CUTERA, INC.
2012 PROXY STATEMENT AND 2011 ANNUAL REPORT
Dear Stockholders:
You are cordially invited to attend the 2012 Annual Meeting of Stockholders of Cutera, Inc. (the “Company”). The
meeting will be held at our principal executive offices located at 3240 Bayshore Blvd., Brisbane, California 94005-
1021 on June 13, 2012 at 10:00 a.m. Pacific Time.
The attached Notice of 2012 Annual Meeting of Stockholders and Proxy Statement contain details of the business to be
conducted at the Annual Meeting. We have also made available a copy of our 2011 Annual Report to Stockholders
with this proxy statement. We encourage you to read our Annual Report. It includes our audited financial statements
and provides information about our business.
We have elected to provide access to our proxy materials over the internet under the Securities and Exchange
Commission’s “notice and access” rules. We are constantly focused on improving the ways people connect with
information, and believe that providing our proxy materials over the internet increases the ability of our stockholders to
connect with the information they need, while reducing the environmental impact of our Annual Meeting. If you need
additional information about Cutera, please visit the Investor Relations section of the Company’s website at
www.cutera.com.
Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the meeting.
Therefore, I urge you to promptly vote and submit your proxy via the internet, by phone, or by signing, dating, and
returning the proxy card provided to you. If you decide to attend the Annual Meeting, you will be able to vote in
person, even if you have previously submitted your proxy.
On behalf of Cutera’s Board of Directors and executive team, I would like to express our appreciation for your
continued interest and confidence in our business.
Sincerely,
Kevin Connors,
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant
Filed by a Party other than the Registrant
Check the appropriate box:
Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-2
CUTERA, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
No fee required
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1)
Title of each class of securities to which transaction applies:
(2)
Aggregate number of securities to which transaction applies:
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it was determined):
(4)
Proposed maximum aggregate value of transaction:
(5)
Total fee paid:
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and
the date of its filing.
(1)
Amount Previously Paid:
(2)
Form, Schedule or Registration Statement No.:
(3)
Filing Party:
(4)
Date Filed:
NOTICE OF 2012 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 13, 2012
10:00 A.M. Pacific Time
To our Stockholders:
You are cordially invited to attend the 2012 Annual Meeting of Stockholders of Cutera, Inc. (the “Company”).
The meeting will be held at our principal executive offices located at 3240 Bayshore Blvd., Brisbane, California
94005-1021. The meeting will be held on June 13, 2012 at 10:00 a.m. Pacific Time, for the following purposes:
1.
To elect two Class II directors to each serve for a three-year term that expires at the 2015 Annual
Meeting of Stockholders and until their successors have been duly elected and qualified;
2.
3.
To hold a non-binding vote on the compensation of our named executive officers;
To ratify the selection of Ernst & Young LLP as the independent registered public accounting firm of
the Company (the “Independent Registered Public Accounting Firm”) for the fiscal year ending December 31, 2012;
4.
To adopt our 2004 Equity Incentive Plan (As Amended); and
5.
To transact such other business as may properly come before the Annual Meeting, including any
motion to adjourn to a later date to permit further solicitation of proxies, if necessary, or before any adjournment
thereof.
The foregoing items of business are more fully described in the proxy statement accompanying this Notice of
Annual Meeting.
To help conserve resources and reduce printing and distribution costs, we will be mailing a notice to our
stockholders, instead of a paper copy of this proxy statement and our 2011 Annual Report, with instructions on how to
access our proxy materials over the Internet, including this proxy statement, our 2011 Annual Report and a form of
proxy card or voting instruction card. The notice will also contain instructions on how each of those stockholders can
receive a paper copy of our proxy materials.
The meeting will begin promptly at 10:00 a.m., local time, and check-in will begin at 9:50 a.m. local time.
Only holders of record of shares of our common stock (NASDAQ: CUTR) at the close of business on April 16, 2012
will be entitled to notice of, and to vote at, the meeting and any postponements or adjournments of the meeting.
For a period of at least 10 days prior to the meeting, a complete list of stockholders entitled to vote at the
meeting will be available and open to the examination of any stockholder for any purpose relating to the Annual
Meeting during normal business hours at our principal executive offices located at 3240 Bayshore Blvd., Brisbane,
California 94005-1021.
By order of the Board of Directors,
Kevin P. Connors
President and Chief Executive Officer
Brisbane, California
April 30, 2012
YOUR VOTE IS IMPORTANT!
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE
BY TELEPHONE, OR IF AVAILABLE, ELECTRONICALLY, OR, IF YOU RECEIVED PER YOUR
REQUEST A PAPER COPY OF OUR PROXY MATERIALS, COMPLETE, SIGN, DATE, AND RETURN
THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. NO
ADDITIONAL POSTAGE IS NECESSARY IF THE PROXY CARD IS MAILED IN THE UNITED STATES
OR CANADA. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE
MEETING.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS REGARDING THIS SOLICITATION AND VOTING AT THE ANNUAL
MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Why am I receiving these proxy materials? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Why did I receive a notice in the mail regarding the Internet availability of the proxy materials instead of
a paper copy of the proxy materials? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is the purpose of the Annual Meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who is entitled to attend the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who is entitled to vote at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How many shares must be present or represented to conduct business at the meeting (that is, what
constitutes a quorum)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What items of business will be voted on at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How does the Board recommend that I vote? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What shares can I vote at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is the difference between holding shares as a stockholder of record and as a beneficial owner? . . . . .
How can I vote my shares without attending the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How can I vote my shares in person at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Can I change my vote? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Is my vote confidential? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What vote is required to approve each item and how are votes counted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is a “broker non-vote”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How are “broker non-votes” counted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How are abstentions counted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What happens if additional matters are presented at the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who will serve as inspector of election? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What should I do in the event that I receive more than one set of proxy/voting materials? . . . . . . . . . . . . . . .
Who is soliciting my vote and who will bear the costs of this solicitation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Where can I find the voting results of the meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is the deadline to propose actions for consideration at next year’s Annual Meeting of stockholders
or to nominate individuals to serve as directors? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
STOCK OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CORPORATE GOVERNANCE AND BOARD MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Oversight and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Committees of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meetings Attended by Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Nomination Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review, Approval or Ratification of Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Family Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indemnification Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications with the Board by Stockholders
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TABLE OF CONTENTS
Stock Ownership Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REPORT OF THE AUDIT COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL ONE — ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Classes of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors Whose Terms Extend Beyond the 2012 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL TWO — NON-BINDING VOTE ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of 2011 Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL THREE — RATIFICATION OF ERNST & YOUNG LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit and Non-Audit Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL FOUR — ADOPTION OF 2004 EQUITY INCENTIVE PLAN (AS AMENDED) . . . . . . . . . . . . .
NAMED EXECUTIVE OFFICERS AND EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Revenue Code Section 162(m) and Limitations on Executive Compensation . . . . . . . . . . . . . . . . . . .
Securities Authorized for Issuance Under Equity Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Incentive Awards Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options Exercised and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Potential Payments Upon Termination or Change in Control
COMPENSATION COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A — 2004 EQUITY INCENTIVE PLAN (AS AMENDED)
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ii
PROXY STATEMENT
FOR
2012 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 13, 2012
The Board of Directors of Cutera, Inc., a Delaware corporation, is soliciting the enclosed proxy from you. The
proxy will be used at our 2012 Annual Meeting of Stockholders to be held on Wednesday, June 13, 2012, beginning at
10:00 a.m., Pacific Time, which is the local time, at our principal executive offices located at 3240 Bayshore Blvd.,
Brisbane, California 94005-1021, and at any postponements or adjournments thereof. This proxy statement contains
important information regarding the meeting. Specifically, it identifies the matters upon which you are being asked to
vote, provides information that you may find useful in determining how to vote and describes the voting procedures.
In this proxy statement the terms “we”, “our”, “Cutera” and the “Company” each refer to Cutera, Inc.; the
term “Board” means our Board of Directors; the term “proxy materials” means this proxy statement, the enclosed
proxy card, and our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the U.S. Securities
and Exchange Commission (the “SEC”) on March 15, 2012, and the term “Annual Meeting” means our 2012 Annual
Meeting of Stockholders.
We are sending the Notice of Internet Availability of Proxy Materials on or about May 4, 2012, to all
stockholders of record at the close of business on April 16, 2012 (the “Record Date”).
QUESTIONS AND ANSWERS REGARDING THIS SOLICITATION AND
VOTING AT THE ANNUAL MEETING
Why am I receiving these proxy
materials?
You are receiving these proxy materials from us because you were a stockholder of
record at the close of business on the Record Date (which was April 16, 2012). As
a stockholder of record, you are invited to attend the meeting and are entitled to
and requested to vote on the items of business described in this proxy statement.
Why did I receive a notice in the
mail regarding the Internet
availability of the proxy
materials instead of a paper
copy of the proxy materials?
Pursuant to SEC rules, we have elected to provide access to our proxy materials
over the Internet. Accordingly, we are sending a Notice of Internet Availability of
Proxy Materials (the “Notice”) to our stockholders.
All stockholders will have the ability to access the proxy materials on a website
referred to in the Notice or request to receive a printed set of the proxy materials.
Instructions on how to access the proxy materials over the Internet or to request a
printed copy may be found on the Notice.
In addition, stockholders may request to receive proxy materials in printed form by
mail or electronically by email on an ongoing basis. Choosing to receive your
future proxy materials by email will save us the cost of printing and mailing
documents to you and will reduce the impact of our annual stockholders’ meetings
on the environment. If you chose in connection with our 2011 Annual Meeting of
Stockholders to receive future proxy materials by email, you should receive an
email this year with instructions containing a link to those materials and a link to
the proxy voting site. In connection with our upcoming Annual Meeting, if you
choose to receive future proxy materials by email, you will receive an email next
year with instructions containing a link to those materials and a link to the proxy
voting site. Your election to receive proxy materials by email will remain in effect
until you terminate it.
-1-
What is the purpose of the
Annual Meeting?
At our meeting, stockholders of record will vote upon the items of business
outlined in the notice of meeting (on the cover page of this proxy statement), each
of which is described more fully in this proxy statement. In addition, management
will report on the performance of the Company and respond to questions from
stockholders.
Who is entitled to attend the
meeting?
You are entitled to attend the meeting only if you owned our common stock (or
were a joint holder) as of the Record Date or if you hold a valid proxy for the
meeting. You should be prepared to present photo identification for admittance.
Please also note that if you are not a stockholder of record but hold shares in street
name (that is, through a broker or nominee), you will need to provide proof of
beneficial ownership as of the Record Date, such as your most recent brokerage
account statement, a copy of the voting instruction card provided by your broker,
trustee or nominee, or other similar evidence of ownership.
The meeting will begin promptly at 10:00 a.m., local time. Check-in will begin at
9:50 a.m., local time.
Who is entitled to vote at the
meeting?
Only stockholders who owned our common stock at the close of business on the
Record Date are entitled to notice of and to vote at the meeting, and at any
postponements or adjournments thereof.
As of the Record Date, 14,068,863 shares of our common stock were outstanding.
Each outstanding share of our common stock entitles the holder to one vote on each
matter considered at the meeting. Accordingly, there are a maximum of 14,068,863
votes that may be cast at the meeting.
How many shares must be
present or represented to
conduct business at the meeting
(that is, what constitutes a
quorum)?
The presence at the meeting, in person or by proxy, of the holders of a majority of
the shares of our common stock entitled to vote at the meeting will constitute a
quorum. A quorum is required to conduct business at the meeting. The presence of
the holders of our common stock representing at least 7,034,432 votes will be
required to establish a quorum at the meeting. Both abstentions and broker non-
votes are counted for the purpose of determining the presence of a quorum.
What items of business will be
voted on at the meeting?
The items of business scheduled to be voted on at the meeting are as follows:
1.
the election of two nominees to serve as Class II directors on our Board;
2. a non-binding vote on executive compensation;
3.
the ratification of Ernst & Young LLP as the Independent Registered
Public Accounting Firm for the 2012 fiscal year; and
4.
the adoption of our 2004 Equity Incentive Plan (as amended).
These proposals are described more fully below in this proxy statement. As of the
date of this proxy statement, the only business that our Board intends to present or
knows of that others will present at the meeting is as set forth in this proxy
statement. If any other matter or matters are properly brought before the meeting, it
is the intention of the persons who hold proxies to vote the shares they represent in
accordance with their best judgment.
-2-
How does the Board
recommend that I vote?
Our Board recommends that you vote your shares “FOR” each of the director
nominees, “FOR” the approval of a non binding vote on executive compensation
and “FOR” the ratification of Ernst & Young LLP as the Independent Registered
Public Accounting Firm for the 2012 fiscal year, and “FOR” for the adoption of
our 2004 Equity Incentive Plan (as amended).
What shares can I vote at the
meeting?
You may vote all shares owned by you as of the Record Date, including (1) shares
held directly in your name as the stockholder of record, and (2) shares held for you
as the beneficial owner through a broker, trustee or other nominee such as a bank.
What is the difference between
holding shares as a stockholder
of record and as a beneficial
owner?
Most of our stockholders hold their shares through a broker or other nominee rather
than directly in their own name. As summarized below, there are some distinctions
between shares held of record and those owned beneficially.
Stockholders of Record. If your shares are registered directly in your name with
our transfer agent, Computershare Trust Company, Inc., you are considered, with
respect to those shares, the stockholder of record, and these proxy materials are
being sent directly to you by us. As the stockholder of record, you have the right to
grant your voting proxy directly to Cutera or to vote in person at the meeting. We
have enclosed a proxy card for your use.
Beneficial Owner. If your shares are held in a brokerage account or by another
nominee, you are considered the beneficial owner of shares held in street name,
and these proxy materials are being forwarded to you together with a voting
instruction card. As the beneficial owner, you have the right to direct your broker,
trustee or nominee how to vote and are also invited to attend the meeting. Please
note that since a beneficial owner is not the stockholder of record, you may not
vote these shares in person at the meeting unless you obtain a “legal proxy” from
the broker, trustee or nominee that holds your shares, giving you the right to vote
the shares at the meeting. Your broker, trustee or nominee has enclosed or provided
voting instructions for you to use in directing the broker, trustee or nominee how to
vote your shares.
Whether you hold shares directly as the stockholder of record or beneficially in
street name, you may direct how your shares are voted without attending the
meeting. Stockholders of record of our common stock may submit proxies by
completing, signing and dating their proxy cards and mailing them in the
accompanying pre-addressed envelope. Our stockholders who hold shares
beneficially in street name may vote by mail by completing, signing and dating the
voting instruction cards provided by the broker, trustee or nominee and mailing
them in the accompanying pre-addressed envelope.
Shares held in your name as the stockholder of record may be voted in person at
the meeting. Shares held beneficially in street name may be voted in person only if
you obtain a legal proxy from the broker, trustee or nominee that holds your shares
giving you the right to vote the shares. Even if you plan to attend the meeting, we
recommend that you also submit your proxy card or voting instructions as
described above so that your vote will be counted if you later decide not to, or are
unable to, attend the meeting.
You may change your vote at any time prior to the vote at the meeting. If you are
the stockholder of record, you may change your vote by granting a new proxy
bearing a later date (which automatically revokes the earlier proxy), by providing a
written notice of revocation to our Secretary prior to your shares being voted, or by
attending the meeting and voting in person. Attendance at the meeting will not
cause your previously granted proxy to be revoked unless you specifically so
request.
-3-
How can I vote my shares
without attending the meeting?
How can I vote my shares in
person at the meeting?
Can I change my vote?
Is my vote confidential?
For shares you hold beneficially in street name, you may change your vote by
submitting new voting instructions to your broker, trustee or nominee, or, if you
have obtained a legal proxy from your broker, trustee or nominee giving you the
right to vote your shares, by attending the meeting and voting in person.
Proxy
tabulations that
instructions, ballots and voting
individual
stockholders are handled in a manner that protects your voting privacy. Your vote
will not be disclosed either within Cutera or to third parties, except: (1) as
necessary to meet applicable legal requirements, (2) to allow for the tabulation of
votes and certification of the vote, and (3) to facilitate a successful proxy
solicitation. Occasionally, stockholders provide written comments on their proxy
card, which are then forwarded to our management.
identify
What vote is required to approve
each item and how are votes
counted?
votes is set forth below:
The vote required to approve each item of business and the method for counting
Election of Directors. The two director nominees receiving the highest number of
affirmative “FOR” votes at the meeting (a plurality of votes cast) will be elected to
serve as Class II directors. You may vote either “FOR” or “WITHHOLD” your
vote for the director nominees. A properly executed proxy marked “WITHHOLD”
with respect to the election of one or more directors will not be voted with respect
to the director or directors indicated, although it will be counted for purposes of
determining whether there is a quorum.
Non-binding Vote on Executive Compensation. For the non-binding vote on
executive compensation, the affirmative “FOR” vote of a majority of the shares
represented in person or by proxy and entitled to vote on the item will be required
for approval. You may vote “FOR,” “AGAINST” or “ABSTAIN” for this item of
business. If you “ABSTAIN,” your abstention has the same effect as a vote
“AGAINST.”
Ratification of Ernst & Young LLP as our Independent Registered Public
Accounting Firm. For the ratification of Ernst & Young LLP as our Independent
Registered Public Accounting Firm, the affirmative “FOR” vote of a majority of
the shares represented in person or by proxy and entitled to vote on the item will be
required for approval. You may vote “FOR,” “AGAINST” or “ABSTAIN” for this
item of business. If you “ABSTAIN,” your abstention has the same effect as a vote
“AGAINST.”
Adoption of 2004 Equity Incentive Plan (As Amended). For the adoption of our
2004 Equity Incentive Plan (as amended), the affirmative “FOR” vote of a majority
of the shares represented in person or by proxy and entitled to vote on the item will
be required for approval. You may vote “FOR,” “AGAINST” or “ABSTAIN” for
this item of business. If you “ABSTAIN,” your abstention has the same effect as a
vote “AGAINST.”
If you provide specific instructions with regard to certain items, your shares will be
voted as you instruct on such items. If you sign your proxy card or voting
instruction card without giving specific instructions, your shares will be voted in
accordance with the recommendations of the Board (“FOR” all of the Company’s
nominees to the Board, “FOR” the approval, by non-binding vote, of executive
compensation, “FOR” ratification of Ernst & Young LLP as our Independent
Registered Public Accounting Firm, “FOR” the adoption of the 2004 Equity
Incentive Plan (As Amended), and in the discretion of the proxy holders on any
other matters that may properly come before the meeting).
-4-
What is a “broker non-vote”?
A “broker non-vote” occurs when a broker expressly instructs on a proxy card that
it is not voting on a matter, whether routine or non-routine. Under the rules that
govern brokers who have record ownership of shares that are held in street name
for their clients who are the beneficial owners of the shares, brokers have the
discretion to vote such shares on routine matters, which includes ratifying the
appointment of an independent registered public accounting firm but does not
include the election of directors, and the non-binding vote on executive
compensation. Therefore, if you do not otherwise instruct your broker, the broker
may turn in a proxy card voting your shares “FOR” ratification of Ernst & Young
LLP as the Independent Registered Public Accounting Firm. However, if you do
not instruct your broker how to vote with respect to the election of directors,
the non-binding vote on executive compensation and the adoption of the 2004
Equity Incentive Plan (as amended), your broker may not vote with respect to
such proposal and your shares will not be counted as voting in favor of these
matters.
How are “broker non-votes”
counted?
Broker non-votes will be counted for the purpose of determining the presence or
absence of a quorum for the transaction of business, but they will not be counted in
tabulating the voting result for any particular proposal.
How are abstentions counted?
What happens if additional
matters are presented at the
meeting?
If you return a proxy card that indicates an abstention from voting on all matters,
the shares represented will be counted for the purpose of determining both the
presence of a quorum and the total number of votes cast with respect to a proposal
(other than the election of directors), but they will not be voted on any matter at the
meeting. In the absence of controlling precedent to the contrary, we intend to treat
abstentions in this manner. Accordingly, abstentions will have the same effect as a
vote “AGAINST” a proposal.
Other than the four proposals described in this proxy statement, we are not aware
of any other business to be acted upon at the meeting. If you grant a proxy, the
persons named as proxy holders, Kevin P. Connors (our President and Chief
Executive Officer) and Ronald J. Santilli (our Chief Financial Officer), will have
the discretion to vote your shares on any additional matters that may be properly
presented for a vote at the meeting. If, for any unforeseen reason, any of our
nominees is not available as a candidate for director, the persons named as proxy
holders will vote your proxy for such other candidate or candidates as may be
nominated by our Board.
Who will serve as inspector of
election?
We expect a representative of Computershare Trust Company, Inc., our transfer
agent, to tabulate the votes, and expect Rajesh Madan, our Vice President of
Finance to act as inspector of election at the meeting.
What should I do in the event
that I receive more than one set
of proxy/voting materials?
You may receive more than one set of these proxy solicitation materials, including
multiple copies of this proxy statement and multiple proxy cards or voting
instruction cards. For example, if you hold your shares in more than one brokerage
account, you may receive a separate voting instruction card for each brokerage
account in which you hold shares. In addition, If you are a stockholder of record
and your shares are registered in more than one name, you may receive more than
one proxy card. Please complete, sign, date and return each Cutera proxy card and
voting instruction card that you receive to ensure that all your shares are voted.
-5-
Who is soliciting my vote and
who will bear the costs of this
solicitation?
Your vote is being solicited on behalf of the Board, and the Company will bear the
entire cost of solicitation of proxies, including preparation, assembly, printing and
mailing of this proxy statement. In addition to these mailed proxy materials, our
directors and employees may also solicit proxies in person, by telephone, by
electronic mail or by other means of communication. Directors and employees will
not be paid any additional compensation for soliciting proxies. We may reimburse
brokerage firms, banks and other agents for the cost of forwarding proxy materials
to beneficial owners. We may also engage the services of a professional proxy
solicitation firm to aid in the solicitation of proxies from certain brokers, bank
nominees and other institutional owners. Our costs for such services, if retained,
will not be material.
Where can I find the voting
results of the meeting?
We intend to announce preliminary voting results at the Annual Meeting and file a
Form 8-K with the SEC within four business days after the end of our Annual
Meeting to report the voting results.
What is the deadline to propose
actions for consideration at next
year’s Annual Meeting of
stockholders or to nominate
individuals to serve as
directors?
As a stockholder, you may be entitled to present proposals for action at a future
meeting of stockholders, including director nominations.
Stockholder Proposals: For a stockholder proposal to be considered for inclusion
in our proxy statement for the Annual Meeting to be held in 2013, the written
proposal must be received by our corporate Secretary at our principal executive
offices no later than January 3, 2013, which is the date 120 calendar days before
the anniversary of the mailing date of the Notice of Internet Availability of Proxy
Materials. If the date of next year’s Annual Meeting is moved more than 30 days
before or after the anniversary date of this year’s Annual Meeting, the deadline for
inclusion of proposals in our proxy statement is instead a reasonable time before
we begin to print and mail its proxy materials. Such proposals also must comply
with the requirements of Rule 14a-8 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and any other applicable rules established by the
SEC. Stockholders interested in submitting such a proposal are advised to contact
knowledgeable legal counsel with regard to the detailed requirements of applicable
securities laws. Proposals should be addressed to:
Secretary
Cutera, Inc.
3240 Bayshore Blvd.
Brisbane, California 94005-1021
Nomination of Director Candidates: You may propose director candidates for
consideration by our Board. Any such recommendations should include the
nominee’s name and qualifications for Board membership and should be directed
to the “Secretary” at the address of our principal executive offices set forth above.
In addition, our Bylaws permit stockholders to nominate directors for election at an
Annual Meeting of stockholders. To nominate a director, the stockholder must
provide the information required by our Bylaws, as well as a statement by the
nominee consenting to being named as a nominee and to serve as a director if
elected. In addition, the stockholder must give timely notice to our corporate
Secretary in accordance with the provisions of our Bylaws, which require that the
notice be received by our corporate Secretary no later than January 3, 2013.
-6-
Copy of Bylaw Provisions: You may contact our corporate Secretary at our
principal executive offices for a copy of the relevant bylaw provisions regarding
the requirements for making stockholder proposals and nominating director
candidates.
-7-
Security Ownership of Certain Beneficial Owners and Management
STOCK OWNERSHIP
The following table provides information relating to the beneficial ownership of our common stock as of the
Record Date, by:
●
each stockholder known by us to own beneficially more than 5% of our common stock;
●
each of our executive officers named in the Summary Compensation Table on page 41 (including our
Chief Executive Officer, our Chief Financial Officer, and our Chief Technology Officer);
●
each of our directors; and
●
all of our directors and Named Executive Officers as a group.
The number of shares beneficially owned by each entity, person, director or executive officer is determined in
accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares over which the individual has the sole or
shared voting power or investment power and any shares that the individual has the right to acquire within 60 days of
April 16, 2012 (the Record Date) through the exercise of any stock option or other right. The number and percentage of
shares beneficially owned is computed on the basis of 14,068,863 shares of our common stock outstanding as of the
Record Date. The information in the following table regarding the beneficial owners of more than 5% of our common
stock is based upon information supplied by principal stockholders or Schedules 13D and 13G filed with the SEC.
Shares of our common stock that a person has the right to acquire within 60 days of the Record Date are
deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but are not
deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to
the percentage ownership of all directors and executive officers as a group. To our knowledge, except as set forth in the
footnotes to this table and subject to applicable community property laws, each person or entity named in the table has
sole voting and disposition power with respect to the shares set forth opposite such person’s or entity’s name. The
address for those persons for which an address is not otherwise provided is c/o Cutera, Inc., 3240 Bayshore Blvd.,
Brisbane, California 94005-1021.
Name and Address of Beneficial Owner
Dimensional Fund Advisors LP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David B. Apfelberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gregory Barrett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kevin P. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leonard C. DeBenedictis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David A. Gollnick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W. Mark Lortz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timothy J. O’Shea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ronald J. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jerry P. Widman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All directors and Named Executive Officers as a group (9 persons) . . . .
*Less than 1%.
Number of
Shares
Outstanding
1,179,754
33,796
—
604,349
3,292
203,750
23,389
19,354
36,517
21,104
945,551
Warrants and
Options
Exercisable
Within 60
Days
Approximate
Percent
Owned
—
52,000
—
419,967
68,334
35,001
62,000
42,000
229,287
62,000
970,589
8.4%
*
*
7.1%
*
1.7%
*
*
1.9%
*
12.7%
-8-
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, officers and beneficial owners of more than 10% of
our common stock to file reports of ownership and reports of changes in the ownership with the SEC. Such persons are
required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us, or written representations from
reporting persons that no Forms 3, 4 or 5 were required of such persons, we believe that during our fiscal year ended
December 31, 2011 all reports were timely filed.
CORPORATE GOVERNANCE AND BOARD MATTERS
Director Independence
Our Board currently consists of eight authorized directors, with one vacancy. The Company’s directors are
David B. Apfelberg, Gregory Barrett, Kevin P. Connors, David A. Gollnick, Timothy J. O’Shea, W. Mark Lortz, and
Jerry P. Widman. Our Board has determined that each of the directors other than Kevin P. Connors, the Company’s
President and Chief Executive Officer, and David A. Gollnick, the Company’s former Executive Vice President of
Research and Development and a current consultant to our Company satisfy the current “independent director”
standards established by rules of The NASDAQ Stock Market LLC (“Nasdaq”).
Board Leadership Structure
Our Board does not have a chairman but David B. Apfelberg is the Board-designated lead independent
director. Our Chief Executive Officer, Mr. Connors, performs many of the functions that a chairman would typically
perform and works together with Dr. Apfelberg in setting the agenda for each board meeting and presiding over such
meetings. At the end of each board meeting, the independent directors meet without Mr. Connors and Mr. Gollnick
present. Following each meeting, Dr. Apfelberg provides feedback to Mr. Connors on his performance and the
performance of other Cutera employees during the meeting and frequently recommends new agenda items for the next
meeting.
As described in more detail below, the Board has three standing committees, an Audit Committee, a
Compensation Committee and a Nominating and Corporate Governance Committee. The chairman and each member
of these committees is an independent director. The Board delegates substantial duties and responsibilities to each
committee. The committees make recommendations to the Board and report regularly to the Board on their activities
and any actions they have taken. We believe that our independent board committees and their chairman are an
important aspect of our board leadership structure.
Risk Oversight and Analysis
Our management is responsible for managing the risks we face in the ordinary course of operating our
business. The Board oversees potential risks and our risk management activities by receiving operational and strategic
presentations from management which include discussions of key risks to our business. While our Board has the
ultimate responsibility for risk management and oversight, various committees of the Board also support the Board in
its fulfillment of this responsibility. For example, our Audit Committee assists the Board in its risk oversight function
by reviewing and discussing with management our system of disclosure controls and our internal controls over
financial reporting, and risks associated with our cash investment policies. Our business is run conservatively and
excessive risk taking has been discouraged. As a result, risk analysis has not been a significant factor for our
Compensation Committee in establishing compensation. The Nominating and Corporate Governance Committee
assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with
Board organization, membership and structure.
-9-
Committees of the Board
Our Board has three standing committees: the Audit Committee, the Compensation Committee and the
Nominating and Corporate Governance Committee. From time to time, our Board may also create various ad hoc
committees for special purposes. The membership during the last fiscal year and the function of each of the committees
are described below.
Name of Director
Non-Employee Directors:
Jerry P. Widman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timothy J. O’Shea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W. Mark Lortz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David B. Apfelberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David A. Gollnick**
Gregory Barrett*** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee Director:
Kevin P. Connors
Number of Meetings Held During the Last Fiscal Year. . . . . . . . . . . . . .
Audit
Committee
Compensation
Committee
Nominating
and Corporate
Governance
Committee
X*
X
X
X
X *
X
6
1
X
X
X
X
X
1
X = Committee member
* = Chairman of Committee
** = Mr. Gollnick resigned from the position of Executive Vice President of Research and Development effective
March 20, 2009 and continues to be a member of our Board and a consultant to our Company.
*** = Mr. Barrett replaced Mr. O’Shea as a member of the Compensation Committee on October 21, 2011.
Audit Committee. The Audit Committee oversees the Company’s accounting and financial reporting processes
and the audits of its financial statements. In this role, the Audit Committee monitors and oversees the integrity of the
Company’s financial statements and related disclosures, the qualifications, independence, and performance of the
Company’s Independent Registered Public Accounting Firm, and the Company’s compliance with applicable legal
requirements and its business conduct policies. Our Board has determined that each member of the Audit Committee
meets the independence and financial literacy requirements of the Nasdaq rules and the independence requirements of
the SEC. Our Board has determined that Jerry P. Widman continues to qualify as an “audit committee financial
expert,” as defined in SEC rules. The Audit Committee has a written charter, which was adopted by our Board in
January 2004, a copy of which can be found on our website at www.cutera.com. The report of the Audit Committee
appears on page 15 of this proxy statement.
Compensation Committee. The Compensation Committee, together with our Board, establishes compensation
for our Chief Executive Officer and the other executive officers and administers the Company’s 2004 Equity Incentive
Plan (as amended in 2008) and 2004 Employee Stock Purchase Plan. The Compensation Committee has a written
charter, which was adopted by our Board in January 2004, and amended on April 13, 2007 and on April 25, 2008, and
can be found on our website at ir.cutera.com.
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee
reviews and makes recommendations to the Board on matters concerning corporate governance, Board composition,
identification, evaluation and nomination of director candidates, Board committees, Board compensation, and conflicts
of interest. The Nominating and Corporate Governance Committee has a written charter, which was adopted by our
Board in October 2011 and can be found on our website.
-10-
Meetings Attended by Directors
During 2011, the Board held ten meetings, the Audit Committee held six meetings, the Compensation
Committee held one meeting, and the Nominating and Corporate Governance Committee held one meeting. No
director attended fewer than 75% of the meetings of the Board or committee(s) on which he or she served during 2011.
The directors of the Company are encouraged to attend the Company’s Annual Meeting of Stockholders. In
2011, directors David B. Apfelberg, Kevin P. Connors, Jerry P. Widman, and W. Mark Lortz attended the meeting in
person. No other board members attended that meeting, in person or telephonically.
Director Nomination Process
Director Qualifications. While the Nominating and Corporate Governance Committee has not established
specific minimum qualifications for director candidates, the candidates for Board membership should have the highest
professional and personal ethics and values, and conduct themselves consistent with our Code of Ethics. While the
Nominating and Corporate Governance Committee has not formalized specific minimum qualifications they believe
must be met by a candidate to be recommended by the independent members, the Nominating and Corporate
Governance Committee believes that candidates and nominees must reflect a Board that is comprised of directors who
(i) have broad and relevant experience, (ii) are predominantly independent, (iii) are of high integrity, (iv) have
qualifications that will increase overall Board effectiveness and enhance long-term stockholder value, and (v) meet
other requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect
to Audit Committee members.
Stockholder Nominations and Recommendations. As described above in the Question and Answer section of
this proxy statement under “What is the deadline to propose actions for consideration at next year’s Annual Meeting of
Stockholders or to nominate individuals to serve as directors?,” our Bylaws set forth the procedure for the proper
submission of stockholder nominations for membership on our Board. In addition, the Nominating and Corporate
Governance Committee may consider properly submitted stockholder recommendations (as opposed to formal
nominations) for candidates for membership on the Board. A stockholder may make such a recommendation by
submitting the following information to our Secretary at 3240 Bayshore Blvd., Brisbane, California 94005-1021: the
candidate’s name, home and business contact information, detailed biographical data, relevant qualifications,
professional and personal references, information regarding any relationships between the candidate and Cutera within
the last three years and evidence of ownership of Cutera stock by the recommending stockholder.
Identifying and Evaluating Director Nominees. Typically new candidates for nomination to the Board are
suggested by existing directors or by our executive officers, although candidates may initially come to our attention
through professional search firms, stockholders or other persons. The Nominating and Corporate Governance
Committee carefully reviews the qualifications of any candidates who have been properly brought to its attention. Such
a review may, in the Nominating and Corporate Governance Committee’s discretion, include a review solely of
information provided to the Nominating and Corporate Governance Committee or may also include discussion with
persons familiar with the candidate, an interview with the candidate or other actions that the Nominating and Corporate
Governance Committee deems proper. The Nominating and Corporate Governance Committee shall consider the
suitability of each candidate, including the current members of the Board, in light of the current size and composition
of the Board. In evaluating the qualifications of the candidates, Nominating and Corporate Governance Committee
considers many factors, including, issues of character, judgment, independence, expertise, length of service, and other
commitments. In addition, the Nominating and Corporate Governance Committee takes into account diversity in
professional experience, skills and background in considering and evaluating candidates. However, while diversity
relating to background, skill, experience and perspective is one factor considered in the nomination process, the
Company does not have a formal policy relating to diversity. The Nominating and Corporate Governance Committee
evaluates such factors, among others, and does not assign any particular weighting or priority to any of these factors.
Candidates properly recommended by stockholders are evaluated by the Nominating and Corporate Governance
Committee using the same criteria as other candidates. Candidates are not discriminated against on the basis of race,
religion, national origin, sexual orientation, disability or any other basis proscribed by law.
-11-
Director Nominees at our 2012 Annual Meeting. Our Nominating and Corporate Governance Committee
recommended the director nominees for nomination to our Board.
