comply with performance standards, including design and operation requirements, and manufacturers to certify
in product labeling and in reports to the FDA that their products comply with all such standards. The law also
requires laser manufacturers to file new product and annual reports, maintain manufacturing, testing and sales
records, and report product defects. Various warning labels must be affixed and certain protective devices
installed, depending on the class of the product.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZV=YHW3Š
1*
1C
44641 TX 18
IFV
PS
1D36CR9=6ZV=YHW
CLN
05-Mar-2008 10:53 EST
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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which
may include any of the following sanctions:
• Warning letters, fines, injunctions, consent decrees and civil penalties;
• Repair, replacement, recall or seizure of our products;
• Operating restrictions or partial suspension or total shutdown of production;
• Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses,
or modifications to existing products;
• Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
• Criminal prosecution.
The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we
have manufactured or distributed. If any of these events were to occur, they could have a material adverse effect
on our business.
We are also subject to a wide range of federal, state and local laws and regulations, including those related to the
environment, health and safety, land use and quality assurance. We believe that compliance with these laws and
regulations as currently in effect will not have a material adverse effect on our capital expenditures, earnings and
competitive and financial position.
International
International sales of medical devices are subject to foreign governmental regulations, which vary substantially
from country to country. The time required to obtain clearance or approval by a foreign country may be longer or
shorter than that required for FDA clearance or approval, and the requirements may be different.
The primary regulatory environment in Europe is that of the European Union, which consists of a number of
countries encompassing most of the major countries in Europe. The member states of the European Free Trade
Association have voluntarily adopted laws and regulations that mirror those of the European Union with respect
to medical devices. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and
allow the marketing of medical devices that meet European Union requirements. The European Union has
adopted numerous directives and European Standardization Committees have promulgated voluntary standards
regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices.
Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking,
indicating that the device conforms with the essential requirements of the applicable directives and, accordingly,
can be commercially distributed throughout the member states of the European Union, the member states of the
European Free Trade Association and countries which have entered into a Mutual Recognition Agreement. The
method of assessing conformity varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an
independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party
assessment may consist of an audit of the manufacturer’s quality system and specific testing of the
manufacturer’s device. An assessment by a Notified Body in one member state of the European Union, the
European Free Trade Association or one country which has entered into a Mutual Recognition Agreement is
required in order for a manufacturer to commercially distribute the product throughout these countries. ISO 9001
and ISO 13845 certification are voluntary harmonized standards. Compliance establishes the presumption of
conformity with the essential requirements for a CE Marking. In February 2000, our facility was awarded the
ISO 9001 and EN 46001 certification. In March 2003, we received our ISO 9001 updated certification (ISO
9001:2000) as well as our certification for ISO 13485:1996 which replaced our EN 46001 certification. In March
2004, we received our ISO 13485:2003 certification, which is the most current ISO certification for medical
device companies.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX02
9.9.26
SER soeus0pa
PAL
ˆ1D36CRB0V351WHWŠ
4*
1C
44641 TX 19
PMT
PS
1D36CRB0V351WHW
CLN
13-Mar-2008 13:54 EST
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Employees
As of December 31, 2007, we had 273 employees, of which 121 were in sales and marketing, 67 in
manufacturing operations, 37 in technical service, 21 in research and development and 27 in general and
administrative. We believe that our future success will depend in part on our continued ability to attract, hire and
retain qualified personnel. None of our employees is represented by a labor union, and we believe our employee
relations are good.
Available Information
We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are
required to file reports and information with the Securities and Exchange Commission, or SEC, including reports
on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. These reports and other information concerning the company may be accessed through
the SEC’s website at http://www.sec.gov and our website at http://www.cutera.com. Such filings are placed on
our website as soon as reasonably practicable after they are filed with the SEC.
Our most recent charter for our Audit and Compensation Committees and our Code of Ethics are available on our
website at http://www.cutera.com. In the event that we grant a waiver under our Code of Ethics to any of our
officers and directors we will publish it on our website.
ITEM 1A. RISK FACTORS
The initiatives that we are implementing in an effort to improve our sales productivity, revenue and income
could be unsuccessful, which could harm our business and may further depress the price of our stock.
In an effort to improve our revenue and income levels, we have implemented several strategic initiatives,
including the following:
• We increased the number of our North American sales professionals and added additional sales
managers.
• We launched our new Pearl product worldwide.
• We dedicated additional sales professionals to work in conjunction with PSS, and increased our focus
and attention on our PSS relationship.
We believe these initiatives should improve our revenue and income. However, these initiatives may not be
successful for several reasons: they may lead to employee turnover; there are no assurances that we can hire and
train new sales employees; we may not be able to successfully market our new products; and our efforts to
improve our sales productivity may result in instability to our operations, causing harm to our business and a
further decline in our stock price.
Our revenue and earnings are difficult to predict and our decision to not provide public guidance could harm
our business, and our stock price might become more volatile and could decline.
We historically provided guidance to the investment community regarding our anticipated future operating
performance, both for the coming quarters and fiscal year. However, beginning with the release of our earnings
for the quarter ended September 30, 2007, we have discontinued our practice of providing financial guidance
because the following factors have made it difficult for us to accurately forecast our revenue and earnings:
•
•
Some of our publicly-traded competitors have reported reduced growth rates for the second half of
calendar 2007, which could indicate signs of a slowing market growth rate;
There has been a slower-than-expected adoption of our new Pearl product by new customers;
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX02
9.9.26
SER soeus0pa
PAL
ˆ1D36CRB0V36LP=WSŠ
4*
1C
44641 TX 20
PMT
PS
1D36CRB0V36LP=W
CLN
13-Mar-2008 13:54 EST
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•
The sales productivity of our recently-hired North American sales professionals has not increased to our
expected level;
• We have short sales cycles in our business; and
• Many of our customer orders in any given quarter are received during the last month of a quarter, which
results in uncertainties in our ability to ship our products by the end of the quarter.
Due to our decision to not provide public guidance, if, in the future, our actual results are below the expectations
of third party financial analysts, our business could be harmed, the volatility of our stock price could increase,
and our stock price could decline significantly as a result.
Our North American sales team has many new sales professionals and managers. If we are unable to
effectively train, retain and manage these employees, our ability to manage and expand our business will be
harmed, which would impair our future revenue and profitability.
As of December 31, 2007, as a result of our sales-expansion efforts and sales employee turnover in 2007, a
significant number of our sales professionals and sales managers on our North American sales team had been in
their respective roles for less than a year. Our experience is that new sales professionals are at higher risk for
employee turnover and generally take two to three quarters to achieve effective productivity levels. Our success
largely depends on our ability to manage and improve the productivity levels of our sales professionals and
worldwide distribution network. If we fail to manage, or do not improve the productivity of, any material part of
that network, including the North American sales team, this could lead to reduced revenue and employee
turnover, which could materially harm our business. If we experience significant levels of attrition among our
sales professionals or our sales managers, our revenue and profitability may be adversely affected as a result.
To successfully market and sell our products internationally, we must address many issues with which we have
little or no experience.
For the quarter and year ended December 31, 2007, approximately 42% and 37%, respectively, of our revenue
was derived from international customers, which is a material component of our growth strategy. We depend on
third-party distributors and a relatively new direct sales operation to sell our products internationally, and if these
distributors or direct sales personnel underperform, we may be unable to increase or maintain our level of
international revenue. We will need to expand the territories in which we sell our products and attract additional
international distributors to grow our business. Distributors may not accept our business or commit the necessary
resources to market and sell our products to the level of our expectations. If current or future distributors do not
perform adequately, or if we are unable to engage distributors in particular geographic areas, we may not be able
to realize international revenue growth. Additionally, we expect to expand our direct sales force in Europe and
Asia. If we are unable to hire, retain and obtain satisfactory performance from such additional personnel, our
revenue from international operations may be adversely affected.
We believe that an increasing amount of our future revenue will come from international sales as we expand our
overseas operations and develop opportunities in additional international territories. International sales are
subject to a number of risks, including:
• Difficulties in staffing and managing our foreign operations;
• Difficulties in penetrating markets in which our competitors’ products are more established;
• Reduced protection for intellectual property rights in some countries;
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Export restrictions, trade regulations and foreign tax laws;
Fluctuating foreign currency exchange rates;
Foreign certification and regulatory requirements;
20
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CRB0PQQLMRW9Š
2*
1C
44641 TX 21
PMT
PS
1D36CRB0PQQLMRW
CLN
13-Mar-2008 04:38 EST
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•
Lengthy payment cycles and difficulty in collecting accounts receivable;
• Customs clearance and shipping delays;
•
•
•
Political and economic instability;
Lack of awareness of our brand in international markets; and
Preference for locally-produced products.
If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the
situation, and if we were unsuccessful at finding a solution, our revenue may decline.
We may incur substantial expenses if our practices are shown to have violated the Telephone Consumer
Protection Act.
We had previously used facsimiles to disseminate commercial information about our business to customers and
potential customers. In February 2008, we adopted a policy of sending commercial facsimiles only to our
customers and others with whom we have an existing business relationship.
the federal Telephone Consumer Protection Act, or TCPA,
Under
recipients of unsolicited facsimile
“advertisements” may be entitled to damages of $500 per violation for inadvertent violations and $1,500 per
violation for knowing or willful violations.
In January 2008, a TCPA class action lawsuit was filed against us in the Illinois Circuit Court, Cook County, by
Bridgeport Pain Control Center, LTD., seeking monetary damages, injunctive relief, costs and other relief. The
complaint alleges that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff
and other recipients without the prior express invitation or permission of the recipients. On February 22, 2008,
we removed the case to federal court in the Northern District of Illinois, and filed our response to the complaint
on February 29, 2008. Although we are continuing to investigate the number of facsimiles transmitted during the
period for which the plaintiff in the lawsuit seeks class certification and the number of these facsimiles that were
“unsolicited” within the meaning of the TCPA, we expect the number of unsolicited facsimiles could be large.
We intend to defend this lawsuit vigorously, including the plaintiff’s allegations seeking class certification, but
litigation is subject to numerous uncertainties and we are unable to predict the ultimate outcome of this matter.
Even if we prevail in this lawsuit, other individual or class action claims may be brought against us alleging
violations of the TCPA. Moreover, the amount of any potential liability in connection with this lawsuit will
depend, to a large extent, on whether a class in this type of action is certified and, if one is certified, on the scope
of the class, neither of which we can predict at this time.
We have not recorded a liability related to this lawsuit. However, we may determine in the future that an accrual
is required, and we may be required to pay damages in respect of this lawsuit out of our transmission of
facsimiles, any of which could materially and adversely affect our results of operations, cash flows and financial
condition. Regardless of the outcome, this lawsuit may cause us to incur significant expenses and divert the
attention of our management and key personnel from our business operations.
We have not tendered this lawsuit to our insurance carrier, may not do so, and, even if we do so, coverage may
be disputed. Even if coverage is determined to apply, since the potential liability under this claim could be
substantial, our coverage may not be sufficient to satisfy any damages or expenses that we may be required to
pay.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CRB0PQTK72WAŠ
5*
1C
44641 TX 22
PMT
PS
1D36CRB0PQTK72W
CLN
13-Mar-2008 04:38 EST
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We compete against companies that have longer operating histories, more established products and greater
resources, each of which may prevent us from achieving significant market penetration or increased operating
results.
Our industry is subject to intense competition. Our products compete against similar products offered by public
companies, such as Candela, Cynosure, Elen (in Italy), Iridex, Palomar, Syneron and Thermage, as well as
private companies such as Alma, Aesthera, Lumenis, Reliant, Sciton and several other companies. Additional
competitors may enter the market, and we are likely to compete with new companies in the future. Competition
with these companies could result in price-cutting, reduced profit margins and loss of market share, any of which
would harm our business, financial condition and results of operations. We also face competition from medical
products, such as Botox, an injectable compound used to reduce wrinkles, and collagen injections. Other
alternatives to the use of our products include sclerotherapy, a procedure involving the injection of a solution into
the vein to collapse it, electrolysis, a procedure involving the application of electric current to eliminate hair
follicles, and chemical peels. We may also face competition from manufacturers of pharmaceutical and other
products that have not yet been developed. Our ability to compete effectively depends upon our ability to
distinguish our company and our products from our competitors and their products, and includes such factors as:
•
•
•
Intellectual property protection;
Product performance;
Product pricing;
• Quality of customer support;
•
Success and timing of new product development and introductions; and
• Development of successful distribution channels, both domestically and internationally.
Some of our competitors have more established products and customer relationships than we do, which could
inhibit our market penetration efforts. For example, we have encountered, and expect to continue to encounter,
situations where, due to pre-existing relationships, potential customers decided to purchase additional products
from our competitors. Potential customers also may need to recoup the cost of expensive products that they have
already purchased from our competitors and may decide not to purchase our products, or to delay such purchases.
If we are unable to achieve continued market penetration, we will be unable to compete effectively and our
business will be harmed.
In addition, some of our current and potential competitors have significantly greater financial, research and
development, business development, manufacturing, and sales and marketing resources than we have. Our
competitors could utilize their greater financial resources to acquire other companies to gain enhanced name
recognition and market share, as well as new technologies or products that could effectively compete with our
existing product
lines. To compete effectively, we have to demonstrate that our products are attractive
alternatives to other devices and treatments by differentiating our products on the basis of performance, brand
name, service and price. Our competitors could form strategic alliances with other companies to develop
products and solutions that effectively compete with our products. For example, Palomar and Syneron have each
entered into agreements with Proctor and Gamble for the proposed development of home-use aesthetic devices.
And Syneron entered into an agreement with Obagi Medical Products to study the effects of using Obagi’s skin
care products during treatments with Syneron aesthetic devices. Business combinations and alliances by our
competitors could increase competition, which could harm our business.
Competition among providers of laser and other energy-based devices for the aesthetic market is characterized
by rapid innovation, and we must continuously develop or acquire new products and successfully introduce
them or our revenue may decline.
Some of our competitors release new products more often and more successfully than we do. For example, in the
second half of 2007, revenue from sales of our new Pearl product to new customers did not meet our
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CRB0PQZ0NYW"Š
2*
1C
44641 TX 23
PMT
PS
1D36CRB0PQZ0NYW
CLN
13-Mar-2008 04:39 EST
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expectations, although revenue from sales of Pearl upgrades to existing customers grew significantly and was the
primary reason for the 217% and 104% increases in upgrade revenue in the third and fourth quarter of 2007,
compared to the corresponding periods in 2006, respectively. We believe that, to increase revenue from sales of
new products and related product upgrades, we need to continue developing our clinical support and increasing
market awareness of the benefits of those new products. If we fail to successfully commercialize any of our
products, our business could be harmed.
While we attempt to protect our products through patents and other intellectual property, there are few barriers to
entry that would prevent new entrants or existing competitors from developing products that compete directly
with ours. For example, while our CoolGlide product was the first long-pulse Nd:YAG, or long wavelength, laser
system cleared by the FDA for permanent hair reduction on all skin types, competitors have subsequently
introduced systems that utilize Nd:YAG lasers, and received FDA clearances to market these products as treating
all skin types. We expect
that any competitive advantage we may enjoy from other current and future
innovations, such as combining multiple hand pieces in a single system to perform a variety of applications, may
diminish over time, as companies successfully respond to our, or create their own, innovations. Consequently, we
believe that we will have to continuously innovate and improve our products and technology to compete
successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue
could decline as our customers and prospects purchase our competitors’ products.
Our ability to compete effectively depends upon our ability to innovate, to develop, acquire and commercialize
new products and product enhancements, and to identify new markets for our technology.
We have created products to apply our technology to hair removal, treatment of veins and skin rejuvenation,
including the treating of diffuse redness, skin laxity, fine lines, skin texture, pore size and pigmented lesions.
Currently, these applications represent the majority of laser and other energy-based aesthetic procedures. To
continue growing in the future, we must develop and acquire new and innovative aesthetic applications, identify
new markets for our existing technology, and develop and acquire new technology from various platforms. To
successfully expand our product offerings, we must, among other things:
• Develop or acquire new products that either add to or significantly improve our current products;
• Convince our customers and prospective customers that our new products or product upgrades would be
an attractive revenue-generating addition to their practices;
Sell our products to a broad customer base;
Identify new markets and alternative applications for our technology;
Protect our existing and future products with defensible intellectual property; and
Satisfy and maintain all regulatory requirements for commercialization.
•
•
•
•
Every year since 2000, we have introduced at least one new product. Historically, these introductions have been a
significant component of our financial performance. Our business strategy is based, in part, on our expectation
that we will continue to make annual product introductions that we can sell to new customers and to existing
customers as upgrades. Even with a significant investment in research and development, we may be unable to
continue to develop or acquire new products and technologies annually, or at all, which could adversely affect
our projected growth rate.
If there is not sufficient demand for the procedures performed with our products, practitioner demand for our
products could be inhibited, resulting in unfavorable operating results and reduced growth potential.
Continued expansion of the global market for laser-and other energy-based aesthetic procedures is a material
assumption of our growth strategy. Most procedures performed using our products are elective procedures not
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CRB0PR26YTW:Š
2*
1C
44641 TX 24
PMT
PS
1D36CRB0PR26YTW
CLN
13-Mar-2008 04:39 EST
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reimbursable through government or private health insurance, with the costs borne by the patient. The decision to
utilize our products may therefore be influenced by a number of factors, including:
•
•
•
The cost of procedures performed using our products;
The cost, safety and effectiveness of alternative treatments, including treatments which are not based
upon laser- or other energy-based technologies and treatments which use pharmaceutical products;
The success of our sales and marketing efforts;
• Consumer confidence, which may be impacted by political and macroeconomic conditions, such as
recession, continuing increases in oil prices, high unemployment rates, increased interest rates and
subprime mortgage failures; and
•
The education of our customers and patients on the benefits and uses of our products, compared to
competitors’ products and technologies.
Also, some of our publicly-traded competitors have reported reduced growth rates for the second-half of calendar
2007, which could indicate signs of a slowing demand for aesthetic procedures.
If, as a result of these factors, there is not sufficient demand for the procedures performed with our products,
practitioner demand for our products could be reduced, which could have a material adverse effect on our
business, financial condition, revenue and result of operations.
If PSS World Medical fails to perform to our expectations, we may fail to achieve anticipated operating
results.
We have a distribution agreement with PSS World Medical. PSS sales professionals work in coordination with
our sales force to locate new customers for our products throughout the United States. For the years ended
December 31, 2007, 2006, and 2005, approximately 14%, 15% and 16% of our revenue came from PSS,
respectively. Although we have dedicated additional sales professionals to work closely with, and increase the
focus and attention on, our PSS relationship, it may take time for the increase in resources to result in an
improvement in revenue from our PSS relationship. In addition, we can provide no assurances that the increased
focus on PSS will translate into increased revenue for us. Further, if PSS does not perform adequately under the
arrangement, or terminates our relationship, it may have a material adverse effect on our business, financial
condition and results of operations.
Two securities class action lawsuits were filed against us in April and May 2007, respectively, based upon the
decreases in our stock price following the announcement of our preliminary first quarter 2007 revenue and
earnings, and the announcement of our revised 2007 guidance. Defending ourselves against this litigation
could distract management and harm our business.
Two class action lawsuits were filed against us following declines in our stock price in the spring of 2007. On
November 1, 2007, the court ordered the two cases consolidated. We will incur legal costs as a result of this
litigation. Although we retain director and officer liability insurance, there can be no guarantee that such
insurance will cover the claims that are made or will insure us fully for all losses on covered claims. This
litigation may distract our management and consume resources that would otherwise have been directed toward
running our business. Each of these factors could harm our business.
We hold auction-rate securities in our portfolio of investments. Due to failed auctions for some of our auction
rate investments in February 2008, we are unable to readily liquidate our auction rate securities into cash,
future earnings could be reduced if we have to take an impairment charge, our business could be harmed and
our stock price could decline significantly as a result.