Director Compensation
The following table sets forth a summary of the cash compensation paid and the grant date fair value of fully
vested shares of Cutera common stock awarded to our non-employee directors in the fiscal year ended December 31,
2011.
2011 Director Compensation Table
Name
Fees Earned
or Paid in
Cash (1)
Stock
Awards (2)
All Other
Compensation (3)
Total
David B. Apfelberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gregory Barrett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David A. Gollnick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W. Mark Lortz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timothy J. O’Shea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jerry P. Widman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
65,000
—
45,000
52,500
57,000
71,000
60,000(4) $
—(5)
60,000(6)
60,000(7)
60,000(8)
60,000(9)
—
181,920(6)
43,200(4) $ 168,200
—
286,920
112,500
117,000
131,000
—
—
—
(1) The amounts reported in this column were earned in connection with serving on our Board and its committees, or
as committee Chairman retainers, each as described below.
(2) The amounts reported in this column represent the aggregate grant date fair value of fully vested shares of Cutera
common stock awarded during the fiscal year ended December 31, 2011 calculated in accordance with Financial
Accounting Standards Board Accounting Standards Codification (ASC) Topic 718.
(3) The amounts reported in this column were earned for services provided for other than serving on our Board or its
committees, each as described below.
(4) At December 31, 2011, Dr. Apfelberg held options to purchase 52,000 shares of Cutera common stock. Dr.
Apfelberg was the Medical Director of the Cutera Clinic, and, in connection with this role, was paid $43,200
during the fiscal year ended December 31, 2011. Effective April 20, 2012, Dr. Apfelberg resigned from his
position as Medical Director of the Cutera Clinic.
(5) At December 31, 2011, Mr. Barrett held options to purchase 14,000 shares of Cutera common stock.
(6) Mr. Gollnick resigned from the position of Executive Vice President of Research and Development effective
March 20, 2009. He continues to be a member of our Board and is a consultant to the Company. In connection
with his consulting agreement, he was paid $181,920 during the fiscal year ended December 31, 2011. At
December 31, 2011, Mr. Gollnick held options to purchase 41,126 shares of Cutera common stock.
(7) At December 31, 2011, Mr. Lortz held options to purchase 62,000 shares of Cutera common stock.
(8) At December 31, 2011, Mr. O’Shea held options to purchase 42,000 shares of Cutera common stock.
(9) At December 31, 2011, Mr. Widman held options to purchase 62,000 shares of Cutera common stock.
For 2011, our non-employee directors earned an annual retainer of $45,000 for regular Board meetings;
$6,000 for Compensation Committee meetings (for members other than the Chairman); and $7,500 for Audit
Committee meetings (for members other than the Chairman). Our non-employee directors did not earn an annual
retainer for Nominating and Corporate Governance Committee meetings. The Chairmen of the Audit Committee and
the Compensation Committee each earned an annual retainer of $20,000 for their services on the respective
committees. Our non-employee directors no longer receive meeting fees for Board and committee meetings regardless
of the number of meetings held throughout the year.
Our 2004 Equity Incentive Plan provides for the automatic grant of options to purchase shares of Cutera
common stock to our non-employee directors. Each non-employee director who is appointed to the Board will receive
an initial option to purchase 14,000 shares of Cutera common stock upon such appointment. Each of these stock
options will have an exercise price equal to fair market value of Cutera common stock on the date of grant and a term
of seven years and will become exercisable as to one-third of the shares subject to the option on each anniversary of its
date of grant, provided the non-employee director remains a director on such dates. In addition, each non-employee
director who is a director on the date of each Annual Meeting of Stockholders and has been a director for at least the
preceding six months, will receive an award of fully vested shares of Cutera common stock on an annual basis
equivalent to the number of shares represented by the quotient of $60,000 divided by the closing market price of Cutera
common stock on the date of such Annual Meeting. In June 2011, our non-employee directors received an award for
$60,000 of fully vested shares of Cutera common stock.
-12-
Code of Ethics
We are committed to maintaining the highest standards of business conduct and ethics. Our Code of Ethics, as
amended, (the “Code”) reflects our values and the business practices and principles of behavior that support this
commitment. The Code is intended to satisfy SEC rules for a “code of ethics” required by Section 406 of the Sarbanes-
Oxley Act of 2002, as well as the Nasdaq listing standards requirement for a “code of conduct.” The Code is an Exhibit
to our Form 8-K filed with the SEC on April 29, 2004, was amended and restated on November 19, 2009, and is
available on the Company’s website at www.cutera.com. We will post any amendment to the Code, as well as any
waivers that are required to be disclosed by the rules of the SEC or Nasdaq, on our website.
Compensation Committee Interlocks and Insider Participation
No member of our Compensation Committee, nor any of our executive officers, has a relationship that would
constitute an interlocking relationship with executive officers or directors of another entity. No Compensation
Committee member is an officer or employee of Cutera.
Certain Relationships and Related Transactions
In the Company’s last fiscal year, and except for compensation paid to its directors and executive officers for
services performed in such roles, and except as provided in the following paragraph, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in
which the amount involved exceeds $120,000 and in which any director, executive officer, holder of more than 5% of
our common stock or any member of their immediate families had or will have a direct or indirect material interest.
We have a consulting agreement with David A. Gollnick pursuant to which Mr. Gollnick is compensated for
services that he provides to us, including product development and clinical support. Payments to Mr. Gollnick under
this agreement in 2011 and 2010 were $181,920 and $133,520, respectively.
Review, Approval or Ratification of Related Party Transactions
As provided by our Audit Committee charter, our Audit Committee must review and approve in advance any
proposed related party transaction. All of our directors and officers are required to report to our Audit Committee any
such related party transaction prior to its completion. We have not adopted specific standards for approval of related
party transactions, but instead our Audit Committee reviews each such transaction on a case-by-case basis. Our policy
is to require that all executive compensation-related matters be recommended and approved by our Compensation
Committee as provided by our Compensation Committee charter and be reported under applicable SEC rules.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Indemnification Agreements
Each of our directors and officers has an indemnification agreement with our Company.
-13-
Communications with the Board by Stockholders
Stockholders wishing to communicate with the Board or with an individual Board member concerning the
Company may do so by writing to the Board or to the particular Board member, and mailing the correspondence to:
Attention: Board of Directors, c/o Secretary, Cutera, Inc., 3240 Bayshore Blvd., Brisbane, California 94005-1021. The
envelope should indicate that it contains a stockholder communication. All such stockholder communications will be
forwarded to the director or directors to whom the communications are addressed.
Stock Ownership Guidelines
To enhance our overall corporate governance practices and director compensation program, in April 2012, our
Board adopted stock ownership guidelines for our non-employee directors, which the Compensation Committee
intends to review annually. These guidelines are designed to align our non-employee directors’ interests with our
stockholders’ long-term interests by promoting long-term ownership of Cutera common stock. These guidelines
provide that, within five years of the later of the adoption of the guidelines or his or her first date of election to our
Board, our non-employee directors must hold shares of Cutera common stock having a value not less than three times
the value of their annual retainer for general Board service.
-14-
REPORT OF THE AUDIT COMMITTEE
The material in this section is not deemed filed with the SEC and is not incorporated by reference in any filing
of our Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after
the date of this Proxy Statement and irrespective of any general incorporation language in those filings.
The Audit Committee of the Board of Directors is comprised solely of independent directors (as defined by
Nasdaq rules) who were all appointed by the Board of Directors. The Audit Committee operates pursuant to a written
charter adopted by the Board of Directors, a copy of which can be found on our website. The Audit Committee reviews
and assesses the adequacy of its charter on an annual basis. As more fully described in the charter, the purpose of the
Audit Committee is to provide general oversight of Cutera’s financial reporting, integrity of financial statements,
internal controls and internal audit functions. The Audit Committee has authority to retain outside legal, accounting or
other advisors as its deems necessary to carry out its duties and to require Cutera to pay for such expenditures.
The Audit Committee monitors Cutera’s external audit process, including the scope, fees, auditor
independence matters and the extent to which the Independent Registered Public Accounting Firm may be retained to
perform non-audit services. The Audit Committee has responsibility for the appointment, compensation, retention and
oversight of Cutera’s Independent Registered Public Accounting Firm. The Audit Committee also reviews the results
of the external audit work with regard to the adequacy and appropriateness of Cutera’s financial, accounting and
internal controls over financial reporting. In addition, the Audit Committee generally oversees Cutera’s internal
compliance programs. The Audit Committee members are not all professional accountants or auditors, and their
function is not intended to duplicate or to certify the activities of management and the Independent Registered Public
Accounting Firm, nor can the Audit Committee certify that the Independent Registered Public Accounting Firm is
“independent” under applicable rules.
The Audit Committee provides advice, counsel and direction to management and the Independent Registered
Public Accounting Firm on matters for which it is responsible based on the information it receives from management
and the Independent Registered Public Accounting Firm and the experience of its members in business, financial and
accounting matters.
Management is responsible for the preparation and integrity of Cutera’s financial statements, accounting and
financial reporting processes and internal control over financial reporting for compliance with applicable accounting
standards, laws and regulations.
Cutera’s Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP, is responsible for
performing an independent audit of Cutera’s financial statements in accordance with generally accepted auditing
standards and expressing an opinion in its report on those financial statements, and for expressing an opinion on the
effectiveness of Cutera’s internal control over financial reporting.
In this context, the Audit Committee hereby reports as follows:
● The Audit Committee has reviewed and discussed the audited financial statements for 2011 with Cutera’s
management.
● The Audit Committee has discussed with the Independent Registered Public Accounting Firm the matters
required to be discussed by SAS 61 (Codification of Statements on Auditing Standard, AU 380), SAS 99
(Consideration of Fraud in a Financial Statement Audit) and SEC rules discussed in Final Releases Nos.
33-8183 and 33-8183a.
The Audit Committee has received written disclosures and a letter from the Independent Registered Public
Accounting Firm, PricewaterhouseCoopers LLP, pursuant to Rule 3526, Communication with Audit Committees
Concerning Independence, of the Public Company Accounting Oversight Board (“PCAOB”), and has discussed with
PricewaterhouseCoopers LLP its independence.
-15-
● The Audit Committee has discussed with the Independent Registered Public Accounting Firm the overall
scope and plans for its audit.
● The Audit Committee has met with the Independent Registered Public Accounting Firm, with and
without management present, to discuss the results of its examinations, its evaluations of our internal
control over financial reporting, and to discuss the overall quality of our financial reporting.
● The Audit Committee has considered whether the provision by the Independent Registered Public
Accounting Firm of non-audit services is compatible with maintaining its independence.
● Based on the review and discussion referred to above, the Audit Committee has approved that the audited
financial statements and the report of management on internal control over financial reporting be included
in Cutera’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
The foregoing report is provided by the undersigned members of the Audit Committee.
W. Mark Lortz
Timothy J. O’Shea
Jerry P. Widman
-16-
PROPOSAL ONE—ELECTION OF DIRECTORS
Classes of the Board of Directors
Our Amended and Restated Certificate of Incorporation provides that our Board shall be divided into three
classes designated as Class I, Class II and Class III, respectively, with the classes of directors serving for staggered
three-year terms. Our Board currently consists of seven directors, divided among the three classes as follows:
●
●
●
two Class I directors, Kevin P. Connors and David A. Gollnick, whose terms expire at our Annual
Meeting of Stockholders to be held in 2014;
two Class II directors, David B. Apfelberg and Timothy J. O’Shea, whose terms expire at our Annual
Meeting of Stockholders to be held in 2012; and
three Class III directors W. Mark Lortz, Gregory Barrett and Jerry P. Widman, whose terms expire at the
Annual Meeting of Stockholders to be held in 2013.
The name of each member of the Board, the class in which he or she serves, and his or her age as of the
Record Date, principal occupation and length of service on the Board are as follows:
Name
Class I Directors
Kevin P. Connors . . . . . . . . . . . . . . . .
David A. Gollnick . . . . . . . . . . . . . . .
Class II Directors
Timothy J. O’Shea(2)(3) . . . . . . . . .
David B. Apfelberg(1)(3) . . . . . . . .
Class III Directors
W. Mark Lortz (2)(3) . . . . . . . . . . . .
Gregory Barrett(1)(3) . . . . . . . . . . .
Jerry P. Widman (1)(2)(3) . . . . . . . .
Term
Expires
2014
2014
2012
2012
2013
2013
2013
Age
Principal Occupation
Director Since
50
48
President and Chief Executive Officer
Former Executive Vice President of
Research and Development
59
70
Managing Director, Oxo Capital
Clinical Professor of Plastic Surgery,
Stanford University Medical Center
60
Former Chief Executive Officer,
TheraSense, Inc.
58
Former Chairman, President and Chief
Executive Officer, BÂRRX Medical
69
Former Chief Financial Officer,
Ascension Health
1998
1998
2004
1998
2004
2011
2004
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of Nominating and Corporate Governance Committee.
Director Nominees
The Board has nominated David B. Apfelberg, MD and Timothy J. O’Shea for re-election as Class II
directors.
David B. Apfelberg, MD has served as a member of our board of directors since November 1998. Since 1980,
Dr. Apfelberg has held various roles at the Stanford University Medical Center, and currently serves as a Clinical
Professor of Plastic Surgery. Since 1987, Dr. Apfelberg has also been a consultant for entrepreneurs and venture capital
companies in the areas of medical devices and medicine. From June 1991 to May 2001, Dr. Apfelberg was Director of
the Plastic Surgery Center in Atherton, California. Dr. Apfelberg is the author of five books on lasers in medicine and
is a founding member and past president of the American Society for Lasers in Medicine and Surgery. Dr. Apfelberg
holds both a B.M.S., Bachelor of Medical Science, and an M.D. from Northwestern University Medical School. We
believe Dr. Apfelberg’s qualifications to serve on our board of directors include his medical expertise, understanding of
our products, and his knowledge of the aesthetics market generally.
-17-
Timothy J. O’Shea has served as a member of our board of directors since April 2004. Mr. O’Shea has been
with Oxo Capital since 2008 and serves as a managing director. From 1995 to 2008, he served in a variety of
management positions at Boston Scientific, including Corporate Vice President of Business Development from 2000 to
2008. Mr. O’Shea holds a B.A. in history from the University of Detroit. We believe Mr. O’Shea’s qualifications to
serve on our board of directors include his corporate marketing knowledge as well as his diverse experience in the
medical device industry working for a large medical device company.
If elected to our board of directors, directors David B. Apfelberg, MD and Timothy J. O’Shea would each
hold office as a Class II director until our Annual Meeting of Stockholders to be held in 2015 or until his earlier
resignation, removal, or death.
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” EACH OF THE TWO
NOMINEES FOR CLASS II DIRECTOR LISTED ABOVE.
Directors Whose Terms Extend Beyond the 2012 Annual Meeting
Kevin P. Connors has served as our President and Chief Executive Officer and as a member of our board of
directors since our inception in August 1998. From May 1996 to June 1998, Mr. Connors served as President and
General Manager of Coherent Medical Group, a unit of Coherent Inc., which manufactures lasers, optics and related
accessories. We believe Mr. Connors’ qualifications to serve on our board of directors include, his knowledge of and
leadership experience, in the aesthetic medical equipment industry prior to joining Cutera and the substantial
understanding of the Company and its operations that he has gained while serving as President, Chief Executive
Officer and director of the Company since inception.
David A. Gollnick has served as a member of our Board since our inception in August 1998. He served as our
Vice President of Research and Development from August 1998 until April 2007, and served as our Executive Vice
President of Research and Development from April 2007 until March 2009. From June 1996 to July 1998, Mr.
Gollnick was Vice President of Research and Development at Coherent Medical Group, a unit of Coherent Inc. Mr.
Gollnick holds a B.S. in Mechanical Engineering from Fresno State University. We believe Mr. Gollnick’s
qualifications to serve on our board of directors include his technical experience in researching and developing
products for the aesthetic medical equipment industry and his understanding of our employees, products and
operations.
W. Mark Lortz has served as a member of our board of directors since June 2004. Mr. Lortz served as the
Chairman, President and Chief Executive Officer of TheraSense until June of 2004 after its acquisition by Abbott
Laboratories. Prior to TheraSense, Mr. Lortz held several positions at LifeScan, including Vice President, Operations
and Group Vice President, Worldwide Business Operations. Prior to LifeScan, Mr. Lortz had 18 years of experience
with the General Electric Company in several divisions. Mr. Lortz currently serves as a member of the board of
directors of two privately-held companies in the healthcare industry. Within the past five years, Mr. Lortz also served
on the board of directors of NeuroMetrix, a publicly-traded manufacturer of neurological diagnostic and therapeutic
devices, and IntraLase, a manufacturer of lasers for the medical industry and for eye surgery which was acquired by
Advanced Medical Optics. Mr. Lortz holds an M.B.A. in Management from Xavier University and a B.S. in
Engineering Science from Iowa State University. We believe Mr. Lortz’s qualifications to serve on our board of
directors include his executive leadership and management experience as a former Chief Executive Officer, as well as
his experience serving on the boards of other public and private companies.
Gregory Barrett has served as a member of our board of directors since October 2011. Mr. Barrett is the
President and Chief Executive Officer of BÂRRX Medical, Inc., a private medical device company that was recently
acquired by Covidien, that manufactures and distributes products to treat gastrointestinal diseases. Prior to joining
BÂRRX Medical in February 2004, from January 2001 through August 2003, Mr. Barrett served as President and
Chief Executive Officer of ACMI Corporation, a developer of medical visualization and energy systems; Group Vice
President at Boston Scientific Corporation; Vice President, Global Sales and Marketing at both Orthofix Corporation
(formerly American Medical Electronics) and Baxter Healthcare. Mr. Barrett spent 13 years at C.R. Bard Corporation
and finished his tenure there as vice president of marketing in the Cardiosurgery Division. Mr. Barrett holds a B.A. in
Marketing from the University of Texas, Austin. We believe Mr. Barrett’s qualifications to serve on our board of
directors include his more than 34 years of diverse experiences in the medical device industry, including time spent
serving as president and chief executive officer of several medical device companies.
-18-
Jerry P. Widman has served as a member of our board of directors since March 2004. From 1982 to 2001, Mr.
Widman served as the Chief Financial Officer of Ascension Health, a not-for-profit multi-hospital system. Mr.
Widman currently serves as a member of the board of directors of three other privately-held companies in the
healthcare industry. Within the past five years, Mr. Widman also served on the board of directors of ArthroCare
Corporation, United Surgical Partners International and the Trizetto Group. Mr. Widman holds a B.B.A. from Case
Western Reserve University, an M.B.A. from the University of Denver, and a J.D. from Cleveland State University and
is a Certified Public Accountant. We believe Mr. Widman’s qualifications to serve on our board of directors include his
financial expertise and prior experience as a Chief Financial Officer, as well as his experience serving on the boards of
various public and private companies.
-19-
PROPOSAL TWO—NON-BINDING VOTE ON COMPENSATION
OF NAMED EXECUTIVE OFFICERS
General
Pursuant to Section 14A of the Securities Exchange Act of 1934, we are providing our stockholders with the
opportunity to vote to approve, on an advisory or non-binding basis, the compensation of our Named Executive
Officers as disclosed in accordance with the SEC’s rules in the “Executive Compensation” section of this proxy
statement beginning on page 30 below. This proposal, commonly known as a “say-on-pay” proposal, gives our
stockholders the opportunity to express their views on our Named Executive Officers’ compensation as a whole. This
vote is not intended to address any specific item of compensation or any specific Named Executive Officer, but rather
the overall compensation of all of our Named Executive Officers and the philosophy, policies and practices described
in this proxy statement.
This vote is advisory only, and therefore not binding on the Company, the Compensation Committee or our
Board. The vote will, however, provide information to us regarding investor sentiment about our executive
compensation philosophy, policies and practices, which the Compensation Committee will be able to consider when
determining executive compensation for the remainder of the current fiscal year and beyond. Our Board and the
Compensation Committee value the opinions of our stockholders and to the extent there is any significant vote
against the compensation of the Named Executive Officers as disclosed in this proxy statement, they will consider
our stockholders’ concerns and the Compensation Committee will evaluate whether any actions are necessary to
address those concerns.
Summary of 2011 Executive Compensation Program
Following is a summary of some of the key features of our 2011 executive compensation program:
●
●
●
●
●
●
The primary objectives of our executive compensation programs are that they be fair, objective and
consistent, that compensation be directly and substantially linked to measurable corporate and
individual performance and that compensation remains competitive, so that we can attract, motivate,
retain and reward the key executives whose knowledge, skills and performance are necessary for our
success.
We seek to foster a culture where individual performance is aligned with organizational objectives.
We evaluate and reward our Named Executive Officers based on the comparable industry specific
and general market compensation for their respective positions in the Company and an evaluation of
their contributions to the achievement of short-and long-term organizational goals.
Executive compensation is reviewed annually by the Compensation Committee, and adjustments are
made to reflect performance-based factors and competitive conditions.
Our Named Executive Officers are compensated with cash, equity and non-equity incentives, and
other customary employee benefits.
Our Named Executive Officers have Change of Control and Severance Agreements and, except for
these arrangements, we do not have employment agreements with any of our Named Executive
Officers.
In response to the results of our initial stockholder advisory vote on the compensation of our Named
Executive Officers at the 2011 Annual Meeting of Stockholders, we have made changes to our corporate governance
policies that include: creating a Nominating and Corporate Governance Committee, engaging an outside compensation
consultant, revising our compensation peer group and making changes to our executive compensation program,
including the adoption of stock ownership guidelines. In addition, our Board is presently evaluating the implementation
of a compensation recovery (a so-called “clawback”) policy. For more information about our executive compensation
philosophy, policies and practices and other changes that we have made to our corporate governance policies, see the
“Executive Compensation” section of this proxy statement beginning on page 30 below.
-20-
We believe that the information provided above and within the Executive Compensation section of this proxy
statement demonstrates that our executive compensation program has been designed appropriately and is working to
ensure our Named Executive Officers’ interests are aligned with our stockholders’ interests to support long-term value
creation.
Accordingly, we ask our stockholders to vote “FOR” the following resolution at the Annual Meeting:
“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the
Named Executive Officers, as disclosed in the Company’s Proxy Statement for the Annual Meeting of
Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission,
including the Compensation Discussion and Analysis, the compensation tables and the other related
disclosure.”
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ADVISORY
(NON-BINDING) VOTE APPROVING THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS.
-21-
PROPOSAL THREE—RATIFICATION OF ERNST & YOUNG LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board has selected Ernst & Young LLP as the Independent Registered Public
Accounting Firm to perform the audit of the Company’s consolidated financial statements for the fiscal year ending
December 31, 2012. PricewaterhouseCoopers LLP audited the Company’s consolidated financial statements for the
fiscal years 2001 through 2011.
The Board is asking the stockholders to ratify the selection of Ernst & Young LLP as the Company’s
Independent Registered Public Accounting Firm for 2012. Although not required by law, by rules of NASDAQ, or by
the Company’s bylaws, the Board is submitting the selection of Ernst & Young LLP to the stockholders for ratification
as a matter of good corporate practice. Even if the selection is ratified, the Audit Committee in its discretion may select
a different Independent Registered Public Accounting Firm at any time during the year if it determines that such a
change would be in the best interests of the Company and its stockholders.
We have requested that representatives of PricewaterhouseCoopers LLP and Ernst & Young LLP be present
at the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and will be available
to respond to appropriate questions from the Company’s stockholders.
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF
THE SELECTION OF ERNST & YOUNG LLP AS THE COMPANY’S INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM FOR 2012.
Prior Changes in Independent Registered Public Accountant
On March 26, 2012, the Company dismissed PricewaterhouseCoopers LLP as the Company’s independent
registered public accountant.
The dismissal of PricewaterhouseCoopers LLP was approved by the Audit Committee of the Board of
Directors and the Board. The reports of PricewaterhouseCoopers LLP on the financial statements of the Company as of
and for the fiscal years ended December 31, 2010 and 2011 contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting principle.
During the Company’s fiscal years ended December 31, 2010 and 2011 and through March 26, 2012, (i) there
were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to
PricewaterhouseCoopers LLP’s satisfaction, would have caused PricewaterhouseCoopers LLP to make reference to the
subject matter of such disagreements in its reports on the Company’s consolidated financial statements for such years,
and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
We provided PricewaterhouseCoopers LLP with a copy of the disclosures we proposed to make in a current
report on Form 8-K filed on March 26, 2012, and requested from PricewaterhouseCoopers LLP a letter indicating
whether or not it agrees with such disclosures. A copy of PricewaterhouseCoopers LLP’s letter was filed as an exhibit
to the Form 8-K reporting the change in our auditors.
Based on the Audit Committee’s recommendation, the Company engaged Ernst & Young LLP on March 26,
2012, as the Company’s independent registered public accountant for the fiscal year ending December 31, 2012.
During the Company’s two most recent fiscal years ended December 31, 2010 and 2011 and through March 26, 2012,
neither the Company nor anyone on its behalf consulted Ernst & Young LLP regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might
be rendered on the Company’s financial statements, and no written report or oral advice was provided to the Company
that Ernst & Young LLP concluded was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement or
reportable event as defined in Item 304(a)(1)(iv) and Item 304(a)(1)(v), respectively, of Regulation S-K.
-22-
Audit and Non-Audit Services
The Audit Committee is directly responsible for the appointment, compensation, and oversight of the
Company’s Independent Registered Public Accounting Firm. In addition to retaining Ernst & Young LLP to audit the
Company’s consolidated financial statements for 2012, the Audit Committee retained PricewaterhouseCoopers LLP to
provide other auditing and advisory services in 2011. The Audit Committee understands the need for Ernst & Young
LLP and PricewaterhouseCoopers LLP to maintain objectivity and independence in their audits of the Company’s
financial statements. The Audit Committee has reviewed all non-audit services provided by PricewaterhouseCoopers
LLP in 2011 and has concluded that the provision of such services was compatible with maintaining
PricewaterhouseCoopers LLP’s independence in the conduct of its auditing functions.
To help ensure the independence of the Independent Registered Public Accounting Firm, the Audit
Committee has adopted a policy for the pre-approval of all audit and non-audit services to be performed for the
Company by its Independent Registered Public Accounting Firm. Pursuant to this policy, all audit and non-audit
services to be performed by the Independent Registered Public Accounting Firm must be approved in advance by the
Audit Committee. The Audit Committee may delegate to one or more of its members the authority to grant the required
approvals, provided that any exercise of such authority is presented to the full Audit Committee at its next regularly
scheduled meeting.
All of the services provided by PricewaterhouseCoopers LLP described in the table below were approved by
the Audit Committee.
The aggregate fees incurred by the Company for audit and non-audit services in 2011 and 2010 were as
follows:
Service Category
Audit Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Related Fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Fees(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2011
643,250
—
147,338
1,800
792,388
$
$
2010
507,150
11,200
102,900
1,500
622,750
(1) In accordance with the SEC’s definitions and rules, audit fees are comprised of billed and unbilled fees for
professional services related to the audit of financial statements and internal control over financial reporting for the
Company’s 2011 and 2010 fiscal years as included in the annual report on Form 10-K; and the review of financial
statements for interim periods included in the quarterly reports on Form 10-Q within those years.
(2) Audit-related fees are fees for services that are normally provided by the accountant in connection with statutory
and regulatory filings or engagements;
(3) Tax fees are fees for tax compliance services;
(4) All other fees relates to a subscription fee for a PricewaterhouseCoopers LLP online service used for accounting
research purposes.
-23-
PROPOSAL FOUR—ADOPTION OF 2004 EQUITY INCENTIVE PLAN (AS AMENDED)
We are asking our stockholders to adopt our 2004 Equity Incentive Plan, as amended (the “2004 Plan”) to:
●
●
●
●
add 1,910,000 shares of our common stock to the total number of shares reserved for issuance under
the 2004 Plan;
add a “fungible share” provision whereby each full-value award issued under the 2004 Plan results in
a requirement to subtract 2.12 shares from the shares reserved under the 2004 Plan;
limit the terms of Options and Stock Appreciation Rights to seven years; and
clarify that no options will be granted at an exercise price less than 100% of fair market value.
Our Board has approved these provisions of the 2004 Plan, subject to stockholder adoption at the Annual
Meeting. If stockholders do not adopt the 2004 Plan, no additional shares will be added for issuance under the 2004
Plan and the 2004 Plan will continue under its current terms and conditions.
Our named executive officers and Directors have an interest in this proposal as they are eligible to receive
equity awards under the 2004 Plan.
The Board believes that long-term incentive compensation programs align the interests of management,
employees and the stockholders to create long-term stockholder value. Our Board believes that the 2004 Plan increases
our ability to achieve this objective by allowing for several different forms of long-term incentive awards, which our
Board believes will help us to recruit, reward, motivate and retain talented personnel. Our Board and management
believe that the ability to continue to grant equity awards will be important to the future success of Cutera.
Our Board believes that adoption of the 2004 Plan is essential to our continued success, as the additional
shares will enable us to continue to use the 2004 Plan to achieve employee performance, recruiting, retention and
incentive goals. In particular, our Board believes that our employees are our most valuable assets and that the awards
permitted under the Incentive Plan are vital to our ability to attract and retain outstanding and highly skilled individuals
in the extremely competitive labor markets in which we compete. Such awards also are crucial to our ability to
motivate employees to achieve our goals.
Vote Required
Approval of the 2004 Plan requires the affirmative vote of a majority of the shares of our Common Stock that are
present in person or proxy and entitled to vote at the Annual Meeting.
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF
THE 2004 PLAN.
Summary of the 2004 Plan
The following is a summary of the principal features of the 2004 Plan and its operation. It is qualified in its
entirety by reference to the 2004 Plan set forth in Appendix A.
The 2004 Plan provides for the grant of the following types of incentive Awards: (i) stock options, (ii)
restricted stock, (iii) restricted stock units, (iv) stock appreciation rights (v) performance units and performance shares,
and (vi) and other stock or cash awards. Each of these is referred to individually as an “Award.” Those eligible for
Awards under the 2004 Plan include employees, directors and consultants who provide services to us or our
subsidiaries. As of April 26, 2012, approximately 220 of our employees, directors and consultants were eligible to
participate in this plan.
Number of Shares of Common Stock Available Under the 2004 Plan. A total of 1,750,000 shares of common
stock were initially authorized for issuance under the 2004 Plan, plus any shares returned under the 1998 Stock Plan as
a result of termination of options or repurchase of shares issued under such plan, and shares added pursuant to
automatic annual increase under the 2004 Plan. In 2008, stockholders approved an amendment to the 2004 Plan which
eliminated the “evergreen” provision which provided for an automatic annual increase in the number of shares
available in the 2004 Plan. As of April 16, 2012, a total of 564,000 shares were authorized and remained available for
future awards under the 2004 Plan. The shares may be authorized, but unissued, or reacquired common stock.
-24-
Any shares that are subject to Awards and are granted with an exercise price less than fair market value on the
date of grant of the Award will be counted against the numerical limits described above as 2.12 shares for every 1
share. If any shares acquired pursuant to such an Award are forfeited or repurchased by the Company and would
otherwise return to the 2004 Plan as described below, 2.12 times the number of shares forfeited or repurchased will
return to the plan and become available for issuance
If an Award expires or becomes unexercisable without having been exercised in full, or, with respect to
restricted stock, restricted stock units, performance shares or performance units, is forfeited to or repurchased by us,
the unpurchased shares (or for Awards other than options and stock appreciation rights, the forfeited or repurchased
shares) which were subject thereto will become available for future grant or sale under the 2004 Plan. Upon exercise of
a stock appreciation rights settled in shares, the gross number of shares covered by the portion of the stock appreciation
right will cease to be available under the 2004 Plan. Shares that have actually been issued under the 2004 Plan under
any Award will not be returned to the 2004 Plan and will not become available for future distribution under the 2004
Plan; provided, however, that if shares of restricted stock, restricted stock units, performance shares or performance
units are repurchased by us or are forfeited to us, such shares will become available for future grant under the 2004
Plan as described above. Shares used to pay the exercise price of an Award and/or used to satisfy tax withholding
obligations will not become available for future grant or sale under the 2004 Plan. To the extent an Award is paid out
in cash rather than stock, such cash payment will not reduce the number of shares available for issuance under the 2004
Plan.
If we declare a stock dividend or engage in a reorganization or other change in our capital structure, including
a merger, the Administrator will adjust the (i) number and class of shares available for issuance under the 2004 Plan,
(ii) number, class and price of shares subject to outstanding Awards, and (iii) specified per-person limits on Awards to
reflect the change.
Administration of the 2004 Plan. Our Board, or its Compensation Committee, or a committee of directors or
of other individuals satisfying applicable laws and appointed by our Board (referred to as the “Administrator”),
administers 2004 Plan. To make grants to certain of our officers and key employees, the members of the committee
must qualify as “non-employee directors” under Rule 16b-3 of the Securities Exchange Act of 1934 (the “Exchange
Act”), and as “outside directors” under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code”) (so that we can receive a federal tax deduction for certain compensation paid under the
Incentive Plan).
Subject to the terms of the 2004 Plan, the Administrator has the sole discretion to select the employees,
consultants, and directors who will receive Awards, to determine the terms and conditions of Awards, to modify or
amend each Award (subject to the restrictions of the 2004 Plan), to interpret the provisions of the 2004 Plan and
outstanding Awards, and to allow participants to satisfy withholding tax obligations by electing to have us withhold
from the shares to be issued upon exercise that number of shares having a fair market value equal to the minimum
amount required to be withheld.
The Administrator may, but only with stockholder approval, implement an exchange program under which (i)
outstanding Awards may be surrendered or cancelled in exchange for Awards of the same type, Awards of a different
type, or cash, (ii) participants would have the opportunity to transfer any outstanding Awards to a financial institution
or other person or entity selected by the Administrator, and/or (iii) the exercise price of an outstanding Award could be
reduced.
Automatic Director Grants. The 2004 Plan provides for an automatic grant to outside directors of an option to
purchase 14,000 shares on the date the person first becomes an outside director and such shares will vest and become
exercisable as to one-third of the shares subject to the option on each annual anniversary of its date of grant. In
addition, each outside director who is a director on the date of each Annual Meeting of stockholders and has been a
director for at least the preceding six months, will receive fully-vested Cutera stock on an annual basis equivalent to the
number of shares represented by the quotient of $60,000 divided by the closing stock price of our common stock on the
date of such Annual Meeting.
-25-
Options. The Administrator is able to grant nonstatutory stock options and incentive stock options under the 2004 Plan.
The Administrator determines the number of shares subject to each option, although the 2004 Plan provides that a participant may
not receive options for more than 1,000,000 shares in any fiscal year, except in connection with his or her initial employment with
us, in which case he or she may be granted an option covering up to an additional 1,000,000 shares.
The Administrator determines the exercise price of options granted under the 2004 Plan, provided the exercise price must
be at least equal to, and not less than, the fair market value of our common stock on the date of grant. In addition, the exercise price
of an incentive stock option granted to any participant who owns more than 10% of the total voting power of all classes of our
outstanding stock must be at least 110% of the fair market value of the common stock on the grant date.
The term of each option will be stated in the Award agreement. The term of an option may not exceed seven years, except
that, with respect to any participant who owns more than 10% of the voting power of all classes of the Company’s outstanding
capital stock, the term of an incentive stock option may not exceed five years.