We invest our excess cash primarily in money market funds and in highly liquid debt instruments of the U.S.
government and its agencies, U.S. municipalities, and in bonds of high-quality corporate issuers. At
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CRB0PR35GCWdŠ
2*
1C
44641 TX 25
PMT
PS
1D36CRB0PR35GCW
CLN
13-Mar-2008 04:39 EST
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December 31, 2007, we had marketable securities of $95.9 million, of which $21.5 million was invested in
auction rate securities. Of the $21.5 million of auction rate securities, we classified $7.4 million under the caption
of ‘Marketable investments- long term portion’ in the Consolidated Balance Sheet.
As of February 29, 2008 we had $13.6 million of our investment portfolio invested in auction rate securities.
These auction rate securities provide liquidity via an auction process that resets the applicable interest rate at
predetermined calendar intervals, generally every 35 days—though auctions for some of the securities are held
every 360 days.
During the period from January 1, 2008 to February 29, 2008, auctions for $9.6 million of our investments in
auction rate securities failed due to the current overall credit concerns in capital markets. Upon an auction failure,
the interest rates do not reset at a market rate but instead reset based on a formula contained in the security,
which rate is generally higher than the current market rate. The failure of the auctions impacts our ability to
readily liquidate our auction rate securities into cash until a future auction of these investments is successful or
the auction rate security is refinanced by the issuer into another type of debt instrument.
If in the future we are unable to liquidate our investments in auction rate securities and / or there is an other-than-
temporary impairment in their market value, our future earnings could be reduced if we have to take an
impairment charge, our business could be harmed and our stock price could decline significantly as a result.
The price of our common stock may fluctuate substantially. We have a limited number of shares of common
stock outstanding, a large portion of which is held by a small number of investors, which could result in the
increase in volatility of our stock price.
As of December 31, 2007, approximately 50% of our outstanding shares of common stock was held by ten
institutional investors. As a result of our relatively small public float, our common stock may be less liquid than
the stock of companies with broader public ownership. Among other things, trading of a relatively small volume
of our common stock may have a greater impact on the trading price for our shares than would be the case if our
public float were larger.
The public market price of our common stock has in the past fluctuated substantially and, given the current
concentration of stockholders, may continue to do so in the future. The market price for our common stock could
also be affected by a number of other factors, including:
•
Sales of large blocks of our common stock, including sales by our executive officers, directors and our
large institutional investors;
• Quarterly variations in our, or our competitors’, results of operations;
• Changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our
failure to achieve analysts’ estimates;
•
•
The announcement of new products or service enhancements by us or our competitors;
The announcement of the departure of a key employee or executive officer;
• Regulatory developments or delays concerning our, or our competitors’ products;
•
The initiation of litigation by us or one of our competitors; and
• General market conditions and other factors unrelated to our operating performance or the operating
performance of our competitors.
Actual or perceived instability in our stock price could reduce demand from potential buyers of our stock,
thereby causing our stock price to decline.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZX1HQW(Š
1*
1C
44641 TX 26
IFV
PS
1D36CR9=6ZX1HQW
CLN
05-Mar-2008 10:53 EST
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Any acquisitions that we make could disrupt our business and harm our financial condition.
We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies.
We may also consider joint ventures and other collaborative projects. We may not be able to identify appropriate
acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any businesses,
products or technologies that we acquire. Furthermore, the integration of any acquisition and management of any
collaborative project may divert management’s time and resources from our core business and disrupt our
operations. We do not have any experience as a team with acquiring companies or products. If we decide to
expand our product offerings beyond laser and other energy-based products, we may spend time and money on
projects that do not increase our revenue. Any cash acquisition we pursue would diminish our available cash
balances to us for other uses, and any stock acquisition could be dilutive to our stockholders.
While we from time to time evaluate potential collaborative projects and acquisitions of businesses, products and
technologies, and anticipate continuing to make these evaluations, we have no present understandings,
commitments or agreements with respect to any material acquisitions or collaborative projects.
We may be involved in future costly intellectual property litigation, which could impact our future business
and financial performance.
Our competitors or other patent holders may assert that our present or future products and the methods we
employ are covered by their patents. In addition, we do not know whether our competitors own or will obtain
patents that they may claim prevent, limit or interfere with our ability to make, use, sell or import our products.
Although we may seek to resolve any potential future claims or actions, we may not be able to do so on
reasonable terms, or at all. If, following a successful third-party action for infringement, we cannot obtain a
license or redesign our products, we may have to stop manufacturing and selling the applicable products and our
business would suffer as a result. In addition, a court could require us to pay substantial damages, and prohibit us
from using technologies essential to our products, any of which would have a material adverse effect on our
business, results of operations and financial condition.
We may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual
property rights but also to protect our own intellectual property. For example, we have been, and may hereafter
become, involved in litigation to protect the trademark rights associated with our company name or the names of
our products. Infringement and other intellectual property claims, with or without merit, can be expensive and
time-consuming to litigate, and could divert management’s attention from our core business.
Intellectual property rights may not provide adequate protection for some or all of our products, which may
permit third parties to compete against us more effectively.
We rely on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect our
technology and products. At December 31, 2007, we had nine issued U.S. patents. Some of our components, such
as our laser module, electronic control system and high-voltage electronics, are not, and in the future may not be,
protected by patents. Additionally, our patent applications may not issue as patents or, if issued, may not issue in
a form that will be advantageous to us. Any patents we obtain may be challenged, invalidated or legally
circumvented by third parties. Consequently, competitors could market products and use manufacturing
processes that are substantially similar to, or superior to, ours. We may not be able to prevent the unauthorized
disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or
current employees, despite the existence generally of confidentiality agreements and other contractual
restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not
know whether the steps we have taken to protect our intellectual property will be effective. Moreover, the laws of
many foreign countries will not protect our intellectual property rights to the same extent as the laws of the
United States.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZX4KCW}Š
1*
1C
44641 TX 27
IFV
PS
1D36CR9=6ZX4KCW
CLN
05-Mar-2008 10:53 EST
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The absence of complete intellectual property protection exposes us to a greater risk of direct competition.
Competitors could purchase one of our products and attempt to replicate some or all of the competitive
advantages we derive from our development efforts, design around our protected technology, or develop their
own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is
not adequately protected against competitors’ products and methods, our competitive position and our business
could be adversely affected.
If we fail to obtain or maintain necessary FDA clearances for our products and indications, if clearances for
future products and indications are delayed or not issued, if there are federal or state level regulatory changes
or if we are found to have violated applicable FDA marketing rules, our commercial operations would be
harmed.
Our products are medical devices that are subject to extensive regulation in the United States by the FDA for
manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of
or labeling claim for an existing product, can be marketed in the United States, it must first receive either 510(k)
clearance or pre-marketing approval from the FDA, unless an exemption applies. Either process can be expensive
and lengthy. In the event that we do not obtain FDA clearances or approvals for our products, our ability to
market and sell them in the United States and revenue derived therefrom may be adversely affected.
Medical devices may be marketed in the United States only for the indications for which they are approved or
cleared by the FDA. For example, we have FDA clearance to market our Titan product in the United States only
for deep dermal heating, and are therefore prevented from promoting or advertising Titan in the United States for
any other indications. If we fail to comply with these regulations, it could result in enforcement action by the
FDA which could lead to such consequences as warning letters, adverse publicity, criminal enforcement action
and/or third-party civil litigation, each of which could adversely affect us.
We have obtained 510(k) clearance for the indications for which we market our products. However, our
clearances can be revoked if safety or effectiveness problems develop. We also are subject to Medical Device
Reporting regulations, which require us to report to the FDA if our products cause or contribute to a death or
serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury. Our
products are also subject to state regulations, which are, in many instances, in flux. Changes in state regulations
may impede sales. For example, federal regulations allow our products to be sold to, or on the order of, “licensed
practitioners,” as determined on a state-by-state basis. As a result, in some states, non-physicians may legally
purchase our products. However, a state could change its regulations at any time, thereby disallowing sales to
particular types of end users. We cannot predict the impact or effect of future legislation or regulations at the
federal or state levels.
The FDA and state authorities have broad enforcement powers. If we fail to comply with applicable regulatory
requirements, it could result in enforcement action by the FDA or state agencies, which may include any of the
following sanctions:
• Warning letters, fines, injunctions, consent decrees and civil penalties;
• Repair, replacement, recall or seizure of our products;
• Operating restrictions or partial suspension or total shutdown of production;
• Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses,
or modifications to existing products;
• Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
• Criminal prosecution.
If any of these events were to occur, it could harm our business.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=FJLLFRWeŠ
2*
1C
44641 TX 28
PMT
PS
1D36CR9=FJLLFRW
CLN
06-Mar-2008 08:50 EST
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If we fail to comply with the FDA’s Quality System Regulation and laser performance standards, our
manufacturing operations could be halted, and our business would suffer.
We are currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation,
or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design,
testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products.
Because our products involve the use of lasers, our products also are covered by a performance standard for
lasers set forth in FDA regulations. The laser performance standard imposes specific record-keeping, reporting,
product testing and product labeling requirements. These requirements include affixing warning labels to laser
products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the
QSR and laser performance standards through periodic unannounced inspections. Our failure to take satisfactory
corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser
performance standards could result in enforcement actions, including a public warning letter, a shutdown of our
manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, such as those
described in the preceding paragraph, which would cause our sales and business to suffer.
If we modify one of our FDA-approved devices, we may need to seek re-approval, which, if not granted, would
prevent us from selling our modified products or cause us to redesign our products.
Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that
would constitute a major change in its intended use would require a new 510(k) clearance or possibly a
pre-market approval. We may not be able to obtain additional 510(k) clearance or pre-market approvals for new
products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all.
Delays in obtaining future clearance would adversely affect our ability to introduce new or enhanced products in
a timely manner, which in turn would harm our revenue and future profitability. We have made modifications to
our devices in the past and may make additional modifications in the future that we believe do not or will not
require additional clearance or approvals. If the FDA disagrees, and requires new clearances or approvals for the
modifications, we may be required to recall and to stop marketing the modified devices, which could harm our
operating results and require us to redesign our products.
We may be unable to obtain or maintain international regulatory qualifications or approvals for our current
or future products and indications, which could harm our business.
Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely
from country to country. In addition, exports of medical devices from the United States are regulated by the
FDA. Complying with international regulatory requirements can be an expensive and time-consuming process
and approval is not certain. The time required to obtain clearance or approvals, if required by other countries,
may be longer than that required for FDA clearance or approvals, and requirements for such clearances or
approvals may significantly differ from FDA requirements. We may be unable to obtain or maintain regulatory
qualifications, clearances or approvals in other countries. We may also incur significant costs in attempting to
obtain and in maintaining foreign regulatory approvals or qualifications. If we experience delays in receiving
necessary qualifications, clearances or approvals to market our products outside the United States, or if we fail to
receive those qualifications, clearances or approvals, we may be unable to market our products or enhancements
in international markets effectively, or at all, which could have a material adverse effect on our business and
growth strategy.
The expense and potential unavailability of insurance coverage for our customers could adversely affect our
ability to sell our products, and therefore our financial condition.
Some of our customers and prospective customers have had difficulty in procuring or maintaining liability
insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing
coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers
may discontinue using our products and potential customers may opt against purchasing laser and other energy-
28
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=FJLZNCW<Š
2*
1C
44641 TX 29
PMT
PS
1D36CR9=FJLZNCW
CLN
06-Mar-2008 08:50 EST
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based products due to the cost or inability to procure insurance coverage. The unavailability of insurance
coverage for our customers and prospects could adversely affect our ability to sell our products, and that could
harm our financial condition.
Because we do not require training for users of our products, and sell our products at times to non-physicians,
there exists an increased potential for misuse of our products, which could harm our reputation and our
business.
Federal regulations allow us to sell our products to or on the order of “licensed practitioners.” The definition of
“licensed practitioners” varies from state to state. As a result, our products may be purchased or operated by
physicians with varying levels of training, and in many states, by non-physicians, including nurse practitioners,
chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications
or training for purchasers or operators of our products. We do not supervise the procedures performed with our
products, nor do we require that direct medical supervision occur. We and our distributors generally offer but do
not require product training to the purchasers or operators of our products. In addition, we sometimes sell our
systems to companies that rent our systems to third parties and that provide a technician to perform the
procedures. The lack of training and the purchase and use of our products by non-physicians may result in
product misuse and adverse treatment outcomes, which could harm our reputation and our business, and, in the
event these result in product liability litigation, distract management and subject us to liability, including legal
expenses.
Product liability suits could be brought against us due to a defective design, material or workmanship or
misuse of our products and could result in expensive and time-consuming litigation, payment of substantial
damages and an increase in our insurance rates.
If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we
may become subject to substantial and costly litigation by our customers or their patients. Misusing our products or
failing to adhere to operating guidelines could cause significant eye and skin damage, and underlying tissue damage.
In addition, if our operating guidelines are found to be inadequate, we may be subject to liability. We have been
involved, and may in the future be involved, in litigation related to the use of our products. Product liability claims
could divert management’s attention from our core business, be expensive to defend and result in sizable damage
awards against us. We may not have sufficient insurance coverage for all future claims. We may not be able to
obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities.
Any product liability claims brought against us, with or without merit, could increase our product liability insurance
rates or prevent us from securing continuing coverage, could harm our reputation in the industry and could reduce
product sales. In addition, we have been experiencing steep increases in our product liability insurance premiums. If
our premiums continue to rise, we may no longer be able to afford adequate insurance coverage.
If we are unable to maintain adequate insurance coverage, or we have product liability claims in excess of our
insurance coverage, claims would be paid out of cash reserves, thereby harming our financial condition,
operating results and profitability.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply
shortages and price fluctuations, which could harm our business.
Many of the components and materials that comprise our products are currently manufactured by a limited
number of suppliers. A supply interruption or an increase in demand beyond our current suppliers’ capabilities
could harm our ability to manufacture our products until a new source of supply is identified and qualified. Our
reliance on these suppliers subjects us to a number of risks that could harm our business, including:
•
Interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;
• Delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s
variation in a component;
29
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=FJMBV=WpŠ
2*
1C
44641 TX 30
PMT
PS
1D36CR9=FJMBV=W
CLN
06-Mar-2008 08:50 EST
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• A lack of long-term supply arrangements for key components with our suppliers;
•
Inability to obtain adequate supply in a timely manner, or on reasonable terms;
• Difficulty locating and qualifying alternative suppliers for our components in a timely manner;
•
Production delays related to the evaluation and testing of products from alternative suppliers, and
corresponding regulatory qualifications; and,
• Delay in supplier deliveries.
Any interruption in the supply of components or materials, or our inability to obtain substitute components or
materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the
demand of our customers, which would have an adverse effect on our business.
Components used in our products are complex in design, and any defects may not be discovered prior to
shipment to customers, which could result in warranty obligations that would reduce our revenue and
increase our cost.
In manufacturing our products, we depend upon third parties for the supply of various components. Many of
these components require a significant degree of technical expertise to produce. If our suppliers fail to produce
components to specification, or if the suppliers, or we, use defective materials or workmanship in the
manufacturing process, the reliability and performance of our products will be compromised.
If our products contain defects that cannot be repaired easily and inexpensively, we may experience:
•
Loss of customer orders and delay in order fulfillment;
• Damage to our brand reputation;
•
•
Increased cost of our warranty program due to product repair or replacement;
Inability to attract new customers;
• Diversion of resources from our manufacturing and research and development departments into our
service department; and
•
Legal action.
The occurrence of any one or more of the foregoing could materially harm our business.
We forecast sales to determine requirements for components and materials used in our products and if our
forecasts are incorrect, we may experience either delays in shipments or increased inventory costs.
We keep limited materials and components on hand. To manage our manufacturing operations with our suppliers,
we forecast anticipated product orders and material requirements to predict our inventory needs up to twelve months
in advance and enter into purchase orders on the basis of these requirements. Our limited historical experience may
not provide us with enough data to accurately predict future demand. If our business expands, our demand for
components and materials would increase and our suppliers may be unable to meet our demand. If we overestimate
our component and material requirements, we will have excess inventories, which would increase our expenses. If
we underestimate our component and material requirements, we may have inadequate inventories, which could
interrupt, delay or prevent delivery of our products to our customers. Any of these occurrences would negatively
affect our financial performance and the level of satisfaction our customers have with our business.
Lack of demand for our products in the non-core market would harm our anticipated revenue growth.
Most of our revenue in the United States is derived from sales to customers outside of the core dermatologist and
plastic surgeon specialties, such as family practitioners, primary care physicians, gynecologists and medi-spas.
Continuing to achieve further penetration into this market is a material assumption of our growth strategy.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=FJNPL5W1Š
2*
1C
44641 TX 31
PMT
PS
1D36CR9=FJNPL5W
CLN
06-Mar-2008 08:51 EST
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Demand for our products in the non-core market could be weakened by several factors including poor financial
performance of businesses introducing aesthetic procedures to their practice or medi-spas, reduced patient
demand for alternative treatments and services being provided by non-core practitioners and an increase in
malpractice lawsuits against non-core practitioners. If we do not achieve anticipated demand for our products in
the non-core market, our revenue may be adversely impacted.
We depend on skilled and experienced personnel to operate our business effectively. If we are unable to
recruit, hire and retain these employees, our ability to manage and expand our business will be harmed, which
would impair our future revenue and profitability.
Our success largely depends on the skills, experience and efforts of our officers and other key employees. We do
not have employment contracts with any of our officers or other key employees. Any of our officers and other
key employees may terminate their employment at any time. We do not have a succession plan in place for each
of our officers and key employees. In addition, we do not maintain “key person” life insurance policies covering
any of our employees. The loss of any of our senior management team members could weaken our management
expertise and harm our business.
Our ability to retain our skilled labor force and our success in attracting and hiring new skilled employees are
critical factors in determining whether we will be successful in the future. We may not be able to meet our future
hiring needs or retain existing personnel. We will face particularly significant challenges and risks in hiring,
training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain
personnel, particularly technical and sales and marketing personnel, would materially harm our ability to
compete effectively and grow our business.
Our profit margins may vary over time.
Our profit margins may be adversely affected by a number of factors, including decreases in our shipment
volume, reductions in, or obsolescence of, our inventory, shifts in our product mix and increased expenses
associated with repairing defective products covered by our warranty program. In addition, the competitive
market environment in which we operate may adversely affect pricing for our products. Because we own most of
our manufacturing capacity, a significant portion of our operating costs are fixed. If we experience a decrease in
shipment volume, or have to reduce our pricing to remain competitive, or experience a greater than expected
failure rate for any of our products, etc., our gross and operating margins will be adversely impacted.
We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies.
We do not actively hedge our exposure to currency rate fluctuations. While we transact business primarily in
U.S. Dollars, and a significant proportion of our revenue is denominated in U.S. Dollars, a portion of our costs
and revenue is denominated in other currencies, such as the Euro, Japanese Yen, Australian Dollar, Canadian
Dollar and British Pound Sterling. As a result, changes in the exchange rates of these currencies to the
U.S. Dollar will affect our net income.
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
Our investment portfolio consists of both high investment grade corporate and municipal securities that have a
maximum effective maturity of up to two years. In addition to bonds, we invest in variable rate demand notes and
auction-rate-securities whose interest rates reset generally every 35 days—though auctions for some of the
securities are held every 360 days. The longer the duration of a security, the more susceptible it is to changes in
market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a
mark-to-market unrealized loss. For example, assuming a hypothetical increase in interest rates of one percentage
point, the fair value of our total investment portfolio as of December 31, 2007 would have potentially decreased
by $443,000, resulting in an unrealized loss that would subsequently adversely impact our earnings. As a result,
changes in the market interest rates will affect our future net income.
31
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=FJQHKNWuŠ
2*
1C
44641 TX 32
PMT
PS
1D36CR9=FJQHKNW
CLN
06-Mar-2008 08:51 EST
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Anti-takeover provisions in our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware
law, contain provisions that could discourage a takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that
might enable our management to resist a takeover, and might make it more difficult for an investor to acquire a
substantial block of our common stock. These provisions include:
• A classified board of directors;
• Advance notice requirements to stockholders for matters to be brought at stockholder meetings;
• A supermajority stockholder vote requirement for amending certain provisions of our Amended and
Restated Certificate of Incorporation and Bylaws;
Limitations on stockholder actions by written consent; and
The right to issue preferred stock without stockholder approval, which could be used to dilute the stock
ownership of a potential hostile acquirer.
•
•
These provisions might discourage, delay or prevent a change in control of our company or a change in our
management. The existence of these provisions could adversely affect the voting power of holders of common
stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
Our effective income tax rate may vary significantly.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates
could be unfavorably affected by changing interpretations of existing tax laws or regulations, changes in
estimates of prior years’ items, unanticipated decreases in the amount of revenue or earnings in countries with
low statutory tax rates, changes in the valuation of our deferred tax assets and liabilities, future levels of
research and development spending, deductions for employee stock option exercises being different from what
we projected, and changes in overall levels of income before taxes.
The quarterly royalty payments under our patent license with Palomar are subject to an annual audit.
Any material adjustments from this audit could result in a material adverse effect on our business and our
stock price.
We pay royalties to Palomar after each fiscal quarter for applicable product sales made in that quarter. These
royalty amounts are subject to an annual review by an independent public accountant hired by Palomar. The
independent public accountant’s interpretation of the applicable royalty rate for any new products, or
combination of products, and the net revenue from which to calculate the royalty, could be different from ours. In
the event that the independent public accountant’s assessment of the accuracy of our estimated royalty payments
to Palomar is materially different from our calculations, we could owe a higher amount to Palomar than we
accrued for, and would then have to report it as an additional expense in our financial statements for the
applicable period. This could result in a material adverse effect on our business and stock price.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on
investment may be limited to the value of our stock.
We have never paid cash dividends on our common stock and do not currently anticipate paying cash dividends
on our common stock. The payment of dividends on our common stock will depend on our earnings, financial
condition and other business and economic factors affecting us at such time as our board of directors may
consider relevant. If we do not pay dividends, our stock may be less valuable because a return on investment will
only occur if our stock price appreciates.
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32
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=FJSWW1WEŠ
3*
1C
44641 TX 33
PMT
PS
1D36CR9=FJSWW1W
CLN
06-Mar-2008 08:51 EST
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters and U.S. operations are located in a 66,000 square foot facility in Brisbane,
California. We lease these premises under a non-cancelable operating lease which expires in 2014. In addition,
we have leased office facilities of approximately 5,790 square feet, 2,690 square feet, and 1,240 square feet, in
Japan, Switzerland, and France, respectively. The lease in Switzerland expires in July 2008, the two leases in
Japan expire in May 2008 and July 2010, respectively, and the lease in France expires in December 2009. We
believe that these facilities are adequate for our current and future needs for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
Two securities class action lawsuits were filed against us and two of our executive officers in April 2007 and
May 2007, respectively, in the U.S. District Court for the Northern District of California following declines in
our stock price. The plaintiffs claim to represent purchasers of our common stock from January 31, 2007 through
May 7, 2007. The complaints generally allege that materially false statements and omissions were made
regarding our financial prospects, and seek unspecified monetary damages. On November 1, 2007, the Court
ordered the two cases consolidated. On December 17, 2007, the plaintiffs filed a consolidated, amended
complaint, and on January 31, 2008, we filed a motion to dismiss that complaint. A hearing on our motion is
scheduled with the Court for May 1, 2008. We intend to defend this consolidated case vigorously. Although we
retain director and officer liability insurance, there is no assurance that such insurance will cover the claims that
are made or will insure us fully for all losses on covered claims. Since the outcome of this litigation is
unpredictable, and the amount that could be payable is not reasonably estimable, since we believe that a
significant adverse result for us is not probable, no expense has been recorded with respect to the contingent
liability associated with this matter.
A Telephone Consumer Protection Act, or TCPA, class action lawsuit was filed against us in January 2008 in the
Illinois Circuit Court, Cook County, by Bridgeport Pain Control Center, LTD., seeking monetary damages,
injunctive relief, costs and other relief. The complaint alleges that we violated the TCPA by sending unsolicited
advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission
of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements may be entitled to damages
of $500 per violation for inadvertent violations and $1,500 per violation for knowing or willful violations.
On February 22, 2008, we removed the case to federal court in the Northern District of Illinois, and filed our
response to the complaint on February 29, 2008. Although we are continuing to investigate the number of
facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification and the
number of these facsimiles that were “unsolicited” within the meaning of the TCPA, we expect that the number
of unsolicited facsimiles could be large. We intend to defend this case vigorously, including the plaintiff’s
allegations seeking class certification. Since the outcome of this litigation is unpredictable, and since the amount
that could be payable is not reasonably estimable, no expense has been recorded with respect to the contingent
liability associated with this matter. However, we may determine in the future that an accrual is required, and we
may be required to pay damages in respect of this lawsuit, any of which could materially and adversely affect our
results of operations, cash flows and financial condition. We have not tendered this lawsuit to our insurance
carrier, may not do so, and, even if we do so, coverage may be disputed. Even if coverage is determined to apply,
since the potential liability under this lawsuit could be substantial, our insurance coverage may not be sufficient
to satisfy any damages or expenses that we may be required to pay.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
33
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FORM 10-K
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Exchange Listing
Our common stock trades on The NASDAQ Global Market under the symbol “CUTR.” As of February 29, 2008,
the closing sale price of our common stock was $12.68 per share.
Common Stockholders
We had 10 stockholders of record as of February 29, 2008. Since many stockholders choose to hold their shares
under the name of their brokerage firm, we believe, the actual number of stockholders was approximately 5,700.
Stock Prices
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated
fiscal periods.
Common Stock
2007
2006
High
Low
High
Low
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd Quarter
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27.04
26.55
38.39
37.48
$14.44
20.84
23.40
27.06
$29.93
26.59
27.94
31.24
$25.32
18.86
16.49
24.99
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CUTERA, INC.,
NASDAQ MARKET INDEX (U.S.) AND NASDAQ MEDICAL EQUIPMENT
S
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A
L
L
O
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275
250
225
200
175
150
125
100
75
50
25
0
3
/
3
6
/
3
9
/
3
1
/
0
4
0
/
0
4
0
/
0
4
1
2
/
3
1
/
0
4
3
/
3
6
/
3
9
/
3
1
/
0
5
0
/
0
5
0
/
0
5
1
2
/
3
1
/
0
5
3
/
3
6
/
3
9
/
3
1
/
0
6
0
/
0
6
0
/
0
6
1
2
/
3
1
/
0
6
3
/
3
6
/
3
9
/
3
1
/
0
7
0
/
0
7
0
/
0
7
1
2
/
3
1
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0
7
CUTERA, INC.
NASDAQ MEDICAL EQUIPMENT
NASDAQ MARKET INDEX (U.S.)
ASSUMES $100 INVESTED ON MAR. 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2007
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Dividend Policy
We have never paid a cash dividend and have no present intention to pay cash dividends in the foreseeable
future. We intend to retain any future earnings for use in our business.
We did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
The information required by this Item regarding equity compensation plans is incorporated by reference to the
information set forth in Part III Item 12 of this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
Period
June 1 – 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1 – 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August 1 – 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Number
of Shares
Purchased
123,800
234,283
749,773
Average
Price
Paid
per
Share
$24.36
$23.94
$21.84
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs *
Millions of Dollars
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
123,800
234,283
749,773
21,984
16,376
—
1,107,856
$22.57
1,107,856
*
On May 15, 2007, the Company’s Board of Directors approved a stock repurchase program under which the Company was
authorized to use up to $25 million to repurchase shares of its common stock. The Company entered into a pre-arranged, Rule
10b5-1 trading plan with a broker to facilitate the repurchases of its shares. Acquisitions were made in accordance with the trading
plan, at prevailing prices, subject to market conditions and other factors. This repurchase program terminated on August 31, 2007,
when the Company had acquired $25 million worth of shares of its common stock. The stock repurchased under the plan was
cancelled and returned to authorized share status.
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12 for information regarding securities authorized for issuance under equity compensation
plans.
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FORM 10-K
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ITEM 6. SELECTED FINANCIAL DATA
The table set forth below contains certain consolidated financial data for each of our last five fiscal years. This
data should be read in conjunction with the detailed information, financial statements and related notes, as well
as Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere
herein.
Consolidated Statements of Operations Data (in thousands, except per share data):
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101,726
35,002
$100,692
29,859
$75,620
19,792
$52,641
14,689
$39,088
12,317
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,724
70,833
55,828
37,952
26,771
Year ended December 31,
2007
2006
2005
2004
2003
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . .
38,277
7,169
11,721
—
57,167
9,557
4,207
13,764
3,260
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,504
Net income available to common stockholders used in
basic net income per share . . . . . . . . . . . . . . . . . . . . . . .
$ 10,504
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.80
0.74
$
$
$
$
Weighted-average number of shares used in per share
calculations:
32,890
6,473
15,192
18,935
25,021
5,353
8,782
—
19,326
4,549
8,924
—
13,792
3,448
4,367
—
73,490
39,156
32,799
21,607
(2,657)
3,596
939
(1,184)
16,672
2,034
18,706
4,905
5,153
632
5,785
2,025
5,164
30
5,194
2,088
2,123
$13,801
$ 3,760
$ 3,106
2,123
$13,801
$ 3,284
0.17
0.15
$
$
1.20
1.00
$
$
0.38
0.31
$
$
$
963
0.46
0.35
2,106
8,835
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,153
12,558
11,535
8,573
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,228
14,278
13,864
12,222
As of December 31,
2007
2006
2005
2004
2003
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable convertible preferred stock . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,054
88,510
106,894
138,653
—
34,279
109,353
$ 11,800
96,285
111,999
133,875
—
23,866
109,732
$
5,260
86,736
98,318
111,958
—
21,743
97,177
$ 7,070
59,200
68,519
80,549
—
7,942
68,456
$10,290
—
14,205
24,198
7,372
4,182
7,875
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FORM 10-K
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached financial statements and notes thereto,
and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2007. This
Annual Report on Form 10-K, including the following sections, contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to,
statements relating to our future financial performance, the ability to grow our business, expectations regarding
new products and applications, expectations for improvements in our sales and distribution network, future
capital expenditures and requirements and the impact of exchange rate volatility. These forward-looking
statements involve risks and uncertainties. The cautionary statements set forth below and those contained in
Item 1A—“Risk Factors” commencing on page 19, identify important factors that could cause actual results to
differ materially from those predicted in any such forward-looking statements. The reader is cautioned not to
place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the
date of this Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements to
reflect events or circumstances occurring after the date of this Form 10-K.
Introduction
The Management’s Discussion and Analysis, or MD&A, is organized as follows:
•
Executive summary- This section provides a general description of our business, a brief discussion of
our product lines and the opportunities, trends, challenges and risks we focus on in the operation of our
business.
• Critical accounting policies and estimates- This section describes the key accounting policies that are
affected by critical accounting estimates.
•
•
•
Recent accounting pronouncements- This section describes the issuance and effect of new accounting
pronouncements that are applicable to our Company.
Results of operations- This section provides our analysis and outlook for the significant line items on
our Consolidated Statement of Operations.
Liquidity and capital resources- This section provides an analysis of our liquidity and cash flows, as
well as a discussion of our commitments that existed as of December 31, 2007.
Executive Summary
Company Description. We are a global medical device company engaged in the design, development,
manufacture, marketing and servicing of laser and other light-based aesthetics systems for practitioners
worldwide. We offer easy-to-use products on three platforms—CoolGlide, Xeo and Solera—which enable
physicians and other qualified practitioners to offer safe and effective aesthetic treatments to their customers.
Our corporate headquarters and U.S. operations are located in Brisbane, California, where we conduct our
manufacturing, warehousing, research, regulatory, sales, service marketing and administrative activities. In the
United States, we market, sell and service our products primarily through a direct sales force of 53 employees as
of December 31, 2007 and through a distribution relationship with PSS World Medical Shared Services, Inc., a
wholly-owned subsidiary of PSS World Medical, or PSS, which has over 700 sales professionals serving
physician offices throughout the United States. In addition, we also sell certain items, like Titan hand piece refills
and marketing brochures, via the web.
International sales are generally made through a direct sales force of 29 employees and through a worldwide
distributor network in approximately 34 countries as of December 31, 2007. Outside the United States, we have a
direct sales presence in Australia, Canada, France, Japan, Spain, Switzerland and the United Kingdom.
37
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Products. Our revenue is derived from the sale of products, product upgrades, service, and Titan hand piece
refills. Product revenue represents the sale of a system, which consists of one or more hand pieces and a console
that incorporates a universal graphic user interface, a laser and/or other light-based module, control system
software and high voltage electronics. However, depending on the application, the laser or other light-based
module is sometimes instead contained in the hand piece. We offer our customers the ability to select the system
that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as
their practice grows. This enables customers to upgrade their systems whenever they want and provides us with a
source of recurring revenue, which we classify as product upgrade revenue. Service revenue relates to
amortization of pre-paid maintenance and support contract revenue and receipts for services on out-of-warranty
products. Titan hand piece refill revenue is associated with our Titan hand piece, which requires a periodic
“refilling” process, which includes the replacement of the optical source after a set number of pulses have been
used.
Significant Business Trends. We believe that revenue growth has been, and will continue to be, primarily
attributable to the following:
•
Investments made in our global sales and marketing infrastructure, including the expansion of our sales
force to increase our market penetration in the aesthetic laser market.
• Continuing introduction of new aesthetic products and applications.
• Marketing to physicians outside the core dermatology and plastic surgeon specialties.
• Generating service, upgrade and Titan hand piece refill revenue from our growing installed base of
customers.
In 2007, compared to 2006, our U.S. revenue declined 8% and our international revenue grew 22%. In contrast,
in 2006, compared to 2005, our U.S. revenue grew 28%, while our international revenue grew 46%. The weaker
U.S. revenue growth from 2006 to 2007, as compared from 2005 to 2006, was primarily attributable to lower
sales productivity of our recently-hired North American sales professionals and to slower-than-expected adoption
of our new Pearl product by new customers. Also, some of our public competitors have reported reduced growth
rates for the second half of the year ended December 31, 2007, which may indicate signs of a slowing market
growth rate that could have contributed to a decrease in our U.S. revenue growth rate. The stronger international
revenue growth in 2007, compared to U.S. revenue growth for that same period, was primarily attributable to
continuing investments in building our international sales distribution channels. These efforts have resulted in
increased revenue from several of our geographic locations, with growth primarily sourced from Australia,
Japan, many European countries and Latin America. As a result of this stronger international revenue growth,
international revenue as a percentage of total revenue increased to 37% in 2007, compared with 31% in 2006.
For 2007, our gross margin declined to 66%, compared to 70% in 2006. This decrease was primarily attributable
to lower introductory margins for our Pearl-enabled systems and upgrades that started shipping in June 2007,
reduced leverage of our manufacturing and service expenses due to lower than expected revenue, and $764,000
of higher patent royalty expense. Since the patent license was signed in the second quarter of 2006, royalty
expenses were incurred for sales made during the last three quarters of 2006, and for all four quarters of 2007.
Sales and Marketing expenses for 2007, compared to 2006, increased by $5.4 million, or 16%, due primarily to
expenses associated with the expansion of our worldwide sales force and management team. Sales and marketing
expenses as a percentage of total revenue increased to 38% in 2007, compared to 33% in 2006, due primarily to
lower sales productivity from the recently expanded North American sales team.
Research and Development expenses for 2007, compared with 2006, increased by $696,000, or 11%, due
primarily to increased expenses related to the development, testing and clinical research of our Pearl product,
which started shipping in June 2007. As a percentage of total revenue, research and development expenses
increased to 7% in 2007, compared to 6% in 2006.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FJX9QPWxŠ
5*
1C
44641 TX 39
PMT
PS
1D36CR9=FJX9QPW
CLN
06-Mar-2008 08:53 EST
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General and administrative expenses for 2007, compared with 2006, decreased by $3.5 million, or 23%, to $11.7
million and were 12% of net revenue. This decrease was primarily attributable to the following expenses incurred
in 2006 but not in 2007: $3.3 million of legal expenses related to the patent litigation matter settled in the second
quarter ended June 30, 2006 and a charge of approximately $505,000 relating to a liability for sales taxes in
certain jurisdictions that we had determined we did not have a taxable presence. In April and May 2007, two
securities class action lawsuits were filed against us and were later consolidated into one lawsuit. In 2007 we
incurred approximately $131,000 in legal fees to defend this class action lawsuit. However, given that we retain
director and officer liability insurance with a deductible, this litigation is not expected to have a material impact
on our expenses in 2008. In January 2008, a TCPA class action lawsuit was filed against us. For additional
details relating to these lawsuits see Part I, Item 3 “Legal Proceedings.”
Factors that May Impact Future Performance
Our industry is impacted by numerous competitive, regulatory and other significant factors. Our industry is
highly competitive and our future performance depends on our ability to compete successfully. Additionally, the
growth of our business relies on our ability to continue to develop new products and innovative technologies,
obtain regulatory clearances for our products, protect the proprietary technology of our products and our
manufacturing processes, manufacture our products cost effectively, and successfully market and distribute our
products in a profitable manner. If we fail to compete effectively, continue to develop new products and
technologies, obtain regulatory clearances, protect our intellectual property, manufacture our products cost
effectively, or market and distribute our products in a profitable manner, our business could suffer. A detailed
discussion of these and other factors that could impact our future performance are provided in Part I, Item 1A
“Risk Factors.”
Critical Accounting Policies and Estimates
The preparation of our financial statements and related disclosures in conformity with generally accepted
accounting principles in the United States, or GAAP, requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are based on
historical experience and on various other factors that we believe are reasonable under the circumstances. We
periodically review our accounting policies and estimates and make adjustments when facts and circumstances
dictate. In addition to the accounting policies that are more fully described in the Notes to the Consolidated
Financial Statements included in this Annual Report on Form 10-K, we consider the critical accounting policies
described below to be affected by critical accounting estimates. To the extent that there are material differences
between these estimates and actual results, our financial condition or results of operations will be affected.
Our critical accounting policies that are affected by accounting estimates are as follows:
Cash Equivalents and Marketable Securities
We maintain investment portfolio holdings of various issuers, types and maturities. We consider all highly liquid
investments purchased with original maturities of three months or less to be cash equivalents. At December 31,
2007, all other investment securities are classified as available-for-sale and consequently are recorded on the
balance sheet at fair value with unrealized gains and losses reported as a component of accumulated other
comprehensive income (loss) within stockholders’ equity. Management assesses whether declines in the fair
value of investment securities are other than temporary. If the decline in fair value is judged to be other than
temporary, the cost basis of the individual security is written down to fair value and the amount of the write
down is included in earnings. In determining whether a decline is other than temporary, management considers
the following factors:
•
•
Length of the time and the extent to which the market value has been less than cost;
The financial condition and near-term prospects of the issuer; and
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FJXPY9WKŠ
5*
1C
44641 TX 40
PMT
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1D36CR9=FJXPY9W
CLN
06-Mar-2008 08:53 EST
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• Our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in market value.
To date we have had no declines in fair value that have been identified as other than temporary.
Stock-based Compensation Expense
We account for stock-based compensation in accordance with Statement of Financial Accounting Standards, or
SFAS 123(R), “Share-Based Payment (revised 2004).” SFAS 123(R) requires the measurement and recognition
of compensation expense for all share-based payment awards made to our employees and directors, including
stock options, employee stock purchases related to the Employee Stock Purchase Plan and restricted stock unit
awards. Our consolidated financial statements as of and for the year ended December 31, 2007 and 2006 reflect
the impact of SFAS 123(R). In accordance with the modified prospective transition method, our consolidated
financial statements for periods prior to 2006 have not been restated to reflect, and do not include, the impact of
SFAS 123(R). Share-based compensation expense recognized is based on the value of the portion of share-based
payment awards that is ultimately expected to vest. Share-based compensation expense recognized in our
Consolidated Statements of Operations for the years ended December 31, 2007 and 2006 included compensation
expense for share-based payment awards granted prior to, but not yet vested as of, December 31, 2005 based on
the fair value estimated in accordance with the pro forma provisions of SFAS 123 “Accounting for Stock-Based
Compensation,” or SFAS 123, and compensation expense for the share-based payment awards granted
subsequent to December 31, 2005 based on the fair value estimated in accordance with the provisions of SFAS
123(R). In conjunction with the adoption of SFAS 123(R), we estimated the fair value of each stock option on the
date of grant using the Black-Scholes option valuation model and elected to attribute the value of share-based
compensation to expense using the straight-line method, which was previously used for our pro forma
information required under SFAS No. 123. Given the Black-Scholes option valuation model requires the use of
subjective assumptions including expected stock price volatility, expected term of stock option, risk-free interest
rate and forfeiture rates, if any of the assumptions used change significantly, stock-based compensation expense
may differ materially in the future from that recorded in the current period.