After a termination of service with us, a participant will be able to exercise the vested portion of his or her option for the
period of time stated in the Award agreement. If no such period of time is stated in the participant’s Award agreement, the
participant will generally be able to exercise his or her option for (i) three months following his or her termination for reasons other
than death or disability, and (ii) twelve months following his or her termination due to death or disability. In no event may an option
be exercise beyond its maximum term.
Restricted Stock. Awards of restricted stock are rights to acquire or purchase shares of our common stock, which vest in
accordance with the terms and conditions established by the Administrator in its sole discretion. For example, the Administrator
may set restrictions based on the achievement of specific performance goals. The Administrator, in its discretion, may accelerate the
time at which any restrictions will lapse or be removed. The Award agreement generally will grant us the right to repurchase or
reacquire the shares upon the termination of the participant’s service with us for any reason (including death or disability). The
Administrator will determine the number of shares granted pursuant to an Award of restricted stock, but no participant will be
granted a right to purchase or acquire more than 300,000 shares of restricted stock during any fiscal year, except that a participant
may be granted up to an additional 300,000 shares of restricted stock in connection with his or her initial employment with us.
Restricted Stock Units. Awards of restricted stock units result in a payment to a participant only if the vesting criteria the
Administrator establishes is satisfied. For example, the Administrator may set vesting criteria based on the achievement of specific
performance goals. The restricted stock units vest at a rate determined by the Administrator; provided, however, that after the grant
of restricted stock units, the Administrator, in its sole discretion, may reduce or waive any restrictions for such restricted stock units.
Upon satisfying the applicable vesting criteria, the participant will be entitled to the payout specified in the Award agreement. The
Administrator, in its sole discretion, may pay earned restricted stock units in cash, shares, or a combination thereof. Restricted stock
units that are fully paid in cash will not reduce the number of shares available for grant under the 2004 Plan. On the date set forth in
the Award agreement, all unearned restricted stock units will be forfeited to us. The Administrator determines the number of
restricted stock units granted to any participant, but no participant may be granted more than 300,000 restricted stock units during
any fiscal year, except that the participant may be granted up to an additional 300,000 restricted stock units in connection with his or
her initial employment with us.
Stock Appreciation Rights. The Administrator will be able to grant stock appreciation rights (“SARs”), which are the
rights to receive the appreciation in fair market value of common stock between the exercise date and the date of grant. We can pay
the appreciation in cash, shares of common stock, or a combination thereof. The Administrator, subject to the terms of the 2004
Plan, will have complete discretion to determine the terms and conditions of SARs granted under the 2004 Plan, provided, however,
that the exercise price may not be less than 100% of the fair market value of a share on the date of grant and the term of a SAR may
not exceed seven years. No participant will be granted SARs covering more than 1,000,000 shares during any fiscal year, except that
a participant may be granted SARs covering up to an additional 1,000,000 shares in connection with his or her initial employment
with us.
The Administrator may grant “affiliated” SARs, “freestanding” SARs, “tandem” SARs, or any combination thereof. An
“affiliated SAR” is a SAR that is granted in connection with a related option and which automatically will be deemed to be
exercised at the same time that the related option is exercised. However, an affiliated SAR will not require a reduction in the number
of shares subject to the related option. A “freestanding” SAR is one that is granted independent of any options. A “tandem” SAR is a
SAR granted in connection with an option that entitles the participant to exercise the SAR by surrendering to us an equivalent
portion of the unexercised related option. A tandem SAR may be exercised only with respect to the shares for which its related
option is then exercisable. With respect to a tandem SAR granted in connection with an incentive stock option, the tandem SAR will
expire no later than the expiration of the underlying incentive stock option, the value of the payout with respect to the tandem SAR
will be for no more than 100% of the difference between the exercise price of the underlying incentive stock option and the fair
market value of the shares subject to the underlying incentive stock option at the time the tandem SAR is exercised, and the tandem
SAR will be exercisable only when the fair market value of the shares subject to the incentive stock option exceeds the exercise
price of the incentive stock option.
-26-
After termination of service with us, a participant will be able to exercise the vested portion of his or her SAR
for the period of time stated in the Award agreement. If no such period of time is stated in a participant’s Award
agreement, a participant will generally be able to exercise his or her vested SARs for the same period of time as applies
to stock options.
Performance Units and Performance Shares. The Administrator may grant performance units and
performance shares, which are Awards that will result in a payment to a participant only if the performance goals or
other vesting criteria the Administrator may establish are achieved or the Awards otherwise vest. Earned performance
units and performance shares will be paid, in the sole discretion of the Administrator, in the form of cash, shares, or in
a combination thereof. The Administrator will establish performance or other vesting criteria in its discretion, which,
depending on the extent to which they are met, will determine the number and/or the value of performance units and
performance shares to be paid out to participants. The performance units and performance shares will vest at a rate
determined by the Administrator; provided, however, that after the grant of a performance unit or performance share,
the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions
for such performance unit or performance share. During any fiscal year, no participant will receive more than 300,000
performance shares and no participant will receive performance units having an initial value greater than $2,000,000,
except that a participant may be granted performance shares covering up to an additional 300,000 shares in connection
with his or her initial employment with us. Performance units will have an initial value established by the
Administrator on or before the date of grant. Performance shares will have an initial value equal to the fair market
value of a share of our common stock on the grant date.
Performance Goals. Awards of restricted stock, restricted stock units, performance shares, performance units
and other incentives under the 2004 Plan may be made subject to the attainment of performance goals relating to one or
more business criteria within the meaning of Section 162(m) of the Internal Revenue Code and may provide for a
targeted level or levels of achievement including: (i) cash position, (ii) earnings per Share, (iii) net income, (iv)
operating cash flow, (v) operating income, (vi) operating expenses, (vii) product revenues, (viii) profit after-tax, (ix)
revenue, (x) revenue growth, and (xi) total stockholder return. The performance goals may differ from participant to
participant and from Award to Award, may be used alone or in combination, may be used to measure our performance
as a whole or the performance of one of our business units, and may be measured relative to a peer group or index.
Transferability of Awards. Awards granted under the 2004 Plan are generally not transferable, and all rights
with respect to an Award granted to a participant generally will be available during a participant’s lifetime only to the
participant.
Change in Control. In the event we experience a change in control, each outstanding Award will be assumed
or an equivalent option or right substituted by the successor corporation or a parent or subsidiary of the successor
corporation. In the event that the successor corporation refuses to assume or substitute for the Award, the participant
will fully vest in and have the right to exercise all of his or her outstanding options and stock appreciation rights,
including shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on restricted
stock will lapse, and, with respect to restricted stock units, performance shares and performance units, all performance
goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met. In
addition, if an option or stock appreciation right is not assumed or substituted for in the event of a change in control,
the Administrator will notify the participant in writing or electronically that the option or stock appreciation right will
be fully vested and exercisable for a period of time determined by the Administrator in its sole discretion, and the
option or stock appreciation right will terminate upon the expiration of such period.
-27-
With respect to Awards granted to an outside director that are assumed or substituted for, if on the date of or
following such assumption or substitution the participant’s status as a director or a director of the successor
corporation, as applicable, is terminated other than upon a voluntary resignation by the participant not at the request of
the successor, then the participant will fully vest in and have the right to exercise his or her options and/or stock
appreciation rights as to all of the shares subject to the Award, including shares as to which such Awards would not
otherwise be vested or exercisable, all restrictions on restricted stock shall lapse, and, with respect to restricted stock
units, performance shares and performance units, all performance goals or other vesting criteria will be deemed
achieved at target levels and all other terms and conditions met.
Amendment and Termination of the 2004 Plan. The Administrator has the authority to amend, alter, suspend
or terminate the 2004 Plan, except that stockholder approval will be required for any amendment to the extent required
by applicable laws. No amendment, alteration, suspension or termination of the 2004 Plan will impair the rights of any
participant, unless mutually agreed otherwise between the participant and the Administrator and which agreement must
be in writing and signed by the participant and us. The 2004 Plan will terminate in 2014, unless our Board terminates it
earlier.
Number of Awards Granted to Employees, Consultants, and Directors
The number of Awards that an employee, director or consultant may receive under the 2004 Plan is in the
discretion of the Administrator and therefore cannot be determined in advance. The following table sets forth (a) the
aggregate number of shares of common stock subject to options granted under the 2004 Plan during the last fiscal year,
and (b) the average per share exercise price of such options.
Name of Individual or Group
All Named Executive Officers, as a group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All directors who are not Named Executive Officers, as a group . . . . . . . . . . . .
All employees who are not Named Executive Officers, as a group . . . . . . . . . .
Federal Tax Aspects of the 2004 Plan
Number of
Options
Granted
Average Per
Share Exercise
Price
$
340,000
—
866,500
8.73
—
8.56
The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers
and us of Awards granted under the 2004 Plan. Tax consequences for any particular individual may be different.
Nonstatutory Stock Options. No taxable income is reportable when a nonstatutory stock option with an
exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant.
Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair market value
(on the exercise date) of the shares purchased over the exercise price of the option. Any taxable income recognized in
connection with an option exercise by one of our employees is subject to tax withholding by us. Any additional gain or
loss recognized upon any later disposition of the shares would be capital gain or loss.
As a result of Section 409A of the Internal Revenue Code and the Treasury regulations promulgated
thereunder (“Section 409A”), however, nonstatutory stock options and stock appreciation rights granted with an
exercise price below the fair market value of the underlying stock or with a deferral feature may be taxable to the
recipient in the year of vesting in an amount equal to the difference between the then fair market value of the
underlying stock and the exercise price of such Awards and may be subject to an additional 20% federal income tax
plus penalties and interest. In addition, certain states, such as California, have adopted similar tax provisions.
Incentive Stock Options. No taxable income is reportable when an incentive stock option is granted or
exercised (except for purposes of the alternative minimum tax, in which case taxation is the same as for nonstatutory
stock options). If the participant exercises the option and then later sells or otherwise disposes of the shares more than
two years after the grant date and more than one year after the exercise date, the difference between the sale price and
the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or
otherwise disposes of the shares before the end of the two- or one-year holding periods described above, he or she
generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise
date (or the sale price, if less) minus the exercise price of the option.
-28-
Stock Appreciation Rights. No taxable income is reportable when a stock appreciation right with an exercise
price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon
exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair
market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares
would be capital gain or loss.
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares. A participant generally
will not have taxable income at the time an Award of restricted stock, restricted stock units, performance shares or
performance units are granted. Instead, he or she will recognize ordinary income in the first taxable year in which his
or her interest in the shares underlying the Award becomes either (i) freely transferable, or (ii) no longer subject to
substantial risk of forfeiture. However, the recipient of a restricted stock Award may elect to recognize income at the
time he or she receives the Award in an amount equal to the fair market value of the shares underlying the Award (less
any cash paid for the shares) on the date the Award is granted.
Section 409A. Section 409A addresses non-qualified deferred compensation arrangements. Awards granted
under our 2004 Plan with a deferral feature will be subject to the requirements of Section 409A, including discount
stock options and stock appreciation rights discussed above. If an Award is subject to and fails to satisfy the
requirements of Section 409A, the recipient of that Award may recognize ordinary income on the amounts deferred
under the Award, to the extent vested, which may be prior to when the compensation is actually or constructively
received. Also, if an Award that is subject to Section 409A fails to comply with Section 409A’s provisions, Section
409A imposes an additional 20% federal income tax on compensation recognized as ordinary income, as well as
interest on such deferred compensation. Some states may also apply a penalty tax (for instance, California imposes a
20% penalty tax in addition to the 20% federal penalty tax). The Internal Revenue Service has not issued complete and
final guidance under Section 409A and, accordingly, the requirements of Section 409A (and the application of those
requirements to Awards issued under the 2004 Plan) are not entirely clear. We strongly encourage recipients of such
Awards to consult their tax, financial, or other advisor regarding the tax treatment of such Awards.
Tax Effect for us; Section 162(m) of the Internal Revenue Code. We generally will be entitled to a tax
deduction in connection with an Award under the 2004 Plan in an amount equal to the ordinary income realized by a
participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock
option). Special rules limit the deductibility of compensation paid to our Chief Executive Officer (i.e., its principal
executive officer) and to each of our three most highly compensated executive officers for the taxable year (other than
the principal financial officer). Under Section 162(m) of the Internal Revenue Code, the annual compensation paid to
any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, we
can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are
met. These conditions include stockholder adoption of the 2004 Plan, setting limits on the number of Awards that any
individual may receive and for Awards other than certain stock options and stock appreciation rights, establishing
performance criteria that must be met before the Award actually will vest or be paid. The 2004 Plan has been designed
to permit the Administrator to grant Awards that qualify as performance-based for purposes of satisfying the conditions
of Section 162(m), thereby permitting us to continue to receive a federal income tax deduction in connection with such
Awards.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON PARTICIPANTS AND US WITH RESPECT TO THE GRANT AND EXERCISE OF AWARDS UNDER
THE INCENTIVE PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX
CONSEQUENCES OF A PARTICIPANT’S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF
ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
-29-
NAMED EXECUTIVE OFFICERS AND EXECUTIVE COMPENSATION
Set forth below is certain information as of the Record Date concerning our Named Executive Officers who
were with the Company as of December 31, 2011.
Name
Kevin P. Connors . . . . . . . . . . . . . . . . . . . . . . . . .
Ronald J. Santilli . . . . . . . . . . . . . . . . . . . . . . . . .
Leonard C. DeBenedictis . . . . . . . . . . . . . . . . . .
Age
50
52
71
Position(s)
President, Chief Executive Officer and Director
Executive Vice President and Chief Financial Officer
Chief Technology Officer
Further information regarding Kevin P. Connors is provided above under “Directors Whose Terms Extend
Beyond the 2012 Annual Meeting.”
Ronald J. Santilli has served as our Chief Financial Officer since September 2001 and as our Executive Vice
President since April 2007. From September 2001 to April 2007, Mr. Santilli served as our Vice President of Finance
and Administration. From April 2001 to August 2001, Mr. Santilli served as Senior Director of Financial Planning and
Accounting at Lumenis, a manufacturer of medical lasers. From May 1993 to March 2001, Mr. Santilli held several
positions at Coherent Inc., including Sales Operations Manager, Controller of the Medical Group and, most recently,
Director of Finance and Administration. Mr. Santilli holds a B.S. in Business Administration from San Jose State
University and an M.B.A. in Finance from Golden Gate University.
Leonard C. DeBenedictis has served as our Chief Technology Officer since January 5, 2011. From December
2008 to October 2010, Mr. DeBenedictis served as Chief Technology Officer and director of Solta Medical, a public
company specializing in aesthetic products, procedures and services. From January 2005 to December 2008, Mr.
DeBenedictis served as Chief Technology Officer and Executive Vice President of Reliant Technologies and also
served as President and Chief Executive Officer of Reliant Technologies from November 2005 to October 2006. From
January 2003 to January 2005, Mr. DeBenedictis served as President and Chief Technology Officer of Reliant
Technologies. From February 2002 to January 2003, Mr. DeBenedictis served as Vice President, New Product
Development of Reliant Technologies. Mr. DeBenedictis holds a B.S. in Physics from the University of California at
Santa Barbara and an M.S. in Physics from California State University at San Diego.
Compensation Discussion and Analysis
Mr. Connors, Mr. Santilli, and Mr. DeBenedictis are our only Named Executive Officers.
Overview
The primary objectives of our compensation programs are:
●
that they be fair, objective and consistent across the employee population;
●
●
that compensation be directly and substantially linked to measurable corporate and individual
performance; and
that compensation remains competitive, so that we can attract, motivate, retain and reward the key
employees whose knowledge, skills and performance are necessary for our success.
We seek to foster a culture where individual performance is aligned with organizational objectives. We
evaluate and reward our Named Executive Officers based on the comparable industry specific and general market
compensation for their respective positions in the Company and an evaluation of their contributions to the achievement
of short-term and long-term organizational goals. Executive compensation is reviewed annually by the Compensation
Committee, and adjustments are made to reflect performance-based factors and competitive conditions.
-30-
Financial Highlights
Fiscal 2011 was a year of improvement and achievement amidst a slowly improving market. We reported
13% revenue growth which included an increase in U.S. revenue of 21% in 2011, compared to 2010, and an increase of
9% in international revenue, compared to 2010. More specifically, revenue grew from $53.2 million in 2010 to $60.3
million in 2011. We continued to conservatively manage our cash and we also continued to maintain a disciplined
approach in controlling operating costs.
Across our product lines, we expanded our product offerings through the launch of Excel V, our new premium
vascular laser, and myQ, a Q-switched laser for the treatment of a wide range of popular aesthetic applications,
including superficial and deep pigmented lesions (ie melasma), skin rejuvenation, laser skin toning, and tattoo removal.
We also received approval from the United States Food and Drug Administration for GenPlus, a laser for the treatment
of toenail fungus. In addition, we increased our technical and sales capacity by growing our research and development
and sales teams.
Executive Compensation Actions
We conducted our initial stockholder advisory vote on the compensation of our Named Executive Officers at
the 2011 Annual Meeting of Stockholders. A majority of the votes cast on this advisory proposal were either voted
against or abstained on voting on the compensation of our Named Executive Officers.
In response to this outcome, our Compensation Committee conducted a review of our executive compensation
policies and practices. As part of this review, our executives directly contacted several of our major stockholders to
solicit their input on our executive compensation policies and practices. In addition, the Compensation Committee,
with the assistance of its compensation consultant, performed a thorough analysis of our executive compensation
program, including design, pay mix, and pay levels, to identify any policies or practices that were inconsistent with
“best practice.”
At the completion of these activities, the Compensation Committee recommended, and our Board approved
the following changes to our executive compensation program and outstanding compensation arrangements:
● Maintained an annual bonus program to base bonus determinations solely on the Company’s actual
financial performance as measured against multiple objective performance criteria;
● Postponed any bonus payments under the annual bonus program until after the end of year (rather than
providing quarterly payments);
● Engaged an outside compensation consultant and revised our process for developing our compensation
Peer Group (as defined on page 34);
● Adopted stock ownership guidelines for our executive officers and non-employee directors.
We believe that these changes respond to the concerns expressed by our stockholders and strengthen the
alignment of the interests of our Named Executive Officers with those of our stockholders. Our Board and the
Compensation Committee will continue to explore ways in which our executive compensation program may be
improved.
-31-
In addition, for 2011 the Compensation Committee approved the following actions with respect to the
compensation of our Named Executive Officers:
● maintained their base salaries at their 2010 levels;
●
after maintaining target bonus opportunities at their 2010 levels, awarded bonus payments for the second,
third, and fourth quarters of 2011 based on the Company’s quarterly revenue growth of 22%, 26%, and
22%, respectively;
●
approved equity awards at levels that the Compensation Committee believed met competitive market
concerns, satisfied our retention objectives and rewarded corporate and individual performance in 2011.
The Compensation Committee concluded that these equity awards should be sufficient to maintain
competitiveness with the executives in comparable positions at the companies in our Peer Group. Further, the
Compensation Committee also took into consideration the fact that, consistent with our compensation objectives, these
awards increased our Named Executive Officers’ stake in the Company, thereby reinforcing their incentive to manage
our business as owners and subjecting a significant portion of their total compensation to fluctuations in the market
price of Cutera common stock in alignment with stockholder interests.
Consistent with the preference of our stockholders as reflected in the advisory vote on the frequency of future
say on pay votes conducted at our 2011 Annual Meeting of Stockholders, the Board has adopted a policy providing for
annual advisory votes on the compensation of the Named Executive Officers. Accordingly, following the Annual
Meeting of Stockholders to which this proxy statement relates, the next advisory vote on the compensation of the
Named Executive Officers will take place in 2013.
Corporate Governance Highlights
We endeavor to maintain good corporate governance standards consistent with our executive compensation
policies and practices. The following policies and practices were in effect during 2011:
● The Compensation Committee is comprised solely of independent directors who have established
effective means for communicating with stockholders regarding executive compensation issues and
concerns. In addition, in October 2011, we formally established our Nominating and Corporate
Governance Committee to review and make recommendations to the Board on matters concerning
corporate governance, director composition, identification, evaluation and nomination of director
candidates, Board committees, director compensation and conflicts of interest.
●
In December 2011, the Compensation Committee engaged its own compensation consultant, Compensia,
to assist with its 2012 compensation reviews.
● The Compensation Committee conducts an annual review and approval of our compensation strategy,
including a review of our Peer Group.
● Our compensation philosophy and related corporate governance features are complemented by several
elements that are designed to align our executive compensation with long-term stockholder interests,
including the following:
o We do not currently offer, nor do we have plans to provide, pension arrangements, retirement plans
or nonqualified deferred compensation plans or arrangements to our executive officers, including our
Named Executive Officers;
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o We provide limited perquisites to our executive officers, including our Named Executive Officers. Our
executive officers participate in broad-based Company-sponsored health and welfare benefits programs
on the same basis as our other full-time, salaried employees;
o Executive officers are not entitled to any tax reimbursement payments (including “gross-ups”) on any
severance or change-in-control payments or benefits;
o All change-in-control payments and benefits are based on a “double-trigger” arrangement (i.e.,
requiring both a change-in-control of the Company plus a qualifying termination of employment
before payments and benefits are paid);
o We use performance-based short-term and long-term incentives.
Role of Our Compensation Committee
Compensation Committee Charter
The Compensation Committee establishes the compensation for our Named Executive Officers – our Chief
Executive Officer, Chief Financial Officer and Chief Technology Officer – and administers our equity incentive plans,
which are currently the 2004 Equity Incentive Plan and the 2004 Employee Stock Purchase Plan. The Compensation
Committee has a written charter, which was adopted by our Board in January 2004, and was amended in April 2007
and in April 2008. A copy of this charter, as amended, can be found on our website, which is ir.cutera.com.
Duties of the Compensation Committee
The responsibilities of the Compensation Committee include:
(i)
Establishing the following for our Named Executive Officers and such other executive officers as
appropriate: (a) annual base salary, (b) annual incentive bonus, which may include the setting of specific goals and
target amounts, (c) equity compensation, (d) agreements for employment, severance and change-of-control payments
and benefits and (e) any other benefits, compensation or arrangements, other than benefits generally available to our
employees.
(ii) Reviewing and making recommendations to our Board, at such intervals as may be decided by the
Compensation Committee from time to time, regarding (a) general compensation goals and guidelines for our
employees and the criteria by which bonuses and stock compensation awards to our employees are determined; and, (b)
other policies and plans for the provision of compensation to our employees, directors and consultants.
(iii) Acting as Administrator of our 2004 Equity Incentive Plan, 2004 Employee Stock Purchase Plan and
any other equity compensation plans adopted by our Board.
(iv) Reviewing and making recommendations to our Board with respect to policies relating to the
issuance of equity incentives to employees, directors and consultants.
(v) Evaluating the compensation of the independent members of our Board.
(vi) Preparing the report that follows this Compensation Discussion and Analysis.
-33-
Compensation Committee Members
The members of the Compensation Committee are appointed by our Board. The members of the
Compensation Committee as of the Record Date were Dr. David B. Apfelberg (chairman), Mr. Jerry P. Widman and
Mr. Gregory Barrett. Each member of the Compensation Committee is an “outside director” for purposes of Section
162(m) of the Internal Revenue Code, a “non-employee director” for purposes of Exchange Act Rule 16b-3 and
satisfies the independence requirements imposed by Nasdaq.
Role of the Compensation Committee and its Consultant in Setting Executive Compensation
The Compensation Committee establishes the compensation for our Named Executive Officers to ensure
consistency with market compensation rates for similar positions, our compensation philosophy and corporate
governance guidelines. With the SEC’s recent reforms relating to executive compensation disclosure, the
Compensation Committee has assumed an active role in reviewing market data and working with a compensation
consultant on executive compensation matters. Because certain components of executive compensation—such as bonus
targets—are driven by operational priorities, as to which management has greater insight than our Board or the
Compensation Committee, the Compensation Committee has directed management to interface with the Committee
and the compensation consultant to help establish appropriate target levels. For 2011, the annual base salary and total
target cash compensation opportunities of our Named Executive Officers remained the same as it was in 2009 and
2010, except for Mr. DeBenedictis who joined us in January 2011 when his annual base salary and total target cash
compensation opportunity was established.
In December 2011, the Compensation Committee engaged Compensia to assist it in establishing executive
compensation for 2012. Due to the significant cost associated with services provided by a compensation consultant, we
may decide not to engage a compensation consultant each year, but rather once every few years. This decision will be
evaluated regularly and will be based on the Compensation Committee’s evaluation of whether the prior report
obtained, along with the publicly-available information about the executive compensation practices of other public
companies from our Peer Group, is sufficient to allow it to make informed and reasonable decisions with regard to
executive-compensation matters.
Role of our Executives in Setting Compensation
On occasion, the Compensation Committee meets with members of our management team, including our
Chief Executive Officer and Chief Financial Officer, to obtain recommendations with respect to Company
compensation programs, practices and packages for our executive officers, other employees and directors. Management
may make recommendations to the Compensation Committee on all components of compensation. The Compensation
Committee considers, but is not bound to and does not always accept, management’s recommendations with respect to
these matters. The Compensation Committee has the ultimate authority to make decisions with respect to the
compensation of our Named Executive Officers and does not delegate any of its compensation functions to others.
Competitive Positioning
In developing, reviewing, and approving the annual compensation for our Named Executive Officers, the
Compensation Committee develops and maintains a peer group of public companies from which to gather competitive
market data. In December 2011, the Compensation Committee, with the assistance of Compensia, refined its approach
to reviewing market compensation data for our Named Executive Officers and approved a set of selection criteria for
determining the companies to comprise the compensation peer group. Going forward, companies should meet the
following criteria to be included in our compensation peer group (the “Peer Group”):
● U.S.-based companies with a primary focus on health care equipment and supplies;
●
revenue of between 0.5x to 2.0x Cutera (approximately $30 million and $120 million); and
-34-
● market capitalization of between 0.5x to 2.5x Cutera (approximately $50 million and $250 million).
This set of selection criteria led us to revise the then-existing Peer Group to, for 2012, consist of the following
companies:
Atrion Corporation
AtriCure
Biolast Technology
Cardiovascular Systems
Cryolife
Cynosure
Compensation Components
Exactech
Kensey Nash
Lemaitre Vascular
Palomar Medical Technologies
Photomedex
RTI Biologics
Soltera Medical
Spectranetics
Synergetics USA
Theragenis
Young Innovations
Zeltiq Aesthetics
Our Named Executive Officers are compensated with cash, equity and non-equity incentives, and other
customary employee benefits.
Cash Compensation
Cash compensation consists of base salary, participation in a bonus program and participation in a profit-
sharing plan. Our cash compensation goals for our Named Executive Officers are based upon the following principles:
● Base salary should generally be set at or above the 50th percentile of the Peer Group;
● Base salary should be positioned to reflect each individual’s experience, performance and potential;
● A significant portion of cash compensation should be “at risk”; and
● The amount of bonuses payable for any quarter should be based on revenue growth, compared with the
same quarter in the prior year, and the operating profit before stock-based compensation and non-
operational expenses, or “adjusted operating profit”, as a percentage of revenue.
Base Salary and Total Target Cash Compensation
Total target cash compensation for each Named Executive Officer includes his annual base salary, annual
target bonus opportunity (described below) and annual profit-sharing payments.
Bonus Program
In addition to base salary, we provided cash bonus opportunities for our Named Executive Officers in 2011
pursuant to which cash bonuses were determined quarterly based on the Company’s performance for the then-
preceding quarter.
Target Bonus Opportunities
For 2011, the target cash bonuses were designed to reward our Named Executive Officers based on the
Company’s overall financial performance. As in prior years, the Compensation Committee determined that the target
cash bonus for each Named Executive Officer should be determined as a percentage of such executive officer’s base
salary. The target cash bonus opportunities for the Named Executive Officers were as follows:
-35-
Named Executive Officer
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . . . . . . . . . . . . . . .
Target Bonus Opportunity (expressed as a
percentage of base salary)
60%
45%
50%
With respect to each Named Executive Officer, the amount of his target cash bonus opportunity was
determined by the Compensation Committee, based on the recommendation of our Chief Executive Officer (except
with respect to his own target annual cash bonus opportunity) and was based on several factors, including the scope of
the Named Executive Officer’s performance, contributions, responsibilities, experience, prior years’ target cash bonus
and market conditions. The target cash bonus opportunities for our Named Executive Officers were the same as their
target opportunities for 2009 and 2010, except for Mr. DeBenedictis, who joined the Company in 2011.
Corporate Performance Measures
For 2011, the Compensation Committee selected revenue growth and adjusted operating profits as the
corporate performance measures that best supported our annual operating plan and enhanced long-term value creation
for purposes of paying annual cash bonuses. For these purposes, “adjusted operating profits” was defined as operating
profit less deferred stock based compensation expense and non-operational expenses. The Compensation Committee
decided that these expenses should be excluded from the operating profit amount as they were deemed unrelated to
quarterly “operating” performance.
Using these measures, each fiscal quarter the Compensation Committee compared our performance against
the same fiscal quarter in the prior year, 2010, and applied a multiplier of 5.0 to the percentage increase for that quarter
to determine our quarterly performance for that measure. If the percentage growth for a fiscal quarter in 2011 was
negative (when compared to the same fiscal quarter for the prior year), the multiplier for that measure was zero. For
example, at 10% revenue growth and 10% adjusted operating profit, an individual would be eligible to receive 100% of
his or her target bonus opportunity for that quarter. At 15% revenue growth and 15% adjusted operating profit, an
individual would be eligible to receive 150% of his or her target bonus opportunity.
Bonus Decisions and Analysis
In January 2012, the Compensation Committee evaluated the Company’s financial performance each fiscal
quarter of 2011 and the level of achievement of each of the corporate performance measures for those quarters. Based
on this evaluation, the Compensation Committee determined that we had achieved the following revenue growth and
adjusted operating profit targets:
-36-
Revenue
Growth
(expressed as
a
percentage)
-15.48 %
21.92 %
25.97 %
21.86 %
Fiscal Period
First quarter . . . . .
Second quarter . . .
Third quarter . . . . .
Fourth quarter . . .
Revenue
Growth
Multiplier
—
109.61%
129.84%
109.32%
Factor
5
5
5
5
Adjusted
Operating
Profit
(expressed as
a
percentage)
-26.86%
-11.33%
-11.38%
1.81%
Adjusted
Operating
Profit
Multiplier
—
—
—
9.03%
Total
Payout
Multiplier
—
109.61%
129.84%
118.36%
Factor
5
5
5
5
In addition, in determining bonus payments to our Named Executive Officers, the Compensation Committee
considered the following factors: the Company’s 2011 revenue increased over 2010; the Company introduced several
new products that the Named Executive Officers were responsible for; individual performance of the bonus recipients;
and the threat of losing these key individuals to competitors or other companies.
Based on these determinations, the Compensation Committee approved annual cash bonuses for our Named
Executive Officers as follows:
Named Executive Officer
Mr. Connors . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . . . . . . .
Annual Cash
Bonus Opportunity
$252,000
$130,500
$156,000
Annual Cash
Bonus Payment
$225,417
$116,734
$139,544
Our Board also granted a one-time special bonus of $50,550 to Mr. DeBenedictis, payable four months after he
commenced employment with the Company.
Profit-Sharing Program
We also have a profit sharing program for our Named Executive Officers and other employees pursuant to
which cash payments may be made quarterly. Target profit-sharing payments are calculated based upon half of the
quarterly pre-tax adjusted operating profit percentage (pre-tax adjusted operating profit divided by revenue) multiplied
by the Named Executive Officer’s gross salary earned during that quarter.
In 2011, we made profit-sharing payments of $948 to our Chief Executive Officer, of $655 to our Chief
Financial Officer and of $705 to our Chief Technology Officer based on the Company’s increased revenue in 2011
over 2010 and on the individual performance of the profit-sharing participants.
Long-Term Incentive Program
We believe that equity-based compensation promotes and encourages long-term successful performance by
our Named Executive Officers that is aligned with the organization’s goals and the generation of stockholder value.
Our equity compensation goals for our Named Executive Officers are based upon the following principles:
● Stockholder and executive officer interests should be aligned;
-37-
● Key and high-performing employees, who have a demonstrable impact on our performance and/or
stockholder value, should be provided this benefit;
● The program should be structured to provide meaningful retention incentives to participants;
● The equity awards should reflect each individual’s experience, performance, potential and be
comparable to what the Peer Group awards for the respective position; and
● Actual awards should be tailored to reflect individual performance and attraction/retention goals.
Equity Incentive Compensation
Under our 2004 Equity Incentive Plan, we are permitted to grant stock options, stock appreciation rights,
restricted shares, restricted stock unit (“RSU”) awards, performance shares and other stock-based awards. Under this
Plan, we grant options to our executive officers, directors and employees to purchase shares of Cutera common stock at
an exercise price equal to the fair market value of such stock on the date of grant. The grant date for stock options to
our Named Executive Officers is typically the date of a regularly scheduled Board meeting, or, for annual merit grants,
on or around June 1 of each year. Our non-employee directors are granted stock awards annually on the date of our
Annual Meeting of Stockholders. We have no program, plan or practice to select option grant dates (or set board
meeting and annual stockholder meeting dates) to correspond with the release of material non-public information.
In May 2011, our Board, with the approval of our non-employee directors, granted stock options to our Chief
Executive Officer, Chief Financial Officer and Chief Technology Officer to purchase 120,000, 80,000 and 40,000
shares of Cutera common stock under our 2004 Equity Incentive Plan, respectively. Each of these stock options has a
vesting commencement date of June 1, 2011, a term of seven years and vests as follows: one-third of the total number
of shares subject to the stock option vest one full calendar year following the vesting commencement date of June 1,
2011 and 1/36th of the total number of shares subject to the stock option vest on the last day of each full calendar
month thereafter, until all such shares have vested, subject to the Named Executive Officer continuing to provide
services to the Company through each such date. In granting these stock option awards, our Board considered the
individual performance and contribution of each Named Executive Officer, the Company’s performance, its own
subjective assessment of market conditions, its ability to retain the individual Named Executive Officer, and the goal of
increasing the value of the Company, in arriving at the amounts awarded to each individual recipient.
In addition, in May 2011, our Board, with the approval of our non-employee directors, granted RSU awards to
our Chief Executive Officer, Chief Financial Officer and Chief Technology Officer to acquire 11,000, 7,500 and 3,750
shares of Cutera common stock under our 2004 Equity Incentive Plan, respectively. These RSU awards vest as to one-
third of the shares on each of June 1, 2011, 2012 and 2013. In granting these RSU awards, our Board considered the
individual performance and contribution of each Named Executive Officer, the Company’s performance, its own
subjective assessment of market conditions, its ability to retain the individual Named Executive Officer, and the goal of
increasing the value of the Company, in arriving at the amounts awarded to each individual recipient.
Benefits
We provide the following benefits to our Named Executive Officers generally on the same basis as the
benefits provided to all employees:
● Health, dental and vision insurance;
● Life insurance;
● Short-term and long-term disability insurance;
-38-
● A Section 401(k) plan (although, in 2009 we discontinued our discretionary employer match on employee
contributions to the plan); and
● Flexible Spending Accounts.
These benefits are consistent with those offered by other companies and specifically with those companies
with which we compete for employees.