Prior to the adoption of SFAS 123(R) with effect from January 1, 2006, we accounted for stock-based employee
compensation arrangements in accordance with the provisions of Accounting Principles Board, or APB, Opinion
No. 25, “Accounting for Stock Issued to Employees,” and its interpretations and complied with the disclosure
provisions of SFAS 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition
and Disclosure—an amendment of FASB Statement No. 123.” Under APB Opinion No. 25, compensation
expense is based on the difference, if any, on the date of the grant between the fair market value of our stock and
the exercise price. Employee stock-based compensation is amortized on a straight-line basis over the vesting
period of the underlying options.
Revenue Recognition
We recognize distributor and non-distributor revenue in accordance with the SEC’s Staff Accounting Bulletin, or
SAB, No. 104, “Revenue Recognition.” SAB No. 104 requires that four basic criteria must be met before revenue
can be recognized:
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•
Persuasive evidence of an arrangement exists;
• Delivery has occurred or services have been rendered;
•
The fee is fixed or determinable; and
• Collectability is reasonably assured.
Determination of whether persuasive evidence of an arrangement exists and whether delivery has occurred or
services have been rendered, are based on management’s judgments regarding the fixed nature of the fee charged
for services rendered and products delivered, and the collectability of those fees. In instances where final
40
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LBD3G5WvŠ
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44641 TX 41
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CLN
07-Mar-2008 03:24 EST
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acceptance of the product is specified by the customer or collectability has not been reasonably assured, revenue
is deferred until all acceptance criteria have been met. Revenue under service contracts is recognized on a
straight-line basis over the period of the applicable service contract. Service revenue, not under a service
contract, is recognized as the services are provided. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue recognized for any reporting period
could be adversely affected.
Inventories
We state our inventories at the lower of cost or market, computed on a standard cost basis, which approximates
actual cost on a first-in, first-out basis and market being determined as the lower of replacement cost or net
realizable value. Standard costs are monitored and updated quarterly or as necessary, to reflect changes in raw
material costs, labor to manufacture the product and overhead rates. We provide for excess and obsolete
inventories when conditions indicate that the selling price could be less than cost due to physical deterioration,
usage, obsolescence, reductions in estimated future demand and reductions in selling prices. Inventory provisions
are measured as the difference between the cost of inventory and estimated market value and charged to cost of
revenue to establish a lower cost basis for the inventories. We balance the need to maintain strategic inventory
levels with the risk of obsolescence due to changing technology and customer demand levels. Unfavorable
changes in market conditions may result in a need for additional inventory provisions that could adversely impact
our gross margins. Conversely, favorable changes in demand could result in higher gross margins when product
that has previously been reserved is sold.
Warranty Obligations
We provide a standard one-year or two-year warranty coverage on our systems. Warranty coverage provided is
for labor and parts necessary to repair the systems during the warranty period. We provide for the estimated
future costs of warranty obligations in cost of revenue when the related revenue is recognized. The accrued
warranty costs represent our best estimate at the time of sale, and as reviewed and updated quarterly, of the total
costs that we expect to incur in repairing or replacing product parts that fail while still under warranty. Accrued
warranty costs include costs of material, technical support labor and associated overhead. The amount of accrued
estimated warranty costs obligation for established products is primarily based on historical experience as to
product failures adjusted for current information on repair costs. For new products, estimates will include
historical experience of similar products, as well as reasonable allowance for start-up expenses. Actual warranty
costs could differ from the estimated amounts. On a quarterly basis, we review the accrued balances of our
warranty obligations and update the historical warranty cost trends. If we were required to accrue additional
warranty cost in the future due to actual product failure rates, material usage, service delivery costs or overhead
costs differing from our estimates, revisions to the estimated warranty liability would be required, which would
negatively impact our operating results.
Provision for Income Taxes
We are subject to taxes on earnings in both the United States and numerous foreign jurisdictions. As a global
taxpayer, significant
judgments and estimates are required in evaluating our uncertain tax positions and
determining our provision for income taxes on earnings. Effective January 1, 2007, we adopted FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109,” or FIN 48. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions
accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates that it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being
realized upon settlement. Although we believe we have adequately reserved for our uncertain tax positions, no
assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves
41
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FJYGBKW"Š
5*
1C
44641 TX 42
PMT
PS
1D36CR9=FJYGBKW
CLN
06-Mar-2008 08:53 EST
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in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate.
To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences
will impact the provision for income taxes in the period in which such determination is made. The provision for
income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate,
as well as the related net interest.
Our effective tax rates have differed from the statutory rate primarily due to the tax impact of tax-exempt interest
income, foreign operations, research and development tax credits, state taxes, and certain benefits realized related
to stock option activity. Our current effective tax rate does not assume U.S. taxes on undistributed profits of
foreign subsidiaries. These earnings could become subject to incremental foreign withholding or U.S. federal and
state taxes, should they either be deemed or actually remitted to the United States. The effective tax rate was
24%, (126)% and 26% for the years ended December 31, 2007, 2006 and 2005, respectively. For 2006, given that
the litigation settlement expense of $18.9 million resulted in a significantly lower level of income before income
taxes, the impact of deductible permanent items including, tax-exempt interest income, R&D tax credits and
deductions for disqualifying incentive stock option exercises, resulted in a substantially more pronounced impact
on our effective income tax rate, as they represented a larger percentage of our income before income taxes.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries
where we have lower statutory rates and being higher than anticipated in countries where we have higher
statutory rates, or by changes in tax laws—including whether the U.S. Congress ratifies the federal R&D tax
credit for 2008—regulations, accounting principles, or interpretations thereof. In addition, we are subject to the
examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes.
Contingencies
We have been, and may in the future become, subject to legal proceedings related to securities litigation,
intellectual property and other operational matters such as the TCPA infringement matter described in Item 3-
Legal Proceedings. Based on the information available at the balance sheet dates and through consultation with
our legal counsel, we assess the likelihood of any adverse judgments or outcomes for these matters, as well as
potential ranges of probable loss. If losses are probable and reasonably estimable, we will record a reserve in
accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. Currently
we have no such reserves recorded. Any reserves recorded in the future may change due to new developments in
each matter.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, “Fair Value
Measurements,” or SFAS 157, which defines fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but
in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for us beginning January 1, 2008. We are currently evaluating the impact
of SFAS 157 on our consolidated financial statements.
rather eliminates
inconsistencies
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities,” or SFAS 159. SFAS 159 permits companies to choose to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. SFAS 159 is effective for us beginning January 1, 2008.
We are currently evaluating the impact that SFAS 159 will have on our consolidated financial statements.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LC390NW@Š
8*
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44641 TX 43
PMT
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1D36CR9=LC390NW
CLN
07-Mar-2008 03:34 EST
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In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” or SFAS 141R. This issuance
retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141
called the purchase method) be used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves
control. SFAS 141R is effective for us beginning January 1, 2009. Though this pronouncement is not expected to
have an effect on our consolidated financial position, annual results of operations or cash flows, if we were to
acquire another entity, we would be required to account for it in accordance with this pronouncement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” (“SFAS 160”). This issuance amends Accounting Research Bulletin 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for us
beginning January 1, 2009. Though this pronouncement is not expected to have an effect on our consolidated
financial position, annual results of operations or cash flows, if we were to acquire another entity, we would be
required to account for it in accordance with this pronouncement.
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a
percentage of net total revenue.
Operating Ratios:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Year ended December 31,
2007
2006
2005
100%
34%
66%
100%
30%
70%
100%
26%
74%
38%
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7%
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12%
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — %
33%
33%
7%
6%
15%
12%
19% — %
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57%
9%
4%
13%
3%
10%
73%
(3)%
4%
1%
(1)%
2%
52%
22%
3%
25%
7%
18%
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43
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LC3S8YWwŠ
8*
1C
44641 TX 44
PMT
PS
1D36CR9=LC3S8YW
CLN
07-Mar-2008 03:34 EST
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Total Revenue
(Dollars in thousands)
Revenue mix by geography:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
Year ended December 31,
2006
% Change
% Change
2005
$ 64,084
(8)% $ 69,895
28% $54,506
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total international revenue . . . . . . . . . . . . . . . . . . . . . . .
17,898
9,258
10,486
37,642
13%
28%
35%
22%
15,781
7,239
7,777
30,797
19%
66%
120%
46%
13,220
4,351
3,543
21,114
Consolidated total revenue . . . . . . . . . . . . . . . . . . . . . . .
$101,726
1% $100,692
33% $75,620
United States as a percentage of total revenue . . . .
International as a percentage of total revenue . . . . .
63%
37%
69%
31%
72%
28%
Revenue mix by product category:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Titan hand piece refills . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 74,502
13,342
9,128
4,754
(12)% $ 84,695
6,006
122%
5,890
55%
4,101
16%
34% $63,349
6,630
(9)%
3,881
52%
1,760
133%
Consolidated total revenue . . . . . . . . . . . . . . . . . . . . . . .
$101,726
1% $100,692
33% $75,620
In 2007, compared to 2006, our U.S. revenue declined 8% and our international revenue grew 22%. In contrast,
in 2006, compared to 2005, our U.S. revenue grew by 28%, while our international revenue grew by 46%. The
weaker U.S. revenue growth from 2006 to 2007, as compared to 2005 to 2006, was primarily attributable to
lower sales productivity of our recently-hired North American sales professionals and to slower-than-expected
adoption of our new Pearl product by new customers. Also, some of our public competitors have reported
reduced growth rates for the year ended December 31, 2007, which may indicate signs of a slowing market
growth rate that could have contributed to a decrease in our U.S. revenue growth rate. The stronger international
revenue growth in 2007, compared to U.S. revenue growth for that same period, was primarily attributable to
continuing investments in building our international sales distribution channels. These efforts have resulted in
increased revenue from several of our geographic locations, with growth primarily sourced from Australia,
Japan, many European countries and Latin America. As a result of continued stronger international revenue
growth, international revenue as a percentage of total revenue increased to 37% in 2007, compared with 31% and
28% in 2006 and 2005, respectively.
Product revenue decreased 12% in 2007, compared with 2006, but increased by 34% in 2006, compared with
2005. This reduction in product revenue growth was due primarily to slower-than-expected adoption of our Pearl
product by new customers in 2007 and to lower sales productivity of the North American sales professionals that
were hired in 2007. Upgrade revenue increased by 122% in 2007, compared with 2006, due primarily to an
increase in existing customers choosing to upgrade their systems with our new Pearl application introduced in
2007. Service revenue continued to increase as a result of an increase in our installed base of customers
purchasing extended service contracts. Titan hand piece refills revenue increased by 16% in 2007, compared with
2006, and 133% in 2006, compared with 2005. The reduction in growth of revenue from Titan hand piece refills
is due in part to us providing an increased number of shots per hand piece with the introduction of Titan V in
2006—15,000 shots, compared to 10,000 shots in the original Titan S hand piece. In addition, we believe some of
our customers, particularly high-volume Titan users, may be using fewer shots than before, due in part to the
introduction of other new applications for skin rejuvenation in the marketplace, including our Pearl product.
44
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LC4FNJW2Š
7*
1C
44641 TX 45
PMT
PS
1D36CR9=LC4FNJW
CLN
07-Mar-2008 03:35 EST
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Gross Profit
(Dollars in thousands)
2007
Year Ended December 31,
2006
% Change
% Change
2005
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . .
$66,724
(6)% $70,833
27% $55,828
66%
70%
74%
Our cost of revenue consists primarily of material, labor, employee stock-based compensation, royalty expense,
warranty, and manufacturing overhead expenses. For 2007, our gross margin declined to 66%, compared to 70%
in 2006. This decrease was primarily attributable to lower introductory margins for our Pearl-enabled systems
and upgrades that started shipping in June 2007, reduced leverage of our manufacturing and service expenses due
to lower than expected revenue in 2007, and $764,000 of higher patent royalty expense. Royalty expenses were
incurred for a full-year in 2007, but for only the last three quarters in 2006.
The decline in gross margin to 70% in 2006, compared to 74% in 2005, was primarily attributable to the royalty
expense recorded with effect from April 1, 2006 and to higher stock-based compensation expense due to the
adoption of the fair value recognition provisions of SFAS 123(R) with effect from January 1, 2006.
Sales and Marketing
(Dollars in thousands)
2007
% Change
2006
% Change
2005
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . .
$38,277
16% $32,890
31% $25,021
38%
33%
33%
Year Ended December 31,
Sales and marketing expenses consist primarily of personnel cost, stock-based compensation expense and
expenses associated with customer-attended workshops, trade shows and advertising. In 2007, the $5.4 million,
or 16%, increase in sales and marketing expenses was due primarily to $2.7 million of higher personnel expenses
associated with the expansion of our worldwide sales force and management team, $1.2 million of higher
advertising and promotional expenses, and $756,000 of higher employee travel and entertainment expenses
related to the increased sales headcount. Sales and marketing expenses as a percentage of total revenue, increased
to 38% in 2007, compared with 33% in 2006, due primarily to lower sales productivity from the recently
expanded North American sales team.
Of the $7.9 million increase in sales and marketing expenses in 2006, compared with 2005, $6.0 million was
attributable to personnel expenses associated primarily with increased headcount and higher stock-based
compensation expenses due to the adoption of SFAS 123(R) with effect from January 1, 2006 and $1.6 million of
higher advertising and promotional expenses. Sales and marketing expenses as a percentage of total revenue was
33% in both 2006 and 2005.
Research and Development (R&D)
(Dollars in thousands)
Year Ended December 31,
2007 % Change
2006 % Change
2005
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . . . . .
$7,169
11% $6,473
21% $5,353
7%
6%
7%
Research and development expenses consist primarily of personnel cost, stock-based compensation expenses and
clinical, regulatory and material costs. In 2007, compared with 2006, research and development expenses
increased by $696,000, or 11%, due primarily to $463,000 of higher consulting and other services expense and
$303,000 of higher expensed tools, equipment and materials used primarily in the research and development
45
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LM3R69W*Š
8*
1C
44641 TX 46
PMT
PS
1D36CR9=LM3R69W
CLN
07-Mar-2008 04:13 EST
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activities related to our Pearl product. As a result of the increased expenses, R&D expenses as a percentage of
total revenue increased to 7% in 2007, compared to 6% in 2006.
Of the $1.1 million increase in R&D expenses in 2006 over 2005, $565,000 was attributable to personnel related
expenses associated primarily to increased headcount, and $492,000 was attributable to stock-based
compensation expenses associated with the adoption of FAS 123(R) in 2006. Due primarily to $25.1 million of
higher revenue in 2006, compared with 2005, research and development expenses as a percentage of revenue
decreased to 6% in 2006, compared with 7% in 2005.
General and Administrative (G&A)
(Dollars in thousands)
2007
% Change
2006
% Change
2005
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . . . . . . .
$11,721
(23)% $15,192
73% $8,782
12%
15%
12%
Year Ended December 31,
General and administrative expenses consist primarily of personnel costs, stock-based compensation expenses,
legal fees, accounting fees and other general and administrative expenses. General and administrative expenses
for 2007, compared with 2006, decreased by $3.5 million, or 23%, to $11.7 million and were 12% of net revenue.
This decrease was primarily attributable to the following expenses incurred in 2006 but not in 2007: $3.3 million
of legal expenses related to the patent litigation matter settled in the second quarter ended June 30, 2006 and a
charge of approximately $505,000 relating to a liability for sales taxes in certain jurisdictions that we had
determined we did not have a taxable presence.
The $6.4 million, or 73%, increase in G&A expenses in 2006, compared with 2005, was primarily attributable to
$2.6 million of higher legal expenses associated primarily with the then-active Palomar patent litigation matter,
$759,000 of stock-based compensation expenses associated with the adoption of FAS 123(R) in 2006, $673,000
of personnel expenses, due in part to increased headcount, $602,000 of audit and tax consulting fees related
primarily to the audit of our internal control over financial reporting, and a charge of approximately $505,000
recorded in 2006 relating to a liability for sales taxes in certain jurisdictions that we previously determined we
did not have a taxable presence. Due to these reasons, G&A expenses as a percentage of revenue increased from
12% in 2005 to 15% in 2006.
In April and May 2007, two securities class action lawsuits were filed against us and were later consolidated into
one lawsuit. In 2007 we incurred approximately $131,000 in legal fees to defend this securities class action
lawsuit. However, given that we retain director and officer liability insurance with a deductible, this litigation is
not expected to have a material impact to our Consolidated Statement of Operations for 2008. In January 2008, a
TCPA class action lawsuit was filed against us. For additional details relating to these lawsuits see Part I, Item 3
“Legal Proceedings.”
Litigation Settlement
On June 2, 2006, we settled all patent litigation brought against us by Palomar and MGH. Under the terms of the
settlement agreement, we owed Palomar $20.2 million relating to royalties on sales of infringing systems,
accrued interest and reimbursement of Palomar’s legal costs, through March 31, 2006. Of the $20.2 million, we
recorded $18.9 million as a litigation settlement expense and $1.2 million as the intangible asset representing the
value of the ongoing sublicense obtained as part of the settlement agreement.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LC5ZH0WAŠ
7*
1C
44641 TX 47
PMT
PS
1D36CR9=LC5ZH0W
CLN
07-Mar-2008 03:35 EST
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Interest and Other Income, Net
(Dollars in thousands)
Year Ended December 31,
2007 % Change
2006 % Change
2005
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,207
17% $3,596
77% $2,034
The $611,000, or 17%, net increase in interest and other income in 2007 and the $1.6 million, or 77%, net
increase in 2006, compared to the respective prior years, was primarily attributable to improved tax-exempt
interest yields on investments in government bonds and an increased average amount invested. Our cash, cash
equivalents and marketable investment balances were at $107.0 million, $108.1 million and $92.0 million as of
December 31, 2007, 2006 and 2005, respectively.
Provision (Benefit) for Income Taxes
(Dollars in thousands)
2007
Change
2006
Change
2005
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,764
3,260
$12,825
4,444
$
939
(1,184)
$(17,767) $18,706
4,905
(6,089)
24%
(126)%
26%
Year Ended December 31,
Our effective tax rate reflects applicable United States federal and state tax rates and the tax impact of foreign
operations, offset by research and development tax credits, tax exempt interest income and certain benefits
realized related to stock option activity. The effective tax rate was 24% and (126)% for the years ended
December 31, 2007 and 2006, respectively. The change in the effective tax rate for 2007, compared with 2006,
was primarily attributable to the litigation settlement expense in 2006, and the increased benefit associated with
deductible permanent items—R&D tax credits relating to both fiscal 2006 and 2007 and tax-exempt interest
income in 2007.
The significant change in the effective tax rate for 2006, compared with 2005, was primarily due to the $18.9
million litigation settlement expense. In 2006, given the litigation settlement expense resulted in a significantly
lower level of income before income taxes, the impact of deductible permanent items—R&D tax credits,
tax-exempt interest income and deductions for disqualifying incentive stock option exercises—resulted in a
substantially more pronounced impact on our effective income tax rate, as they represented a larger percentage of
our income before income taxes.
Net Income and Net Income Per Diluted Share
(Dollars in thousands, except per share data)
2007
% Change
2006 % Change
2005
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . .
$10,504
0.74
$
395% $2,123
393% $ 0.15
(85)% $13,801
1.00
(85)% $
Year Ended December 31,
The $8.4 million increase in net income, and $0.59 increase in net income per diluted share, in 2007, compared
with 2006, was primarily due to $11.7 million of patent litigation settlement expense of $18.9 million, net of the
marginal tax impact of $7.2 million, being incurred in 2006 but not in 2007. The $11.7 million improvement was
offset in part by lower gross margins, higher operating expenses and a higher effective income tax rate.
The $11.7 million decrease in net income, and $0.85 decrease in net income per diluted share, in 2006, compared
with 2005, was due primarily to $11.7 million of patent litigation settlement expense of $18.9 million, net of the
marginal tax impact of $7.2 million, resulting from the June 2006 settlement of all patent litigation brought
against us by Palomar and MGH.
47
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LC6X=LW_Š
7*
1C
44641 TX 48
PMT
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1D36CR9=LC6X=LW
CLN
07-Mar-2008 03:35 EST
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Liquidity and Capital Resources
Liquidity is the measurement of our ability to meet potential cash requirements, fund the planned expansion of
our operations and acquire businesses. Our sources of cash include operations, stock option exercises, employee
stock purchases and interest income. We actively manage our cash usage and investment of liquid cash to ensure
the maintenance of sufficient funds to meet our daily needs.
Cash, Cash Equivalents and Marketable Investments
The following table summarizes our cash, cash equivalents and marketable securities:
(Dollars in thousands)
Cash, cash equivalents and marketable securities:
As of December 31,
2007
2006
Decrease
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,054
88,510
$ 11,800
96,285
$ (746)
(7,775)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$99,564
$108,085
$(8,521)
Cash Flows
In summary, our cash flows were as flows:
(Dollars in thousands)
Cash flows provided by (used in):
Year ended December 31,
2007
2006
2005
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,890
(426)
(17,210)
$ 12,466
(11,355)
5,429
$ 20,388
(28,342)
6,144
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . .
$
(746) $ 6,540
$ (1,810)
Cash Flows From Operating Activities
Cash provided by operating activities in 2007 was $16.9 million and consisted of net income of $10.5 million,
adjustments for non-cash items of $4.7 million and cash provided by working capital and other activities of $1.7
million. Adjustments for non-cash items primarily consisted of: (i) $5.6 million of stock-based compensation
expense; (ii) $4.2 million of tax benefit from employee stock option exercises; (iii) partially offset by $3.6
million of excess tax benefits related to stock-based compensation expenses reclassed from operating activities to
financing activities in accordance with FAS 123(R); and (iv) offset by a $2.7 million increase in deferred tax
assets resulting from an increase in accrued liabilities and unutilized deductions for stock-based compensation
expenses. Working capital activities primarily consisted of: (i) an increase of $3.8 million in deferred revenue
due to the growth in service contracts sold to our expanding customer installed base; (ii) partially offset by cash
used to increase inventories by $2.6 million to support a broader product offering and due to lower than expected
revenue in the fourth quarter 2007; and (iii) an increase in accounts receivable by $1.1 million resulting from a
higher uncollected balance relating to fourth quarter 2007 revenue.
Cash provided by operating activities in 2006 was $12.5 million and consisted of net income of $2.1 million,
adjustments for non-cash items of $3.4 million and cash provided by working capital and other activities of $7.0
million. Adjustments for non-cash items primarily consisted of: (i) $4.5 million of stock-based compensation
expense; (ii) $1.8 million of tax benefit from employee stock option exercises; (iii) partially offset by a $2.8
million increase in deferred tax assets resulting from increased accrued liabilities, R&D credits, and unutilized
deductions for stock based compensation; and (iv) $1.0 million of excess tax benefits related to stock-based
48
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9.26
SER soeus0pa
PAL
ˆ1D36CR9=QGDB03WBŠ
8*
1C
44641 TX 49
PMT
PS
1D36CR9=QGDB03W
CLN
07-Mar-2008 16:34 EST
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compensation expenses which was reclassed from operating activities to financing activities in accordance with
FAS 123(R). Working capital activities primarily consisted of: (i) $4.2 million of cash provided by an increase in
accrued liabilities due in part to higher accrued warranty and royalty expenses resulting from the increase in
revenue in 2006; (ii) $3.6 million of cash provided by an increase in deferred revenue due to the continued
growth in service contracts sold to our expanding customer installed base; (iii) offset partially by $3.0 million
cash used to increase accounts receivable due to the strong revenue growth in the fourth quarter ended
December 31, 2006.
Cash provided by operating activities in 2005 was $20.4 million. This was primarily attributable to net income of
$13.8 million, adjustments for non-cash items of $9.4 million and cash used in working capital and other
activities of $2.8 million. Adjustments for non-cash items primarily consisted of tax benefits related to employee
stock option exercises of $7.4 million and stock-based compensation expenses of $1.4 million. Working capital
activities primarily consisted of (i) $1.1 million cash generated from an increase in deferred revenue resulting
from an increase in customer service contracts sold; (ii) offset by cash used to increase inventory by $3.1 million
to support anticipated shipments and a broader product offering; and (iii) an increase in other assets of $2.9
million that resulted from income taxes paid prior to the fourth quarter of 2005 becoming refundable due to an
increase in employee stock option deductions in the fourth quarter of 2005.
Cash Flows From Investing Activities
We used $426,000 of cash in investing activities in 2007. Of this amount, $594,000 was used to invest the cash
generated from operations in marketable securities, $1.0 million was used to purchase capital equipment for
R&D and manufacturing operations as well as a trade show booth for marketing, and $20,000 was used to
purchase an intangible asset.
We used $11.4 million of cash in investing activities in 2006. Of this amount, $9.5 million was used to invest the
cash generated from operations in marketable securities, $1.2 million was used to purchase an ongoing patent
sublicense and $642,000 was used to purchase capital equipment for R&D and manufacturing departments.
In 2005, net cash used in investing activities was $28.3 million. Of this amount, $27.6 million was used to
purchase additional marketable investments from the cash generated by operations, the exercises of stock options
and employee stock purchases. In addition, $539,000 was primarily used to purchase research and development
and manufacturing capital equipment and $165,000 was used to purchase intangibles associated with the set up of
a new office in Zurich, Switzerland through the acquisition of a distributor.
Cash Flows From Financing Activities
Net cash used in financing activities in 2007 was $17.2 million, which primarily related to $25.0 million of cash
used to repurchase shares of our common stock pursuant to our stock repurchase program, which was partially
offset by $4.1 million of cash generated from the issuance of stock pursuant to our stock option and stock
purchase plans and $3.7 million of excess tax benefits related to stock-based compensation expenses reclassed
from operating activities to financing activities in accordance with FAS 123(R).
Cash provided by financing activities in 2006 was $5.4 million which was attributable to $4.4 million of proceeds
from the issuance of stock through our stock option and employee stock purchase plans and $1.0 million of
excess tax benefits related to stock-based compensation expenses reclassed from operating activities to financing
activities in accordance with FAS 123(R).
Cash provided by financing activities in 2005 was $6.1 million which was attributable to the proceeds from the
issuance of stock through our stock option and employee stock purchase plans.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX02
9.9.26
SER saruc0pa
PAL
ˆ1D36CRB0909XQWW%Š
9*
1C
44641 TX 50
PMT
PS
1D36CRB0909XQWW
CLN
11-Mar-2008 19:13 EST
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Adequacy of cash resources to meet future needs
We had cash and marketable investments of $107.0 million as of December 31, 2007. Of this amount, we had
$21.5 million invested in auction rate securities that were rated AAA or better by a major credit rating agency
and are either commercially insured or guaranteed by the Federal Family Education Loan Program (FFELP). As
of December 31, 2007, of the $21.5 million of auction rate securities, the Company classified $7.4 million under
the caption of ‘Marketable investments- long term portion’ in the Consolidated Balance Sheet.
As of February 29, 2008 we had $13.6 million of our investment portfolio invested in auction-rate securities.
These auction rate securities provide liquidity via an auction process that resets the applicable interest rate at
predetermined calendar intervals, generally every 35 days—though auctions for some of the securities are held
every 360 days. During the period from January 1, 2008 to February 29, 2008, auctions for $9.6 million of our
investments in auction rate securities failed due to the current overall credit concerns in capital markets. Upon an
auction failure, the interest rates do not reset at a market rate but instead reset based on a formula contained in the
security prospectus, which rate is generally higher than the current market rate. The failure of the auctions
impacts our ability to readily liquidate our auction rate securities into cash until a future auction of these
investments is successful or the auction rate security is refinanced by the issuer into another type of debt
instrument. Based on our ability to access our cash and other short-term investments, our expected operating cash
flows, and our other sources of cash, we do not anticipate the current lack of liquidity on these investments will
affect our ability to operate our business as usual.
Contractual Cash Obligations
The following summarizes our contractual obligations as of December 31, 2007 for minimum lease payments
related to facility leases.
Contractual Obligations
Payments Due by Period ($’000’s)
Total
Less Than
1 Year
1-3
Years
3-5
Years
More Than
5 Years
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,921
$1,198
$2,442
$2,736
$1,545
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities,
which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of December 31, 2007, we were not involved in any unconsolidated
transactions.
Income Tax Liability
As a result of the adoption of FIN 48, as of December 31, 2007, we have included in our condensed consolidated
balance sheet $367,000 in Accrued Liabilities and $1.2 million in long-term Income Tax Liability with respect to
unrecognized tax benefits and accrued interest. At this time, we are unable to make a reasonably reliable estimate
of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit
outcomes. As a result, this amount is not included in the Contractual Obligations table above.
Indemnifications
In the normal course of business, we enter into agreements that contain a variety of representations, warranties,
and indemnification obligations. For example, we have entered into indemnification agreements with each of our
directors and executive officers. In 2007, two of our executive officers were named as defendants in securities
class action litigation—see Part I, Item 3—Legal Proceedings. Our exposure under the various indemnification
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351042
9.9.26
SER accaa0pa
PAL
ˆ1D36CRB0HZVF53W!Š
11*
1C
44641 TX 51
PMT
PS
1D36CRB0HZVF53W
CLN
12-Mar-2008 15:34 EST
obligations, including those under the indemnification agreements with our directors and executive officers, is
unknown since the outcome of the securities litigation is unpredictable and the amount that could be payable
thereunder is not reasonably estimable, and since other indemnification obligations involve future claims that
may be made against us. We have not accrued or paid any amounts for any such indemnification obligations.
However, we may record charges in the future as a result of these potential indemnification obligations, including
those related to the securities class action litigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have
their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may
produce less income than expected if interest rates fall. Due in part to these factors, our future investment income
may fall short of expectation due to changes in interest rates or we may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates. The primary objective of our
investment activities is to preserve principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest in debt instruments—including variable rate demand notes,
auction rate securities and bonds—of the U.S. Government, its agencies, and municipalities, and high-quality
corporate issuers. By policy, we restrict our exposure to any single corporate issuer by imposing concentration
limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at a weighted
average maturity (interest reset date for auction-rate securities and variable rate demand notes) of generally less
than eighteen months. For maturities of our marketable investments, see Note 2 to the Notes to Consolidated
Financial Statements. Assuming a hypothetical increase in interest rates of one percentage point, the fair value of
our total investment portfolio as of December 31, 2007 would have potentially declined by $443,000.
While we transact business primarily in U.S. Dollars, and a significant proportion of our revenue is denominated
in U.S. Dollars, a portion of our revenue and operating expenses are denominated in other currencies, such as the
Euro, Japanese Yen, Australian Dollar, Canadian Dollar and British Pound Sterling. Though our exposure to
exchange rate volatility has not been significant to date, future fluctuations in the value of the U.S. dollar may
affect the price competitiveness of our products and/ or adversely impact our gross margins and operating
margins. We do not believe, however, that we currently have significant direct foreign currency exchange rate
risk and have not hedged exposures denominated in foreign currencies.
We do not utilize derivative financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions in any material fashion.
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51
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
START PAGE
CA8609AC351071
9.9.26
SER garcm0pa
PAL
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7*
1C
44641 TX 52
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1D36CR9=MNGF3GW
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07-Mar-2008 07:56 EST
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CUTERA, INC. AND SUBSIDIARY COMPANIES
ANNUAL REPORT ON FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be
included in Item 8:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
53
54
55
56
57
58
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years
ended December 31, 2007, 2006 and 2005 is filed as a part of this Report as required to be included in Item 15(a)
and should be read in conjunction with the Consolidated Financial Statements of the Registrant and its
subsidiaries:
Schedule
Page
II
Valuation and Qualifying Accounts
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
All other required schedules are omitted because of the absence of conditions under which they are required or
because the required information is given in the Consolidated Financial Statements or the Notes thereto.
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52
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
START PAGE
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FK4F3GW_Š
6*
1C
44641 TX 53
PMT
PS
1D36CR9=FK4F3GW
CLN
06-Mar-2008 08:54 EST
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cutera, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all
material respects, the financial position of Cutera, Inc. and its subsidiaries at December 31, 2007 and 2006, and
the results of their operations and their cash flows for each of the three years in the period ended December 31,
2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on
the financial statement schedule, and on the Company’s internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it
accounts for share-based compensation in 2006 and the manner in which it accounts for uncertain tax positions in
2007.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
limitations,
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/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 12, 2008
53
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
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CUTERA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts in 2007 and 2006 of
$9 and $34, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments, long term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles, net
Deferred tax asset, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2007
2006
$ 11,054
88,510
$ 11,800
96,285
10,692
7,533
8,058
1,955
127,802
1,361
7,429
1,227
834
9,601
5,220
5,792
2,702
131,400
1,029
—
1,446
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$138,653
$133,875
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,350
13,587
4,971
20,908
1,639
5,593
1,160
29,300
$
2,212
13,675
3,514
19,401
1,424
3,258
60
24,143
Commitments and contingencies (Note 10 and 11)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value
Authorized: 5,000,000 shares; none issued and outstanding . . . . . . . . . . . . . . . . . .
—
—
Common stock, $0.001 par value:
Authorized: 50,000,000 shares in both 2006 and 2005;
Issued and outstanding: 12,738,449 and 12,939,389 shares in 2007 and 2006,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss)
13
74,871
—
34,279
190
13
86,242
(331)
23,866
(58)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,353
109,732
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
$138,653
$133,875
The accompanying notes are an integral part of these consolidated financial statements.
54
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
START PAGE
CHMPRFRS1
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CUTERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2007
2006
2005
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101,726
35,002
$100,692
29,859
$75,620
19,792
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66,724
70,833
55,828
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,277
7,169
11,721
—
57,167
9,557
4,207
13,764
3,260
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,504
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.80
0.74
32,890
6,473
15,192
18,935
25,021
5,353
8,782
—
73,490
39,156
(2,657)
3,596
939
(1,184)
16,672
2,034
18,706
4,905
2,123
$13,801
0.17
0.15
$
$
1.20
1.00
$
$
$
Weighted-average number of shares used in per share calculations:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,153
12,558
11,535
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,228
14,278
13,864
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The accompanying notes are an integral part of these consolidated financial statements.
55
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FORM 10-K
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CUTERA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Deferred
Stock-Based
Compensation
Retained
Earnings
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
Balance at December 31, 2004 . . . . . . . . 10,957,202
Issuance of common stock for employee
purchase plan . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Deferred stock-based compensation . . . .
Issuance of restricted stock units . . . . . . .
Non-employee stock compensation . . . . .
Amortization of stock-based
58,323
1,197,949
—
—
—
compensation . . . . . . . . . . . . . . . . . . . .
Tax benefit related to employee stock
options . . . . . . . . . . . . . . . . . . . . . . . . .
Components of other comprehensive
income:
Net income . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . .
Comprehensive income . . . . . .
—
—
—
—
—
Balance at December 31, 2005 . . . . . . . . 12,213,474
Issuance of common stock for employee
purchase plan . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Issuance of common stock in settlement
of restricted stock units, net of shares
withheld for employee taxes. . . . . . . . .
Share-based compensation expense . . . .
Change in deferred stock-based
40,651
673,940
11,324
—
compensation, net of terminations . . . .
Tax benefit from exercises of stock-
based payment awards . . . . . . . . . . . . .
Components of other comprehensive
income:
Net income . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . .
Comprehensive income . . . . . .
—
—
—
—
—
Balance at December 31, 2006 . . . . . . . . 12,939,389
Issuance of common stock for employee
purchase plan . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . .
Issuance of common stock in settlement
of restricted stock units, net of shares
withheld for employee taxes. . . . . . . . .
Repurchase of common stock . . . . . . . . .
Share-based compensation expense . . . .
Change in deferred stock-based
42,868
854,147
9,901
(1,107,856)
—
compensation, net of terminations . . . .
Tax benefit from exercises of stock-
based payment awards . . . . . . . . . . . . .
Adjustment to retained earnings upon
adoption of FIN 48 . . . . . . . . . . . . . . .
Components of other comprehensive
income:
Net income . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . .
Comprehensive income . . . . . .
—
—
—
—
—
—
$ 11
$ 62,738
$(2,226)
$ 7,942
$
(9)
$ 68,456
—
1
—
—
—
—
—
—
—
—
12
—
1
—
—
—
—
—
—
—
13
—
1
—
(1)
—
—
—
—
—
—
—
575
5,568
(323)
1,448
262
—
7,437
—
—
—
—
—
323
(1,448)
(262)
1,442
—
—
—
—
—
—
—
—
—
—
—
13,801
—
—
77,705
(2,171)
21,743
881
3,515
(112)
3,973
—
—
—
569
(1,271)
1,271
1,551
—
—
—
—
—
—
—
—
—
—
—
—
—
2,123
—
—
86,242
(331)
23,866
954
3,321
(138)
(24,999)
5,305
(9)
4,195
—
—
—
—
—
—
—
—
322
9
—
—
—
—
—
—
—
—
—
—
—
—
(91)
10,504
—
—
—
—
—
—
—
—
—
—
(103)
—
(112)
—
—
—
—
—
—
—
54
—
(58)
—
—
—
—
—
—
—
—
—
248
—
575
5,569
—
—
—
1,442
7,437
13,801
(103)
13,698
97,177
881
3,516
(112)
4,542
—
1,551
2,123
54
2,177
109,732
954
3,322
(138)
(25.000)
5,627
—
4,195
(91)
10,504
248
10,752
Balance at December 31, 2007 . . . . . . . . 12,738,449
$ 13
$ 74,871
$ —
$34,279
$ 190
$109,353
The accompanying notes are an integral part of these consolidated financial statements.
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FORM 10-K
RR Donnelley ProFile
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CUTERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2007
2006
2005
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
$ 10,504
$
2,123
$ 13,801
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in deferred tax asset/liability . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from employee stock options . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based compensation expense . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
913
(2,662)
5,627
4,195
(3,652)
248
(1,066)
(2,592)
747
138
367
215
3,792
116
869
(2,765)
4,542
1,808
(1,032)
(53)
(2,980)
(65)
1,026
860
4,175
328
3,630
—
689
(735)
1,442
7,437
—
595
475
(3,146)
(2,850)
157
937
448
1,138
—
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . .
16,890
12,466
20,388
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of marketable investments . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of marketable investments . . . . . . . . . . . . . . . . .
Purchase of marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,000)
(20)
69,103
31,508
(100,017)
(642)
(1,218)
23,522
99,439
(132,456)
(539)
(165)
18,324
49,948
(95,910)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . .
(426)
(11,355)
(28,342)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase
plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based compensation expense . . . . . .
4,138
(25,000)
3,652
Net cash provided by (used in) financing activities . . . . . . . . . . . . .
(17,210)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . .
(746)
11,800
4,397
—
1,032
5,429
6,540
5,260
6,144
—
—
6,144
(1,810)
7,070
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,054
$ 11,800
$ 5,260
Supplemental and non-cash disclosure of cash flow information:
Change in deferred stock-based compensation, net of terminations . . . . . .
Cash paid (received) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(9) $
(808) $
(1,271) $ 1,387
(1,990) $ 1,837
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The accompanying notes are an integral part of these consolidated financial statements.
57
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FORM 10-K
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CUTERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations and Principles of Consolidation.
Cutera Inc. (“Cutera” or the “Company”) is a global provider of laser and other light-based aesthetic systems for
practitioners worldwide. The Company, designs, develops, manufactures, and markets the CoolGlide, Xeo and
Solera product platforms for use by primary care physicians and other qualified practitioners to offer safe and
effective aesthetic treatments to their customers.
Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Canada,
France, Japan, Spain, Switzerland and United Kingdom that market, sell and service its products outside of the
United States. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries.
All inter-company transactions and balances have been eliminated.
Management Estimates.
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally
accepted in the United States of America 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
Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
Cash, Cash Equivalents and Investments.
The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S.
municipalities, the U.S. government and its agencies, and in bonds of high-quality corporate issuers. All highly
liquid investments with stated maturities of three months or less from date of purchase are classified as cash
equivalents; all highly liquid investments with stated maturities of greater than three months are classified as
marketable investments. The Company determines the appropriate classification of its investments in marketable
securities at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s
marketable securities have been classified and accounted for as available-for-sale. The Company may, or may
not, hold securities with stated maturities greater than 12 months until maturity. In response to changes in the
availability of and the yield on alternative investments as well as liquidity requirements, it occasionally sells
these securities prior to their stated maturities. As these securities are viewed by the Company as available to
support current operations, based on the provisions of Accounting Research Bulletin No. 43, Chapter 3A,
Working Capital-Current Assets and Liabilities, securities with maturities beyond 12 months (such as auction
rate securities and variable rate demand notes) are classified as current assets under the caption marketable
investments in the accompanying Consolidated Balance Sheets. These securities are carried at fair value, with the
unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity, except for unrealized
losses determined to be other than temporary which are recorded as interest income and other, net, in accordance
with the Company’s policy and FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. Any realized gains or losses on
the sale of marketable securities are determined on a specific identification method, and such gains and losses are
reflected as a component of interest income and other, net. As of December 31, 2007 and 2006, the Company had
not incurred any losses that were other-than-temporary.
As of December 31, 2007, the Company held $21.5 million in auction rate securities which are variable rate debt
instruments, which bear interest rates that reset generally every 35 days—though auctions for some of the
securities are held every 360 days. The auction rate securities owned by the Company were rated AAA or better
by a major credit rating agency and are either commercially insured or guaranteed by the Federal Family
58
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Education Loan Program (FFELP). The underlying securities have contractual maturities which are generally
greater than ten years. The auction rate securities are classified as available-for-sale and are recorded at fair
value. Typically, the carrying value of auction rate securities approximates fair value due to the frequent resetting
of the interest rates. In the accompanying Consolidated Balance Sheets, the Company has classified these
investments as current assets under the caption ‘Marketable investments’ and classified $7.4 million of un-sold
auction-rate securities as of February 29, 2008, under the caption ‘Marketable investments- long term portion’-
see Note 12- Subsequent Event.
Fair Value of Financial Instruments.
Carrying amounts of the Company’s financial instruments, including cash and cash equivalents, marketable
investments, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the
balance sheet dates because of their generally short maturities. The fair value of marketable investments is based
on quoted market prices.
Concentration of Credit Risk and Other Risks and Uncertainties.
Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash,
cash equivalents, marketable investments and accounts receivable. The Company’s cash and cash equivalents are
primarily invested in deposits and money market accounts with two major banks in the United States. In addition,
the Company has operating cash balances in banks in each of the international locations in which it operates.
Deposits in these banks may exceed the amount of insurance provided on such deposits, if any. Management
believes that these financial institutions are financially sound and, accordingly, believes that minimal credit risk
exists. The Company has not experienced any losses on its deposits of cash and cash equivalents. Accounts
receivable are typically unsecured and are derived from revenue earned from customers primarily located in the
United States. The Company performs credit evaluations of its customers and maintains reserves for potential
credit losses. Concentrations of accounts receivable balances are presented in Note 2 and segment, geographic
and major customer information is presented in Note 9.
The Company invests in debt instruments—including variable rate demand notes, auction rate securities and
bonds—of the U.S. Government, its agencies and municipalities, and in bonds of high-quality corporate issuers.
By policy, the Company restricts its exposure to any single corporate issuer by imposing concentration limits. To
minimize the exposure due to adverse shifts in interest rates, the Company maintains investments at an average
maturity (interest reset date for auction-rate securities and variable rate demand notes) of generally less than
eighteen months.
The Company is subject to risks common to companies in the medical device industry, including, but not limited
to, new technology innovations, dependence on key personnel, dependence on key suppliers, protection of
proprietary technology, product liability and compliance with government regulations. To continue profitable
operations, the Company must continue to successfully design, develop, manufacture and market its products.
There can be no assurance that current products will continue to be accepted in the marketplace. Nor can there be
any assurance that any future products can be developed or manufactured at an acceptable cost and with
appropriate performance characteristics, or that such products will be successfully marketed, if at all. These
factors could have a material adverse effect on the Company’s future financial results and cash flows.
Future products developed by the Company may require additional approvals from the Food and Drug
Administration or international regulatory agencies prior to commercial sales. There can be no assurance that the
Company’s products will continue to meet the necessary regulatory requirements. If the Company was denied
such approvals or such approvals were delayed, it may have a materially adverse impact on the Company.
59
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Inventories.
Inventories are stated at the lower of cost or market, cost being determined on a standard cost basis (which
approximates actual cost on a first-in, first-out basis) and market being determined as the lower of replacement
cost or net realizable value.
The Company includes demonstration units within inventories. Demonstration units are carried at cost and
amortized over their estimated economic life of two years. Amortization expense related to demonstration units is
recorded in cost of revenue or in the respective operating expense line based on which function and purpose it is
being used for. Proceeds from the sale of demonstration units are recorded as revenue and all costs incurred to
refurbish the systems prior to sale are charged to cost of revenue.
Property and Equipment.
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives
of the related assets, which is generally three years. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related
assets. Upon sale or retirement of assets, the costs and related accumulated depreciation and amortization are
removed from the balance sheet and the resulting gain or loss is reflected in operating expenses. Maintenance and
repairs are charged to operations as incurred.
Intangible Assets.
Purchased technology sublicense and other intangible assets are presented at cost, net of accumulated
amortization. The technology licenses are being amortized on a straight-line basis over their expected useful life
of 9-10 years and the other intangibles are being amortized over their expected useful life of two years.
Impairment of Long-lived Assets.
In accordance with the provisions of Statement of Financial Accounting Standards Board, or SFAS, No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets,” the Company reviews long-lived assets,
including property and equipment, and intangible assets, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS No. 144,
an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured
as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Through December 31,
2007, there have been no such impairments.
Warranty Obligations.
The Company provides standard one-year or two-year warranty coverage on its systems. Warranty coverage
provided is for labor and parts necessary to repair the systems during the warranty period. The Company
accounts for the estimated warranty cost of the standard warranty coverage as a charge to costs of revenue when
revenue is recognized. The estimated warranty cost is based on historical product performance. Utilizing actual
service records, the Company calculates the average service hours and parts expense per system and applies the
actual labor and overhead rates to determine the estimated warranty charge. The Company updates these
estimated charges every quarter.
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FORM 10-K
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Revenue Recognition.
The Company recognizes distributor and non-distributor revenue in accordance with the SEC’s Staff Accounting
Bulletin, or SAB, No. 104, “Revenue Recognition.” Product revenue, including upgrade revenue, and revenue
from Titan hand piece refills, is recognized when title and risk of ownership has been transferred, provided that:
•
•
•
Persuasive evidence of an arrangement exists;
The price is fixed or determinable;
The remaining obligations are insignificant; and
• Collectability is reasonably assured.
Transfer of title and risk of ownership occurs when the product is shipped to the customer or when the customer
receives the product, depending on the nature of the arrangement. Revenue is recorded net of customer and
distributor discounts. For sales transactions when collectability is not reasonably assured,
the Company
recognizes revenue upon receipt of cash payment. Sales to customers and distributors do not include any return
or exchange rights. In addition the Company’s distributor agreements obligate the distributor to pay the Company
for the sale regardless of whether the distributor is able to resell the product. Shipping and handling charges are
invoiced to customers based on the amount of products sold. Shipping and handling fees are recorded as revenue
and the related expense as a component of cost of revenue.
The Company also offers customers extended service contracts. Revenue under service contracts is recognized on
a straight-line basis over the period of the applicable service contract. Service revenue, from customers whose
systems are not under a service contact, is recognized as the services are provided. Service revenue for the years
ended December 31, 2007, 2006 and 2005 was $9.1 million, $5.9 million and $3.9 million, respectively
Research and Development Expenditures.
Costs related to research, design, development and testing of products are charged to research and development
expense as incurred. Expenses incurred primarily relate to employees, facilities, material, third party contractors
and clinical and regulatory fees.
Advertising Costs.
Advertising costs are included as part of sales and marketing expense and are expensed as incurred. Advertising
expense for the years ended December 31, 2007, 2006 and 2005 were $2.1 million, $1.5 million and $1.2 million,
respectively.
Stock-based Compensation.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment (revised 2004),” or SFAS 123(R), using the modified prospective transition method,
which requires the measurement and recognition of compensation expense for all share-based payment awards
made to the Company’s employees and directors, including stock options, employee stock purchases related to
the Employee Stock Purchase Plan and restricted stock units. The Company’s consolidated financial statements
for the years ended December 31, 2007 and 2006 reflect the impact of SFAS 123(R). In accordance with the
modified prospective transition method, the Company’s consolidated financial statements for periods prior to the
year ended December 31, 2006 have not been restated to reflect, and do not include, the impact of SFAS 123(R).
Prior to the adoption of SFAS 123(R) the Company recognized stock-based compensation expense in accordance
with Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees.” In
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FORM 10-K
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06-Mar-2008 08:54 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
March 2005, the SEC issued Staff Accounting Bulletin No 107, “Share-Based Payment,” or SAB 107, regarding
the SEC’s interpretation of SFAS 123(R) and the valuation of stock-based payments for public companies. The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). See Note 4 for a further
discussion on stock-based compensation.
Share-based compensation expense recognized is based on the value of the portion of share-based payment
awards that is ultimately expected to vest. Share-based compensation expense recognized in the Company’s
Consolidated Statements of Operations during the years ended December 31, 2007 and 2006 included
compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31,
2005 based on the fair value estimated in accordance with the pro forma provisions of SFAS No. 123
“Accounting for Stock-Based Compensation,” or SFAS 123, and compensation expense for the share-based
payment awards granted subsequent to December 31, 2005 based on the fair value estimated in accordance with
the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company estimated the
fair value of each stock option on the date of grant using the Black-Scholes option valuation model and elected to
attribute the value of share-based compensation to expense using the straight-line method, which was previously
used for its pro forma information required under SFAS 123. With respect to Restricted Stock Units (“RSUs”)
issued by the Company in 2005, the Company measures them based on the fair market values of the underlying
stock on the dates of grant and recognizes the share-based compensation to expense using the straight-line
method over the vesting period.
Upon the vesting of RSUs, stock is issued on the dates of vesting, net of the statutory withholding requirements
to be paid by the Company on behalf of its employees. As a result, the actual number of shares issued is less than
the actual number of RSUs vested. Furthermore, in accordance with SFAS 123(R), the liability for withholding
amounts to be paid by the Company is recorded as a reduction to additional paid-in capital when paid.
In compliance with SFAS 123R, the Company included as part of its cash flows from financing activities the
benefits of tax deductions in excess of the tax-effected compensation of the related stock-based awards for the
options exercised and RSUs vested during the years ended December 31, 2007 and 2006, whereas the excess tax
benefits previously generated in 2005 under the then applicable accounting rules, are reported as a cash flow
from operating activities. Total cash flow remains unchanged from what would have been reported under prior
accounting rules. During the year ended December 31, 2007 and 2006, the amount of cash received from exercise
of stock options was $4.1million and $4.4 million, respectively, and the total direct tax benefit realized, including
the excess tax benefit, from stock based award activity was $4.2 million and $1.8 million, respectively. The
Company elected to account for the indirect effects of stock-based awards—primarily the research and
development tax credit—through the statement of operations.
Non-employees Option Grants.
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force, or EITF, No. 96-18, “Accounting for Equity Instruments That
Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Equity
instruments issued to non-employees are recorded at their fair value on the measurement date. The compensation
expense for non-employee option grants is recognized over the expected service period and was $0, $0 and
$262,000 for the year ended December 31, 2007, 2006 and 2005, respectively
Income Taxes.
The Company accounts for income taxes under the liability method in accordance with SFAS No. 109,
“Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using
62
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351071
9.9.26
SER garcm0pa
PAL
ˆ1D36CR9=LCG7=3W3Š
6*
1C
44641 TX 63
PMT
PS
1D36CR9=LCG7=3W
CLN
07-Mar-2008 03:37 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
enacted statutory tax rates for the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if
it is more likely than not that a portion of the deferred tax asset will not be realized. The Company has
determined that its future taxable income will be sufficient to recover all of the deferred tax assets. However,
should there be a change in their ability to recover the deferred tax assets, the Company could be required to
record a valuation allowance against its deferred tax assets. This would result in an increase to the Company’s
tax provision in the period in which they determined that the recovery was not probable.
In addition, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109,” or FIN 48, which requires the
Company to calculate tax liabilities dealing with uncertainties in the application of complex tax regulations and
recognizes liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions pursuant to FIN 48.
Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the
largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. The Company has provided taxes and related
interest and penalties due for potential adjustments that may result from examinations of open U.S. Federal, state
and foreign tax years. If the Company ultimately determines that payment of these amounts are not more-likely-
than-not, the Company will reverse the liability and recognize a tax benefit during the period in which the
Company makes the determination. The Company will record an additional charge in the Company’s provision
for taxes in the period in which the Company determines that the recorded tax liability is less than the Company
expects the ultimate assessment to be.
Comprehensive Income.
Comprehensive income generally represents all changes in stockholders’ equity except those resulting from
investments or contributions by stockholders. The Company’s unrealized gains and losses on marketable
investments represents the only component of other comprehensive income that is excluded from net income.
Foreign Currency.
The U.S. dollar is the functional currency of the Company’s subsidiaries. Monetary and non-monetary assets and
liabilities are remeasured into U.S. dollars at period end and historical exchange rates, respectively. Sales and
operating expenses are remeasured at average exchange rates in effect during each period, except for those
expenses related to non-monetary assets which are remeasured at historical exchange rates. Gains or losses
resulting from foreign currency transactions are included in net income and are insignificant for each of the three
years ended December 31, 2007. The effect of exchange rate changes on cash and cash equivalents was
insignificant for each of the three years presented in the period ended December 31, 2007.
Recent Accounting Pronouncements.
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In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but
in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for the Company beginning January 1, 2008. The Company is currently
evaluating the impact of SFAS 157 on its consolidated financial statements.
rather eliminates
inconsistencies
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair
63
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKG1BRW\Š
6*
1C
44641 TX 64
PMT
PS
1D36CR9=FKG1BRW
CLN
06-Mar-2008 08:54 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
value option has been elected be reported in earnings. SFAS 159 is effective for the Company beginning
January 1, 2008. The Company is currently evaluating the impact that SFAS 159 will have on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS 141R”). This issuance
retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141
called the purchase method) be used for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves
control. SFAS 141R is effective for the Company beginning January 1, 2009. Though this pronouncement is not
expected to have an effect on the Company’s consolidated financial position, annual results of operations or cash
flows, if it were to acquire another entity, it would be required to account for it in accordance with this
pronouncement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” (“SFAS 160”). This issuance amends Accounting Research Bulletin 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for the
Company beginning January 1, 2009. Though this pronouncement is not expected to have an effect on the
Company’s consolidated financial position, annual results of operations or cash flows, if it were to acquire
another entity, it would be required to account for it in accordance with this pronouncement.
NOTE 2—BALANCE SHEET DETAIL:
Cash, Cash Equivalents and Marketable Investments:
The Company considers all highly liquid investments, with an original maturity of three months or less at the
time of purchase, to be cash equivalents. Investments in debt securities are accounted for as “available-for-sale”
securities, carried at fair value with unrealized gains and losses reported in other comprehensive income, held for
use in current operations and classified in current assets as “Marketable Investments.” The following is a
summary of cash, cash equivalents and marketable investments.
Security Description
Checking and money market funds . . . . . . . . . . . . .
U.S. government agencies and municipal securities
(Marketable investments) . . . . . . . . . . . . . . . . . .
December 31, 2007
Gross
Unrealized
Gains
Unrealized
Losses
Amortized
Cost
$ 11,054
$—
95,749
$106,803
190
$190
$—
—
$—
Fair
Market
Value
$ 11,054
95,939
$106,993
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64
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9.26
SER soeus0pa
PAL
ˆ1D36CR9=QGD=CQW7Š
6*
1C
44641 TX 65
PMT
PS
1D36CR9=QGD=CQW
CLN
07-Mar-2008 16:34 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
As of December 31, 2007, the Company had $21.5 million invested in auction rate securities, of which $7.4
million was classified under the caption of ‘Marketable investments- long term portion’ in the accompanying
Consolidated Balance Sheet. These auction rate securities were rated AAA by a major credit rating agency, and
are guaranteed by U.S. federal agencies or commercial insurance carriers. See note 12- Subsequent event.
Security Description
Checking and money market funds . . . . . . . . . . . . .
U.S. government agencies and municipal securities
(Marketable investments) . . . . . . . . . . . . . . . . . .
December 31, 2006
Gross
Unrealized
Gains
Unrealized
Losses
Fair
Market
Value
$—
—
$—
$—
$ 11,800
(58)
96,285
$ (58)
$108,085
Amortized
Cost
$ 11,800
96,343
$108,143
The contractual maturities of cash, cash equivalents and marketable-investments as of December 31, 2007, are as
follows (in thousands):
December 31, 2007
Due in less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 1 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 3 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in greater than 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$ 52,667
14,651
—
—
39,675
$106,993
Accounts Receivable:
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable credit losses existing in accounts
receivable and is based on historical write-off experience and any specific customer issues that have been
identified. Account balances are charged off against the allowance when it is probable the receivable will not be
recovered. As of December 31, 2007 and 2006, one customer accounted for 35% and 28% of the Company’s
total accounts receivable balance, respectively.
Inventories:
Inventories consist of the following (in thousands):
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,313
4,220
$2,816
2,404
$7,533
$5,220
December 31,
2007
2006
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65
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKHD1YWiŠ
5*
1C
44641 TX 66
PMT
PS
1D36CR9=FKHD1YW
CLN
06-Mar-2008 08:54 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Other Current Assets:
Other current assets consist of the following (in thousands):
Tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 227
900
828
$1,739
698
265
December 31,
2007
2006
Property and Equipment, net:
Property and equipment, net consists of the following (in thousands):
$1,955
$2,702
December 31,
2007
2006
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
$
152
2,541
1,987
$
140
1,926
1,663
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
4,680
(3,319)
3,729
(2,700)
$ 1,361
$ 1,029
Depreciation and amortization expense related to property and equipment was $674,000, $628,000 and $594,000
for the years ended December 31, 2007, 2006 and 2005, respectively.
Intangible Assets:
Intangible assets were principally comprised of a technology sublicense acquired in 2002, a patent sublicense
acquired from Palomar in 2006, and other intangible assets acquired in 2005. The components of intangible
assets at December 31, 2007 and 2006 were as follows:
Gross
Carrying
Amount
Accumulated
Amortization
Amount
December 31, 2007 (in thousands)
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2006 (in thousands)
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,218
538
185
$1,941
$1,218
538
165
$1,921
$241
302
171
$714
$104
247
124
$475
Net
Amount
$ 977
236
14
$1,227
$1,114
291
41
$1,446
66
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKHZCWW<Š
5*
1C
44641 TX 67
PMT
PS
1D36CR9=FKHZCWW
CLN
06-Mar-2008 08:54 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
For the year ended December 31, 2007, 2006 and 2005, amortization expense for intangible assets was $239,000,
$241,000 and $95,000, respectively.