We also maintain a 2004 Employee Stock Purchase Plan that provides eligible employees with the
opportunity to purchase shares of Cutera common stock at a 15% discounted price to the lower of the fair market value
at either the beginning or the end of the applicable offering period.
Post-Employment Compensation
Except for Change of Control and Severance Agreements, we do not have employment agreements with any
of our Named Executive Officers. We have Change of Control and Severance Agreements with each of our Named
Executive Officers. The purpose of these agreements is to provide incentives to our Named Executive Officers to
continue their employment with the Company and not be distracted by the possibility of loss of employment as a result
of an acquisition of the Company or for other reasons. For a summary of the material terms and conditions of these
Change of Control and Severance agreements, see Potential Payments upon Termination or Change in Control below.
Internal Revenue Code Section 162(m) and Limitations on Executive Compensation
Section 162(m) of the Internal Revenue Code may limit our ability to deduct for federal income tax purposes
compensation paid to either our Chief Executive Officer or to our three other most highly paid executive officers (other
than our Chief Financial Officer) in any fiscal year that is, for each such person, in excess of $1,000,000. None of our
executive officers received any such compensation in excess of this limit during 2011, or any prior year.
Stock options granted under the 2004 Equity Incentive Plan are not subject to the deduction limitation;
however, to preserve our ability to deduct the compensation income associated with stock options granted to such
executive officers pursuant to Section 162(m) of the Internal Revenue Code, our 2004 Equity Incentive Plan provides
that no optionee may be granted option(s) to purchase more than 500,000 shares of Cutera common stock in any one
fiscal year. However, in the fiscal year in which the optionee is hired, an optionee may be granted an option to
purchase up to 1,000,000 shares of Cutera common stock. In the future, the Compensation Committee may, in its
judgment, authorize compensation payments that do not comply with an exemption from the deductibility limit when it
believes that such payments are appropriate to attract and retain executive talent.
Accounting for Stock-Based Compensation
We follow Financial Accounting Standard Board Accounting Standards Codification Topic 718, or ASC 718,
for our stock-based compensation awards. ASC 718 requires companies to measure the compensation expense for all
share-based payment awards made to employees and directors, including stock options, based on the grant date “fair
value” of these awards. This calculation is performed for accounting purposes and reported in the compensation tables
below, even though our executive officers may never realize any value from their awards. ASC Topic 718 also requires
companies to recognize the compensation cost of their stock-based awards in their income statements over the period
that an employee is required to render service in exchange for the award.
-39-
Securities Authorized for Issuance Under Equity Compensation Plans
Our stockholders approved each of our equity compensation plans, including a 2008 amendment to our 2004
Equity Incentive Plan. The following table provides information regarding the shares of Cutera common stock that may
be issued upon the exercise of stock options and RSU awards granted under our 2004 Equity Incentive Plan as of
December 31, 2011.
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (a)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights (b)
3,549,022 $
—
3,549,022 $
9.92
—
9.92
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)) (c)
474,537
—
474,537
Plan category
Equity compensation plans approved by security holders. . . . .
Equity compensation plan not approved by security holders . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Compensation Practices and Policies
Stock Ownership Guidelines
To enhance our overall corporate governance practices and executive compensation program, on April 27,
2012, our Board adopted stock ownership guidelines for our executive officers, which the Compensation Committee
intends to review annually. These guidelines are designed to align our executive officers’ interests with our
stockholders’ long-term interests by promoting long-term ownership of Cutera common stock, which reduces the
incentive for excessive short-term risk taking. These guidelines provide that, within five years of the later of the
adoption of the guidelines or his or her first date of employment, our executive officers must hold shares of Cutera
common stock having a value not less than the amount specified below:
Executive Officer
Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Recovery Policy
Stock Ownership Guideline
(as a multiple of base salary)
Three times
One time
Our Board is evaluating whether to adopt a compensation recovery (“clawback”) policy for our executive
officers pursuant to which the Compensation Committee may, to the extent permitted by governing law and as
appropriate under the circumstances, recover for the benefit of the Company all or a portion of any incentive-based
cash compensation erroneously awarded to such executive officer in excess of the amount that such executive officer
would have received (as re-calculated following the accounting restatement) to the extent that such compensation was
paid after the date the policy was adopted.
-40-
Insider Trading Compliance Program
According to our Insider Trading Compliance Program, no employee of the Company, including, but not
limited to, our executive officers and directors, may invest in derivatives of the Company’s securities. This prohibition
includes, but is not limited to, trading in put or call options related to securities of the Company.
2011 Summary Compensation Table
The following table sets forth summary compensation information for the fiscal years ended December 31,
2011, 2010 and 2009 for our Chief Executive Officer, our Chief Financial Officer, and our Chief Technology Officer.
We refer to these persons as our Named Executive Officers elsewhere in this proxy statement.
Name and Principal Position
Salary
Bonus(1)
Option
Awards
(2)
Stock
Awards
(2)
Non-Equity
Incentive Plan
Compensation
All Other
Compensation
Total
Kevin P. Connors
President and Chief Executive Officer
2011 . . . . . . . . . . . . . . . . . . . . . . . . . $ 420,000 $
2010 . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . .
420,000
420,000
Ronald J. Santilli
Executive Vice President and Chief
Financial Officer
2011 . . . . . . . . . . . . . . . . . . . . . . . . . $ 290,000 $
2010 . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . .
290,000
290,000
―
―
―
―
―
―
$ 359,508 $
391,852
481,284
337,920
―
95,920 $
$ 239,672 $
171,266
220,589
225,280
―
65,400 $
226,365(3) $
―
18,454
―
―
―
$ 1,101,793
1,149,772
919,738
117,389(3) $
―
10,012
$ 712,461
686,546
520,601
—
—
Leonard C. DeBenedictis
Chief Technology Officer
2011 . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,000 $ 50,550(4) $ 460,686 $
2010 . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
32,700 $
―
―
140,249(3) $
—
—
—
—
—
$ 996,185
—
—
(1) The amounts reported in this column represent discretionary bonuses earned for each of the years covered in the
table.
(2) The amounts reported in this column represent the aggregate grant date fair value of stock awards granted during
each of the fiscal years in 2011, 2010 and 2009 calculated in accordance with ASC Topic 718. See Note 5 of the
Consolidated Notes to Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2011 filed with the SEC on March 15, 2012 for a discussion of the valuation assumptions for stock-
based compensation.
(3) Amounts shown include an annual bonus and profit sharing earned in 2011 and paid in 2012.
(4) Our Board granted a one-time bonus of $50,550 to Mr. DeBenedictis, payable four months after he commenced
employment with the Company.
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2011 Grants of Plan-Based Awards Table
The following table lists grants of plan-based stock options and RSU awards made to our Named Executive
Officers during the fiscal year ended December 31, 2011.
Name
Mr. Connors . . . . . . .
Grant Date
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Maximum
Threshold Target
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
All Other
Option
Awards:
Number of
Securities
Underlying
Options
Grant Date
Fair Value
of Stock
and
Option
Awards (2)
Exercise or
Base Price
of Option
Awards (1)
05/27/2011
—
—
—
11,000
120,000 $
8.72 $ 455,428
Mr. Santilli . . . . . . . .
05/27/2011
—
—
—
7,500
80,000 $
8.72 $ 305,072
Mr. DeBenedictis . . .
1/5/2011
5/27/2011
—
—
—
3,750
100,000 $
40,000
8.75 $ 340,850
152,536
8.72
(1) The per-share exercise prices of the option awards were based on the closing market price of a share of Cutera
common stock on the respective dates of grant.
(2) The amounts reported in this column reflect the grant date fair value of equity awards calculated in accordance
with ASC Topic 718. See Note 5 of the Notes to Consolidated Financial Statements included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 15, 2012 for a discussion
of the valuation assumptions for our stock-based compensation.
-42-
2011 Outstanding Equity Awards at Fiscal Year-End Table
The following table lists the outstanding equity incentive awards held by our Named Executive Officers as of
December 31, 2011.
Name
Mr. Connors . . . . . . . .
Mr. Santilli . . . . . . . . .
Option Awards
Number of
Securities
Underlying
Unexercised
Earned
Options
Number of
Securities
Underlying
Unexercised
Unearned
Options
Option
Exercise
Price
3,333
30,000
29,138
100,000
100,000
60,000
—
3,372
14,753
10,000
15,000
11,988
50,000
45,834
27,501
$
$
—
—
4,162(1)
—
20,000(2)
60,000(2)
120,000(2)
—
—
—
—
1,712(1)
—
9,166(2)
27,499(2)
80,000(2)
4.25
20.25
10.43
10.43
8.66
10.24
8.72
4.25
4.25
13.30
20.25
10.43
10.43
8.66
10.24
8.72
Option
Expiration
Date
8/13/2013
7/28/2015
5/28/2015
5/28/2015
6/08/2016
5/14/2017
5/27/2018
8/07/2012
8/13/2013
7/20/2014
7/28/2015
5/28/2015
5/28/2015
6/08/2016
5/14/2017
5/27/2018
Mr. DeBenedictis . . .
—
—
100,000(2) $
40,000(2) $
8.75
8.72
1/05/2018
5/27/2018
Number of
Shares or
Units of
Stock that
Have Not
Vested
Stock AwardsMarket
Value of
Shares or
Units of
Stock that
Have Not
Vested
Date
Awards
Will be
Fully
Vested
11,000(3) $
7,334(4)
81,950(3)
54,638(4)
6/01/2012(3)
6/01/2013(4)
7,333(3)
5,000(4)
$
54,631(3)
37,250(4)
6/01/2012(3)
6/01/2013(4)
2,500(4)
18,625(4)
6/01/2013(4)
(1) One-quarter of the shares underlying each of these stock options vest on the first anniversary of the vesting
commencement date and 1/48th of the underlying shares vest each month thereafter.
(2) One-third of the shares underlying each of these stock options vest on the first anniversary of the vesting
commencement date and 1/36th of the underlying shares vest each month thereafter.
(3) One-half of the shares underlying each of these awards will vest on June 1, 2011 and 2012.
(4) One-half of the shares underlying each of these awards will vest on June 1, 2012 and 2013.
-43-
2011 Options Exercised and Stock Vested Table
The following table lists the stock options exercised by, and stock awards vested to, our Named Executive
Officers in the fiscal year ended December 31, 2011.
Name
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise
Value
Realized on
Exercise (1)
40,000
20,000
—
$
$
232,400
33,568
—
Number of
Shares
Acquired on
Vesting
Value
Realized
Upon
Vesting (2)
14,666
9,833
1,250
$
$
$
128,474
86,137
10,950
(1) The amounts reported in this column represents the excess of fair market value of the shares of Cutera common
stock purchased on the exercise date over the aggregate exercise price of such options.
(2) The amounts reported in this column represent the fair market value of the shares of Cutera common stock on the
vesting date of each Named Executive Officer’s outstanding RSU awards.
Pension Benefits
We did not sponsor any defined benefit pension or other actuarial plan for our executive officers, including
our Named Executive Officers, during 2011.
Nonqualified Deferred Compensation
We did not maintain any nonqualified defined contribution or other deferred compensation plans or
arrangements for our executive officers, including our Named Executive Officers, during 2011.
Employment Agreements
We do not have employment agreements with any of our Named Executive Officers.
-44-
Potential Payments Upon Termination or Change in Control
We have entered into Change of Control and Severance Agreements with each of our Named Executive
Officers. These agreements provide that if a Named Executive Officer’s employment with the Company is terminated
by the Company without “cause” (as defined in the agreement) or by the Named Executive Officer for “good reason”
(as defined in the agreement) either prior to three months before or after 12 months following a Change of Control (as
defined in the agreement) of the Company but not in connection with a Change of Control, the Named Executive
Officer will receive, subject to signing a release of claims in favor of the Company:
●
a lump sum severance payment equal to 200% of the annual base salary as in effect immediately prior to
such termination for our Chief Executive Officer and 100% of the annual base salary as in effect
immediately prior to such termination for our Chief Financial Officer and Chief Technology Officer; and
● up to 24 months for our Chief Executive Officer and up to 12 months for our Chief Financial Officer and
Chief Technology Officer of reimbursement for premiums paid for COBRA coverage.
These agreements also provide that if a Named Executive Officer’s employment with the Company is
terminated by the Company without “cause” or by the Named Executive Officer for “good reason” and such
termination occurs within the period beginning three months before, and ending 12 months following, a Change of
Control of the Company and in connection with a Change of Control, the Named Executive Officer will receive,
subject to signing a release of claims in favor of the Company
●
●
a lump sum severance payment equal to 200% of the annual base salary as in effect immediately prior to
such termination or, if greater, at the level in effect immediately prior to the Change of Control for our
Chief Executive Officer and 100% of the annual base salary as in effect immediately prior to such
termination or, if greater, at the level in effect immediately prior to the Change of Control for our Chief
Financial Officer and Chief Technology Officer;
a lump sum severance payment equal to 100% of the Named Executive Officer’s annual target bonus for
the fiscal year in which the termination occurs or, if greater, his annual target bonus in effect immediately
prior to the Change of Control;
●
automatic vesting in full of all outstanding and unvested equity awards held by the Named Executive
Officer as of the date of the Change of Control; and
● up to 24 months for our Chief Executive Officer and up to 12 months for our Chief Financial Officer and
Chief Technology Officer of reimbursement for premiums paid for COBRA coverage.
Each agreement has an initial term of three years, and will extend for an additional year unless the Company
or the applicable Named Executive Officer provides written notice at least 60 days prior to the third anniversary of the
agreement.
For purposes of these agreements, “cause” means a Named Executive Officer’s termination of employment
only upon (i) his willful failure to substantially perform his duties (subject to notice and a reasonable period to cure),
other than a failure resulting from his complete or partial incapacity due to physical or mental illness or impairment;
(ii) his willful act which constitutes gross misconduct and which is injurious to the Company; (iii) his willful breach of
a material provision of the agreement (subject to notice and reasonable period to cure); or (iv) his knowing, material
and willful violation of a federal or state law or regulation applicable to the business of the Company.
For purposes of these agreements, “good reason” means a Named Executive Officer’s termination of
employment within 90 days following the expiration of any cure period following the occurrence of one or more of the
following, without his consent: (i) a material reduction in his authority, duties, or responsibilities relative to duties,
position or responsibilities in effect immediately prior to such reduction; (ii) a material reduction in his base salary as
in effect immediately prior to such reduction; or (iii) a material change in the geographic location at which he must
perform services (in other words, the relocation of the Named Executive Officer to a facility that is more than 50 miles
from his then-current location).
-45-
The following table lists our Named Executive Officers and the estimated payments and benefits that each of
them would have received had their employment with the Company been terminated without “cause” or had they
resigned for “good reason” on December 31, 2011.
Name
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Estimated
Total Value
of Cash
Payment
Estimated
Total Value
of Health
Coverage
Continuation
840,000
290,000
312,000
$
$
$
16,979
24,681
8,464
The following table lists our Named Executive Officers and the estimated payments and benefits that each of
them would have received had their employment with the Company been terminated without “cause” or had they
resigned for “good reason” in connection with a Change in Control of the Company on December 31, 2011.
Name
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Total Value
of Cash
Payment
Estimated
Total Value
of Health
Coverage
Continuation
Value of
Accelerated
Equity (1)
$
$
$
1,092,000
420,500
468,000
$
$
$
16,979
24,681
8,464
$
$
$
136,588
91,881
18,625
(1) We estimate the value of acceleration of the outstanding and unvested stock options and RSU awards held by each
of our Named Executive Officers based on a market price of $7.45 per share for Cutera common stock as of
December 31, 2011.
-46-
COMPENSATION COMMITTEE REPORT (1)
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of SEC Regulation S-K with management. Based on such review and discussion, the
Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis
be included in Cutera’s proxy statement.
The foregoing report is provided by the undersigned members of the Compensation Committee.
David B. Apfelberg
Gregory Barrett
Jerry P. Widman
(1) The material in this report is not deemed soliciting material or filed with the SEC and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, whether made before or after the date of this Proxy Statement and irrespective of any
general incorporation language in those filings.
-47-
OTHER MATTERS
We are not aware of any other business to be presented at the meeting. As of the date of this proxy statement,
no stockholder had advised us of the intent to present any business at the meeting. Accordingly, the only business that
our Board of Directors intends to present at the meeting is as set forth in this proxy statement.
If any other matter or matters are properly brought before the meeting, the proxies will use their discretion to
vote on such matters in accordance with their best judgment.
By order of the Board of Directors,
Kevin P. Connors
President and Chief Executive Officer
Brisbane, California
April 30, 2012
-48-
CUTERA, INC.
2004 EQUITY INCENTIVE PLAN
(as amended on April 27, 2012, subject to stockholder approval on June 13, 2012)
1.
Purposes of the Plan. The purposes of this Plan are:
•
•
•
to attract and retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees, Directors and Consultants, and
to promote the success of the Company’s business.
The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock,
Restricted Stock Units, Stock Appreciation Rights, Performance Units, Performance Shares and other stock or cash
awards as the Administrator may determine.
2.
Definitions. As used herein, the following definitions will apply:
Plan, in accordance with Section 4 of the Plan.
(a)
“Administrator” means the Board or any of its Committees as will be administering the
which automatically will be deemed to be exercised at the same time that the related Option is exercised.
(b)
“Affiliated SAR” means an SAR that is granted in connection with a related Option, and
(c)
“Applicable Laws” means the requirements relating to the administration of equity-based
awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or
jurisdiction where Awards are, or will be, granted under the Plan.
“Award” means, individually or collectively, a grant under the Plan of Options, SARs,
Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares and other stock or cash awards as the
Administrator may determine.
(d)
“Award Agreement” means the written or electronic agreement setting forth the terms and
provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and
conditions of the Plan.
(e)
(f)
(g)
“Board” means the Board of Directors of the Company.
“Change in Control” means the occurrence of any of the following events:
-49-
Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of
securities of the Company representing fifty percent (50%) or more of the total voting power represented by the
Company’s then outstanding voting securities; or
(i)
all of the Company’s assets;
(ii)
The consummation of the sale or disposition by the Company of all or substantially
(iii)
A change in the composition of the Board occurring within a two-year period, as a
result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors
who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the
Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or
nomination (but will not include an individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company); or
(iv)
The consummation of a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after
such merger or consolidation.
of the Code herein will be a reference to any successor or amended section of the Code.
(h)
“Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section
Laws appointed by the Board in accordance with Section 4 hereof.
(i)
“Committee” means a committee of Directors or of other individuals satisfying Applicable
(j)
(k)
(l)
“Common Stock” means the common stock of the Company.
“Company” means Cutera, Inc., a Delaware corporation, or any successor thereto.
“Consultant” means any person, including an advisor, engaged by the Company or a Parent
or Subsidiary to render services to such entity.
“Determination Date” means the latest possible date that will not jeopardize the
qualification of an Award granted under the Plan as “performance-based compensation” under Section 162(m) of the
Code.
(m)
(n)
“Director” means a member of the Board.
(o)
“Disability” means total and permanent disability as defined in Section 22(e)(3) of the
Code, provided that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may
determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards
adopted by the Administrator from time to time.
-50-
“Employee” means any person, including Officers and Directors, employed by the
Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by
the Company will be sufficient to constitute “employment” by the Company.
(p)
(q)
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
(r)
“Exchange Program” means a program under which (i) outstanding Awards are surrendered
or cancelled in exchange for Awards of the same type (which may have lower exercise prices and different terms),
Awards of a different type, and/or cash, (ii) Participants would have the opportunity to transfer any outstanding
Awards to a financial institution or other person or entity selected by the Administrator, and/or (iii) the exercise price
of an outstanding Award is reduced. The Administrator will determine the terms and conditions of any Exchange
Program in its sole discretion.
follows:
(s)
“Fair Market Value” means, as of any date, the value of Common Stock determined as
(i)
If the Common Stock is listed on any established stock exchange or a national
market system, including without limitation the Nasdaq Global Market, the Nasdaq Global Select Market or the
Nasdaq Capital Market, its Fair Market Value will be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
If the Common Stock is regularly quoted by a recognized securities dealer but
selling prices are not reported, the Fair Market Value of a Share of Common Stock will be the mean between the high
bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii)
Value will be determined in good faith by the Administrator.
(iii)
In the absence of an established market for the Common Stock, the Fair Market
(t)
(u)
(v)
“Fiscal Year” means the fiscal year of the Company.
“Freestanding SAR” means a SAR that is granted independently of any Option.
“Incentive Stock Option” means an Option intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(w)
“Inside Director” means a Director who is an Employee.
-51-
intended to qualify as an Incentive Stock Option.
(x)
“Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not
16 of the Exchange Act and the rules and regulations promulgated thereunder.
(y)
“Officer” means a person who is an officer of the Company within the meaning of Section
(z)
“Option” means a stock option granted pursuant to the Plan.
(aa)
“Outside Director” means a Director who is not an Employee.
Section 424(e) of the Code.
(bb)
“Parent” means a “parent corporation,” whether now or hereafter existing, as defined in
(cc)
“Participant” means the holder of an outstanding Award.
(dd)
“Performance Goals” will have the meaning set forth in Section 12 of the Plan.
Administrator in its sole discretion.
(ee)
“Performance Period” means any Fiscal Year or such other period as determined by the
“Performance Share” means an Award denominated in Shares which may be earned in
whole or in part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine
pursuant to Section 10.
(ff)
“Performance Unit” means an Award which may be earned in whole or in part upon
attainment of Performance Goals or other vesting criteria as the Administrator may determine and which may be
settled for cash, Shares or other securities or a combination of the foregoing pursuant to Section 10.
(gg)
(hh)
“Period of Restriction” means the period during which the transfer of Shares of Restricted
Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions
may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events
as determined by the Administrator.
(ii)
(jj)
“Plan” means this 2004 Equity Incentive Plan.
“Restricted Stock” means Shares issued pursuant to an Award of Restricted Stock under
Section 7 of the Plan, or issued pursuant to the early exercise of an Option.
“Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the
Fair Market Value of one Share, granted pursuant to Section 8. Each Restricted Stock Unit represents an unfunded and
unsecured obligation of the Company.
(kk)
effect when discretion is being exercised with respect to the Plan.
(ll)
“Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in
(mm)
“Section 16(b)” means Section 16(b) of the Exchange Act.
-52-
(nn)
“Service Provider” means an Employee, Director or Consultant.
the Plan.
(oo)
“Share” means a share of the Common Stock, as adjusted in accordance with Section 13 of
an Option, that pursuant to Section 9 is designated as a SAR.
(pp)
“Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with
(qq)
defined in Section 424(f) of the Code.
“Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as
“Tandem SAR” means a SAR that is granted in connection with a related Option, the
exercise of which will require forfeiture of the right to purchase an equal number of Shares under the related Option
(and when a Share is purchased under the Option, the SAR will be canceled to the same extent).
(rr)
“Unvested Awards” will mean Options or Restricted Stock that (i) were granted to an
individual in connection with such individual’s position as an Employee and (ii) are still subject to vesting or lapsing of
Company repurchase rights or similar restrictions.
(ss)
3.
Stock Subject to the Plan.
Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, as of April 16,
2012, the maximum aggregate number of shares of common stock that may be awarded and sold under the amended
2004 Plan was 4,647,992, of which 564,329 shares remained available for future awards.
(a)
(b)
Full Value Awards. Any Shares subject to Awards granted with an exercise price less than
Fair Market Value on the date of grant of such Awards will be counted against the numerical limits of this Section 3 as
2.12 Shares for every one Share subject thereto. Further, if Shares acquired pursuant to any such Award are forfeited or
repurchased by the Company and would otherwise return to the Plan pursuant to Section 3(c), 2.12 times the number of
Shares so forfeited or repurchased will return to the Plan and will again become available for issuance
(c)
Lapsed Awards. If an Award expires or becomes unexercisable without having been
exercised in full, or, with respect to Restricted Stock, Restricted Stock Units, Performance Shares or Performance
Units, is forfeited to or repurchased by the Company, the unpurchased Shares (or for Awards other than Options and
Stock Appreciation Rights, the forfeited or repurchased Shares) which were subject thereto will become available for
future grant or sale under the Plan (unless the Plan has terminated). Upon exercise of a Stock Appreciation Right
settled in Shares, the gross number of Shares covered by the portion of the Award so exercised will cease to be
available under the Plan. If the exercise price of an Option is paid by tender to the Company, or attestation to the
ownership, of Shares owned by the Participant, the number of Shares available for issuance under the Plan will be
reduced by the gross number of Shares for which the Option is exercised. Shares that have actually been issued under
the Plan under any Award will not be returned to the Plan and will not become available for future distribution under
the Plan; provided, however, that if unvested Shares of Restricted Stock, Restricted Stock Units, Performance Shares or
Performance Units are repurchased by the Company or are forfeited to the Company, such Shares will become
available for future grant under the Plan. Shares used to pay the tax and/or exercise price of an Award will not become
available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than
Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan.
Notwithstanding the foregoing provisions of this Section 3(c), subject to adjustment provided in Section 14, the
maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate
Share number stated in Section 3(a), plus, to the extent allowable under Section 422 of the Code, any Shares that
become available for issuance under the Plan under this Section 3(c).
-53-
available such number of Shares as will be sufficient to satisfy the requirements of the Plan.
(d)
Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep
4.
Administration of the Plan.
(a)
Procedure.
groups of Service Providers may administer the Plan.
(i)
Multiple Administrative Bodies. Different Committees with respect to different
Section 162(m). To the extent that the Administrator determines it to be desirable
to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of
the Code, the Plan will be administered by a Committee of two (2) or more “outside directors” within the meaning of
Section 162(m) of the Code.
(ii)
Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt
under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption
under Rule 16b-3.
(iii)
by (A) the Board or (B) a Committee, which committee will be constituted to satisfy Applicable Laws.
(iv)
Other Administration. Other than as provided above, the Plan will be administered
Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a
Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the
authority, in its discretion:
(b)
(i)
to determine the Fair Market Value;
(ii)
to select the Service Providers to whom Awards may be granted hereunder;
(iii)
to determine the number of Shares to be covered by each Award granted
hereunder;
(iv)
to approve forms of agreement for use under the Plan;
-54-
Program;
(v)
with the approval of the Company’s stockholders, to institute an Exchange
(vi)
to determine the terms and conditions, not inconsistent with the terms of the Plan,
of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time
or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or
waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto,
based in each case on such factors as the Administrator will determine;
Plan;
(vii)
to construe and interpret the terms of the Plan and Awards granted pursuant to the
rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws;
(viii)
to prescribe, amend and rescind rules and regulations relating to the Plan, including
to modify or amend each Award (subject to Section 18(c) of the Plan), including
the discretionary authority to extend the post-termination exercisability period of Awards longer than is otherwise
provided for in the Plan;
(ix)
(x)
to allow Participants to satisfy withholding tax obligations by electing to have the
Company withhold from the Shares to be issued upon exercise of an Award that number of Shares having a Fair
Market Value equal to the minimum amount required to be withheld (the Fair Market Value of the Shares to be
withheld will be determined on the date that the amount of tax to be withheld is to be determined and all elections by a
Participant to have Shares withheld for this purpose will be made in such form and under such conditions as the
Administrator may deem necessary or advisable);
required to effect the grant of an Award previously granted by the Administrator;
(xi)
to authorize any person to execute on behalf of the Company any instrument
to allow a Participant to defer the receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant under an Award pursuant to such procedures as the
Administrator may determine; and
(xii)
the Plan.
(xiii)
to make all other determinations deemed necessary or advisable for administering
interpretations will be final and binding on all Participants and any other holders of Awards.
(c)
Effect of Administrator’s Decision. The Administrator’s decisions, determinations and
5.
Eligibility. Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation
Rights, Performance Units, Performance Shares, and such other cash or stock awards as the Administrator determines
may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.
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6.
Stock Options.
(a)
Limitations.
(i)
Each Option will be designated in the Award Agreement as either an Incentive
Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first
time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary)
exceeds $100,000 (U.S.), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section
6(a), Incentive Stock Options will be taken into account in the order in which they were granted. The Fair Market
Value of the Shares will be determined as of the time the Option with respect to such Shares is granted.
(ii)
The following limitations will apply to grants of Options:
(1)
purchase more than 1,000,000 Shares.
No Service Provider will be granted, in any Fiscal Year, Options to
In connection with his or her initial service, a Service Provider may be
granted Options to purchase up to an additional 1,000,000 Shares, which will not count against the limit set forth in
Section 6(a)(ii)(1) above.
(2)
(3)
with any change in the Company’s capitalization as described in Section 14.
The foregoing limitations will be adjusted proportionately in connection
If an Option is cancelled in the same Fiscal Year in which it was granted
(other than in connection with a transaction described in Section 14), the cancelled Option will be counted against the
limits set forth in subsections (1) and (2) above.
(4)
(b)
Term of Option. The term of each Option will be stated in the Award Agreement, but in no
event will the term be greater than seven (7) years from the date of grant. In the case of an Incentive Stock Option, the
term will be seven (7) years from the date of grant or such shorter term as may be provided in the Award Agreement.
Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option
is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from
the date of grant or such shorter term as may be provided in the Award Agreement.
(c)
Option Exercise Price and Consideration.
exercise of an Option will be determined by the Administrator, subject to the following:
(i)
Exercise Price. The per share exercise price for the Shares to be issued pursuant to
(1)
In the case of an Incentive Stock Option
granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of
the Company or any Parent or Subsidiary, the per Share exercise price will be no less than 110% of the Fair Market
Value per Share on the date of grant.
a)
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granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price will be no less than 100% of the Fair Market Value per
Share on the date of grant.
b)
Notwithstanding the foregoing, Incentive Stock Options may be
granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant
pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.
c)
(2)
In the case of a Nonstatutory Stock Option, the per Share exercise price
will be determined by the Administrator, but the per Share exercise price will be no less than 100% of Fair Market
Value per Share on the date of grant. In the case of a Nonstatutory Stock Option intended to qualify as “performance-
based compensation” within the meaning of Section 162(m) of the Code, the per Share exercise price will be no less
than 100% of the Fair Market Value per Share on the date of grant. Notwithstanding the foregoing, Nonstatutory Stock
Options may be grated with a per Share exercise price of less than 100% of the Fair Market Value per Share on the
date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.
Waiting Period and Exercise Dates. At the time an Option is granted, the
Administrator will fix the period within which the Option may be exercised and will determine any conditions that
must be satisfied before the Option may be exercised.
(ii)
(iii)
Form of Consideration. The Administrator will determine the acceptable form(s) of
consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the
Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist
entirely of: (1) cash; (2) check; (3) promissory note; (4) other Shares, provided that such Shares have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option will be
exercised and provided that accepting such Shares, in the sole discretion of the Administrator, shall not result in any
adverse accounting consequences to the Company; (5) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; (6) a reduction in the amount of any
Company liability to the Participant, including any liability attributable to the Participant’s participation in any
Company-sponsored deferred compensation program or arrangement; (7) such other consideration and method of
payment for the issuance of Shares to the extent permitted by Applicable Laws; or (8) any combination of the
foregoing methods of payment.
(d)
Exercise of Option.
Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder
will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the
Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.
(i)
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An Option will be deemed exercised when the Company receives: (i) written or electronic
notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise the Option, and (ii)
full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the
Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the
Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder will exist with respect to the Shares, notwithstanding the
exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 14 of the Plan.
Exercising an Option in any manner will decrease the number of Shares thereafter available,
both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(ii)
Termination of Relationship as a Service Provider. If a Participant ceases to be a
Service Provider, other than upon the Participant’s termination as the result of the Participant’s death or Disability, the
Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the
extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such
Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option
will remain exercisable for three (3) months following the Participant’s termination. Unless otherwise provided by the
Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares
covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not
exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares
covered by such Option will revert to the Plan.
(iii)
Disability of Participant. If a Participant ceases to be a Service Provider as a result
of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified
in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the
Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’s termination.
Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination
the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the
Shares covered by such Option will revert to the Plan.
(iv)
Death of Participant. If a Participant dies while a Service Provider, the Option may
be exercised following the Participant’s death within such period of time as is specified in the Award Agreement to the
extent that the Option is vested on the date of death (but in no event may the option be exercised later than the
expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s designated beneficiary,
provided such beneficiary has been designated prior to Participant’s death in a form acceptable to the Administrator. If
no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal
representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the
Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the
Award Agreement, the Option will remain exercisable for twelve (12) months following Participant’s death. Unless
otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the Option is not so
exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert
to the Plan.
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7.
Restricted Stock.
Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the
Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such
amounts as the Administrator, in its sole discretion, will determine.
(a)
(b)
Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an
Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and
conditions as the Administrator, in its sole discretion, will determine. Notwithstanding the foregoing sentence, for
Restricted Stock intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of
the Code, during any Fiscal Year no Participant will receive more than an aggregate of 300,000 Shares of Restricted
Stock. Notwithstanding the foregoing limitation, in connection with his or her initial service as an Employee, for
Restricted Stock intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of
the Code, an Employee may be granted an aggregate of up to an additional 300,000 Shares of Restricted Stock. Unless
the Administrator determines otherwise, Shares of Restricted Stock will be held by the Company as escrow agent until
the restrictions on such Shares have lapsed.
Transferability. Except as provided in this Section 7, Shares of Restricted Stock may not be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction.
(c)
restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
(d)
Other Restrictions. The Administrator, in its sole discretion, may impose such other
(e)
Removal of Restrictions. Except as otherwise provided in this Section 7, Shares of
Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as
practicable after the last day of the Period of Restriction. The Administrator, in its discretion, may accelerate the time
at which any restrictions will lapse or be removed.
Voting Rights. During the Period of Restriction, Service Providers holding Shares of
Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the
Administrator determines otherwise.
(f)
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(g)
Dividends and Other Distributions. During the Period of Restriction, Service Providers
holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to
such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in
Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted
Stock with respect to which they were paid.
Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the
Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for
grant under the Plan.
(h)
(i)
Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted
Stock as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion,
may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the
Administrator on or before the Determination Date. In granting Restricted Stock which is intended to qualify under
Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be
necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining
the Performance Goals).
8.
Restricted Stock Units.
(a)
Grant. Restricted Stock Units may be granted at any time and from time to time as
determined by the Administrator. Each Restricted Stock Unit grant will be evidenced by an Award Agreement that will
specify such other terms and conditions as the Administrator, in its sole discretion, will determine, including all terms,
conditions, and restrictions related to the grant, the number of Restricted Stock Units and the form of payout, which,
subject to Section 8(d), may be left to the discretion of the Administrator. Notwithstanding anything to the contrary in
this subsection (a), for Restricted Stock Units intended to qualify as “performance-based compensation” within the
meaning of Section 162(m) of the Code, during any Fiscal Year of the Company, no Participant will receive more than
an aggregate of 300,000 Restricted Stock Units. Notwithstanding the limitation in the previous sentence, for Restricted
Stock Units intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the
Code, in connection with his or her initial service as an Employee, an Employee may be granted an aggregate of up to
an additional 300,000 Restricted Stock Units.
(b)
Vesting Criteria and Other Terms. The Administrator will set vesting criteria in its
discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock
Units that will be paid out to the Participant. After the grant of Restricted Stock Units, the Administrator, in its sole
discretion, may reduce or waive any restrictions for such Restricted Stock Units. Each Award of Restricted Stock Units
will be evidenced by an Award Agreement that will specify the vesting criteria, and such other terms and conditions as
the Administrator, in its sole discretion will determine. The Administrator, in its discretion, may accelerate the time at
which any restrictions will lapse or be removed.
will be entitled to receive a payout as specified in the Award Agreement.