Based on intangible assets recorded at December 31, 2007, and assuming no subsequent additions to, or
impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as
follows (in thousands):
Year ending December 31,
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
202
196
192
192
158
287
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,227
Accrued Liabilities:
Accrued liabilities consist of the following (in thousands):
Payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2007
2006
$ 5,547
2,725
1,047
328
1,134
588
809
208
1,201
$ 5,101
3,055
1,304
202
785
698
1,107
781
642
$13,587
$13,675
NOTE 3—WARRANTY AND SERVICE CONTRACTS:
The Company has a direct field service organization in the United States. Internationally, the Company provides
direct service support through its wholly-owned subsidiaries in Australia, Canada, France, Japan and Switzerland
as well as through a network of distributors and third-party service providers in several other countries where it
does not have a direct presence. The Company provides a warranty with its products, depending on the type of
product. After the original warranty period, maintenance and support are offered on a service contract basis or on
a time and materials basis. The Company currently provides for the estimated cost to repair or replace products
under warranty at the time of sale.
67
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKJQT3WgŠ
5*
1C
44641 TX 68
PMT
PS
1D36CR9=FKJQT3W
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Warranty Accrual (in thousands):
Balance at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Accruals for warranties issued during the year . . . . . . . . . . . . . . . . . . . . . . .
Less: Settlements made during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,055
5,087
(5,417)
$ 2,043
5,552
(4,540)
Balance at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,725
$ 3,055
Year Ended
December 31,
2007
2006
Deferred Service Contract Revenue (in thousands):
Year Ended
December 31,
2007
2006
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Revenue recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,652
10,498
(6,586)
$ 3,117
7,455
(3,920)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,564
$ 6,652
Costs incurred under service contracts during the years ended December 31, 2007, 2006 and 2005 amounted to
$2.4 million, $1.6 million and $1.1 million, respectively, and are recognized as incurred.
NOTE 4—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION
EXPENSE:
Stock Option Plans.
As of December 31, 2007, the Company had the following stock-based employee compensation plans.
2004 Employee Stock Purchase Plan.
On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. A total of 200,000
shares of common stock were reserved for issuance pursuant to the 2004 Employee Stock Purchase Plan. Under
the 2004 Employee Stock Purchase Plan, or 2004 ESPP, eligible employees are permitted to purchase common
stock at a discount through payroll deductions. Prior to November 1, 2006, the Company had a rolling one-year
offering period, each with two six-month purchase periods. Beginning with the offering period that started on
November 1, 2006, all future offering periods will run for approximately six months, each with one purchase
period. Shares of common stock eligible for purchase are increased on the first day of each fiscal year by an
amount equal to the lesser of (i) 600,000 shares, (ii) 2.0% of the outstanding shares of common stock on such
date or (iii) an amount as determined by the Board of Directors. The Company added 258,788 reserved shares to
the 2004 ESPP on January 1, 2007. The price of the common stock purchased shall be the lower of 85% of the
fair market value of the common stock at the beginning of an offering period or at the end of the offering period.
The Company issued 42,868 and 40,651 shares of common stock under the 2004 ESPP in fiscal years 2007 and
2006, respectively. At December 31, 2007, 745,124 shares remained available for future issuance.
68
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKK931WZŠ
5*
1C
44641 TX 69
PMT
PS
1D36CR9=FKK931W
CLN
06-Mar-2008 08:55 EST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
2004 Equity Incentive Plan and 1998 Stock Plan.
In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the
Company’s common stock have been reserved for issuance to employees, directors and consultants.
On January 12, 2004, the Board of Directors adopted the 2004 Equity Incentive Plan. A total of 1,750,000 shares
of common stock were originally reserved for issuance pursuant to the 2004 Equity Incentive Plan. In addition,
the shares reserved for issuance under the 2004 Equity Incentive Plan included shares reserved but un-issued
under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase
of shares.
Shares of common stock approved under the 2004 Equity Incentive Plan will be increased on the first day of each
fiscal year, commencing in 2005, by an amount equal to the lesser of: (i) 5% of the outstanding shares on the first
day of such year; (b) 2 million shares; or, (c) an amount determined by the Board of Directors. On January 1,
2007, the Company added 646,969 shares to the 2004 Equity Incentive Plan.
Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or
non-statutory stock options. Stock purchase rights may also be granted under the Plan. Incentive stock options
may only be granted to employees. The Board of Directors determines the period over which options become
exercisable, however, except in the case of options granted to officers, directors and consultants, options shall
become exercisable at a rate of no less than 20% per year over five years from the date the options are granted.
Options are to be granted at an exercise price not less than the fair market value per share on the grant date for
incentive options or 85% of fair market value for nonqualified stock options. For employees holding more than
10% of the voting rights of all classes of stock, the exercise price shall not be less than 110% of the fair market
value per share on the grant date. Options granted under the Plan to employees generally become exercisable
25% on the first anniversary of the vesting commencement date and an additional 1/48th of the total number of
shares subject to the option shares shall become exercisable on the last day of each calendar month thereafter
until all of the shares have become exercisable. In June 2007, the Company granted options to non-employee
Board of Directors that become exercisable 100% on the first anniversary of the vesting commencement date.
Unvested options that have been exercised are subject to repurchase upon termination of the holder’s status as an
employee, director or consultant. The contractual term of the options granted is either five, seven or ten years.
During the year ended December 31, 2005, under the 2004 Equity Incentive Plan, the Company’s Board of
Directors approved the grant of 71,500 shares of RSUs to certain members of the Company’s management. The
RSUs generally vest in four equal, annual installments on the anniversaries of the date of grant. The Company
measured the fair market values of the underlying stock on the dates of grant and recognizes the share-based
compensation expense using the straight-line method over the vesting period.
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69
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKL1J9WkŠ
5*
1C
44641 TX 70
PMT
PS
1D36CR9=FKL1J9W
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Option Activity.
Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:
Options Outstanding
Balances, December 31, 2006 . . . . . . . . . . . . . . .
Additional shares reserved . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled or forfeited . . . . . . . . . . . . . . .
Restricted stock units cancelled or forfeited . . . .
Shares
Available
for Grant
1,682,746
646,969
(397,500)
Number of
Shares
2,985,531
—
397,500
— (854,147)
(111,309)
—
111,309
4,125
Balances, December 31, 2007 . . . . . . . . . . . . . . .
2,047,649
2,417,575
Weighted-
Average
Exercise
Price
$10.16
—
$24.68
$ 3.89
$21.94
—
$14.22
Exercisable as of December 31, 2007 . . . . . . . . .
1,494,100
$ 8.99
Weighted-
Average
Remaining
Contractual
Life
(in years)
Aggregate
Intrinsic
Value
(in $ millions)*
5.03
4.44
$12.6
$12.3
*
Based on the closing stock price of $15.70 for the Company’s common stock on December 31, 2007, the last day of trading for the
2007 fiscal year.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate
difference between the Company’s closing stock price on the last trading day of the fiscal year 2007 and the
exercise price, multiplied by the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on December 31, 2007. This amount changes based on the
fair market value of the Company’s common stock. Total intrinsic value of options exercised in the twelve
months ended December 31, 2007 and 2006 was $23.9 million and $13.5 million, respectively.
The options outstanding and exercisable at December 31, 2007 were in the following exercise price ranges:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$ 0.10–$ 0.10 . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.50–$ 4.25 . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5.50–$13.80 . . . . . . . . . . . . . . . . . . . . . . . . .
$14.00–$17.99 . . . . . . . . . . . . . . . . . . . . . . . . .
$20.25–$22.53 . . . . . . . . . . . . . . . . . . . . . . . . .
$23.75–$23.75 . . . . . . . . . . . . . . . . . . . . . . . . .
$24.46–$24.46 . . . . . . . . . . . . . . . . . . . . . . . . .
$24.60–$26.32 . . . . . . . . . . . . . . . . . . . . . . . . .
$27.36–$27.36 . . . . . . . . . . . . . . . . . . . . . . . . .
$34.45–$34.45 . . . . . . . . . . . . . . . . . . . . . . . . .
Number
Outstanding
433,333
340,690
313,736
262,804
223,623
311,535
283,000
206,562
32,292
10,000
$ 0.10–$34.45 . . . . . . . . . . . . . . . . . . . . . . . . .
2,417,575
Weighted-
Average
Remaining
Contractual
Life (in years)
1.70
4.12
6.14
6.84
7.47
5.38
4.44
7.18
4.53
6.69
5.03
Number
Outstanding
433,333
340,690
266,322
167,076
87,819
118,922
—
65,354
14,584
—
1,494,100
Weighted-
Average
Exercise
Price
$ 0.10
2.89
11.75
15.41
20.25
23.75
—
26.04
27.36
—
$ 8.99
As of December 31, 2006, there were 1,864,435 outstanding options that were exercisable at a weighted average
exercise price of $4.30.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKLJSLWEŠ
6*
1C
44641 TX 71
PMT
PS
1D36CR9=FKLJSLW
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Restricted Stock Unit Awards
Information with respect to outstanding restricted stock unit activity is as follows:
Weighted
Average
Grant-
Date Fair
Value
Aggregate
Fair
Value (1)
(in thousands)
Number
of
Shares
Outstanding at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,686
$20.25
— $ —
(15,189) $20.25
(4,125) $20.25
$398 (3)
Outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,372
$20.25
(1) Represents the value of the Company’s stock on the date that the restricted stock units vest.
(2) The number of restricted stock units vested includes shares that the Company withheld on behalf of the employees to satisfy the
statutory tax withholding requirements.
(3) On the grant date, the fair value for these vested awards was $308,000.
Stock-Based Compensation.
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), as discussed in “Note 1:
Summary of Significant Accounting Policies.” Total fair value of vested and expensed stock options, restricted
stock units and ESPP shares for the twelve months ended December 31, 2007 was $5.6 million offset by the
related tax benefit of $2.0 million. The Company issues new shares upon the exercise of options, restricted stock
units and ESPP shares.
Total fair value of vested and expensed stock options, restricted stock units and ESPP shares for the year ended
December 31, 2007 and 2006 was as follows:
Year Ended
December 31,
2007
2006
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,982
294
351
$ 3,885
326
331
Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect on share-based compensation at the marginal tax rates . . . . . . . . . . . .
5.627
(1,963)
4,542
(1,568)
Net share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,664
$ 2,974
As of December 31, 2007, the unrecognized compensation cost, net of expected forfeitures, related to stock
options, RSUs and ESPP was $7.7 million, $382,000 and $100,000, which will be recognized using the straight-
line attribution method over an estimated weighted-average amortization period of 2.4 years, 1.4 years and 0.3
years, respectively.
71
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351076
9.9.26
SER basbm0pa
PAL
ˆ1D36CRB0RTJFWXWCŠ
8*
1C
44641 TX 72
PMT
PS
1D36CRB0RTJFWXW
CLN
13-Mar-2008 08:33 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
Periods Prior to the Adoption of SFAS 123(R).
Prior to January 1, 2006, the Company accounted for stock-based compensation under the recognition and
measurement provisions of APB 25. Accordingly, the Company generally recognized compensation expense
only when it granted options with a discounted exercise price. Any resulting compensation expense was
recognized ratably over the associated service period, which was generally the option vesting term of four years.
Effective January 1, 2006, the Company adopted SFAS 123(R), using the modified prospective application
transition method, which requires the presentation of pro-forma information for periods prior to the adoption of
SFAS 123(R) regarding the net income and net income per share as if the Company had accounted for its stock
options under the fair value method of SFAS 123. For the purpose of this pro-forma disclosure, the estimated
value of the stock awards is recognized on a straight line basis over the vesting periods of the awards. If
compensation had been determined based upon the fair value at the grant date for employee compensation
arrangements, consistent with the methodology prescribed in SFAS 123, the Company’s pro-forma net income
and pro-forma net income per share under SFAS 123 would have been as shown in the table below (in thousands,
except per share data):
Year Ended
December 31, 2005
Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Stock-based employee compensation expense included in reported net
income, net of related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total stock-based employee compensation determined under fair-valued
based method for all awards, net of related tax effects . . . . . . . . . . . . . . . . . . . . . .
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share:
Basic: as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic: pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted: as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted: pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,801
857
(2,126)
$12,532
$
$
$
$
1.20
1.09
1.00
0.91
Valuation Assumptions and Fair Value of Stock Option and ESPP Grants.
For share-based compensation recognized in 2007 and 2006 as a result of the adoption of SFAS No. 123(R), as
well as pro forma disclosures according to the original provisions of SFAS No. 123 for periods prior to the
adoption of SFAS No. 123(R), the Company uses the Black-Scholes option pricing model to estimate the fair
value of options granted under its equity incentive plans and rights to acquire stock granted under its employee
stock purchase plan. The Company based the weighted average estimated values of employee stock option grants
and rights granted under the employee stock purchase plan, as well as the weighted average assumptions used in
calculating these values, on estimates at the date of grant, as follows:
Stock Options
Stock Purchase Plan
2007
2006
2005 (1)
2007
2006
2005 (1)
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Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.44
3.81
$11.42
$14.16
3.76
5.05
4.9%
4.9% 3.9% 4.7% 4.4% 3.5%
64% 67% 59% 58% 51%
56%
— % — % — % — % — % — %
$6.08
0.75
$8.97
0.75
$9.20
0.62
(1) Estimated values and assumptions used in calculating fair value prior to the adoption of SFAS No. 123(R).
72
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKMPDGW]Š
5*
1C
44641 TX 73
PMT
PS
1D36CR9=FKMPDGW
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
The Company bases the expected volatility on implied volatility, because it has determined that implied volatility
is more reflective of market conditions and a better indicator of expected volatility, than its limited historical
volatility since the Initial Public Offering , or IPO, of its common stock. The Company uses the simplified
method of calculating expected life described in SAB 107, due to significant differences in the vesting and
contractual life of current option grants compared to its historical grants, as well as limited data of historical
exercise patterns since the IPO of its common stock.
NOTE 5: COMMON STOCK REPURCHASES
Common Stock Repurchase Program
On May 15, 2007, the Company’s Board of Directors approved a stock repurchase program under which the
Company was authorized to use up to $25 million over a period of up to one year to repurchase shares of its
common stock. Under this program, the Company entered into a pre-arranged Rule 10b5-1 trading plan with a
broker to facilitate the repurchase of its shares. Acquisitions were made in accordance with the trading plan, at
prevailing prices, subject to market conditions and other factors. This repurchase program terminated on
August 31, 2007, when the Company had acquired $25 million worth of shares of its common stock. In the year
ended December 31, 2007, the Company repurchased 1,107,856 shares of its common stock at an average price
of $22.57. The stock repurchased under the plan was cancelled and returned to authorized share status.
Restricted Stock Unit Withholdings
The Company issues restricted stock units as part of its equity incentive plans, which are described more fully in
“Note 4—Stockholders’ Equity, Stock Plans and Stock-Based Compensation Expense.” For the majority of
restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the
statutory withholding requirements paid on behalf of the employees. During 2007, the Company withheld 5,288
shares of common stock to satisfy approximately $139,000 of its employees’ tax obligations. The Company paid
this amount in cash to the appropriate taxing authorities. Although shares withheld are not issued, they are treated
as common stock repurchases for accounting and disclosure purposes, as they reduce the number of shares that
would have been issued upon vesting.
NOTE 6—INCOME TAXES:
The U.S. and international components of the provision for income taxes are as follows (in thousands):
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,904
626
260
$ 1,024
176
382
$4,393
433
231
December 31,
2007
2006
2005
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,790
1,582
5,057
(2,052)
(416)
(62)
(2,457)
(309)
—
(2,530)
(2,766)
(103)
(81)
32
(152)
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,260
$(1,184)
$4,905
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKN7QDW"Š
6*
1C
44641 TX 74
PMT
PS
1D36CR9=FKN7QDW
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
The Company’s deferred tax asset consists of the following (in thousands):
Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accruals and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2007
2006
$ 857
1,075
3,450
2,780
419
130
8,711
181
$1,216
1,204
1,912
1,460
—
—
5,792
(60)
Net deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,892
$5,732
The differences between the U.S. federal statutory income tax rate to the Company’s effective tax are as follows:
Year Ended December 31,
2007
2006
2005
Tax at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit for research and development credit . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.00%
4.58
0.92
(10.62)
1.90
(9.61)
1.51
35.00% 35.00%
4.98
11.80
(109.81)
19.89
(112.08)
24.07
4.48
0.45
(7.89)
(3.17)
(3.26)
0.61
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
23.68% (126.15)% 26.22%
Management evaluates the recoverability of deferred tax assets and the need for a valuation allowance on a
periodic basis.
Undistributed earnings of the Company’s foreign subsidiaries of approximately $1.7 million at December 31,
2007, are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income
taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to various foreign countries.
As of December 31, 2007, the Company had cumulative net operating loss carry-forwards for federal and state
income tax reporting purposes of approximately $1.2 million and $3.0 million, respectively. The federal net
operating loss carry-forwards expire through the year 2026 and the state net operating loss carry-forwards expire
at various dates through the year 2026. Such net operating losses consist of excess tax benefits from employee
stock option exercises and have not been recorded in the Company’s deferred tax assets in accordance with FAS
123(R). The Company will record $525,000 as a credit to additional paid in capital as and when such excess tax
benefits are ultimately realized.
As of December 31, 2007, the Company had cumulative carry-forwards for research and development credits for
federal and state income tax purposes of approximately $1.6 and $2.1 million, respectively. These federal
research and development tax credits expire through the year 2024. The state research and development credits
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKNQZPWtŠ
5*
1C
44641 TX 75
PMT
PS
1D36CR9=FKNQZPW
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
can be carried forward indefinitely, except for $284,000, which will expire at various dates through the year
2020. Furthermore, the Company has federal alternative minimum tax credits of approximately $767,000 that can
be carried forward indefinitely. Certain tax credit carryovers are attributable to excess tax benefits from
employee stock option exercises and have not been recorded in the Company’s deferred tax assets in accordance
with FAS 123(R). The Company will record $2.4 million as a credit to additional paid in capital as and when
such excess tax benefits are ultimately realized.
Uncertain Tax Positions
Effective January 1, 2007, the Company adopted the provisions of FIN 48. This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS No. 109 and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination.
The Company recorded the cumulative effect of applying the provisions of the Interpretation as an adjustment to
the Company’s retained earnings balance as of January 1, 2007. The total amount of unrecognized tax benefits as
of the date of adoption was approximately $1 million. The Company reduced its January 1, 2007 retained
earnings by approximately $91,000. Upon adoption of FIN 48, the Company’s policy to include interest and
penalties related to gross unrecognized tax benefits within the provision for income taxes did not change.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits from
January 1, 2007 to December 31, 2007 (in thousands):
Balance as of January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases related to settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases related to lapsing of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,067
588
(59)
—
—
(96)
Balance as of December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,500
The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate were
$542,000 and $664,000 as of January 1, 2007 and December 31, 2007. As of December 31, 2007, the Company
had accrued $109,000 for payment of interest. Interest included in the provision for income taxes was not
material in all the periods presented. The Company has not accrued any penalties related to its uncertain tax
positions as it believes that it is more likely than not that there will not be any assessment of penalties. The
Company expects that the amount of unrecognized tax benefits will change by approximately $300,000 within
the next 12 months due the expiration of statutes. In general, the Company’s income tax returns are subject to
examination by U.S. federal tax authorities for tax years 2004 onward and by various U.S. state and foreign tax
authorities for tax years 2003 onward. The Company is currently under audit by the Internal Revenue Service for
the year ended December 31, 2005 and by some other state tax authorities for other year(s). The Company has
reserved for potential adjustments to its provision for income taxes that may result from examinations by, or any
negotiated agreements with, these tax authorities, and it believes that the final outcome of these examinations or
agreements will not have a material affect on its results of operations. If events occur which indicate payment of
these amounts is unnecessary, the reversal of the liabilities would result in the recognition of tax benefits in the
period it determines the liabilities are no longer necessary. If the Company’s estimates of the federal, state, and
foreign income tax liabilities are less than the ultimate assessment, a further charge to expense would result.
75
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKP359WlŠ
5*
1C
44641 TX 76
PMT
PS
1D36CR9=FKP359W
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
NOTE 7—NET INCOME PER SHARE:
Basic net income per share is calculated by dividing net income by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is calculated by using the weighted-average
number of common shares outstanding during the period increased to include the number of additional shares of
common stock that would have been outstanding if the dilutive potential shares of common stock had been
issued. The dilutive effect of outstanding options, ESPP shares and restricted stock units is reflected in diluted
earnings per share by application of the treasury stock method, which includes consideration of stock-based
compensation required by SFAS No. 123(R) and SFAS No. 128, “Earnings Per Share.”