(c)
Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant
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(d)
Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as
soon as practicable after the date(s) set forth in the Award Agreement. The Administrator, in its sole discretion, may
pay earned Restricted Stock Units in cash, Shares, or a combination thereof. Shares represented by Restricted Stock
Units that are fully paid in cash again will be available for grant under the Plan.
(e)
Units will be forfeited to the Company.
Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock
(f)
Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted
Stock Units as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its
discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set
by the Administrator on or before the Determination Date. In granting Restricted Stock Units which are intended to
qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to
time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in
determining the Performance Goals).
9.
Stock Appreciation Rights.
Grant of SARs. Subject to the terms and conditions of the Plan, a SAR may be granted to
Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.
The Administrator may grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination thereof.
(a)
(b)
Number of Shares. The Administrator will have complete discretion to determine the
number of SARs granted to any Service Provider; provided, however, no Service Provider will be granted, in any
Fiscal Year, SARs covering more than 1,000,000 Shares. Notwithstanding the limitation in the previous sentence, in
connection with his or her initial service a Service Provider may be granted SARs covering up to an additional
1,000,000 Shares. The foregoing limitations will be adjusted proportionately in connection with any change in the
Company’s capitalization as described in Section 14. In addition, if a SAR is cancelled in the same Fiscal Year in
which it was granted (other than in connection with a transaction described in Section 14), the cancelled SAR will be
counted against the numerical share limits set forth above.
(c)
Exercise Price and Other Terms. The Administrator, subject to the provisions of the Plan,
will have complete discretion to determine the terms and conditions of SARs granted under the Plan; provided,
however, that the per Share exercise price of a SAR will be no less than 100% of the Fair Market Value per Share on
the date of grant. However, the exercise price of Tandem or Affiliated SARs will equal the exercise price of the related
Option.
(d)
Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares
subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A
Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. With
respect to a Tandem SAR granted in connection with an Incentive Stock Option: (a) the Tandem SAR will expire no
later than the expiration of the underlying Incentive Stock Option; (b) the value of the payout with respect to the
Tandem SAR will be for no more than one hundred percent (100%) of the difference between the exercise price of the
underlying Incentive Stock Option and the Fair Market Value of the Shares subject to the underlying Incentive Stock
Option at the time the Tandem SAR is exercised; and (c) the Tandem SAR will be exercisable only when the Fair
Market Value of the Shares subject to the Incentive Stock Option exceeds the Exercise Price of the Incentive Stock
Option.
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Exercise of Affiliated SARs. An Affiliated SAR will be deemed to be exercised upon the
exercise of the related Option. The deemed exercise of an Affiliated SAR will not necessitate a reduction in the number
of Shares subject to the related Option.
(e)
conditions as the Administrator, in its sole discretion, will determine.
(f)
Exercise of Freestanding SARs. Freestanding SARs will be exercisable on such terms and
SAR Agreement. Each SAR grant will be evidenced by an Award Agreement that will
specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the
Administrator, in its sole discretion, will determine.
(g)
(h)
Maximum Term/Expiration of SARs. An SAR granted under the Plan will expire upon the
date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the
foregoing provisions of this Section 9, the rules of Section 6(b) relating to the maximum term, (i.e., that an SAR may
not have a term longer than seven (7) years fom the date of grant) and Section 6(d) relating to post-termination exercise
also will apply to SARs.
payment from the Company in an amount determined by multiplying:
(i)
Payment of SAR Amount. Upon exercise of an SAR, a Participant will be entitled to receive
(i)
over the exercise price; times
The difference between the Fair Market Value of a Share on the date of exercise
(ii)
The number of Shares with respect to which the SAR is exercised.
At the discretion of the Administrator, the payment upon SAR exercise may be in cash, in Shares of
equivalent value, or in some combination thereof.
10.
Performance Units and Performance Shares.
(a)
Grant of Performance Units/Shares. Performance Units and Performance Shares may be
granted to Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole
discretion. The Administrator will have complete discretion in determining the number of Performance Units and
Performance Shares granted to each Participant provided that during any Fiscal Year, for Performance Units or
Performance Shares intended to qualify as “performance-based compensation” within the meaning of Section 162(m)
of the Code, (i) no Participant will receive Performance Units having an initial value greater than $2,000,000, and (ii)
no Participant will receive more than 300,000 Performance Shares. Notwithstanding the foregoing limitation, for
Performance Shares intended to qualify as “performance-based compensation” within the meaning of Section 162(m)
of the Code, in connection with his or her initial service, a Service Provider may be granted up to an additional 300,000
Performance Shares.
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Value of Performance Units/Shares. Each Performance Unit will have an initial value that is
established by the Administrator on or before the date of grant. Each Performance Share will have an initial value equal
to the Fair Market Value of a Share on the date of grant.
(b)
(c)
Performance Objectives and Other Terms. The Administrator will set performance
objectives or other vesting provisions in its discretion which, depending on the extent to which they are met, will
determine the number or value of Performance Units/Shares that will be paid out to the Service Providers. Each Award
of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period, and
such other terms and conditions as the Administrator, in its sole discretion, will determine. The Administrator may set
vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not
limited to, continued employment), or any other basis determined by the Administrator in its discretion.
(d)
Earning of Performance Units/Shares. After the applicable Performance Period has ended,
the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares
earned by the Participant over the Performance Period, to be determined as a function of the extent to which the
corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance
Unit/Share, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting
provisions for such Performance Unit/Share.
(e)
Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance
Units/Shares will be made as soon as practicable after the expiration of the applicable Performance Period. The
Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which
have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the
applicable Performance Period) or in a combination thereof.
Cancellation of Performance Units/Shares. On the date set forth in the Award Agreement,
all unearned or unvested Performance Units/Shares will be forfeited to the Company, and again will be available for
grant under the Plan.
(f)
(g)
Section 162(m) Performance Restrictions. For purposes of qualifying grants of Performance
Units/Shares as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its
discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set
by the Administrator on or before the Determination Date. In granting Performance Units/Shares which are intended to
qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to
time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in
determining the Performance Goals).
11.
Formula Option Grants to Outside Directors.
nondiscretionary and will be made in accordance with the following provisions:
All grants of Options to Outside Directors pursuant to this Section will be automatic and
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Options and, except as otherwise provided herein, will be subject to the other terms and conditions of the Plan.
(a)
Type of Option. All Options granted pursuant to this Section will be Nonstatutory Stock
No Discretion. No person will have any discretion to select which Outside Directors will be
granted Options under this Section or to determine the number of Shares to be covered by such Options (except as
provided in Sections 10(f) and 13).
(b)
(c)
First Option. Each person who first becomes an Outside Director following the Registration
Date will be automatically granted an Option to purchase 10,000 Shares (the “First Option”) on or about the date on
which such person first becomes an Outside Director, whether through election by the stockholders of the Company or
appointment by the Board to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside
Director, but who remains a Director, will not receive a First Option.
Subsequent Option. Each Outside Director will be automatically granted an Option to
purchase 5,000 Shares (a “Subsequent Option”) on each date of the annual meeting of the stockholders of the
Company, if as of such date, he or she will have served on the Board for at least the preceding six (6) months.
(d)
(e)
Terms. The terms of each Option granted pursuant to this Section will be as follows:
(i)
The term of the Option will be seven (7) years.
the date of grant of the Option.
(ii)
The exercise price per Share will be 100% of the Fair Market Value per Share on
Subject to Section 14, the First Option will vest and become exercisable as to 1/3rd
of the Shares subject to such First Option on each anniversary of its date of grant, provided that the Participant
continues to serve as a Director through each such date.
(iii)
Subject to Section 14, the Subsequent Option will vest and become exercisable as
to 100% of the Shares subject to such Option on the third anniversary of its date of grant, provided that the Participant
continues to serve as a Director through such date.
(iv)
(f)
Amendment. The Administrator in its discretion may change and otherwise revise the terms
of Awards granted under this Section 11, including, without limitation, the number of Shares and exercise prices
thereof or the type of Award to be granted, with respect to Awards granted on or after the date the Administrator
determines to make any such change or revision.
12.
Performance-Based Compensation Under Code Section 162(m).
(a)
General. If the Administrator, in its discretion, decides to grant an Award intended to
qualify as “performance-based compensation” under Section 162(m) of the Code, the provisions of this Section 12 will
control over any contrary provision in the Plan; provided, however, that the Administrator may in its discretion grant
Awards that are not intended to qualify as “performance-based compensation” under Section 162(m) of the Code to
such Participants that are based on Performance Goals or other specific criteria or goals but that do not satisfy the
requirements of this Section 12.
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(b)
Performance Goals. The granting and/or vesting of Awards of Restricted Stock, Restricted
Stock Units, Performance Shares and Performance Units and other incentives under the Plan may be made subject to
the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of
the Code and may provide for a targeted level or levels of achievement (“Performance Goals”) including: (i) cash
position, (ii) earnings per Share, (iii) net income, (iv) operating cash flow, (v) operating income, (vi) operating
expenses, (vii) product revenues, (viii) profit after-tax, (ix) revenue, (x) revenue growth, and (xii) total stockholder
return. Prior to the Determination Date, the Administrator will determine whether any significant element(s) will be
included in or excluded from the calculation of any Performance Goal with respect to any Participant. Any
Performance Goals may be used to measure the performance of the Company as a whole or a business unit of the
Company and may be measured relative to a peer group or index. With respect to any Award, Performance Goals may
be used alone or in combination. The Performance Goals may differ from Participant to Participant and from Award to
Award. Prior to the Determination Date, the Administrator will determine whether any significant element(s) will be
included in or excluded from the calculation of any Performance Goal with respect to any Participant.
(c)
Procedures. To the extent necessary to comply with the performance-based compensation
provisions of Section 162(m) of the Code, with respect to any Award granted subject to Performance Goals, within the
first twenty-five percent (25%) of the Performance Period, but in no event more than ninety (90) days following the
commencement of any Performance Period (or such other time as may be required or permitted by Code Section
162(m)), the Administrator will, in writing, (i) designate one or more Participants to whom an Award will be made, (ii)
select the Performance Goals applicable to the Performance Period, (iii) establish the Performance Goals, and amounts
of such Awards, as applicable, which may be earned for such Performance Period, and (iv) specify the relationship
between Performance Goals and the amounts of such Awards, as applicable, to be earned by each Participant for such
Performance Period. Following the completion of each Performance Period, the Administrator will certify in writing
whether the applicable Performance Goals have been achieved for such Performance Period. In determining the
amounts earned by a Participant, the Administrator will have the right to reduce or eliminate (but not to increase) the
amount payable at a given level of performance to take into account additional factors that the Administrator may deem
relevant to the assessment of individual or corporate performance for the Performance Period. A Participant will be
eligible to receive payment pursuant to an Award for a Performance Period only if the Performance Goals for such
period are achieved.
(d)
Additional Limitations. Notwithstanding any other provision of the Plan, any Award which
is granted to a Participant and is intended to constitute qualified performance based compensation under Code Section
162(m) will be subject to any additional limitations set forth in the Code (including any amendment to Section 162(m))
or any regulations and ruling issued thereunder that are requirements for qualification as qualified performance-based
compensation as described in Section 162(m) of the Code, and the Plan will be deemed amended to the extent
necessary to conform to such requirements.
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13.
Leaves of Absence. Unless the Administrator provides otherwise, vesting of Awards granted
hereunder will be suspended during any unpaid leave of absence. A Service Provider will not cease to be an Employee
in the case of (i) any leave of absence approved by the Company, or (ii) transfers between locations of the Company or
between the Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may
exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then six (6)
months and one day following the commencement of such leave any Incentive Stock Option held by the Participant
will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock
Option.
14.
Transferability of Awards. Unless determined otherwise by the Administrator, an Award may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the
Administrator makes an Award transferable, such Award will contain such additional terms and conditions as the
Administrator deems appropriate.
15.
Adjustments; Dissolution or Liquidation; Merger or Change in Control.
(a)
Adjustments. In the event that any dividend or other distribution (whether in the form of
cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the
Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in
order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the
Plan, shall appropriately adjust the number and class of Shares that may be delivered under the Plan and/or the number,
class, and price of Shares covered by each outstanding Award, and the numerical Share limits set forth in Sections 3, 6,
7, 8, 9, and 10.
(b)
Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the
Company, the Administrator will notify each Participant as soon as practicable prior to the effective date of such
proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to
the consummation of such proposed action.
(c)
Change in Control. In the event of a Change in Control, each outstanding Award will be
assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to assume or substitute for the Award, the
Participant will fully vest in and have the right to exercise all of his or her outstanding Options and Stock Appreciation
Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on
Restricted Stock shall lapse, and, with respect to Restricted Stock Units, Performance Shares and Performance Units,
all performance goals or other vesting criteria will be deemed achieved at target levels and all other terms and
conditions met. In addition, if an Option or Stock Appreciation Right is not assumed or substituted for in the event of a
Change in Control, the Administrator will notify the Participant in writing or electronically that the Option or Stock
Appreciation Right will be fully vested and exercisable for a period of time determined by the Administrator in its sole
discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.
-66-
With respect to Awards granted to an Outside Director that are assumed or substituted for, if on the
date of or following such assumption or substitution the Participant’s status as a Director or a director of the successor
corporation, as applicable, is terminated other than upon a voluntary resignation by the Participant not at the request of
the successor, then the Participant will fully vest in and have the right to exercise Options and/or Stock Appreciation
Rights as to all of the Shares subject to the Award, including Shares as to which such Awards would not otherwise be
vested or exercisable, all restrictions on Restricted Stock shall lapse, and, with respect to Restricted Stock Units,
Performance Shares and Performance Units, all performance goals or other vesting criteria will be deemed achieved at
target levels and all other terms and conditions met.
For the purposes of this subsection (c), an Award will be considered assumed if, following the
Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award
immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) or,
in the case of a Stock Appreciation Right upon the exercise of which the Administrator determines to pay cash or a
Restricted Stock Unit, Performance Share or Performance Unit which the Administrator can determine to pay in cash,
the fair market value of the consideration received in the merger or Change in Control by holders of Common Stock for
each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such
consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon
the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, Performance
Share or Performance Unit, for each Share subject to such Award (or in the case of Performance Units, the number of
implied shares determined by dividing the value of the Performance Units by the per share consideration received by
holders of Common Stock in the Change in Control), to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in
Control.
Notwithstanding anything in this Section 15(c) to the contrary, an Award that vests, is earned or
paid-out upon the satisfaction of one or more Performance Goals will not be considered assumed if the Company or its
successor modifies any of such Performance Goals without the Participant’s consent; provided, however, a
modification to such Performance Goals only to reflect the successor corporation’s post-Change in Control corporate
structure will not be deemed to invalidate an otherwise valid Award assumption.
16.
Tax Withholding
(a)
Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award
(or exercise thereof), the Company will have the power and the right to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes (including the
Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof).
(b)
Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such
procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in
whole or in part by (without limitation) (i) paying cash, (ii) electing to have the Company withhold otherwise
deliverable cash or Shares having a Fair Market Value equal to the minimum amount required to be withheld, (iii)
delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be
withheld, or (iv) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as
the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the amount
required to be withheld. The amount of the withholding requirement will be deemed to include any amount which the
Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using
the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award
on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be
withheld or delivered will be determined as of the date that the taxes are required to be withheld.
-67-
17.
No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant
any right with respect to continuing the Participant’s relationship as a Service Provider with the Company, nor will
they interfere in any way with the Participant’s right or the Company’s right to terminate such relationship at any time,
with or without cause, to the extent permitted by Applicable Laws.
18.
Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the
Administrator makes the determination granting such Award, or such later date as is determined by the Administrator.
Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.
19.
Term of Plan. Subject to Section 23 of the Plan, the Plan will become effective upon its adoption by
the Board. It will continue in effect for a term of ten (10) years unless terminated earlier under Section 20 of the Plan.
20.
Amendment and Termination of the Plan.
terminate the Plan.
(a)
Amendment and Termination. The Administrator may at any time amend, alter, suspend or
amendment to the extent necessary and desirable to comply with Applicable Laws.
(b)
Stockholder Approval. The Company will obtain stockholder approval of any Plan
(c)
Effect of Amendment or Termination. No amendment, alteration, suspension or termination
of the Plan will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the
Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the
Plan will not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards
granted under the Plan prior to the date of such termination.
21.
Conditions Upon Issuance of Shares.
Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the
exercise of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be
further subject to the approval of counsel for the Company with respect to such compliance.
(a)
-68-
(b)
Investment Representations. As a condition to the exercise of an Award, the Company may
require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
22.
Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance
and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority will not have been obtained.
23.
Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company
within twelve (12) months after the date the Plan is adopted. Such stockholder approval will be obtained in the manner
and to the degree required under Applicable Laws.
-69-
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CUTERA, INC.
2012 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Cutera, Inc., a Delaware corporation, hereby acknowledges receipt of the
Notice of Annual Meeting of Stockholders and Proxy Statement each dated April 30, 2012 and hereby appoints Kevin
P. Connors (our President and Chief Executive Officer) and Ronald J. Santilli (our Chief Financial Officer), each as
proxy and attorney-in-fact, with full power of substitution, on behalf and in the name of the undersigned to represent
the undersigned at the 2012 Annual Meeting of Stockholders of Cutera, Inc. to be held on June 13, 2012 at 10:00 a.m.,
local time, at Cutera’s offices located at 3240 Bayshore Blvd., Brisbane, California 94005-1021, and at any
postponement or adjournment thereof, and to vote all shares of common stock which the undersigned would be entitled
to vote if then and there personally present, on the matters set forth below:
SEE REVERSE SIDE
FOLD AND DETACH HERE
Please
mark your
votes as
indicated
1.Election of Directors
FOR WITHHOLD 2. A non-binding advisory vote
on the approval of executive
compensation.
FOR
AGAINST ABSTAIN
3. Ratify the appointment of
Ernst & Young LLP as the
Independent Registered
Public Accounting Firm of
the Company for the fiscal
year ending December 31,
2012.
4. Adoption of our 2004 Equity
Incentive Plan (as amended).
FOR
AGAINST ABSTAIN
FOR
AGAINST ABSTAIN
CLASS II NOMINEES:
Timothy J. O’Shea
David B. Apfelberg
THE STOCKHOLDER
MAY WITHHOLD
AUTHORITY TO VOTE
FOR ANY NOMINEE BY
STRIKING OUT THE
INDIVIDUAL’S NAME
ABOVE
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED AS FOLLOWS: (1) FOR THE ELECTION OF THE NOMINATED CLASS II
DIRECTORS; (2) FOR THE APPROVAL, BY NON-BINDING VOTE, OF EXECUTIVE COMPENSATION;
(3) FOR THE ADOPTION OF OUR 2004 EQUITY INCENTIVE PLAN (AS AMENDED); (4) FOR THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM; AND (5) AS THE PROXY HOLDERS DEEM ADVISABLE
ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. IF THE STOCK IS REGISTERED IN THE
NAME OF TWO OR MORE PERSONS, EACH SHOULD SIGN. EXECUTORS, ADMINISTRATORS,
TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT SHOULD ADD THEIR TITLES. IF SIGNER IS A
CORPORATION, PLEASE GIVE FULL CORPORATE NAME AND HAVE A DULY AUTHORIZED OFFICER
SIGN, STATING TITLE. IF SIGNER IS A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
PLEASE SIGN, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE,
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
SIGNATURE(S)
SIGNATURE(S)
DATE:
NOTE: This Proxy should be marked, signed by the stockholder(s) exactly as his or her name appears hereon, and
returned promptly in the enclosed envelope. Persons signing in fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.
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, 2011
Commission file number: 000-50644
Delaware
(State or other jurisdiction of incorporation or organization)
77-0492262
(I.R.S. Employer Identification Number)
Cutera, Inc.
(Exact name of registrant as specified in its charter)
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
Common Stock, $0.001 par value per share
Name of Each Exchange on Which Registered
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
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
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 the definition
of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated
filer
Accelerated
filer
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 Act). Yes No
The aggregate market value of the registrant’s common stock, held by non-affiliates of the registrant as of June 30, 2011 (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
Select Market on that date, was approximately $92 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, 2012 was 13,954,178.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2012 Annual Meeting of
Stockholders.
TABLE OF CONTENTS
Page
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
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
17
32
32
32
32
32
35
36
52
53
84
84
85
86
86
86
86
86
87
i
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 light-based aesthetics systems for practitioners
worldwide. We offer easy-to-use products based on six platforms—CoolGlide®, Xeo®, Solera®, GenesisPlusTM, Excel
VTM, and myQTM — each of which enable physicians and other qualified practitioners to perform safe and effective
aesthetic procedures for their customers.
● CoolGlide- In March 2003, our first product platform, CoolGlide, was launched. This platform 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 the following
applications that we offer: remove unwanted hair, treat vascular lesions and rejuvenate the skin by
treating discoloration, improving texture, reducing pore size and treating fine lines and laxity. This
product platform represents the largest contributor to our Product revenue.
● Solera- In 2004, we introduced the 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.
● GenesisPlus- In 2010, we introduced the GenesisPlus platform, which is a dedicated laser based system
for performing skin rejuvenation procedures and for onychomycosis, or toenail fungus. This system has a
hand piece that includes real time temperature monitoring of the treatment area, as well as a non-contact
distance gauge using two aiming beams, for improving the clinical result of treatment. In addition, this
system can be used to treat patients with skin concerns such as fine wrinkles, diffuse redness, rosacea,
skin texture and pore size.
● Excel V- In February 2011, we introduced our Excel V platform, a high-performance, vascular platform
designed specifically for the core-market of Dermatologists and Plastic Surgeons. This platform provides
a combination of the 532 nm green laser with Cutera’s award winning 1064 nm Nd:YAG technology, to
provide a single, compact and efficient system that treats the entire range of cosmetic vascular conditions,
without the need for costly consumables.
● myQ- In October 2011, we announced a distribution agreement with Quanta System SpA ─ an Italian
Original Equipment Manufacturer (OEM) of laser technologies ─ to market and sell the myQ series of Q-
switched lasers in Japan. Q-switched lasers are designed to be used in a wide range of popular aesthetic
applications, including superficial and deep pigmented lesions (i.e., melasma), skin rejuvenation, laser
skin toning and tattoo removal.
Each of our laser and light-based platforms consists of one or more hand pieces and a console that incorporates a
universal graphic user interface, a laser or 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 practices and provides us with a source of recurring revenue.
In addition to systems and upgrades, we generate revenue from the sale of post warranty services, Titan hand piece
refills, and Dermal filler and cosmeceuticals.
1
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.
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 2011 there were over 12.2 million minimally-invasive aesthetic
procedures performed, a 6% increase over 2010 and a 123% 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 47 to 65 in 2011 ─
represented approximately 80 million people, or 26%, of the U.S. population in 2011. The size of this
aging segment, and its desire to retain a youthful appearance, has contributed to 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.
● Broader Base of Customers- Managed care and government payer reimbursement restrictions in the
United States, and similar payment related constraints outside the United States, may help motivate
qualified practitioners from differing 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 core users such as
dermatologists and plastic surgeons, many other non-core practitioners, such as gynecologists, family
practitioners, primary care physicians, physicians offering aesthetic treatments in non-medical offices,
and other qualified practitioners are offering 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 light-based
technologies to achieve similar therapeutic results. Some of these more common therapies and their limitations are
described below.
2
Hair Removal- Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis and laser and
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 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 approximately 355,000 sclerotherapy
procedures were performed in 2011.
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 light-based
treatments. With these treatments, patients hope to improve overall skin tone and texture, reduce pore size, tighten skin
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 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 2011, approximately 5.7 million injections of Botox and
1.9 million injections of collagen and other soft-tissue fillers were administered; and 1.1 million chemical peels and
900,000 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 however resolve over time,
and the risk of burning the treatment area.
Laser and 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 Light-Based Aesthetic Treatments
Laser and 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 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 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.
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Safe and effective laser and 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- the color of light, which impacts the effective depth and absorption of the energy delivered.
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 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, Solera, GenesisPlus, Excel V and myQ platforms provide the long-lasting benefits of laser
and 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 systems comprise of multi-applications that
enable practitioners to perform multiple aesthetic procedures using a single device. These procedures
include hair removal, vascular treatments and skin rejuvenation ─ including the treatment of
discoloration, laxity, fine lines, pore size 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.
● Technology and Design Leadership- We offer innovative laser and 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. Our Pearl and Pearl Fractional hand pieces, with proprietary YSGG technology,
represent the first application of the 2790 nm wavelength for minimally-invasive cosmetic dermatology.
Further, our GenesisPlus platform for performing skin rejuvenation procedures and toenail fungus has a
hand piece that includes real time temperature monitoring of the treatment area, as well as a non-contact
distance gauge using two aiming beams, for improving the clinical result of the treatment. Excel V is
a stand-alone, laser based product that combines a new high power green laser with Cutera’s award
winning Nd:YAG technology, to provide a system that treats the entire range of cosmetic vascular
conditions, without the need for costly consumables.
● Upgradeable Platform- We have designed some of our products to allow our customers to cost-
effectively upgrade to our multi-application systems (Solera and Xeo), which provide 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.
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● 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 (unsightly
small veins in the leg) and small facial veins; perform skin rejuvenation procedures for discoloration,
texture, pore size, fine lines, and laxity on any type of skin; and treat toenail fungus. 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 and Pearl Fractional hand pieces include 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 light-based aesthetic procedures, including the risk of burns, blistering and
skin discoloration.
Strategy
Our goal is to maintain and expand our position as a leading, worldwide, provider of energy-based aesthetic devices
and complementary aesthetic products by executing the following strategies:
●
● Continue to Expand our Product Offering- Though we believe that our current portfolio of products is
comprehensive, our research and development group has a pipeline of potential products under
development that we expect to commercialize in the future. In 2010 we launched GenesisPlus and in
2011, we launched Excel V. In addition to products in the laser and light-based aesthetic market, we are
expanding our product offering into other complementary aesthetic applications, such as dermal fillers
and cosmeceuticals. Such products will allow us to leverage our existing customer call points, and
provide us with new customer call points, to generate additional revenue, which will enhance the
productivity of our distribution channels.
Increasing Revenue and Improving Productivity- We believe that the market for aesthetic systems will
continue to offer growth opportunities in the future. We continue to build brand-recognition, add
additional products to our international distribution channel and remain focused on enhancing our global
distribution network, all of which we expect will increase our revenue. In addition, we plan to grow our
U.S. revenue by leveraging 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 consultants serving physician offices throughout the United States.
Increasing Focus on Practitioners with Established Medical Offices- We believe there is growth
opportunity in targeting our products to a broad customer base. However, in response to the 2009 to 2010
global recession, we shifted our focus to the core practitioners and physicians with established medical
offices. We believe that our customer success is largely dependent upon having an existing medical
practice, in which our systems provide incremental revenue sources to augment their practice revenue. As
such, in 2011 we increased our focus on marketing our GenesisPlus product to podiatrists and our Excel
V to dermatologists and plastic surgeons.
●
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● Leveraging our Installed Base with Sales of Upgrades- In February 2011, we introduced the Excel V
and in 2010, we introduced GenesisPlus ─ both stand alone platforms. However in the past, we have
introduced new products that allowed 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 potentially 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
with their existing systems.
● Generating Revenue from Services and Refillable Hand Pieces- Our Titan hand pieces and pulsed-light
hand pieces are refillable products, which provide 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 through direct billing for parts and labor. These post-warranty services
serve as additional sources of recurring revenue.
Products
Our CoolGlide, Xeo, Solera, GenesisPlus, Excel V and myQ platforms allow for the delivery of multiple laser and
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 applications that were included in the
product in the years noted.
Applications:
Products:
System
Platforms:
CoolGlide . . . . . . CV
Year:
2000
2001
Excel
2002
Vantage
Xeo: . . . . . . . . . . . Nd:YAG
2003
2003
OPS600
2004
LP560
2004
Titan S
2005
ProWave 770
2005
AcuTip 500
2006
Titan V/XL
2006
LimeLight
Pearl
2007
Pearl Fractional 2008
2004
2005
2005
2005
2005
2006
2006
2010
2011
2011
ProWave 770
OPS 600
LP560
AcuTip 500
Titan V/XL
LimeLight
GenesisPlus . . . .
Excel V . . . . . . . .
myQ . . . . . . . . . . .
Solera . . . . . . . . . Titan S
Hair
Removal:
Vascular
Lesions:
Dyschromia:
Skin Rejuvenation
Texture,
Lines and
Wrinkles:
Skin
Laxity:
Melasma
& Tattoo
Removal:
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Energy
Source:
a
a
a
a
b
b
c
b
b
c
b
d
d
c
b
b
b
b
c
b
a
e
e
Energy Source: a. 1064nm Nd:YAG laser; b. flashlamp; c. Infrared laser; d. 2790 nm YSGG laser; e. combined
frequency 532 nm and 1064 nm Nd:YAG laser
Each of our products consists of a control console and one or more hand pieces, depending on the model.
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Control Console
Our control console includes a universal graphic user interface, control system software and high voltage electronics.
All CoolGlide systems, GenesisPlus, Excel V and some models of the Xeo platform, include our laser module which
consists of electronics, a visible aiming beam, a focusing lens, and an Nd:YAG and/or flashlamp 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 pieces 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 delivered during the treatment.
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.
Excel V Hand Piece- The Excel V system introduced in February 2011 delivers 1064 nm and 532 nm laser energy to
the treatment area for vascular treatments. The Excel V system includes two hand pieces, both consisting of an energy-
delivery component, consisting of an optical fiber and lens. One hand piece includes a sapphire window cooling plate
with temperature monitoring. The second hand piece does not have a cooling plate and includes a non-contact
temperature sensor to monitor the treatment area temperature. In addition, this second hand piece includes two aiming
beams that facilitate consistent treatments by maintaining the correct distance of the hand piece to the skin. Both hand
pieces offer a spot size range from 1.5 to 12 mm in 0.1 mm increments. Each hand piece is capable of delivering either
the 1064 nm or 532 nm laser energy.
GenesisPlus Hand Piece- Our GenesisPlus system launched in 2010 delivers 1064 nm laser energy to the treatment
area for toenail fungus and for skin rejuvenation procedures to treat skin texture and fine lines, and reduce pore size.
This 1064nm Nd:YAG hand piece consists of an energy-delivery component, consisting of an optical fiber and lens but
is lighter since it does not include a copper cooling plate. The hand piece does include a non-contact temperature
sensor to monitor the treatment area temperature. In addition, the hand piece includes two aiming beams that facilitate
consistent treatments by maintaining the correct distance of the hand piece to the skin. This hand piece offers a single 5
mm spot size.
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Pulsed Light Hand Piece- 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 Piece- 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.
Pearl Fractional Hand Piece- The Pearl Fractional hand piece, introduced in 2008, also uses proprietary YSGG
technology and is designed to treat wrinkles and deep dermal imperfections (although it is cleared in the United States
by the FDA only for skin resurfacing and coagulation). This hand piece penetrates the deep dermis producing a series
of microcolumns across the skin, which can result in the removal of damaged tissue and the production of new
collagen. The Pearl Fractional 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.
Upgrades
Our Solera and Xeo platforms are multi-application products that 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, customers will receive fully-refurbished systems before sending their prior
systems back to our headquarters. When customers wish to upgrade from the CoolGlide platform to either a Xeo or a
Solera, we provide them with a trade-in value for their CoolGlide and upgrade them to the multi-application platform
with the desired applications.
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Service
We offer post-warranty services to our customers either through extended service contracts ─ that cover preventive
maintenance and/or replacement parts and labor ─ as well as direct billing for detachable hand piece replacements,
parts and labor. These post-warranty services serve as additional sources of recurring revenue from our installed base.
Titan Hand Piece Refills
Each Titan hand piece is a refillable product, which provides us with a source of recurring revenue from our existing
customers.
Fillers and Cosmeceuticals
We distribute Merz’s Radiesse® dermal filler product and Obagi Medical Product, Inc.’s (or Obagi) prescription-
based, topical skin health systems (or Cosmeceuticals) to physicians in the Japanese market.
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 energy-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 CoolGlide and Xeo 1064nm Nd:YAG hand piece’s
adjustable spot size of 3, 5, 7 or 10 millimeters, or the Excel V 1064 nm and 532 nm hand piece with adjustable spot
sizes from 1.5 to 12 mm, 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 Excel V hand piece the cooling can be performed pre, during and post
delivery of the laser pulse. 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.
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Skin Rejuvenation- Our Nd:YAG laser and 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 myQ Q-switched laser can be used for the treatment of superficial and deep pigmented
lesions (i.e., melasma), skin rejuvenations, laser skin toning and tattoo removal.
Texture; Lines and Wrinkles- 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 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.
When treating wrinkles and deep dermal imperfections with a Pearl Fractional 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 epidermis during the treatment. The energy delivered by the hand piece penetrates the deep dermis
producing a series of microcolumns across the skin, which can result in the removal of damaged tissue and the
production of new collagen. Treatment of the full face can usually be performed in less than an hour. Patients receive
on average between one and three treatments at monthly intervals.
Our CE Mark allows us to market Pearl Fractional in the European Union, Australia and certain other countries outside
the United States for the treatment of wrinkles and deep dermal imperfections. However, in the United States we have
a 510(k) clearance for only skin resurfacing and coagulation.
Toenail Fungus- In addition to performing skin rejuvenation, we have FDA, Health Canada and CE Mark approvals for
GenesisPlus that allows us to market it for onychomycosis (or toenail fungus). Tiny pulses of light from an Nd: YAG
laser pass through the toenail to the fungus underneath, which is irradiated without any damage to the surrounding nail
or skin. The GenesisPlus has two aiming beams that facilitate consistent treatments by maintaining the correct distance
of the hand piece to the skin. In addition, during the treatment an integrated sensor is used to actively monitor the
temperature of the treatment area.
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.
The 532 nm wavelength green laser option on the Excel V can also be used to treat pigmented lesions in substantially
the same way as described above with the pulsed light devices.
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.
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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 market 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.
Sales and Marketing
In the United States we market and sell our products primarily through a direct sales organization. Generally, each
direct sales employee is assigned a specific territory. As of December 31, 2011, we had a U.S. direct sales force of 22
employees. We internally manage our U.S. and Canadian sales organization as one North American sales region with
32 territories as of December 31, 2011. 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. Revenue from PSS was $1.6 million in 2011, $2.6 million in
2010, and $3.8 million in 2009.
International sales are generally made through a direct international sales force of 26 employees, as well as a
worldwide distributor network in over 35 countries as of December 31, 2011. As of December 31, 2011, we had direct
sales offices in Australia, Canada, France, Japan, Spain and the United Kingdom. Our international revenue as a
percentage of total revenue represented 61% in 2011, 64% in 2010 and 61% in 2009.
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 introduce 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 also
market to the non-core aesthetic practices consisting of gynecologists, primary care physicians, family practitioners,
physicians offering aesthetic treatments in non-medical offices, podiatrists 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, ongoing training and support, and distributing (in
Japan only) cosmeceutical and dermal filler products. 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. In addition, we offer clinical forums with recognized expert panelists
to promote advanced treatment techniques using our products to further enhance customer loyalty and uncover new
sales opportunities.
Competition
Our industry is subject to intense competition. Our products compete against conventional non-energy-based
treatments, such as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and sclerotherapy.
Our products also compete against laser and light-based products offered by public companies, such as Cynosure, Elen
(in Italy), Iridex (we acquired their aesthetic laser business in February 2012), Palomar, Solta and Syneron, as well as
private companies, including, Alma, Lumenis, Sciton and several other companies.
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Competition among providers of laser and other energy-based devices for the aesthetic market is characterized by
extensive research efforts and innovative technology. 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 energy-based and alternative technologies. Some of these
competitors have greater resources than we do or product applications for certain sub-markets in which we do not
participate. 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 for our products.
Research and Development
Our research and development group develops new products and applications and builds clinical support to address
unmet or underserved market needs. As of December 31, 2011, our research and development activities were
conducted by a staff of 28 employees with a broad base of experience in lasers, optoelectronics, software and other
fields. 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, to understand unmet
needs and emerging applications in aesthetic medicine. Research and development expenses were approximately $9.1
million in 2011, $7.0 million in 2010 and $6.8 million in 2009.
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, 2011, we had a 30-person global service department.
Internationally, we provide direct service support through our Australia, Canada, France, Japan and Spain offices, and
also through the network of distributors in over 35 countries and third-party service providers. We historically have
provided a standard one-year or two-year warranty coverage on our systems. We have a standard one-year warranty on
all systems. 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 consoles covers parts
and service for a standard period of one year. From time to time, we also have promotions whereby we include a post-
warranty service contract 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. 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. Our Titan hand pieces generally include a warranty for a set
number of shots instead of for a period of time. 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 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.
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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. We had an FDA audit of compliance with laser performance standards in 2010 and a full quality system
audit plus laser performance standard audit in August 2011. There were no significant findings as a result of these
audits 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 13485 certified.
Patents and Proprietary Technology
We rely on a combination of patent, copyright, trademark and trade secret laws, and non-disclosure, confidentiality and
invention assignment agreements to protect our intellectual property rights. As of December 31, 2011, we had 19
issued U.S. patents and 22 pending U.S. patent applications. Acutip 500, Cutera, CoolGlide, CoolGlide Excel,
Limelight, Pearl, Pearl Fractional, ProWave 770, Solera, Solera Titan, Titan and Xeo are only some of the trademarks
and/or service marks of Cutera in the U.S. and other countries. We have trademark rights to these names and others in
the United States and certain other countries. We intend to file for additional patents and trademarks to continue to
strengthen our intellectual property rights.
We license certain patents from Palomar and pay ongoing royalties based on sales of applicable hair-removal products.
The royalty rate on these products ranges from 3.75% to 7.50% of revenue. The patents are set to expire in February
2013 and February 2015. Our revenue from systems that do not include hair-removal capabilities (such as our Solera
Titan, Xeo SA, GenesisPlus and Excel V); and other revenue from service contracts, Titan refills, Fillers and
cosmeceuticals, are not subject to these royalties. In addition, in 2006 we capitalized $1.2 million as an intangible asset
representing the ongoing license for these patents, which is being amortized on a straight-line basis over their expected
useful life of 9-10 years. We also have a technology sublicense purchased in 2002, which is being amortized on a
straight-line basis over its expected useful life of 10 years.
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.
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;
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● Recordkeeping;
● Pre-market clearance or approval;
● Advertising and promotion;
● Production; and
● Product sales and distribution.
● Complaint Handling
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.
The following table details the indications for which we received a 510(k) clearance for our products 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- treatment of Onychomycosis for the clearance of nails. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pulsed-light technologies:
- treatment of pigmented lesions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- hair removal and vascular treatments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Date Received:
June 1999
March 2000
January 2001
June 2002
October 2002
April 2011
March 2003
March 2005
Infrared Titan technology for deep dermal heating for the temporary relief of minor muscle
and joint pain and for the temporary increase in local circulation where applied . . . . . . . . . . . . . .
February 2004
Solera tabletop console:
- for use with the Titan hand piece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- for use with our pulsed-light hand pieces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October 2004
January 2005
Pearl product for the treatment of wrinkles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 2007
Pearl Fractional product for skin resurfacing and coagulation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August 2008
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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 to date has required pre-market approval, although development of future devices or indications may 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 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.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
● Quality system egulations, 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 the promotion of products for un-cleared, unapproved or
“off-label” uses;
● 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.
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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 and the CDHS. The FDA and the CDHS 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 and CDHS.
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.
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.
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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, and in March
2006, March 2010, February 2011 and January 2012 we passed our ISO 13485 recertification audits.
Employees
As of December 31, 2011, we had 200 employees, compared to 187 employees as of December 31, 2010. Of the 200
employees at December 31, 2011, 78 were in sales and marketing, 43 in manufacturing operations, 30 in technical
service, 28 in research and development and 21 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 are
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
www.sec.gov. Such filings, as well as our charters for our Audit and Compensation Committees and our Code of
Ethics are available on our website at 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
We operate in a rapidly changing economic and technological environment that presents numerous risks, many of
which are driven by factors that we cannot control or predict. The following discussion, as well as our discussion in
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7), highlights some of
these risks. The risks described below are not exhaustive and you should carefully consider these risks and
uncertainties before investing in our securities.
In 2011, our U.S. revenue increased by approximately 21%, compared to the same period in 2010. However, in
fiscal year 2010 our U.S. revenue decreased by approximately 8% compared to the same period in 2009. Even
though our U.S. revenue has increased in 2011, it continues to be significantly below the pre-2009 levels. If our U.S.
revenue does not continue to improve, it could have a material adverse effect on our total revenue, profitability,
employee retention and stock price.
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In 2011, our U.S. revenue increased by approximately 21%, compared to the same period in 2010. Even though our
U.S. revenue has increased in 2011, it continues to be significantly below the pre-2009 levels due to several factors,
some of which are:
●
●
●
Our Product and Upgrade ASPs were lower than the pre-2009 levels as a result of customers purchasing fewer
applications for systems, lower pricing resulting from competitive discounting pressures and the impact of a
shift in our product mix towards lower priced systems.
Historically, we have introduced a new product every year since 2000, which typically resulted in increased
revenue. However, in 2009 and until August 2010, we did not have a new product. In August 2010, we
launched GenesisPlus and in February 2011, we launched Excel V. Even though we have introduced these
new products and experienced sales increases as a result, there can be no assurance that they will translate into
increased revenue in the long term in the U.S.
Although our U.S. Titan hand piece refill revenue increased by 19% for the year ended December 31, 2011,
compared to the same period in 2010, our U.S. Titan hand piece refill revenue was still lower than the levels
prior to the second quarter of 2010. That was due to a voluntary recall of certain Titan XL hand pieces in the
second quarter of 2010, whereby all customers that had a Titan XL hand piece subject to the recall were
provided with a fully refilled Titan XL hand piece. This delayed their purchase of a refill and resulted in a
decline of our Titan refill revenue.
If our U.S. revenue does not continue to improve, it could have a material adverse effect on our total revenue,
profitability, employee retention and stock price.
We rely heavily on our sales professionals to market and sell our products worldwide. If we are unable to hire,
effectively train, manage, improve the productivity of, and retain the sales professionals, our business will be
harmed, which would impair our future revenue and profitability.
Our success largely depends on our ability to hire, train, manage and improve the productivity levels of our sales
professionals worldwide. Because of our focus on the non-core market in the past, several of our sales professionals do
not have established relationships with core market physicians (Dermatologists and Plastic Surgeons) or where those
relationships exist, they are not very strong. In addition, we have lost some of our sales professionals in response to the
decline in their earnings resulting from the decreases in their commissions.
We have selectively hired new sales professionals and managers in key territories to fill vacant positions. For example,
in December 2010, Michael Poole joined us as Vice President of North American Sales, which allowed our previous
Vice President of North American Sales to return to Japan in an expanded role to lead our Pacific Rim operations.
Although Mr. Poole has over 17 years of broad sales experience and was employed by us from 2004 to 2008, Mr.
Poole has limited prior experience in managing a large sales force. We have been training our existing and recently
recruited sales professionals to better understand our product technology and how it can be positioned against our
competitors’ products. These initiatives are intended to improve the productivity of our sales professionals, our revenue
and profitability.
In the third quarter of 2011, our European-sourced direct and distributor revenue declined significantly, compared to
the same period in 2010. We have restructured our European sales team as well as our direct hub operation in
Switzerland and in December 2011, we engaged a distributor that was set up by some of our former sales employees.
In addition, we continue to hire additional sales personnel to manage our European business. These initiatives are
intended to improve our European-sourced revenue.
Measures we implement in an effort to retain, train and manage our sales professionals, strengthen their relationships
with core market physicians, and improve their productivity may not be successful and may instead contribute to
instability in our operations, additional departures from our sales organization, or further reduce our revenue and harm
our business.
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If our revenue does not continue to improve from the 2011 level, or if our cost of revenue and/ or operating
expenses increase by a greater percentage than our revenue, our gross margins and operating margins may be
adversely impacted, our loss from operations will increase, and our cash used in operating activities will increase,
which could reduce our assets and have a material adverse effect on our stock price.
Our gross margin in 2011 was 57%, compared to 57% in 2010 and 59% in 2009. Our gross margin is impacted by the
revenue that we generate and the costs incurred to generate the revenue. Our future revenue may be adversely affected
by a number of factors including, the competitive market environment in which we operate, which may result in a
decrease in the number of units sold, a decrease in the number of applications per system purchased by customers, a
decrease in the average selling prices achieved for our product sales, or a shift in our product mix towards products
with lower average selling prices. Our cost of revenue may also be adversely impacted by various factors such as
obsolescence of our inventory, increased expenses associated with repairing defective products covered by our
warranty program, utilization of our relatively fixed manufacturing costs, and a shift in our product mix towards
products that have a higher cost of manufacturing. We have also been investing significant resources in our research
and development activities and using cash in the process. We plan to continue making such investments in order to
bring new products to market.
If our revenue does not continue to improve from the 2011 level, or if our cost of revenue increases by a greater
percentage than our revenue, or if we are not able to reduce expenses in the event of a decline in revenue, we may
continue to generate losses from operations and use cash, which could reduce our assets and have a material adverse
effect on our operations and stock price.
Macroeconomic political and market conditions, and catastrophic events may adversely affect our business, results
of operations, financial condition and stock price.
Our business is influenced by a range of factors that are beyond our control, including:
●
●
●
●
●
●
General economic and business conditions;
The overall demand for our products by the core market specialties of dermatologists and plastic surgeons;
Governmental budgetary constraints or shifts in government spending priorities;
General political developments;
Natural disasters, such as the March 2011 earthquake and tsunami in Japan; and
Currency exchange rate fluctuations.
Macroeconomic developments like the 2009 - 2010 global recession and the debt crisis in the U.S. and certain
countries in the European Union, could negatively affect our business, operating results or financial condition which, in
turn, could adversely affect our stock price. A general weakening of, and related declining corporate confidence in, the
global economy or the curtailment in government or corporate spending could cause current or potential customers to
reduce their budgets or be unable to fund product or upgrade application purchases, which could cause customers to
delay, decrease or cancel purchases of our products and services or cause customers not to pay us or to delay paying us
for previously purchased products and services.
In addition, political unrest in regions like the Middle East, terrorist attacks around the globe and the potential for other
hostilities in various parts of the world, potential public health crises and natural disasters continue to contribute to a
climate of economic and political uncertainty that could adversely affect our results of operations and financial
condition, including our revenue growth and profitability. For example, the March 2011 earthquake and tsunami, and
other collateral events in Japan adversely affected the demand for our products and services in the Japanese market.
Macroeconomic declines, negative political developments, adverse market conditions and catastrophic events may
cause a decline in our revenue, negatively affect our operating results, adversely affect our cash flow and could result
in a decline in our stock price
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Healthcare reform legislation could adversely affect our future profitability and financial condition.
In December 2009, the President and members of Congress passed legislation relating to healthcare reform. Our
products are not reimbursed by insurance companies or federal or state governments and some of this legislation will,
therefore, not affect us. This legislation, however, does include several aspects that will apply to us, including a tax on
our U.S. revenue which is applicable to us beginning in 2013. While we are presently evaluating the full scope of how
this legislation will impact our operations, including how to administer this tax, we believe this will adversely affect
our future profitability and financial condition.
Demand for our products in any of our markets could be weakened by several factors, including:
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Our ability to develop and market our products to the core market specialties of dermatologists and plastic
surgeons;
Poor financial performance of market segments that try introducing aesthetic procedures to their businesses;
The inability to differentiate our products from those of our competitors;
Reduced patient demand for elective aesthetic procedures;
Failure to build and maintain relationships with opinion leaders within the various market segments;
An increase in malpractice lawsuits that result in higher insurance costs; and
The lack of credit financing for some of our potential customers.
If we do not achieve anticipated demand for our products, it could have a material adverse effect on our total revenue,
profitability, employee retention and stock price.
The aesthetic equipment market is characterized by rapid innovation. To compete effectively, we must develop
and/or acquire new products, market them successfully, and 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, wrinkles, skin texture, pore size and pigmented lesions. In 2011,
we launched our vascular laser product – Excel V – and began distribution of a Q-switched laser in Japan that Cutera is
sourcing from a third party OEM for superficial and deep pigmented lesions (i.e., melasma), skin rejuvenation, laser
skin toning and tattoo removal. Currently, these applications represent the majority of offered laser and light-based
aesthetic procedures. Since the first quarter of 2010, we have been distributing cosmeceutical products and dermal
fillers in the Japanese market. To grow in the future, we must continue to develop and acquire new and innovative
aesthetic products and applications, identify new markets, and successfully launch the newly acquired or developed
product offerings.
To successfully expand our product offerings, we must, among other things:
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Develop and acquire new products that either add to or significantly improve our current product offerings;
Convince our existing and prospective customers that our product offerings would be an attractive revenue-
generating addition to their practice;
Sell our product offerings 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.
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Historically, product introductions have been a significant component of our financial performance. To be successful in
the aesthetics industry, we need to continue to innovate. Our business strategy has therefore been based, in part, on our
expectation that we will continue to increase our product offerings. We need to continue to devote substantial research
and development resources to make new product introductions, which can be costly and time consuming to our
organization.
We also believe that, to increase revenue from sales of new products, we need to continue to develop our clinical
support, further expand and nurture relationships with industry thought leaders and increase market awareness of the
benefits of our new products. However, even with a significant investment in research and development, we may be
unable to continue to develop, acquire or effectively launch and market new products and technologies regularly, or at
all. If we fail to successfully commercialize new products, our business may 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. We
expect that any competitive advantage we may enjoy from current and future innovations 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 effectively compete and generate additional revenue from new and existing products depend upon our
ability to distinguish our company and our products from our competitors and their products, and to develop and
effectively market new and existing products. Our success is dependent on many factors, including the following:
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Speed of new and innovative product development;
Effective strategy and execution of new product launches;
Identify and develop clinical support for new indications of our existing products;
Product performance;
Product pricing;
Quality of customer support;
Development of successful distribution channels, both domestically and internationally; and
Intellectual property protection.
To compete effectively, we have to demonstrate that our new and existing products are attractive alternatives to other
devices and treatments, by differentiating our products on the basis of such factors as innovation, performance, brand
name, service, and price. This is difficult to do, especially in a crowded aesthetic market. Some of our competitors have
newer or different products and more established 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 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 increase our market penetration or compete effectively, our revenue and profitability will be
adversely impacted.
21
We compete against companies that offer alternative solutions to our products, or have greater resources, a larger
installed base of customers and broader product offerings than ours. If we are not able to effectively compete with
these companies, it may harm our business.
Our industry is subject to intense competition. Our products compete against similar products offered by public
companies, such as Cynosure, Elen (in Italy), Palomar, Solta, and Syneron and as well as private companies such as
Alma, Lumenis, Sciton and several other companies. Recently, there has been consolidation in the aesthetic industry
leading to companies combining their resources. For example, we acquired the aesthetic business unit of Iridex in
February 2012, Solta (previously Thermage) acquired Aesthera in February 2010 and Reliant in December 2008;
Syneron acquired Ultrashape in March 2012 and Candela in September 2009; and Cynosure acquired the aesthetic laser
business of HOYA ConBio in June 2011. We are likely to compete with new companies in the future. Competition
with these companies could result in reduced selling prices, reduced profit margins and loss of market share, any of
which would harm our business, financial condition and results of operations.
The energy-based aesthetic market faces competition from non energy-based medical products, such as Botox, an
injectable compound used to reduce wrinkles, and collagen injections. Other alternatives to the use of our products
include 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.
We may face problems with the integration of our acquisition of IRIDEX Corporation’s global aesthetic business.
On February 2, 2012, we completed our acquisition of certain assets of IRIDEX Corporation’s (IRIDEX) global
aesthetic business.
We cannot be certain that this integration will be successful or that we will realize the anticipated benefits of the
acquisition. In particular, we may not be able to realize the strategic and operational benefits and objectives we had
anticipated, including, greater revenue and marketing opportunities. In addition, the demand for our combined product
offerings may fluctuate and we will face competition from new competitors in the market for our products. Our ability
to realize the strategic and operational benefits and objectives of this acquisition may be impacted by several factors
including:
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The potential disruption of the company’s ongoing business and diversion of management resources;
The difficulty of incorporating acquired products, technology and rights into the company’s products and
services;
Unanticipated expenses related to integration of operations;
Potential periodic impairment of goodwill and intangible assets acquired, if any; and
Potential inability to retain, integrate and motivate key personnel.
Any of the above mentioned factors, as well as the inability to realize the long-term anticipated synergies of the
acquisition of these assets, may have a material adverse effect on our business, operating results and financial
condition.
If there is not sufficient consumer 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 light-based aesthetic procedures is a material assumption of our
business strategy. Most procedures performed using our products are elective procedures not 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:
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Consumer disposable income and access to consumer credit, which as a result of the unstable economy, may
have been significantly impacted;
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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 light-based technologies and treatments which use pharmaceutical products;
The success of our sales and marketing efforts; and
The education of our customers and patients on the benefits and uses of our products, compared to
competitors’ products and technologies.
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.
Any defects in the design, material or workmanship of our products may not be discovered prior to shipment to
customers, which could materially increase our expenses, adversely impact profitability and harm our business.
The design of our products is complex. To manufacture them successfully, we must procure quality components and
employ individuals with a significant degree of technical expertise. If our designs are defective, or the material
components used in our products are subject to wearing out, or if suppliers fail to deliver components to specification,
or if our employees fail to properly assemble, test and package our products, the reliability and performance of our
products will be adversely impacted. As an example, in 2010, we incurred significant expenses for the voluntary recall
of our Titan XL hand pieces.
If our products contain defects that cannot be repaired easily, inexpensively, or on a timely basis, we may experience:
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Damage to our brand reputation;
Loss of customer orders and delay in order fulfillment;
Increased costs 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 increase expenses, adversely impact profitability
and harm our business.
To successfully market and sell our products internationally, we must address many issues that are unique to our
international business.
International revenue represented 61% of our total revenue for the year ended December 31, 2011 compared to 64%
for 2010. International revenue is a material component of our business strategy. We depend on third-party distributors
and a direct sales force to sell our products internationally, and if they underperform, we may be unable to increase or
maintain our level of international revenue. For example, in 2011 our European revenue declined 38%, compared to
2010, due in part to employee turnover. Further, in the fourth quarter of 2011, some of our direct sales personnel in
Switzerland set up an independent distributor company.
To grow our business, we will need to improve productivity in current sales territories and expand into new territories.
However, direct sales productivity may not improve and distributors may not accept our business or commit the
necessary resources to market and sell our products to the level of our expectations. If we are not able to increase or
maintain international revenue growth, our total revenue, profitability and stock price may be adversely impacted.
23
We believe, as we continue to manage our international operations and develop opportunities in additional
international territories, our international revenue will be subject to a number of risks, including:
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Difficulties in staffing and managing our foreign operations;
Export restrictions, trade regulations and foreign tax laws;
Fluctuating foreign currency exchange rates;
Foreign certification and regulatory requirements;
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;
Preference for locally-produced products; and
Reduced protection for intellectual property rights in some countries.
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, we may not be able to sell our products in a particular market and, as
a result, our revenue may decline.
Federal regulatory reforms and changes occurring at the U.S. Food and Drug Administration, or FDA, could
adversely affect our ability to sell our products profitably and financial condition.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory
provisions governing the clearance or approval, manufacture and marketing of a device. It is impossible to predict
whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the
impact of such changes, if any, may be.
In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may
significantly affect our business and our products. Changes in FDA regulations may lengthen the regulatory approval
process for medical devices and require additional clinical data to support regulatory clearance for the sale and
marketing of our new products. In addition, it may require additional safety monitoring, labeling changes, restrictions
on product distribution or use, or other measures after the introduction of our products to market. Either of these
changes lengthen the duration to market, increase our costs of doing business, adversely affect the future permitted
uses of approved products, or otherwise adversely affect the market for our products.
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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 from there 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, up until
April 2011 our recently introduced GenesisPlus product had a number of general indications for use in the U.S. that
allowed us to market the product in the U.S., however we could only market it internationally for the treatment of
toenail fungus as it has a CE Mark approval. In April 2011, we received FDA clearance to market GenesisPlus in the
U.S. for the treatment of toenail fungus. Another example is our Pearl Fractional product which is cleared only for skin
resurfacing in the U.S. and our Titan product only for deep heating for the temporary relief of muscle aches and pains
in the U.S. Therefore, we are prevented from promoting or advertising Titan and Pearl Fractional 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 frequently changing. 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:
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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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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. We had a full quality system audit in 2008 and an FDA audit of compliance
with laser performance standards in 2010 and a full quality system audit plus laser performance standard audit in
August 2011. There were no significant findings as a result of these audits and our responses have been accepted by the
FDA. 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 for obtaining 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.
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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
historically experienced steep increases in our product liability insurance premiums as a percentage of revenue. If our
premiums continue to rise, we may no longer be able to afford adequate insurance coverage.
If customers are not trained and / or our products are used by non-physicians, it could result in product misuse and
adverse treatment outcomes, which could harm our reputation, result in product liability litigation, distract
management, result in additional costs, all of which could harm our business.
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. U.S. 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.
In 2010 and 2011 we entered into strategic alliances to distribute third party products internationally. To
successfully market and sell these products, we must address many issues that are unique to these businesses and
could reduce our available cash reserves and negatively impact our profitability.
In 2010 and 2011, we entered into distribution arrangements pursuant to which we utilize our sales force and
distributors to sell products manufactured by other companies. Commencing in the fourth quarter of 2011, we began to
distribute in Japan a Q-switched laser product manufactured by a third party OEM. In the first quarter of 2010, we
entered into an agreement with Obagi to distribute certain of their proprietary cosmeceuticals, or skin care products, in
Japan. This agreement requires us to purchase an annual minimum dollar amount of their product. The minimum
purchase requirement for 2012 is $2.0 million. If we do not make these minimum purchases, we could lose exclusivity
for distributing Obagi products to physicians in Japan. Finally, we also have an agreement with Merz Aesthetics to
distribute their Radiesse® dermal filler product in Japan.
Each of these distribution agreements presents its own unique risks and challenges. For example, to sell products in
partnership with Obagi we need to invest in creating a sales structure that is experienced in the sale of cosmeceuticals
and not in capital equipment. We need to commit resources to training this sales force, obtaining regulatory licenses in
Japan and developing new marketing materials to promote the sale of Obagi products. For each of these distribution
arrangements, until we can develop our own experienced sales force, we may need to pay third party distributors to sell
the products which will result in higher fees and lower margins than if we sell direct to customers. In addition, the
minimum commitments and other costs of distributing products manufactured by these companies may exceed the
incremental revenue that we derive from the sale of their products thereby reducing our available cash reserves and
negatively impacting our profitability.
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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. Revenue from PSS has significantly
declined since 2008. Our revenue from PSS, as a percentage of worldwide revenue, was 3% for the year ended
December 31, 2011, 5% in 2010 and 7% in 2009. Although we continue to work closely with, and focus our attention
on, our PSS relationship, there is no assurance that this will translate into increased revenue for us. Further, if revenue
from PSS does not improve, or if they terminate our relationship, it may have an adverse effect on our revenue results
of operations and our stock price.
Adverse conditions in the global banking industry and credit markets may adversely impact the value of our
marketable investments or impair our liquidity.
We invest our excess cash primarily in money market funds and in highly liquid debt instruments of the U.S.
government and its agencies and U.S. municipalities, in commercial paper and high grade corporate debt. As of
December 31, 2011, our balance in marketable investments was $74.7 million. 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, 2011 would have
potentially decreased by approximately $608,000, 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 (loss).
We may be required to record impairment charges in future quarters as a result of the decline in value of our long-
term investments in auction rate securities (ARS).
Included under the caption of “Long-term investments” in the Consolidated Balance Sheet as of December 31, 2011
are $3.9 million (par value) of ARS. These ARS were designed to provide liquidity through an auction process that
resets the applicable interest rate at predetermined calendar intervals, generally every 35 days. Though approximately
$9.5 million (par value) of our original holdings of $13.4 million (par value) of ARS have been redeemed at full par
value since 2008, auctions for the remaining ARS in our portfolio at December 31, 2011 continue to fail and they
remain as illiquid. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a
formula contained in the prospectus of the individual security, which rate is generally higher than the prevailing market
rate. The failure of the auctions impacts our ability to readily liquidate our ARS into cash until a future auction of these
investments is successful, a buyer is found outside of the auction process, or the ARS is refinanced by the issuer into
another type of debt instrument. If there is a decline in fair value in our ARS that is considered other-than-temporary
then we would have to record an impairment charge in our Consolidated Statement of Operations for the loss in value
associated with the worsening of the credit worthiness (credit losses) of the issuer, which would reduce future earnings,
harm our business and may cause our stock price to decline.
We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit,
hire, train 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. Except for
Change of Control and Severance Agreements for our executive officers, 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 may face particularly significant challenges and risks in hiring, training, managing and
retaining engineering and sales and marketing employees. Failure to attract, train and retain personnel, particularly
technical and sales and marketing personnel, would materially harm our ability to compete effectively and grow our
business.
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The price of our common stock may fluctuate substantially due to several factors, some of which are discussed
below. Further, 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, 2011, approximately 45% of our outstanding shares of common stock were held by 10 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, due to the current
concentration of stockholders, it 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:
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Litigation surrounding executive compensation has increased with the passage of the Dodd-Frank Wall
Street Reform and Consumer Protection Act. If we are involved in a lawsuit related to compensation matters
or any other matters not covered by our D&O insurance, there could be material expenses involved, fines, or
remedial actions which could negatively affect our stock price;
The general market conditions unrelated to our operating performance;
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 by us or our competitor;
Regulatory developments or delays concerning our, or our competitors’ products; and
The initiation of litigation by us or against us.
Actual or perceived instability in our stock price could reduce demand from potential buyers of our stock, thereby
causing our stock price to either remain depressed or to decline further.
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.
29
Any acquisitions that we make could disrupt our business and harm our financial condition.
From time to time we 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 and we may
incur significant legal, accounting and banking fees in connection with such a transaction. In addition, if we purchase a
company that is not profitable, our cash balances may be reduced or depleted. 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 light-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 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.
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;
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;
Inability to redesign one or more components in our systems in the event that a supplier discontinues
manufacturing such components and we are unable to source it from other suppliers 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.
30
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, 2011, we had 19 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.
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.
We offer credit terms to some qualified customers and also to leasing companies to finance the purchase of our
products. In the event that any of these customers default on the amounts payable to us, our earnings may be
adversely affected.
While we qualify customers to whom we offer credit terms (generally net 30 to 90 days), we cannot provide any
assurance that the financial position of these customers will not change adversely before we receive payment. Our
general and administrative expenses and earnings are negatively impacted by customer defaults and cause an increase
in the allowance for doubtful accounts. In the event that there is a default by any customers to whom we have provided
credit terms in the future, we may recognize a bad debt charge in our general and administrative expenses and this
could negatively affect our earnings and results of operations.
We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies.
As a result of recent fluctuations in currency markets and the strong dollar relative to many other major currencies, our
products priced in U.S. dollars may be cheaper or more expensive relative to products of our foreign competitors,
which could result in volatility in our revenue. 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 results from operations.
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 light 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.
31
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;
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, as well as Change of Control and Severance Agreements entered into with each of our executive
officers, 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Our corporate headquarters and U.S. operations are located in an approximately 66,000 square foot facility in Brisbane,
California. We lease these premises under a non-cancelable operating lease which expires on December 31, 2017. In
addition, we have leased office facilities in certain international countries as follows:
Country
Japan . . . . . . . . . . . . Approximately 5,878
Square Footage
Lease termination or Expiration
Two leases, one of which expires in December 2013 and one which
Switzerland . . . . . . Approximately 3,174
France . . . . . . . . . . . Approximately 450
Spain . . . . . . . . . . . . Approximately 269
expires in March 2015.
One lease which expires in March 2013.
One lease which expires in November 2014.
Lease automatically renews at the end of each six-month period.
We believe that these facilities are adequate for our current and future needs for at least the next twelve months.
ITEM 3.
LEGAL PROCEEDINGS
We are not a party to any pending litigation that we believe will have a material impact to our results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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 Select Market under the symbol “CUTR.” As of February 29,
2012, the closing sale price of our common stock was $9.35 per share.
32
Common Stockholders
We had 10 stockholders of record as of February 29, 2012. Since many stockholders choose to hold their shares under
the name of their brokerage firm, we believe, the actual number of stockholders was in approximately 2,000.
Stock Prices
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated fiscal
periods:
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Graph
Common Stock
2011
2010
High
$ 7.93
8.74
9.46
9.94
Low
$ 6.96
7.03
7.59
8.08
High
$ 8.39
9.00
12.04
11.03
Low
$ 7.01
6.99
8.62
8.25
Below is a graph showing the cumulative total return to our stockholders during the period from December 31, 2006
through December 31, 2011 in comparison to the cumulative return on the NASDAQ Composite Index (U.S.) and the
NASDAQ Medical Equipment Index during that same period.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cutera, Inc., the NASDAQ Composite Index, and the NASDAQ Medical Equipment Index
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/06
12/07
12/08
12/09
12/10
12/11
Cutera, Inc.
NASDAQ Composite
NASDAQ Medical Equipment
*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
33
The information under “Performance Graph” is not deemed filed with the Securities and Exchange Commission and is
not to be incorporated by reference in any filing of Cutera under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the date of this 10-K and irrespective of
any general incorporation language in those filings.
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.
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12 for information regarding securities authorized for issuance under equity compensation plans.
34
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2011
60,290
25,978
34,312
$
2010
53,274
23,058
30,216
$
2009
53,682
21,759
31,923
2008
$ 83,379
32,358
51,021
2007
$ 101,726
35,002
66,724
Year Ended December 31,
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. . . . . . . . . . . . . .
Other-than-temporary impairments of long-
term investments . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) available to common
stockholders used in basic net income per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of shares used in
per share calculations:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . .
Working capital (current assets less current
liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . .
$
$
$
25,499
9,141
10,104
—
44,744
(10,432)
614
—
(9,818)
243
24,735
7,004
9,576
—
41,315
(11,099)
583
—
(10,516)
2
24,286
6,810
10,320
850
42,266
(10,343)
1,572
—
(8,771)
8,908
$ (10,061) $ (10,518) $ (17,679) $
35,354
7,550
11,270
—
54,174
(3,153)
3,046
(3,554)
(3,661)
(792)
(2,869) $
38,277
7,169
11,721
—
57,167
9,557
4,207
—
13,764
3,260
10,504
$ (10,061) $ (10,518) $ (17,679) $
(2,869) $
10,504
(0.73) $
(0.73) $
(0.78) $
(0.78) $
(1.33) $
(1.33) $
(0.22) $
(0.22) $
0.80
0.74
13,807
13,807
13,540
13,540
13,279
13,279
12,770
12,770
13,153
14,228
2011
14,020
74,666
3,027
$
2010
12,519
77,484
6,784
As of December 31,
2009
22,829
76,780
7,275
$
2008
$ 36,540
60,653
9,627
$
2007
11,054
88,510
7,429
106,894
138,653
34,279
109,353
89,075
111,353
(3,325)
91,567
90,339
111,805
6,736
95,417
96,015
121,352
17,254
100,853
101,644
137,476
31,410
112,108
35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our audited financial statements and notes thereto for the
fiscal year ended December 31, 2011. 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. Throughout
this Report, and particularly in this Item 7, the forward-looking statements are based upon our current expectations,
estimates and projections and that reflect our beliefs and assumptions based upon information available to us at the
date of this Report. In some cases, you can identify these statements by words such as “may,” “might,” “will,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” and
other similar terms. These forward-looking statements are not guarantees of future performance and are subject to
risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance or achievements
could differ materially from those expressed or implied by the forward-looking statements. The forward-looking
statements include, but are not limited to, statements relating to our future financial performance, the ability to grow
our business, increase our revenue, manage expenses, generate additional cash, achieve and maintain profitability,
develop and commercialize existing and new products and applications, improve the performance of our worldwide
sales and distribution network, and to the outlook regarding long term prospects. We caution you 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.
Some of the important factors that could cause our results to differ materially from those in our forward-looking
statements, and a discussion of other risks and uncertainties, are discussed in Item 1A—Risk Factors commencing on
page 17. We encourage you to read that section carefully as well as other risks detailed from time to time in our filings
with the SEC.
Introduction
The Management’s Discussion and Analysis, or MD&A, is organized as follows:
● Executive Summary. This section provides a general description and history 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 Guidance. This section describes the issuance and effect of new accounting
pronouncements that are and may be applicable to us.
● Results of Operations. This section provides our analysis and outlook for the significant line items on our
Consolidated Statements 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, 2011.
Executive Summary
Company Description. We are a global medical device company specializing in the design, development, manufacture,
marketing and servicing of laser and light-based aesthetics systems for practitioners worldwide. We offer easy-to-use
products based on six platforms — CoolGlide®, Xeo®, Solera®, GenesisPlusTM, Excel VTM, and myQTM — each of
which enables physicians and other qualified practitioners to perform safe and effective aesthetic procedures for their
customers. Commencing in the fourth quarter of 2011, we launched a new Q-switched laser product called myQ in
Japan, that Cutera sources from a third party original equipment manufacturer (OEM). The Xeo and Solera platforms
offer multiple hand pieces and applications, which allow customers to upgrade their systems, which we treat as
Upgrade revenue. In addition to systems and upgrade revenue, we generate revenue from the sale of post warranty
service contracts, providing services for products that are out of warranty, Titan hand piece refills, and dermal fillers
and cosmeceuticals.
36
Our corporate headquarters and U.S. operations are located in Brisbane, California, from where we conduct our
manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative
activities. In the United States, we market, sell and service our products through direct sales and service employees,
and a distribution relationship with PSS World Medical Shared Services, Inc. (“PSS”), a wholly owned subsidiary of
PSS World Medical which has over 700 sales representatives serving physician offices throughout the United States.
We also sell certain items such as our Titan hand piece refills and marketing brochures online.