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per
share amounts):
Year Ended December 31,
2007
2006
2005
Numerator:
Net income- Basic and Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,504
$ 2,123
$13,801
Denominator:
Weighted-average number of common shares outstanding used in
computing basic net income per share . . . . . . . . . . . . . . . . . . . . . .
13,153
12,558
11,535
Dilutive potential common shares used in computing diluted net
income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total weighted-average number of shares used in computing diluted
net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,075
1,720
2,329
14,228
14,278
13,864
Anti-dilutive Securities
The following number of outstanding options and ESPP shares, prior to the application to the treasury stock
method, were excluded from the computation of diluted net income per share for the periods presented because
including them would have had an anti-dilutive effect (in thousands):
Common stock options and ESPP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2007
829
2006
621
2005
7
NOTE 8—DEFINED CONTRIBUTION PLAN:
In the United States, the Company has an employee savings plan that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. Eligible employees may make voluntary contributions to the
Plan up to 100% of their annual compensation, subject to statutory annual limitations. Since April 1999, the
Company has made discretionary matching contributions of 50% to 75% of all employees’ contributions in each
Plan year. During the years ended December 31, 2007, 2006 and 2005, the Company made discretionary
contributions of $597,000, $557,000 and $420,000, respectively, under the Plan.
For some of the Company’s foreign subsidiaries, the Company has a defined contribution plan for their
employees. Consistent with the requirements of local laws, the Company deposits funds for these plans with
insurance companies, third-party trustees, or into government-managed accounts and have been fully funded or
accrued as of December 31, 2007. The Company’s contributions for its foreign employees were not material in
each of the years ended December 31, 2007, 2006 and 2005.
76
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKPHCYW?Š
6*
1C
44641 TX 77
PMT
PS
1D36CR9=FKPHCYW
CLN
06-Mar-2008 08:55 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
NOTE 9—SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION:
The Company operates in one business segment, which encompasses the designing, developing, manufacturing,
marketing and servicing of aesthetic laser- and other light-based systems for physicians and other qualified
practitioners worldwide. Management uses one measurement of profitability and does not segregate its business
for internal reporting.
The Company’s long-lived assets maintained outside the United States are insignificant.
Revenue is attributed to geographical regions based on the shipping location of where the product is delivered.
For the years ended December 31, 2007, 2006 and 2005, the Company had one customer that represented 14%,
15% and 16%, respectively, of net revenue.
The following table summarizes revenue by geographic region and product category (in thousands):
2007
2006
2005
Revenue mix by geography:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 64,084
17,898
9,258
10,486
$ 69,895
15,781
7,239
7,777
$54,506
13,220
4,351
3,543
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101,726
$100,692
$75,620
Revenue mix by product category:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Titan hand piece refills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 74,502
13,342
9,128
4,754
$101,726
$ 84,695
6,006
5,890
4,101
$100,692
$63,349
6,630
3,881
1,760
$75,620
NOTE 10—COMMITMENTS AND CONTINGENCIES:
Facility Leases.
The Company leases its office and manufacturing facility under a non-cancelable operating lease, which expires
in 2014. In addition, the Company has leased office facilities of approximately 5,790 square feet, 3,100 square
feet and 1,240 square feet, in Japan, Switzerland and France, respectively. The leases in Japan expire in May
2008, May 2009, and July 2010, respectively, and the leases in, Switzerland and France expire in July 2008 and
December 2009, respectively.
As of December 31, 2007, the Company was committed to minimum lease payments for facilities and other
leased assets under long-term non-cancelable operating leases is as follows (in thousands):
Year Ending December 31,
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future minimum rental payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$1,198
1,210
1,232
1,309
1,427
1,545
$7,921
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
CA8609AC351042
9.9.26
SER accaa0pa
PAL
ˆ1D36CRB0HZX118WÆŠ
8*
1C
44641 TX 78
PMT
PS
1D36CRB0HZX118W
CLN
12-Mar-2008 15:34 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
For the years ended December 31, 2007, 2006 and 2005, gross rent expense was $1.5 million, $1.3 million and
$1.3 million, respectively.
Income Taxes
The Company is currently under audit by the Internal Revenue Service for the year ended December 31, 2005
and other state tax authorities. It has reserved for potential adjustments to its provision for income taxes that may
result from examinations by, or any negotiated agreements with, these tax authorities, and it believes that the
final outcome of these examinations or agreements will not have a material affect on its results of operations. If
events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result
in the recognition of tax benefits in the period the Company determines the liabilities are no longer necessary. If
the Company’s estimates of the federal, state, and foreign income tax liabilities are less than the ultimate
assessment, a further charge to expense would result.
Purchase Commitments.
The Company maintains certain open inventory purchase commitments with its suppliers to ensure a smooth and
continuous supply for key components. The Company’s liability in these purchase commitments is generally
restricted to a forecasted time-horizon as agreed between the parties. These forecasted time-horizons can vary
among different suppliers. The Company’s open inventory purchase commitments were not material at
December 31, 2007.
Indemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations,
the Company has entered into indemnification
warranties, and indemnification obligations. For example,
agreements with each of its directors and executive officers. In 2007, two of the Company’s executive officers
were named as defendants in securities class action litigation—see Note 11—Litigation and Litigation
Settlement. The Company’s exposure under its various indemnification obligations, including those under the
indemnification agreements with its directors and executive officers, is unknown since the outcome of that
securities litigation is unpredictable and the amount that could be payable thereunder is not reasonably estimable,
and since other indemnification obligations involve future claims that may be made against the Company. The
Company has not accrued or paid any amounts for any such indemnification obligations. However, the Company
may record charges in the future as a result of these potential indemnification obligations, including those related
to the securities class action litigation.
NOTE 11—LITIGATION AND LITIGATION SETTLEMENT:
Litigation
Two securities class action lawsuits were filed against the Company and two of its executive officers in April
2007 and May 2007, respectively, in the U.S. District Court for the Northern District of California following
declines in the Company’s stock price. The plaintiffs claim to represent purchasers of the Company’s common
stock from January 31, 2007 through May 7, 2007. The complaints generally allege that materially false
statements and omissions were made regarding the Company’s financial prospects, and seek unspecified
monetary damages. On November 1, 2007, the Court ordered the two cases consolidated. On December 17, 2007,
the plaintiffs filed a consolidated, amended complaint, and on January 31, 2008, the Company filed a motion to
dismiss that complaint. A hearing on the motion is scheduled with the Court for May 1, 2008. The Company
retains director and officer liability insurance, though there is no assurance that such insurance will cover the
claims that are made or will insure the Company fully for all losses on covered claims. The Company intends to
defend this case vigorously. Since the outcome of this litigation is unpredictable, not reasonably estimable, and
78
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX02
9.9.26
SER saruc0pa
PAL
ˆ1D36CRB08ZTKH4WUŠ
8*
1C
44641 TX 79
PMT
PS
1D36CRB08ZTKH4W
CLN
11-Mar-2008 19:11 EST
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CUTERA, INC.
since the Company believes that a significant adverse result is not probable, no expense has been recorded with
respect to the contingent liability associated with this matter.
A Telephone Consumer Protection Act, or TCPA, class action lawsuit was filed against the Company in January
2008 in the Illinois Circuit Court, Cook County, by Bridgeport Pain Control Center, LTD., seeking monetary
damages, injunctive relief, costs and other relief. The complaint alleges that the Company violated the TCPA by
sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express
invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements
may be entitled to damages of $500 per violation for inadvertent violations and $1,500 per violation for knowing
or willful violations. On February 22, 2008, the Company removed the case to federal court in the Northern
District of Illinois, and filed its response to the complaint on February 29, 2008. Although the Company is
continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the
lawsuit seeks class certification and the number of these facsimiles that were “unsolicited” within the meaning of
the TCPA, the Company expects that the number of unsolicited facsimiles could be large. The Company intends
to defend this case vigorously, including the plaintiff’s allegations seeking class certification. Since the outcome
of this litigation is unpredictable, and since the amount that could be payable is not reasonably estimable, the
Company has not recorded any expense with respect to the contingent liability associated with this matter.
However, the Company may determine in the future that an accrual is required, and it may be required to pay
damages in respect of this lawsuit, any of which could materially and adversely affect their results of operations,
cash flows and financial condition. The Company has not tendered this lawsuit to its insurance carrier, may not
do so, and, even if it does so, coverage may be disputed. Even if coverage is determined to apply, since the
potential liability under this lawsuit could be substantial, the insurance coverage may not be sufficient to satisfy
any damages or expenses that the Company may be required to pay.
Litigation Settlement
In June 2006, the Company settled its patent litigation with Palomar Medical Technologies and Massachusetts
General Hospital- with Palomar granting the Company an irrevocable sublicense to the subject patents. In
connection with this settlement, the Company recorded a litigation settlement charge of $18.9 million relating to
past royalties, interest and legal settlement costs and $1.2 million as an intangible asset representing the value of
the on-going sublicense agreement which expires in February 2015.
Other Legal Matters
In addition to the foregoing lawsuits, the Company is named from time to time as a party to product liability and
contractual lawsuits in the normal course of its business. As of December 31, 2007, the Company was not a party
to any material pending litigation.
NOTE 12—SUBSEQUENT EVENT
During the first quarter of fiscal 2008, the Company continued to hold auction rate securities in its long term
investment portfolio, as described in footnote 2 to these financial statements. On February 29, 2008 the Company
had $13.6 million invested in auction rate securities, of which $9.6 million failed to settle at auction. All auction
rate securities owned by the Company on February 29, 2008 are backed by federal student loans which are
guaranteed by the Federal Family Educational Loan Program (FFELP) and continue to carry AAA ratings. The
Company continues to earn interest on the investments that failed to settle at auction, at the maximum contractual
rate. As of December 31, 2007 the carrying value of these investments approximated fair value based on
successful auctions, preceding and subsequent to year-end. The Company will continue to monitor the value of
its auction rate securities each reporting period for a possible impairment if a decline in fair value occurs.
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CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
START PAGE
CHMPRFRS1
9.9.26
SER pf_rend
PAL
ˆ1D36CR9=FKQM=TWYŠ
5*
1C
44641 TX 80
PMT
PS
1D36CR9=FKQM=TW
CLN
06-Mar-2008 08:55 EST
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SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
Quarter ended:
Dec 31,
2007
Sept 30,
2007
June 30,
2007
March 31,
2007
Dec 31,
2006
Sept 30,
2006
June 30,
2006
March 31,
2006
Net revenue . . . . . . . . . . . . . . $ 26,453 $28,143 $ 23,873 $ 23,257 $ 30,481 $25,059 $ 24,395 $20,757
5,811
Cost of revenue . . . . . . . . . . .
9,607
7,910
7,931
7,781
7,768
9,704
8,349
Gross profit
. . . . . . . . . . . . . .
16,749
18,536
15,963
15,476
22,132
17,128
16,627
14,946
Operating expenses:
Sales and marketing . . . . . . . .
. .
Research and development
General and administrative . .
. . . . . . .
Litigation settlement
9,438
1,735
2,725
10,586
1,764
3,078
9,190
1,923
2,900
9,063
1,747
3,018
7,865
1,935
3,578
8,174
1,679
2,992
544
8,305
1,552
4,248
18,391
8,546
1,307
4,375
Total operating expense . . . . .
13,898
15,428
14,013
13,828
13,378
13,389
32,496
14,228
Income (loss) from
operations . . . . . . . . . . . . . .
2,851
3,108
1,950
1,648
8,754
3,739
(15,869)
Interest and other income,
net
. . . . . . . . . . . . . . . . . . .
1,001
1,096
1,108
1,002
981
829
830
718
956
Income (loss) before income
taxes . . . . . . . . . . . . . . . . . .
Provision (benefit) for income
taxes . . . . . . . . . . . . . . . . . .
3,852
4,204
3,058
2,650
9,735
4,568
(15,039)
1,674
229
1,112
1,024
895
2,620
1,618
(5,990)
567
Net income (loss) . . . . . . . . . . $
3,623 $ 3,092 $
2,034 $
1,755 $
7,115 $ 2,950 $ (9,049) $ 1,107
Net income (loss) per share—
basic . . . . . . . . . . . . . . . . . . $
0.28 $
0.24 $
0.15 $
0.13 $
0.56 $
0.23 $
(0.73) $
0.09
Net income (loss) per share—
diluted . . . . . . . . . . . . . . . . $
0.27 $
0.22 $
0.14 $
0.15 $
0.50 $
0.21 $
(0.73) $
0.08
Weight-average number of
shares used in per share
calculations:
Basic . . . . . . . . . . . . . . .
12,714
13,026
13,610
13,216
12,749
12,675
12,444
12,257
Diluted . . . . . . . . . . . . . .
13,561
13,970
14,666
14,629
14,346
14,238
12,444
14,174
Cash, cash equivalents and
marketable investments . . . $106,993 $99,536 $115,415 $111,239 $108,085 $90,672 $ 81,965 $95,511
80
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FORM 10-K
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SCHEDULE II
CUTERA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
For the Year Ended December 31, 2007, 2006 and 2005
Balance at
Beginning
of Year
Additions Deductions
Allowance for doubtful accounts receivable
Year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for excess and obsolete inventories
Year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .
$487
$177
$ 34
$378
$992
$851
8
$
$221
$222
$905
$ 90
$279
$318
$364
$247
$291
$231
$ 79
Balance
at End of
Year
$ 177
34
$
9
$
$ 992
$ 851
$1,051
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CUTERA, INC.
FORM 10-K
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Attached as exhibits to this Annual Report are certifications of the Company’s Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), which are required in accordance with Rule 13a-14 of the Securities
Exchange Act of 1934, as amended (Exchange Act). This Controls and Procedures section includes the
information concerning the controls evaluation referred to in the certifications, and it should be read in
conjunction with the certifications for a more complete understanding of the topics presented.
The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls
and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (Disclosure Controls)
as of the end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The
controls evaluation was conducted under the supervision and with the participation of the Company’s
management, including the CEO and CFO. Based on this evaluation, the CEO and our CFO have concluded that
as of the end of the period covered by this report the Company’s disclosure controls and procedures were
effective at a reasonable assurance level.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be
disclosed in the Company’s reports filed under the Exchange Act, such as this Report, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are
also designed to reasonably assure that such information is accumulated and communicated to the Company’s
including the CEO and CFO, as appropriate to allow timely decisions regarding required
management,
disclosure. The Company’s Disclosure Controls include components of its internal control over financial
reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability
of its financial reporting and the preparation of financial statements in accordance with generally accepted
accounting principles in the U.S. To the extent that components of the Company’s internal control over financial
reporting are included within its Disclosure Controls, they are included in the scope of the Company’s annual
controls evaluation.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision
and with the participation of the Company’s management, including the CEO and CFO, the Company conducted
an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in
the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded
that the Company’s internal control over financial reporting was effective as of December 31, 2007. The
effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, as stated in their report,
which is included herein.
Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure
controls or internal control over financial reporting will prevent all error and all fraud. A control system, no
82
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matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision making can be faulty and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the controls. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
The Company has established that the 2008 Annual Meeting of Stockholders will be held at their principal
executive offices located at 3240 Bayshore Blvd., Brisbane, CA 94005-1021 on June 12, 2008 at 10.00 a.m. and
the record date for the purposes of voting in that meeting shall be April 18, 2008.
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CUTERA, INC.
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PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a
Definitive Proxy Statement (the “Proxy Statement”) for our 2008 Annual Meeting of Stockholders with the
Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2007.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the Proxy Statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The financial statements required by Item 15(a) are filed as Item 8 of this annual report.
(2) The financial statement schedules required by Item 15(a) are filed as Item 8 of this annual report.
(3) Exhibits.
Exhibit No.
Description
3.2(1)
3.4(1)
4.1(4)
10.1(1)
10.2(1)
10.3(1)
10.4(5)
10.6(1)
Amended and Restated Certificate of Incorporation of the Registrant (Delaware).
Bylaws of the Registrant.
Specimen Common Stock certificate of the Registrant.
Form of Indemnification Agreement for directors and executive officers.
1998 Stock Plan.
2004 Equity Incentive Plan.
2004 Employee Stock Purchase Plan.
Brisbane Technology Park Lease dated August 5, 2003 by and between the Registrant and Gal-
Brisbane, L.P. for office space located at 3240 Bayshore Boulevard, Brisbane, California.
10.10(2)
Settlement Agreement and Non-Exclusive Patent License, each between the Registrant and
Palomar Medical Technologies, Inc. dated June 2, 2006.
10.11(3)
Form of Performance Unit Award Agreement.
10.13(4)†
Distribution Agreement between the Registrant and PSS World Medical Shared Services, Inc., a
subsidiary of PSS World Medical dated October 1, 2006.
23.1
24.1
31.1
31.2
32.1
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (see page 86).
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1)
Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was declared
effective on March 30, 2004.
(2)
Incorporated by reference from our Current Report on Form 8-K filed on June 2, 2006.
(3)
Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2005.
(4)
Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 8, 2006.
(5)
Incorporated by reference from our 2006 Annual Report on Form 10-K filed on March 16, 2007.
†
Confidential Treatment has been requested for certain portions of this exhibit.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of The Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of
Brisbane, State of California, on the 13th day of March, 2008.
CUTERA, INC.
By:
/S/ KEVIN P. CONNORS
Kevin P. Connors
President and Chief Executive Officer
Power of Attorney
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kevin P. Connors, his attorney-in-fact, for him or her in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ KEVIN P. CONNORS
President, Chief Executive Officer and
March 13, 2008
Kevin P. Connors
Director (Principal Executive
Officer)
/S/ RONALD J. SANTILLI
Ronald J. Santilli
Chief Financial Officer and Executive
Vice President (Principal Financial
and Accounting Officer)
March 13, 2008
/S/ DAVID A. GOLLNICK
David A. Gollnick
Executive Vice President of Research
and Development and Director
March 13, 2008
David B. Apfelberg
Director
/S/ ANNETTE J. CAMPBELL-WHITE
Director
March 13, 2008
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Annette J. Campbell-White
/S/ MARK LORTZ
Mark Lortz
/S/ TIM O’SHEA
Tim O’Shea
/S/
JERRY P. WIDMAN
Jerry P. Widman
Director
Director
Director
86
March 13, 2008
March 13, 2008
March 13, 2008
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-
114149, 333-123495, 333-132583 and 333-141376) of Cutera, Inc. of our report dated March 12, 2008 relating to
the consolidated financial statements, financial statement schedule and the effectiveness of internal control over
financial reporting, which appears in this Form 10-K.
EXHIBIT 23.1
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 12, 2008
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IFV
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05-Mar-2008 10:53 EST
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kevin P. Connors, certify that:
1. I have reviewed this annual report on Form 10-K of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report)
that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s Independent Registered Public Accounting Firm and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 13, 2008
/s/ KEVIN P. CONNORS
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
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1D36CR9=6ZTP69W
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05-Mar-2008 10:53 EST
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronald J. Santilli, certify that:
1. I have reviewed this annual report on Form 10-K of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report)
that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s Independent Registered Public Accounting Firm and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 13, 2008
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)
CUTERA, INC.
FORM 10-K
RR Donnelley ProFile
SERFBU-MWS-CX01
9.9
SER amarb0dc
PAL
ˆ1D36CR9=6ZTW9MWbŠ
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44641 EX32_1 1
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05-Mar-2008 10:53 EST
EXHIBIT 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin P. Connors, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Cutera Inc. on Form 10-K for the fiscal year ended
December 31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material
respects the financial condition and results of operations of Cutera Inc.
Date: March 13, 2008
By: /s/ Kevin P. Connors
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
I, Ronald J. Santilli, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Cutera Inc. on Form 10-K for the fiscal year ended
December 31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material
respects the financial condition and results of operations of Cutera Inc.
Date: March 13, 2008
By: /s/ Ronald J. Santilli
Ronald J. Santilli
Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)