International sales are generally made through direct sales employees and a worldwide distributor network in over 35
countries. Outside of the United States, we have a direct sales presence in Australia, Canada, France, Japan, Spain,
Switzerland (however, beginning October 1, 2011 we engaged a distributor in Switzerland instead of selling directly)
and the United Kingdom.
Products. Our revenue is derived from the sale of Products, Upgrades, Service, Titan hand piece refills, and Dermal
fillers and cosmeceutical products. Product revenue represents the sale of a system. A system consists of a console that
incorporates a universal graphic user interface, a laser and/or light-based module, control system software and high
voltage electronics; as well as one or more hand pieces. However, depending on the application, the laser or light-based
module is sometimes contained in the hand piece such as with our Pearl and Pearl Fractional applications instead of
within the console. In the fourth quarter of 2011, we launched a new Q-switched laser system called myQ.
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 provides customers the flexibility to
upgrade their systems whenever they want and provides us with a source of recurring revenue which we classify as
Upgrade revenue. Service revenue relates to amortization of prepaid service contracts, direct billings for detachable
hand piece replacements and revenue for parts and labor on out-of-warranty products. Titan hand piece refill revenue is
associated with our Titan hand piece which requires replacement of the optical source after a set number of pulses have
been used. In Japan, we distribute Merz Pharma GmbH’s (Merz) Radiesse® dermal filler product; and Obagi Medical
Products, Inc.’s (Obagi) cosmeceutical products.
Significant Business Trends. We believe that our ability to grow revenue will be primarily dependent on the
following:
● Continuing to expand our product offerings ─ both through internal development and sourcing from other
vendors.
● Ongoing investment in our global sales and marketing infrastructure.
● Use of clinical results to support new aesthetic products and applications.
● Enhanced luminary development and reference selling efforts (to develop a location where our products
can be displayed and used to assist in selling efforts).
● Customer demand for our products.
● Consumer demand for the application of our products.
● Marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those
specialties.
● Generating ongoing revenue from our growing installed base of customers through the sale of Service,
Upgrade, Titan hand piece refills, and Dermal fillers and cosmeceutical products.
Our U.S. revenue increased by 21% and our international revenue increased by 9% in 2011, compared to 2010. We
believe the increase in U.S. revenues was attributable to several factors, including:
● FDA clearance of our GenesisPlus system for onychomycosis, or toenail fungus, in April 2011.
● Commencement of Excel V shipments in the second quarter of 2011
● Effective U.S. sales management changes implemented in early 2011.
37
Our total international revenue increased by 9% in 2011, compared to 2010, and represented 61% of our total revenue.
The international revenue growth was sourced primarily from Australia, Canada, Japan, and several of our international
distributor countries, partially offset by declines in Europe. In Australia and Canada, our revenue increased by 123%
and 34% respectively in 2011, compared to 2010, primarily as a result of increased product sales. With respect to
Japan, our revenue increased by 10%, primarily as a result of continued growth from our Dermal fillers and
cosmecuticals business.
Our gross margin remained flat at 57% in 2011, compared to 2010, which was attributable to several factors, including:
● An improvement of our 2011 margins for Titan refill revenue, given 2011 did not have costs associated
with the recall of certain Titan XL hand pieces in 2010;
● An increase of $823,000 of Titan refill revenue, for which we traditionally earn a higher gross margin
●
than our blended total gross margin percentage;
Improved gross margin on our Dermal fillers and cosmeceutical products sold in Japan, due to higher
average selling prices resulting from favorable foreign exchange rates; which was offset by
● Lower gross margins for our Product revenue, resulting from an unfavorable product mix towards lower
margin products.
Our gross margin in 2010 was 57%, compared with 59% in 2009. This decline was due to several factors, including:
● The 2010 voluntary recall of certain Titan XL hand pieces whereby eligible customers were provided
with fully refilled hand pieces;
● A $1.7 million, or 31%, temporary decrease in our Titan refill revenue in 2010, compared to 2009, for
which we traditionally earn a higher gross margin than our blended total gross margin percentage;
● Our ASPs declined in 2010 due primarily to customers purchasing fewer applications on their platforms
and due to competitive discounting pressures; and
● A higher proportion of distributor revenue, that carries a lower gross margin; partially offset by
● Lower manufacturing expenses resulting from headcount reductions; and
● Reduced warranty and service expenses as a result of improved product reliability (for products other
than Titan XL hand pieces).
Our sales and marketing expenses increased to $25.5 million in 2011, compared with $24.7 million in 2010. This
increase was associated with higher personnel expenses and an increase in travel and entertainment expenses
associated with the increase in revenue, which was partially offset by reduced promotional and marketing related
spending. As a percentage of net revenue, our 2011 sales and marketing expenses declined to 42%, compared to 47%
in 2010, due to the higher revenue in 2011.
Our research and development, or R&D, expenses increased to $9.1 million in 2011, compared with $7.0 million in
2010. This increase was associated with higher personnel expenses resulting primarily from higher headcount and
consulting services in engineering relating to new product development programs. As a percentage of net revenue,
R&D expenses increased to 15% in 2011, compared to 13% in 2010.
Our general and administrative, or G&A, expenses increased to $10.1 million in 2011, compared with $9.6 million in
2010. This increase was due primarily to increased facility costs — associated with the relocation of our Japan offices
and the closure of our Switzerland office — higher legal fees due in part to business development activities, and a
reduced benefit associated with doubtful debt recoveries in 2010 that did not recur in 2011. As a percentage of net
revenue, G&A expenses decreased slightly to 17% in 2011, compared to 18% in 2010, due to the higher revenue in
2011.
38
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, our future
performance is dependent upon our ability to continue to expand our product offerings with 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 execute on the aforementioned initiatives, our business would be adversely affected. 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 Consolidated Financial Statements and related disclosures in conformity with generally
accepted accounting principles in the United States (GAAP) requires us to make estimates, judgments and assumptions
that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates, judgments and
assumptions are based on historical experience and on various other factors that we believe are reasonable under the
circumstances. We periodically review our estimates and make adjustments when facts and circumstances dictate. To
the extent that there are material differences between these estimates and actual results, our financial condition or
results of operations will be affected.
Critical accounting estimates, as defined by the Securities and Exchange Commission (SEC), are those that are most
important to the portrayal of our financial condition and results of operations and require our management’s most
difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting
estimates are as follows:
Revenue Recognition
We recognize revenue from the sale of Products, Upgrades, Titan hand piece refills, and Dermal fillers and
cosmeceuticals when title and risk of ownership has been transferred, provided that:
● 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 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.
Fair Value Measurement of our Long Term Auction Rate Securities Investments
We hold a variety of interest bearing auction rate securities (ARS) that represent investments in pools of student loan
assets. At the time of acquisition, these ARS investments were intended to provide liquidity through an auction process
that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their
holdings or gain immediate liquidity by selling such interests at par. Since February 2008, uncertainties in the credit
markets affected our ARS investments and auctions for some of our ARS have continued to fail to settle on their
respective settlement dates while some have been redeemed in full at their respective par values. The current portfolio
of investments shown as “Long term investments” in our Consolidated Financial Statements represents those
investments that are not currently liquid and we will not be able to access these funds until a future auction of these
investments is successful, a buyer is found outside of the auction process or the issuer refinances their debt. Maturity
dates for these ARS investments range from to 2032 to 2041.
39
At December 31, 2011, total financial assets measured and recognized at fair value were $89.6 million and of these
assets, $3.0 million, or 3%, were ARS that were measured and recognized using significant unobservable inputs (Level
3). During 2011, $4.4 million of ARS were redeemed at their full par value, as a result we transferred from Level 3
assets $3.7 million to cash and this resulted in a gain of $668,000 being recorded to accumulated other comprehensive
loss in 2011.
As of December 31, 2011, we had $3.9 million par value ($3.0 million fair value) of long-term ARS investments. The
aggregate loss in value is included as an unrealized loss in accumulated other comprehensive income (loss). Given
observable market information was not available to determine the fair values of our ARS portfolio, we valued these
investments based on a discounted cash flow model. While our ARS valuation model was based on both Level 2 (credit
quality and interest rates) and Level 3 inputs (pricing models), we determined that the Level 3 inputs were the most
significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates. The
expected future cash flows of the ARS were discounted using a risk adjusted discount rate that compensated for the
illiquidity. Projected future cash flows over the economic life of the ARS (of approximately 10.0 – 12.5 years) were
modeled based on the contractual penalty rates for the security added to a tax adjusted LIBOR interest rate curve. The
discount rates that were applied to the cash flows were based on a premium over the projected yield curve and included
an adjustment for credit, illiquidity, and other risk factors. See Note 1 “Summary of Significant Accounting Policies -
Fair Value Measurements” in Notes to Consolidated Financial Statement in Part II, Item 8 of this Form 10-K for more
information.
The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact
the valuation include duration of time that the ARS remain illiquid, changes to credit ratings of the securities, rates of
default of the underlying assets, changes in the underlying collateral value, market discount rates for similar illiquid
investments, and ongoing strength and quality of credit markets. If the auctions for our ARS investments continue to
fail, and there is a further decline in their valuation, then we would have to: (i) record additional reductions to the fair
value of our ARS investments; and (ii) record unrealized losses in our accumulated other comprehensive income (loss)
for the losses in value that are associated with market risk. If the decline in fair value is considered other-than-
temporary then we would have to record an impairment charge in our Consolidated Statement of Operations for the
loss in value associated with the worsening of the credit worthiness (credit losses) of the issuer, which would reduce
future earnings and harm our business.
Recognition and Presentation of Other-Than-Temporary-Impairments
We review for impairments on a quarterly basis in order to determine the classification of such as “temporary” or
“other-than-temporary.” Factors that we consider to make such determination include the duration and severity of the
impairment; the reason for the decline in value and the potential recovery period; and our intent to sell, or whether it is
more likely than not that we will be required to sell, the investment before recovery. Beginning April 1, 2009, if an
entity intends to sell, or if it is more likely than not that we will be required to sell, an impaired debt security prior to
recovery of its cost basis, the security is other-than-temporarily impaired and the full amount of the impairment is
required to be recognized as a loss through earnings. Otherwise, losses on securities which are other-than-temporarily
impaired are separated into:
the portion of loss which represents the credit loss; or
(i)
(ii) the portion which is due to other factors.
The credit loss portion is recognized as a loss through earnings while the loss due to other factors is recognized in other
comprehensive income (loss), net of taxes and related amortization. At December 31, 2011, we had $3.9 million of par
value ARS investments. We intend to, and have the ability to, hold these investments until the anticipated date of
maturity. As such, we treat the decline in value as temporary and have recognized approximately $873,000 in
unrealized losses. Given we believed that such losses were not credit related, we have included them in accumulated
other comprehensive loss.
Prior to April 1, 2009, all declines in fair value deemed to be other-than-temporary were reflected in earnings as
realized losses. With respect to the ARS that we held as of April 1, 2009, we determined that the cumulative effect
adjustment required to reclassify the non-credit portion of previously recognized other-than-temporarily impaired
adjustments was $3.5 million. Therefore, we increased our accumulated earnings and decreased our accumulated other
comprehensive income (loss) by the $3.5 million cumulative effect adjustment.
40
Stock-based Compensation Expense
Employee stock-based compensation is estimated at the date of grant based on the employee stock award’s fair value
using the Black-Scholes option-pricing model and is recognized as expense ratably over the requisite service period in
a manner similar to other forms of compensation paid to employees. The Black-Scholes option-pricing model requires
the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected
volatility of the market price of our stock and the expected term of the award. The expected volatility is a 50%/50%
blend of implied and historical volatility. We have determined that this is a more reflective measure of market
conditions and a better indicator of expected volatility, than its limited historical volatility since the initial public
offering of our common stock. When establishing an estimate of the expected term of an award, we consider historical
experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements, and
expectation of future employee behavior, including post-vesting terminations. As required under GAAP, we review our
valuation assumptions at each grant date, and, as a result, our valuation assumptions used to value employee stock-
based awards granted in future periods may change.
As of December 31, 2011, the unrecognized compensation cost, net of expected forfeitures, was $4.6 million for stock
options and stock awards and $31,000 for the employee stock purchase plan which will be recognized using the
straight-line attribution method over an estimated weighted-average remaining amortization period of 2.49 years and
0.33 years, respectively. See Note 5 “Stockholders’ Equity, Stock Plans and Stock-Based Compensation Expense,” in
the Notes to Consolidated Financial Statement in Part II, Item 8 of this Form 10-K for more information.
Valuation of 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 had previously been written off is sold.
Warranty Obligations
We provide a one-year standard warranty on all 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. Actual
warranty costs could differ from the estimated amounts. On a quarterly basis, we review the accrued balances of our
warranty obligations and update based on 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.
41
Provision for Income Taxes
We are subject to taxes on earnings in both the United States and various 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. We perform a two-step approach to recognizing and measuring uncertain tax
positions. 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 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, certain benefits realized related to stock
option activity, and changes in valuation allowance. 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 approximately (2)% in 2011, 0% in 2010, and (102)% in 2009. Our future effective tax rates could be 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, accounting principles,
interpretations thereof, net operating loss carryback, research and development tax credits, and due to changes in the
valuation allowance of our U.S. deferred tax assets. 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.
At December 31, 2011, we had an aggregate of approximately $2.7 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be, indefinitely reinvested for continued use in foreign operations. If the
total undistributed earnings of foreign subsidiaries were remitted, a significant amount of the additional tax would be
offset by the allowable foreign tax credits. It is not practical for us to determine the additional tax of remitting these
earnings.
Our deferred tax assets are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. A
valuation allowance reduces deferred tax assets to estimated realizable value, which assumes that it is more likely than
not that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net
carrying value. The four sources of taxable income to be considered in determining whether a valuation allowance is
required include:
● Future reversals of existing taxable temporary differences (i.e., offset gross deferred tax assets against
gross deferred tax liabilities);
● Future taxable income exclusive of reversing temporary differences and carryforwards;
● Taxable income in prior carryback years; and
● Tax planning strategies.
Determining whether a valuation allowance for deferred tax assets is necessary requires an analysis of both positive
and negative evidence regarding realization of the deferred tax assets. In general, positive evidence may include:
● A strong earnings history exclusive of the loss that created the deductible temporary differences, coupled
with evidence indicating that the loss is the result of an aberration rather than a continuing condition; and
● An excess of appreciated asset value over the tax basis of our net assets in an amount sufficient to realize
the deferred tax asset.
42
In general, negative evidence may include:
● A history of operating loss or tax credit carryforwards expiring unused;
● An expectation of being in a cumulative loss position in a future reporting period;
● The existence of cumulative losses in recent years; and
● A carryback or carryforward period that is so brief that it would limit the realization of tax benefits.
The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to
which it can be objectively verified and judgment must be used in considering the relative impact of positive and
negative evidence.
In evaluating the ability to recover deferred tax assets, we considered available positive and negative evidence, giving
greater weight to our recent cumulative losses and our ability to carry-back losses against prior taxable income and
lesser weight to its projected financial results due to the challenges of forecasting future periods. We also considered,
commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary
differences. At the end of the quarter ended September 30, 2009, changes in previously anticipated expectations and
continued operating losses resulted in a valuation allowance against our tax benefits since we no longer considered
them “more-likely-than-not” realizable. We also performed this evaluation as of the year ended December 31, 2011
and determined the full valuation allowance was still required.
Long-Lived Asset Impairment
Long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may not ultimately be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the
asset and its ultimate disposition. If the sum of the expected future cash flows is less than the carrying amount of those
assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Through December 31, 2011, there have been no such impairments.
Litigation
We have been, and may in the future become, subject to legal proceedings related to securities litigation, intellectual
property and other matters. Based on all available information at the balance sheet dates, 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 record an estimated liability.
Recent Accounting Guidance
For a full description of recent accounting pronouncements, including the respective expected dates of adoption and
effects on results of operations and financial condition see Note 1 “Summary of Significant Accounting Policies —
New Accounting Standards” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
43
Results of Operations
The following table sets forth selected consolidated financial data expressed as a percentage of net revenue.
Year Ended December 31,
2010
2011
2009
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
43%
57%
100 %
43 %
57 %
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42%
15%
17%
—%
74%
(17)%
1%
(16)%
1%
(17)%
47 %
13 %
18 %
— %
78 %
(21 )%
1 %
(20 )%
— %
(20 )%
100%
41%
59%
45%
13%
19%
1%
78%
(19)%
3%
(16)%
17%
(33)%
Net Revenue
The following table sets forth selected consolidated revenue by major geographic area and product category with
changes thereof.
(Dollars in thousands)
Revenue mix by geography:
United States . . . . . . . . . . . . . . . . . . . . . . . . $
Percent of total . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Asia, excluding Japan . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of the world . . . . . . . . . . . . . . . . . . . .
Total international revenue . . . . . . . . .
Percent of total . . . . . . . . . . . . . . . . . . . .
2011
% Change
2010
% Change
2009(1)
Year Ended December 31,
23,313
39%
15,019
4,984
3,571
13,403
36,977
61%
21% $
19,337
(8 )% $
21,019
10% $
(3)%
(38)%
43%
9%
36%
13,625
5,131
5,801
9,380
33,937
64%
41 % $
9 %
(18 )%
(16 )%
4 %
39%
9,636
4,727
7,087
11,213
32,663
61%
Total consolidated revenue . . . . . . . . . $
60,290
13% $
53,274
(1 )% $
53,682
Revenue mix by product category:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Titan hand piece refills . . . . . . . . . . . . . . .
Dermal fillers and cosmeceuticals(1) . . .
Total consolidated revenue . . . . . . . . . $
33,703
3,505
13,411
4,686
4,985
60,290
21% $
(27)%
1%
21%
41%
13% $
27,808
4,824
13,231
3,863
3,548
53,274
4 % $
(24 )%
— %
(31 )%
107 %
(1 )% $
26,842
6,343
13,186
5,599
1,712
53,682
(1)Beginning in 2010, we classified revenue from dermal fillers and cosmeceuticals product in the revenue category
‘Dermal fillers and cosmeceuticals.’ Previously, we classified this revenue under the category of ‘Products.’ As such,
we reclassified the 2009 revenue from ‘Products’ to ‘Dermal fillers and cosmeceuticals.’
44
Revenue by Geography:
In 2011 our net revenue increased by 13%, compared to 2010, and in 2010 it declined by 1%, compared to 2009.
Our U.S. revenue increased by 21% in 2011, compared to 2010. We believe the increase in U.S. revenues in 2011,
compared to 2010, was attributable to several factors, including:
● FDA clearance of our GenesisPlus system for onychomycosis, or toenail fungus, in April 2011.
● Commencement of Excel V shipments in the second quarter of 2011.
● Effective U.S. sales management changes implemented in early 2011.
Our U.S. revenue decreased by 8% in 2010, compared to 2009. We believe the decline in U.S. revenues was
attributable to several factors, including:
● Our Products and Upgrades ASPs declined in 2010 and 2009, compared to their respective prior years.
This was attributable primarily to customers purchasing fewer applications for systems and lower pricing
resulting from competitive discounting pressures.
● Our unit sales of Products and Upgrades increased in 2010, compared with 2009.
● We experienced a temporary decline in our Titan refill revenue in 2010, compared to 2009, due to a
voluntary recall of certain Titan XL hand pieces. All customers that had Titan XL hand pieces subject to
the recall, were provided with fully “refilled” hand pieces, which delayed their purchase of a refill.
International revenues increased by 9% in 2011, compared to 2010, and increased by 4% in 2010, compared to 2009.
The growth in our international revenue in 2011 was derived from higher product revenue in Canada, Australia, several
of our international distributor countries and by higher Dermal fillers and cosmecuticals sales in Japan, offset by a
decline in product revenue in Europe. Our total international revenue increased by 9%, with growth being sourced
primarily from Australia, Canada and Japan, partially offset by declines in Europe. In Australia and Canada, our
revenue increased by 123% and 34% respectively in 2011, compared to 2010, primarily as a result of increased product
sales. With respect to Japan, our revenue increased by 10%, primarily as a result of continued growth from the Dermal
fillers and cosmeceuticals business.
Revenue by Product Category:
Our product revenue increased by 21% in 2011 and by 4% in 2010, compared to the respective prior year periods. The
2011 increase in product revenue was primarily attributable to the U.S. FDA clearance of the GenesisPlus system for
toenail fungus in April 2011 and the commencement of Excel V shipments in the second quarter of 2011. The 2010
increase in product revenue was primarily attributable to revenue from the GenesisPlus product that was launched in
the third quarter of 2010. We believe that in 2010 and in 2009 some of our U.S. current and prospective customers that
did not have established medical offices, were reluctant to purchase capital equipment due to the general economic
uncertainty and tight credit conditions, which contributed to the decline in our revenue in these years.
Upgrade revenue decreased by 27% in 2011 and by 24% in 2010, compared to the respective prior year periods. Prior
to 2009, we introduced new products that allowed existing customers to upgrade their previously purchased systems to
obtain benefits from the additional capabilities, which drove our upgrade revenue. However, since 2008 we have not
introduced any new products that our customers could purchase as an upgrade to their previously purchased system.
Instead, we have launched new stand alone products (GenesisPlus in 2010 and Excel V in 2011), which has resulted in
a decline of our upgrade revenue since 2008.
Our service revenue increased by 1% in 2011 compared to 2010, and remained relatively flat in 2010, compared to
2009. Service contract amortization is the primary component of our service revenue. The increase in 2011 was the
result of higher international service revenue being partially offset by a decline in U.S. service revenue. The increase in
international service revenue is due to an increased installed base and a higher number of customer purchased service
contracts. The decline in our U.S. service revenue was primarily attributable to lower contract amortizations as a result
of fewer customers purchasing extended service contracts, a decline in our service contract pricing, partially offset by
higher revenue from the sale of detachable hand pieces (other than Titan refills). In 2010 service revenue remained flat
compared to 2009 as a result of the decline in unit sales in 2009 that included an element of deferred revenue for
service contracts beyond our standard one-year warranty term.
45
Our Titan hand piece refill revenue increased 21% in 2011, compared to 2010, and decreased 31% in 2010, compared
to 2009. The increase in 2011 was due primarily to the partial recovery of our Titan refill revenue following the
voluntary recall of our Titan XL hand piece commencing in the second quarter of 2010, in which we provided our
eligible customers with a fully “refilled” Titan XL hand piece, which delayed their purchase of a refill. The decline in
our Titan refill revenue in 2010, compared to 2009, was also primarily attributable to the Titan XL recall.
Our Dermal filler and cosmeceutical business increased by 41% in 2011, compared to 2010, and by 107% in 2010
compared to 2009. This increase was due primarily to the higher number of customers purchasing Obagi products,
which we began distributing in Japan in the first quarter of 2010, and due to the expansion of cosmeceutical product
lines being distributed.
Gross Profit
(Dollars in thousands)
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . .
2011
34,312
$
Year Ended December 31,
2010
30,216
14% $
57%
57%
% Change
% Change
2009
(5)% $ 31,923
59%
Our cost of revenue consists primarily of materials, personnel expenses, royalty expense, warranty and manufacturing
overhead expenses. Gross margin as a percentage of net revenue remained flat at 57% in 2011, compared to 2010,
which was primarily attributable to the following:
● An improvement of our 2011 margins for Titan refill revenue, given 2011 did not have costs associated
with the recall of certain Titan XL hand pieces in 2010;
● An increase of $823,000 of Titan refill revenue, for which we traditionally earn a higher gross margin
●
than our blended total gross margin percentage;
Improved gross margin on our Dermal fillers and cosmeceutical products sold in Japan, due to higher
average selling prices resulting from favorable foreign exchange rates; which was offset by
● Lower gross margins for our Product revenue, resulting from an unfavorable product mix towards lower
margin products.
Our gross margin in 2010 was 57%, compared with 59% in 2009. This decline was due to several factors, including:
● The 2010 voluntary recall of certain Titan XL hand pieces whereby eligible customers were provided
with fully refilled hand pieces;
● A $1.7 million, or 31%, temporary decrease in our Titan refill revenue in 2010, compared to 2009, for
which we traditionally earn a higher gross margin than our blended total gross margin percentage;
● Our ASPs declined in 2010 due primarily to customers purchasing fewer applications on their platforms
and due to competitive discounting pressures; and
● A higher proportion of distributor revenue, that carries a lower gross margin; partially offset by
● Lower manufacturing expenses resulting from headcount reductions; and
● Reduced warranty and service expenses as a result of improved product reliability (for products other
than Titan XL hand pieces).
Sales and Marketing
(Dollars in thousands)
Sales and marketing . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . .
2011
25,499
$
42%
% Change
% Change
Year Ended December 31,
2010
24,735
3% $
47%
2 % $
2009
24,286
45%
Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended
workshops and trade shows, post-marketing studies and advertising. Sales and marketing expenses increased $764,000
in 2011, compared to 2010, which was primarily attributable to the following:
● $988,000 increase in personnel expenses attributable primarily to higher commission expenses as a result
of the higher revenue;
46
● $541,000 increase in travel, entertainment and sales meeting expenses due to increased sales activity;
offset by
● Reduced promotional and marketing related spending of approximately $781,000 attributable to fewer
workshops, lower spending on public relation and other marketing activities.
In 2010 sales and marketing expenses increased by $449,000 compared to 2009. This increase was primarily
attributable to:
● $855,000 increase in personnel expenses in marketing due primarily to an increase in headcount resulting
from the creation of three new departments: post marketing studies (clinical development), business
development and telesales;
● $242,000 increase in international spending on workshops, advertising and other promotional activities;
offset by
● A decline in U.S. sales personnel expenses by $617,000 due to lower headcount; and due to decreased
sales commissions resulting from lower U.S revenue.
Sales and marketing expenses as a percentage of net revenue, decreased to 42% in 2011, compared to 47% in 2010 and
45% in 2009. The decrease in 2011 was due primarily to an increase in our total revenue in 2011.
Research and Development (R&D)
(Dollars in thousands)
Research and development . . . . . . . . . . .
As a percentage of total revenue . . . .
2011
$
9,141
15%
% Change
Year Ended December 31,
2010
% Change
2009
31% $
7,004
3% $
6,810
13%
13%
Research and development (R&D) expenses consist primarily of personnel expenses, clinical, regulatory and material
costs. R&D expenses increased $2.1 million in 2011, compared to 2010, which was primarily attributable to:
● $1.8 million increase in personnel expenses due to higher headcount and higher consulting fees of
$367,000, both, to ramp up the research, development and clinical support of our new products; offset by
● A decrease in material spending of $165,000.
In 2010 R&D expenses increased by $194,000, compared to 2009, which was due primarily to higher personnel
expenses resulting from higher headcount in engineering relating to new product development programs.
General and Administrative (G&A)
(Dollars in thousands)
General and administrative . . . . . . . . . . .
As a percentage of total revenue . . . .
2011
10,104
$
17%
% Change
Year Ended December 31,
2010
% Change
2009
6% $
9,576
(7)% $ 10,320
18%
19%
General and administrative expenses consist primarily of: personnel expenses, legal fees, accounting, audit and tax
consulting fees, and other general and administrative expenses. G&A expenses increased by $528,000 in 2011,
compared to 2010, which was primarily attributable to:
● $162,000 increase in facility costs due to the relocation of our offices in Tokyo, Japan and the closure of
our office in Switzerland;
● $143,000 increase in legal fees, primarily associated with business development activities, including the
acquisition of assets from Iridex; and.
● $137,000 increase in bad debt expense attributable to a reduced benefit associated with doubtful debt
recoveries in 2010, that did not recur in 2011
In 2010 G&A expenses decreased by $744,000, compared to 2009. This decrease was primarily attributable to:
●
a $626,000 reduction in bad debts expense due to a large non recurring expense in 2009; and
47
●
a $201,000 reduction in legal fees and legal settlement expenses.
Litigation Settlement
In 2009, we settled our TCPA class action lawsuit and in that regard recorded a charge of $850,000 for the cost of the
settlement, net of administrative expenses and amounts that were recovered from our insurance carrier.
Interest and Other Income, Net
The components of “Interest and Other Income, Net” are as follows:
(Dollars in thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . .
Total Interest and other income, net .
$
$
2011
594
20
614
% Change
Year Ended December 31,
2010
% Change
10% $
(55)%
5% $
539
44
583
(61)% $
(77)%
(63)% $
2009
1,383
189
1,572
Interest income increased 10% in 2011, compared to 2010, and decreased 61% in 2010, compared to 2009. The
increase in interest income in 2011 was primarily attributable to improved yields on our investments as a result of
shifting some investments to higher yielding corporate debt instruments, versus municipal bonds. The decrease in 2010
was due primarily to reduced tax-exempt interest yields, as a result of lower interest rates, and a reduced investment
balance. Our cash, cash equivalents, marketable investments and long-term investments measured and recognized at
fair value were $91.7 million at December 31, 2011, $96.8 million at December 31, 2010 and $106.9 million
December 31, 2009.
Provision for Income Taxes
(Dollars in thousands)
Loss before income taxes . . . . . . . . . . .
Provision for income taxes . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . .
2011
$ Change
$
(9,818)
243
$
(2)%
$
698
241
2010
(10,516)
2
0%
$ Change
$
(1,745) $
(8,906)
2009
(8,771)
8,908
(102)%
Year Ended December 31,
Despite a loss before income taxes, we recognized a $243,000 income tax provision in 2011 and a $2,000 provision in
2010. This was a result of foreign tax expenses, as a full valuation allowance was applied against all U.S. federal and
state deferred tax assets arising during the years. In 2009 we recognized a tax provision of $8.9 million due to the
recording of a full valuation allowance on our U.S. federal and state net deferred tax assets.
ASC 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax
assets. Significant management judgment is required in determining any valuation allowance recorded against deferred
tax assets. In evaluating the ability to recover deferred tax assets, we considered available positive and negative
evidence, giving greater weight to our recent cumulative losses and our ability to carry-back losses against prior
taxable income and lesser weight to our projected financial results due to the challenges of forecasting future periods.
We also considered, commensurate with its objective verifiability, the forecast of future taxable income including the
reversal of temporary differences. We performed this evaluation as of each of the years ended December 31, 2011,
2010 and 2009. Under current tax laws, this valuation allowance will not limit our ability to utilize federal and state
deferred tax assets provided we can generate sufficient future taxable income in the U.S.
48
Net Loss and Net Loss per Diluted Share
(Dollars in thousands, except per share data)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per diluted share . . . . . . . . . . .
2011
(10,061)
(0.73)
$
$
% Change
% Change
Year Ended December 31,
2010
(10,518)
(0.78)
(4)% $
(6)% $
(41)% $
(41)% $
2009
(17,679)
(1.33)
The $457,000 decrease in net loss, and $0.05 decrease in net loss per diluted share in 2011, compared to 2010, was
primarily attributable to:
an increase in our gross profit by $4.1 million; offset by
●
● higher operating expenses of $3.4 million, due primarily to the $2.1 million increase in R&D expense in
2011; and
an increase in our tax provision by $241,000.
●
The $7.2 million decrease in net loss, and $0.55 decrease in net loss per diluted share in 2010, compared to 2009, was
primarily attributable to a reduction in the tax provision by $8.9 million, lower operating expenses of $951,000, offset
by a decline in our gross profit by $1.7 million and other income by $989,000.
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, and employee stock
purchases. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient
funds to meet our daily needs. The majority of our cash and investments are held in U.S. banks and our foreign
subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses. The
following table summarizes our cash and cash equivalents, marketable investments and long-term investments (in
thousands):
(Dollars in thousands)
Cash, cash equivalents and marketable securities:
Cash and cash equivalents .......................................
Marketable investments .........................................
Long-term investments ..........................................
Total ..........................................................
Cash Flows
In summary, our cash flows were as follows:
(Dollars in thousands)
Cash flows provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents. . . . . . . . .
$
$
$
$
2011
As of December 31,
2010
Change
14,020
74,666
3,027
91,713
$
$
12,519
77,484
6,784
96,787
$
$
1,501
(2,818)
(3,757)
(5,074)
Year ended December 31,
2010
2011
2009
(5,168) $
5,287
1,382
1,501
$
(8,059) $
(2,777)
526
(10,310) $
41
(14,360)
608
(13,711)
49
Cash Flows from Operating Activities
We used net cash of $5.2 million in operating activities during 2011, which was primarily attributable to:
● $5.4 million used from net loss of $10.1 million after adjusting for non-cash related items of $4.7 million,
consisting primarily of stock based compensation expense of $3.9 million and depreciation and
amortization expense of $637,000;
● $4.3 million used to increase inventory relating primarily to raw materials and finished goods associated
with the ramp up of our recently introduced products — GenesisPlus and Excel V;
● $1.0 million used as a result of an increase in accounts receivable that resulted from increased product
sales in the three-month period ended December 31, 2011, compared to the same period in 2010; partially
offset by
● $3.0 million generated from an increase in accrued liabilities relating primarily to an increase in accrued
but unpaid personnel costs of $1.1 million, increased customer deposits of $923,000 and an increase in
accrued warranty expenses of $325,000 due to the increase in revenue in 2011;
● $2.6 million generated from the reduction of other current assets, primarily from the receipt of a U.S.
income tax refund of $1.2 million and $1.3 million amortization of discounts and purchased interest
relating to our marketable investments; and
● $1.3 million increase in accounts payable.
We used net cash of $8.1 million in operating activities during 2010, which was primarily attributable to:
● $5.2 million used from net loss of $10.5 million after adjusting for non-cash related items of $5.3 million,
consisting primarily of stock based compensation expense of $4.7 million and depreciation and
amortization expense of $717,000;
● $2.6 million used as a result of a decrease in accrued liabilities due primarily to a reduction in the liability
for warranty costs of $253,000 resulting primarily from a reduction in the total units remaining under
warranty, a decrease in accrued expenses of $1.4 million for payroll, professional services, sales &
marketing, and other miscellaneous expenses resulting from continued cost containment initiatives, and a
reduction of approximately $950,000 for the pay out of our prior year accrual for the TCPA class action
lawsuit; and
● $1.2 million used as a result of a decrease in deferred revenue due primarily to a reduction in deferred
service contracts resulting from a decline in our sales unit volume in 2009 and a reduction in the pricing
charged for service contracts; partially offset by
● $2.3 million generated from a reduction in other current assets and prepaid expenses, resulting primarily
from a reduction in accrued interest and unamortized discounts related to our marketable and long-term
investments.
Cash Flows from Investing Activities
We generated net cash of $5.3 million from investing activities in 2011, which was primarily attributable to:
● $69.1 million in net proceeds from the sales and maturities of marketable investments; partially offset by
● $63.1 million of cash used to purchase marketable investments; and
● $751,000 of cash used to purchase property and equipment.
We used net cash of $2.8 million in investing activities in 2010, which was primarily attributable to:
● $85.3 million in net proceeds from the sales and maturities of $650,000 of our ARS investments and due
to us diversifying out of municipal securities into other secure financial instruments; partially offset by
● $87.8 million of cash used to purchase marketable investments; and
● $275,000 of cash used to purchase property and equipment.
50
Cash Flows from Financing Activities
Net cash provided by financing activities in 2011 was $1.4 million, which resulted from $1.36 million of cash
generated by the issuance of stock through our stock option and employee stock purchase plans and $22,000 of excess
tax benefits related to stock-based compensation expenses reclassified from operating activities to financing activities.
Net cash provided by financing activities in 2010 was $526,000, which resulted from $518,000 of cash generated by
the issuance of stock through our stock option and employee stock purchase plans and $8,000 of excess tax benefits
related to stock-based compensation expenses reclassified from operating activities to financing activities.
Adequacy of cash resources to meet future needs
We had cash, cash equivalents, marketable and long-term investments of $91.7 million as of December 31, 2011. Of
this amount, we had $3.0 million invested in long-term ARS investments (see ‘Critical Accounting Policies and
Estimates’ section above, for a full description of our long-term investments in ARS). We believe that our existing cash
resources are sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the
next 12 months.
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.
We have certain contractual arrangements that create potential risk for us and are not recognized in our Consolidated
Balance Sheets. Discussed below are off-balance sheet arrangements that have or are reasonably likely to have a
material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results
of operations, liquidity, capital expenditures, or capital resources.
We lease various real properties under operating leases that generally require us to pay taxes, insurance, maintenance,
and minimum lease payments. Some of our leases have options to renew.
Contractual Obligations
The following are our obligations for future minimum lease commitments related to facility leases as of December 31,
2011:
Contractual Obligations
Operating leases . . . . . . . . . . . . . . . . . . . . . . $
Purchase Commitments
Payments Due by Period ($’000’s)
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
9,162 $
1,680 $
3,456 $
2,680 $
1,346
We maintain certain open inventory purchase commitments with our suppliers to ensure a smooth and continuous
supply for key components. Our 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. Our open
inventory purchase commitments were not material at December 31, 2011. As a result, this amount is not included in
the contractual obligations table above.
Income Tax Liability
We have included in our Consolidated Balance Sheet $478,000 in long-term income tax liability with respect to
unrecognized tax benefits and accrued interest as of December 31, 2011. 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.
51
Other
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. Our exposure under the various indemnification obligations is unknown and not reasonably
estimable as they involve future claims that may be made against us. As such, we have not accrued any amounts for
such obligations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
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 of the U.S. Government and its agencies and municipal bonds, and, by policy,
restrict our exposure to any single type of investment or 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 ARS) of generally less than eighteen months. Based on duration modeling with respect to our total investmnet
portfolio as of December 31, 2011, assuming a hypothetical increase in interest rates of one percentage point, the fair
value would have potentially declined by approximately $608,000.
We hold interest bearing ARS that represent investments in pools of student loans issued by the Federal Family
Education Loan Program. At the time of acquisition, these ARS investments were intended to provide liquidity via an
auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either
roll over their holdings or gain immediate liquidity by selling such interests at par. Since February 2008, uncertainties
in the credit markets affected our holdings in ARS investments and auctions for all of our investments in these
securities failed until December 31, 2008. In 2011, 2010 and 2009, approximately $4.4 million, $650,000 and $4.4
million, respectively of our original $13.4 million par value portfolio has been redeemed in full and as of December 31,
2011 we had $3.9 million par value (fair value of $3.0 million) of long-term ARS, whose auctions continue to fail.
These investments are not currently liquid and we will not be able to access these funds until a future auction of these
investments is successful, a buyer is found outside of the auction process or the ARS is refinanced by the issuer into
another type of debt instrument. Maturity dates for these ARS investments range from 2032 to 2041. We currently
classify all of these investments as long-term investments in our Consolidated Balance Sheet because of our continuing
inability to determine when these investments will settle. We have also modified our current investment strategy and
increased our investments in more liquid money market investments, United States Treasury securities, municipal
bonds, and eliminated investments in corporate debt. The valuation of our ARS investment portfolio is subject to
uncertainties that are difficult to predict. Factors that may impact its valuation include, duration of time that the ARS
remain illiquid, changes to credit ratings of the securities, rates of default of the underlying assets, changes in the
underlying collateral value, market discount rates for similar illiquid investments, ongoing strength and quality of
credit markets. If the auctions for our ARS investments continue to fail, and there is a further decline in the valuation,
then we would have to: (i) record additional reductions to the fair value of our ARS investments; and (ii) record
unrealized losses in our accumulated other comprehensive income (loss) for the losses in value that are associated with
market risk. If the decline in fair value is considered other-than-temporary then we would have to record an impairment
charge in our Consolidated Statement of Operations for the loss in value associated with the worsening of the credit
worthiness (credit losses) of the issuer, which would reduce future earnings and harm our business.
52
Foreign Currency Exchange Risk
We have international subsidiaries and operations and are, therefore, subject to foreign currency rate exposure.
Although the majority of our revenue and purchases are denominated in U.S. dollars, we have revenue to certain
international customers and expenses denominated in the Japanese Yen, Euro, Pounds Sterling, Australian Dollars,
Swiss Francs and Canadian Dollars. The net gains and losses from the revaluation of foreign denominated assets and
liabilities was a gain of approximately $28,000 in 2011, which is included in Interest and Other Income, net in our
Consolidated Statements of Operations. Movements in currency exchange rates could cause variability in our revenues,
expenses or interest and other income (expense). Though to date our exposure to exchange rate volatility has not been
significant, we cannot assure that there will not be a material impact in the future. Future fluctuations in the value of
the U.S. dollar may affect the price competitiveness of our products. 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.
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
54
55
56
57
58
59
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years ended
December 31, 2011, 2010 and 2009 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
II
Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
84
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.
53
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, 2011 and December 31, 2010, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 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 therin 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, 2011, 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, 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 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.
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 limitations, 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 15, 2012
54
CUTERA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2011
2010
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $8 and
$20, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 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; Issued and outstanding: 13,948,395 and
13,629,713 shares at December 31, 2011 and 2010, respectively . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
14,020
74,666
$
5,193
10,729
55
1,432
106,095
853
3,027
446
446
486
111,353
2,573
9,262
5,185
17,020
1,448
840
478
19,786
$
$
12,519
77,484
4,208
6,448
63
2,740
103,462
597
6,784
637
325
—
111,805
1,296
6,194
5,633
13,123
1,501
1,287
477
16,388
—
—
14
95,719
(3,325)
(841)
91,567
111,353
$
14
90,423
6,736
(1,756)
95,417
111,805
The accompanying notes are an integral part of these consolidated financial statements.
55
CUTERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2010
2009
2011
Net revenue:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
46,879 $
13,411
60,290
40,043 $
13,231
53,274
17,545
8,433
25,978
34,312
25,499
9,141
10,104
—
44,744
(10,432)
614
(9,818)
243
(10,061) $
15,805
7,253
23,058
30,216
24,735
7,004
9,576
—
41,315
(11,099 )
583
(10,516 )
2
(10,518 ) $
$
40,496
13,186
53,682
14,083
7,676
21,759
31,923
24,286
6,810
10,320
850
42,266
(10,343)
1,572
(8,771)
8,908
(17,679)
Net loss per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of shares used in per share calculations:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(0.73) $
(0.78 ) $
(1.33)
13,807
13,540
13,279
The accompanying notes are an integral part of these consolidated financial statements.
56
CUTERA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income
(loss)
Total
Stockholders’
Equity
12,806,035 $
13 $
80,318 $
31,410 $
367 $
112,108
Balance at December 31, 2008 . . . . . . . .
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, and stock
awards . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . .
Tax benefit from exercises of stock-based
payment awards . . . . . . . . . . . . . . . . .
Change in accounting principle (see Note
1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of other comprehensive loss:
Net loss . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of full
valuation allowance on tax effect. . .
Comprehensive loss . . . . . . . . . . . .
Balance at December 31, 2009 . . . . . . . .
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, and stock
awards . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . .
Tax benefit from exercises of stock-based
payment awards . . . . . . . . . . . . . . . . .
Components of other comprehensive loss:
Net loss . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of full
valuation allowance on tax effect. . .
Comprehensive loss . . . . . . . . . . . .
Balance at December 31, 2010 . . . . . . . .
Issuance of common stock for employee
purchase plan . . . . . . . . . . . . . . . . . . .
Exercise of stock options. . . . . . . . . . . . .
Issuance of common stock in settlement of
59,365
527,721
43,042
—
—
—
—
—
—
13,436,163
43,859
90,362
59,329
—
—
—
—
—
13,629,713
45,161
207,624
restricted stock units, net of shares
withheld for employee taxes, and stock
awards . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . .
Tax benefit from exercises of stock-based
payment awards . . . . . . . . . . . . . . . . .
Components of other comprehensive loss:
Net loss . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax
effect ($197,000 of tax benefit) . . . .
Comprehensive loss . . . . . . . . . . . .
Balance at December 31, 2011 . . . . . . . .
65,897
—
—
—
—
—
13,948,395 $
—
—
—
—
—
—
—
—
—
13
—
1
—
—
—
—
—
—
14
—
—
—
—
—
—
326
291
(32)
4,236
109
—
—
—
—
85,248
306
337
(126)
4,650
8
—
—
—
90,423
276
1,230
(146)
3,907
29
—
—
—
14 $
—
—
95,719 $
—
—
—
—
—
—
—
—
—
—
3,523
(3,523)
326
291
(32)
4,236
109
—
(17,679)
—
(17,679)
—
—
17,254
1,494
—
(1,662)
—
—
—
—
—
(10,518)
—
—
6,736
—
—
—
—
—
(10,061)
—
—
(3,325) $
—
—
—
—
—
—
(94)
—
(1,756)
—
—
—
—
—
—
915
—
(841) $
1,494
(16,185)
100,853
306
338
(126)
4,650
8
(10,518)
(94)
(10,612)
95,417
276
1,230
(146)
3,907
29
(10,061)
915
(9,146)
91,567
The accompanying notes are an integral part of these consolidated financial statements.
57
CUTERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2010
2011
2009
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,061) $ (10,518) $ (17,679)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (deficit) from stock-based compensation. . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based compensation . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for excess and obsolete inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in deferred tax asset net of valuation allowance . . . . . . . . . . . . . . . . . . . .
Gain on sale of marketable and long term investments, net . . . . . . . . . . . . . . . . .
Tax on unrealized gains on marketable and long term investments . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . .
3,907
29
(22)
637
—
15
(113)
(5)
197
13
(1,000)
(4,281)
2,604
(486)
1,277
2,970
45
(895)
1
(5,168)
4,650
8
(8)
717
235
(122)
(116)
(74)
—
—
(759)
(275)
2,314
—
215
(2,646)
(200)
(1,208)
(272)
(8,059)
4,236
109
(23)
860
611
525
10,512
(103)
—
—
1,940
2,908
1,014
—
(609)
42
(62)
(3,537)
(703)
41
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of marketable and long-term investments . . . . . . . . . . . . . . . .
Proceeds from maturities of marketable investments . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . . . . . .
(275)
(751)
—
36
42,830
21,198
42,505
47,935
(63,131) (87,837)
(2,777)
5,287
(154)
—
27,914
11,535
(53,655)
(14,360)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan . .
585
Excess tax benefit related to stock-based compensation . . . . . . . . . . . . . . . . . . . .
23
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
608
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,711)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,540
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,020 $ 12,519 $ 22,829
Supplemental and non-cash disclosure of cash flow information:
518
8
526
(10,310)
22,829
1,360
22
1,382
1,501
12,519
Cash paid (received) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,345) $
272 $
578
The accompanying notes are an integral part of these consolidated financial statements.
58
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 light-based aesthetic systems for practitioners
worldwide. The Company designs, develops, manufactures, and markets the CoolGlide, Xeo, Solera, GenesisPlus and
Excel V (introduced in 2011) product platforms for use by physicians and other qualified practitioners to allow its
customers to offer safe and effective aesthetic treatments to their customers. Commencing in the fourth quarter ended
December 31, 2011, the Company started distributing a Q-switched laser product called myQ in Japan, which is
sourced from an original equipment manufacturer. The Xeo and Solera platforms offer multiple hand pieces and
applications, which allow customers to upgrade their systems (Upgrade revenue). In addition to systems and upgrade
revenue, the Company generates revenue from the sale of post warranty service contracts, providing services for
products that are out of warranty, Titan hand piece refills, and distributing third party manufactured dermal fillers and
cosmeceuticals.
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.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles in
the United States of America (GAAP) requires the Company’s management to make estimates and assumptions that
affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could
differ materially from those estimates. On an ongoing basis, the Company evaluates their estimates, including those
related to warranty obligation, sales commission, accounts receivable and sales allowances, fair values of long-term
investments, fair values of acquired intangible assets, useful lives of intangible assets and property and equipment, fair
values of options to purchase the Company’s common stock, recoverability of deferred tax assets, and effective income
tax rates, among others. Management bases their estimates on historical experience and on various other assumptions
that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values
of assets and liabilities.
Cash, Cash Equivalents, Marketable Investments, and Long-Term Investments
The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S. federal
and municipal governments and their agencies, commercial paper and corporate debt securities. 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 majority of the Company’s cash and investments are held in U.S. banks and its foreign subsidiaries maintain a
limited amount of cash in their local banks to cover their short term operating expenses.
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 the
Financial Accounting Standards Board Accounting Standards Codification (ASC) topic 210, subtopic 10, securities
with maturities beyond 12 months (such as 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 reported as a component of stockholders’ equity. 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 and other income, net.
59
The Company holds a variety of interest bearing auction rate securities (ARS) that represent investments in pools of
student loan assets issued by the Federal Family Education Loan Program (FELP). At the time of acquisition, the
majority of ARS investments were intended to provide liquidity via an auction process that resets the applicable
interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate
liquidity by selling such interests at par. Since February 2008, uncertainties in the credit markets affected the majority
of ARS investments and auctions for the Company’s investments in these securities have failed to settle on their
respective settlement dates. However, since 2009 $9.5 million of ARS were redeemed at full par value. Maturity dates
for the ARS investments in the Company’s portfolio range from 2032 to 2041.
As of December 31, 2011, the Company had $3.0 million of ARS classified as long-term investments. The Company
has classified its ARS investment balance as long-term investments in the accompanying Consolidated Balance Sheet
because of the Company’s belief that it could take more than one year before they are readily marketable. The
Company’s ARS have been classified and accounted for as available-for-sale. These securities are carried at fair value
with the unrealized gains and losses reported as a component of stockholders’ equity. The estimated fair value of the
Company’s ARS investments was $3.0 million at December 31, 2011 and $6.8 million at December 31, 2010.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date In determining fair value, the Company utilizes
valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the
extent possible as well as considers counterparty credit risk in its assessment of fair value. Carrying amounts of the
Company’s financial instruments, including 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 hierarchy distinguishes between (1) market participant assumptions developed based on market data
obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant
assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair
value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three
levels of the fair value hierarchy are described below:
● Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for
assets or liabilities.
● Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market
data, including quoted prices for similar assets and liabilities in active markets and quoted prices in
markets that are not active. Level 2 also includes assets and liabilities that are valued using models or
other pricing methodologies that do not require significant judgment since the input assumptions used in
the models, such as interest rates and volatility factors, are corroborated by readily observable data from
actively quoted markets for substantially the full term of the financial instrument.
● Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of
significant management judgment. These values are generally determined using pricing models for which
the assumptions utilize management’s estimates of market participant assumptions.
Impairment of Marketable Investments and ARS Securities
The Company reviews its marketable and long term investments for impairment on a quarterly basis. If it concludes
that any of these investments are impaired, it determines whether such impairment is other-than-temporary. Factors
that the Company considers to make such determination include the duration and severity of the impairment, the reason
for the decline in value and the potential recovery period, and its intent to sell, or whether it is more likely than not that
it will be required to sell, the investment before recovery.
60
Beginning April 1, 2009, if an entity intends to sell, or if it is more likely than not that we will be required to sell, an
impaired debt security prior to recovery of its cost basis, the security is other-than-temporarily impaired and the full
amount of the impairment is required to be recognized as a loss through earnings. Otherwise, losses on securities which
are other-than-temporarily impaired are separated into:
(iii)
(iv)
the portion of loss which represents the credit loss; or
the portion which is due to other factors.
The credit loss portion is recognized as a loss through earnings while the loss due to other factors is recognized in other
comprehensive income (loss), net of taxes and related amortization. At December 31, 2011, the Company had
approximately $3.9 million of par value ARS investments. The Company intends to, and has the ability to, hold these
investments until the anticipated date of maturity. As such, the company treats the decline in value as temporary and
has recognized approximately $873,000 in unrealized losses. Given the Company believed that such losses were not
credit related, it has included them in accumulated other comprehensive loss.
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 worldwide customers. The Company performs credit evaluations of its
customers and maintains reserves for potential credit losses. Concentrations of accounts receivable balances are
presented in Note 3 and segment, geographic and major customer information is presented in Note 10.
The Company invests in debt instruments—including bonds and ARS—of the U.S. Government, its agencies and
municipalities. In addition, starting from 2010, the Company has invested in other high grade investments such as
commercial paper and corporate bonds. By policy, the Company restricts its exposure to any single 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. The Company must continue to
successfully design, develop, acquire, manufacture and market its products. There can be no assurance that current or
recently acquired 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 or acquired 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.
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.
61
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 sublicenses 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.
Impairment 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. The Company would recognize an impairment loss 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, 2011, there have been no such impairments.
Warranty Obligations
The Company provides a one-year standard warranty on all 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. To determine the estimated warranty reserve, the Company utilizes
actual service records to calculate the average service expense per system and applies this to the equivalent number of
units exposed under warranty. The Company updates these estimated charges every quarter.
Revenue Recognition
Product, Upgrade, Titan hand piece refill, and Dermal filler and cosmeceutical revenue 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;
● Delivery has occurred or services have been rendered; 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.
62
The FASB amended the accounting standards for multiple deliverable revenue arrangements to:
● provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement
●
●
should be separated, and how the consideration should be allocated;
require an entity to allocate revenue in an arrangement using estimated selling price (ESP) of deliverables
if a vendor does not first have vendor-specific objective evidence (VSOE) of selling price or secondly
does not have third-party evidence (TPE) of selling price; and
eliminate the use of the residual method and require an entity to allocate revenue using the relative selling
price method.
Multiple-element arrangements - A multiple-element arrangement includes the sale of one or more tangible product
offerings with one or more associated services offerings, each of which are individually considered separate units of
accounting. The determination of the Company’s units of accounting did not change with the adoption of the new
revenue recognition guidance and as such the Company allocates revenue to each element in a multiple-element
arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method,
the Company determines the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of
selling price. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses its best estimate of
selling price for that deliverable. Revenue allocated to each element is then recognized when the other revenue
recognition criteria are met for each element.
The above mentioned update was effective for the Company from January 1, 2011 and the Company elected to apply it
prospectively to new or materially modified revenue arrangements after its effective date. This did not have a material
impact on the Company’s financial position or results of operations for the year ended December 31, 2011, and does
not change the units of accounting for its revenue transactions. The new accounting standard, if applied to the year
ended December 31, 2010, would not have had a material impact on our revenue for that year.
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, 2011, 2010, and 2009 was $13.4 million, $13.2 million, and $13.2 million, respectively.
Cost of Revenue
Cost of revenue consists primarily of material, finished and semi-finished products purchased from third-party
manufacturers, labor, stock-based compensation expenses, overhead involved in our internal manufacturing processes,
technology license amortization and royalties, and costs associated with product warranties.
Shipping and Handling Costs
Amounts charged to customers and costs incurred by the Company related to shipping and handling are included in net
sales and cost of goods sold, 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
expenses were $1.3 million in 2011, $947,000 in 2010, and $891,000 in 2009.
63
Stock-based Compensation
The Company elected to use the Black-Scholes-Merton (BSM) pricing model to determine the fair value of stock
options on the dates of grant. Restricted stock units (RSUs) and stock awards are measured based on the fair market
values of the underlying stock on the dates of grant. Shares are issued on the vesting dates, 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 will be fewer than the actual number of RSUs outstanding. Furthermore, the Company records the
liability for withholding amounts to be paid by us as a reduction to additional paid-in capital when the shares are
issued. Also, the Company recognizes stock-based compensation using the straight-line method.
The Company includes as part of cash flows from financing activities the benefits of tax deductions in excess of the
tax-effected compensation of the related stock-based awards for options exercised and RSUs vested during the period.
The amount of cash received from the exercise of stock options and employee stock purchases, net of taxes withheld
and paid was $1.4 million in 2011, $518,000 in 2010, and $585,000 in 2009, and the total direct tax benefit (deficit)
realized, including the excess tax benefit (deficit), from stock-based award activity was $29,000 in 2011, $8,000 in
2010, and $109,000 in 2009. 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.
Income Taxes
The Company recognizes income taxes under the liability method. The Company recognizes deferred income taxes for
differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect
for the years in which differences are expected to reverse. The Company recognizes the effect on deferred taxes of a
change in tax rates in income in the period that includes the enactment date. 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.
The measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of
tax basis. The deferred tax assets and liabilities reflect management’s assessment that tax positions taken, and the
resulting tax basis, are more likely than not to be sustained if they are audited by taxing authorities. Also, assessing tax
rates that the Company expects to apply and determining the years when the temporary differences are expected to
affect taxable income requires judgment about the future apportionment of our income among the states in which the
Company operates. These matters, and others, involve the exercise of significant judgment. Any changes in our
practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our
financial condition or results of operations.
Valuation allowances are established when necessary to reduce deferred income tax assets to amounts that the
Company believes are more likely than not to be recovered. The Company evaluates its deferred tax assets quarterly to
determine whether adjustments to our valuation allowance are appropriate. In making this evaluation, the Company
relies on its recent history of pre-tax earnings, estimated timing of future deductions and benefits represented by the
deferred tax assets, and its forecasts of future earnings, the latter two of which involve the exercise of significant
judgment. As of September 30, 2009, the Company could not sustain a conclusion that it was more likely than not that
the Company would realize any of its deferred tax assets resulting from its cumulative losses reported in the recent past
as well as other factors. Consequently, the Company established a valuation allowance against those deferred tax
assets. The Company also performed this evaluation as of December 31, 2011, and determined the full valuation
allowance was still required.
64
The Company establishes reserves for uncertain tax positions in accordance with the Income Taxes subtopic of the
ASC. The subtopic prescribes the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. Additionally, the subtopic provides guidance on derecognition, measurement,
classification, interest and penalties, and transition of uncertain tax positions. 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 Loss
Comprehensive loss 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 and long-term investments
represent the only component of other comprehensive loss.
On April 1, 2009, the Company adopted updates issued by the Financial Accounting Standards Board (FASB) to the
recognition and presentation of other-than-temporary impairments. A cumulative effect adjustment was required to
retained earnings and a corresponding adjustment to accumulated other comprehensive loss to reclassify the non-credit
portion of previously other-than-temporarily impaired securities which were held at the beginning of the period of
adoption and for which the Company does not intend to sell and it is more likely than not that the Company will not be
required to sell such securities before recovery of the amortized cost basis. As a result of the implementation of this
pronouncement, the Company reclassified the cumulative effect of the non-credit portion of previously recognized
other-than-temporarily impaired adjustments of $3.5 million by increasing retained earnings and decreasing
accumulated other comprehensive loss.
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 the applicable period end exchange rate. 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 (loss) and are insignificant for each of the three years ended December 31, 2011. 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, 2011.
New Accounting Standards
On January 1, 2011, the Company adopted changes issued by the FASB to the classification of certain employee share-
based payment awards. These changes clarify that there is not an indication of a condition that is other than market,
performance, or service if an employee share-based payment award’s exercise price is denominated in the currency of a
market in which a substantial portion of the entity’s equity securities trade and differs from the functional currency of
the employer entity or payroll currency of the employee. An employee share-based payment award is required to be
classified as a liability if the award does not contain a market, performance or service condition. Prior to this guidance,
the Company did not consider the difference between the currency denomination of an employee share-based payment
award’s exercise price and the functional currency of the employer entity or payroll currency of the employee in
determining the proper classification of the share-based payment award. The adoption of these changes had no impact
on the Company’s financial statements.
65
On January 1, 2011, the Company adopted changes issued by the FASB to disclosure requirements for fair value
measurements. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value
measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances
and settlements, (i.e., on a gross basis rather than as one net number). These changes were applied to the disclosure in
the Fair Value of Financial Instruments section of Note 2 to the Condensed Consolidated Financial Statements. The
adoption of these changes had no impact on our financial statements.
In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement: Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards”.
Some of the amendments clarify the Board’s intent about the application of existing fair value measurement
requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing
information about fair value measurements. This guidance is effective for interim and annual periods beginning after
December 15, 2011. The Company is still evaluating the potential future effects of this guidance.
In June 2011, the FASB amended its authoritative guidance on the presentation of comprehensive income. Under the
amendment, an entity will have the option to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. This amendment, therefore, eliminates the currently available
option to present the components of other comprehensive income as part of the statement of changes in stockholders’
equity. The amendment does not change the items that must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net income. The Company will adopt this amended
guidance for the fiscal year beginning January 1, 2012. As this guidance relates to presentation only, the adoption of
this guidance will not have any other effect on the Company’s financial statements.
NOTE 2—INVESTMENT SECURITIES
The following tables summarize cash, cash equivalents, marketable securities and long term investments (in
thousands):
Cash and cash equivalents:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities:
U.S. government notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
2,153
$
1,989
7,318
4,549
14,020
3,665
41,565
6,134
4,747
18,555
74,666
8,330
2,200
12,519
2,070
24,087
15,011
11,465
24,851
77,484
Long-term investments in ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash equivalents, marketable securities and long term investments . . $
3,027
91,713
$
6,784
96,787
66
The following table summarizes unrealized gains and losses related to our marketable investments and long term
investments, both designated as available-for-sale (in thousands):
December 31, 2011
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments
U.S. government notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total marketable securities . . . . . . . . . . . . . . . . . . . . . .
Long-term investments in ARS . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash equivalents, marketable securities
and long term investments . . . . . . . . . . . . . . . . . . . . .
December 31, 2010
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government agencies . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total marketable securities . . . . . . . . . . . . . . . . . . . . . .
Long-term investments in ARS . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash equivalents, marketable securities
and long term investments . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
14,020
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
$
—
$
—
$
14,020
3,655
41,535
6,091
4,747
18,574
74,602
3,900
10
44
44
1
15
114
—
—
(14)
(1)
(1)
(34)
(50)
3,665
41,565
6,134
4,747
18,555
74,666
(873)
3,027
$
92,522
$
114
$
(923) $
91,713
Amortized
Cost
12,519
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
$
—
$
—
$
12,519
2,069
24,088
15,029
11,459
24,825
77,470
8,325
1
17
2
7
55
82
—
—
(18)
(20)
(1)
(29)
(68)
2,070
24,087
15,011
11,465
24,851
77,484
(1,541)
6,784
$
98,314
$
82
$
(1,609) $
96,787
The Company did not have any gains or losses associated with its long-term investments. The realized gains and losses
associated with short-term investments were as follows (in thousands):
Realized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2011
2010
2009
$
5
—
$
78
(4)
103
—
67
The following table summarizes the fair value and the gross unrealized losses for investments that were in an
unrealized loss position, aggregated by category and by the length in time that the individual securities have been in a
continuous loss position (in thousands):
December 31, 2011
U.S. government agencies . . . . . . . .
Municipal securities . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . .
Long-term investments in ARS . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010
U.S. government agencies . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . .
Long-term investments in ARS . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Less Than 12 Months
Gross
Fair
Unrealized
Market
Value
Losses
$ 12,758
929
999
-
-
$ 14,686
$
$
Less Than 12 Months
Gross
Fair
Unrealized
Market
Value
Losses
$ 7,830
10,083
-
8,498
-
$ 26,411
$
12 Months or Greater
Gross
Fair
Unrealized
Market
Losses
Value
Total
Fair
Market
Value
Gross
Unrealized
Losses
(14) $
(1)
(1)
-
-
-
-
-
7,799
3,027
(16) $ 10,826
$
$
- $ 12,758
929
-
-
999
7,799
(34)
(873)
3,027
(907) $ 25,512
$
$
(14)
(1)
(1)
(34)
(873)
(923)
12 Months or Greater
Gross
Fair
Unrealized
Market
Losses
Value
Total
Fair
Market
Value
Gross
Unrealized
Losses
(18) $
(19)
-
(29)
-
-
2,050
-
-
6,784
(66) $ 8,834
$
$
- $ 7,830
(1)
12,133
-
-
-
8,498
6,784
(1,541)
(1,542) $ 35,245
$
$
(18)
(20)
-
(29)
(1,541)
(1,608)
The following table summarizes the estimated fair value of our marketable investments and long term investments
classified by the contractual maturity date of the security as of December 31, 2011 (in thousands):
Due in less than one year (fiscal year 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 1 to 3 years (fiscal year 2013- 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 3 to 5 years (fiscal year 2015-2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 5 to 10 years (fiscal year 2017-2022) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in greater than 10 years (fiscal year 2023 and beyond). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
40,988
33,678
—
—
3,027
77,693
$
$
68
Fair Value Measurements
The following table summarizes financial assets measured and recognized at fair value on a recurring basis and
classified under the appropriate level of the fair value hierarchy as described above (in thousands):
December 31, 2011
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short term marketable investments:
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments:
Available-for-sale ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short term marketable investments:
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments:
Available-for-sale ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Level 1
Level 2
Level 3
Total
7,318
—
$
—
4,549
$
—
74,666
—
—
—
$
7,318
4,549
74,666
—
7,318
Level 1
8,331
—
$
$
—
79,215
$
3,027
3,027
3,027
$ 89,560
Level 2
Level 3
Total
—
2,200
$
—
—
—
$
8,331
2,200
77,484
—
77,484
—
8,331
—
79,684
$
$
6,784
6,784
6,784
$ 94,799
The Company’s Level 1 financial assets are money market funds with stated maturities of three months or less from the
date of purchase, whose fair values are based on quoted market prices. The Company’s Level 2 financial assets are
highly liquid debt instruments of U.S. federal and municipal governments and their agencies, commercial paper and
corporate debt securities whose fair values are obtained from readily-available pricing sources for the identical
underlying security that may, or may not, be actively traded.
At December 31, 2011, observable market information was not available to determine the fair value of the Company’s
ARS investments. Therefore, the fair value is based on broker-provided valuation models that relied on Level 3 inputs
including those that are based on expected cash flow streams and collateral values, assessments of counterparty credit
quality, default risk underlying the security, market discount rates and overall capital market liquidity. The valuation of
the Company’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may
impact the valuations in the future include changes to credit ratings of the securities, as well as to the underlying assets
supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates,
counterparty risk and ongoing strength and quality of market credit and liquidity. These financial instruments are
classified within Level 3 of the fair value hierarchy.
69
The table presented below summarizes the change in carrying value associated with Level 3 financial assets, which
represents the Company’s investment in long term ARS, for the year ended December 31, 2011 (in thousands):
Balance at December 31, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses (realized or unrealized)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in earnings (or changes in net assets)
Included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases and issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses (realized or unrealized)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in earnings (or changes in net assets)
Included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases and issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,275
—
(26)
—
(465)
6,784
—
668
—
(4,425)
3,027
$
NOTE 3—BALANCE SHEET DETAIL
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. The Company had one
customer who accounted for 8% at December 31, 2011 and 10% at December 31, 2010 of the Company’s total
accounts receivable balance.
Inventories
Inventories consist of the following (in thousands):
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
6,587
4,142
10,729
$
$
2010
4,204
2,244
6,448
$
$
December 31,
2011
2010
590
2,761
2,893
6,244
(5,391)
853
$
$
361
2,702
2,688
5,751
(5,154)
597
$
$
Depreciation expense related to property and equipment was $446,000 in 2011, $525,000 in 2010, and $664,000 in
2009.
70
Intangible Assets
Intangible assets were comprised of a patent sublicense acquired from Palomar in 2006 and a technology sublicense
acquired in 2002. The components of intangible assets at December 31, 2011 and 2010 were as follows (in thousands):
Gross
Carrying
Amount
Accumulated
Amortization
Amount
Net
Amount
December 31, 2011
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1,218
538
1,756
1,218
538
1,756
$
$
$
$
793
517
1,310
656
463
1,119
$
$
$
$
425
21
446
562
75
637
Amortization expense for intangible assets was $191,000 in 2011, $192,000 in 2010, and $196,000 in 2009.
Based on intangible assets recorded at December 31, 2011, 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,
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Amount
158
138
138
12
446
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
NOTE 4—WARRANTY AND SERVICE CONTRACTS
December 31,
2011
2010
4,172
1,121
1,054
839
483
434
276
191
692
9,262
$
$
3,035
796
131
809
335
475
—
131
482
6,194
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, Spain, Switzerland (through
November 2011) 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.
71
Warranty Accrual (in thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Accruals for warranties issued during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Settlements made during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Service Contract Revenue (in thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Payments received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Revenue recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
796
4,043
(3,718 )
1,121
$
$
1,049
3,061
(3,314)
796
December 31,
2011
2010
6,765
8,332
(9,259 )
5,838
$
$
8,128
8,254
(9,617)
6,765
$
$
$
$
Costs incurred under service contracts amounted to $4.6 million in 2011, $4.3 million in 2010, and $4.7 million in
2009, and are recognized as incurred.
NOTE 5—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION
EXPENSE
Stock Option Plans
As of December 31, 2011, 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. The 2004 ESPP offering and purchase periods are for approximately six months.
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’s Board of Directors voted not to increase the shares available for
future grant on January 1, 2011 and 2010. The price of the common stock purchased is 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. Under the
2004 ESPP the Company issued 45,161 shares in 2011 and 43,859 shares in 2010. At December 31, 2011, 1,056,936
shares remained available for future issuance.
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 were 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.
72
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 2004 Equity Incentive 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. 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.
In accordance with the 2004 Equity Incentive Plan, the Company’s non-employee directors are granted $60,000 of
grant date fair value, fully vested, stock awards annually on the date of the Company’s Annual Meeting of
stockholders. In the year ended December 31, 2011 and 2010, the Company issued 37,925 and 37,266 shares of stock,
respectively. In addition, in the year ended December 31, 2011 and 2010, the Company’s Board of Directors granted
39,300 and 109,025, respectively, of RSUs to certain members of the Company’s management. These RSUs vest at the
rate of one-third on June 1of the year of grant, and one-third in each of the subsequent two years. The Company
measured the fair market values of the underlying stock on the dates of grant and recognizes the stock-based
compensation expense using the straight-line method over the vesting period.
The Company issues new shares upon the exercise of options, restricted stock units and ESPP shares.
Option Exchange Program
In July 2009, the Company completed its Option Exchange Program for its employees to exchange certain options
outstanding for new options to purchase shares of the Company’s common stock. As a result, options to purchase
864,373 shares of the Company’s common stock were cancelled and new options to purchase up to 447,841 shares of
the Company’s common stock were issued in exchange. The new options have an exercise price per share of $8.49, the
closing price of the Company’s common stock as reported on the Nasdaq Global Select Market on the date that the
offer expired and Option Exchange Program was completed, are unvested as of the grant date, and subject to an
additional six (6) months of vesting over and above the vesting schedule of the surrendered options.
Given the Option Exchange Program was designed to be approximately a “value-for-value” exchange, the Company
did not incur any significant additional non-cash compensation charges as the fair value of the replacement options was
approximately equal to or less than the fair value of the surrendered options. The Company determined the fair value of
stock options using the Black Scholes valuation model.
73
Option Activity
Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:
Shares
Available
For Grant
2,013,089
(1,409,371)
—
1,270,828
(36,540)
2,375
1,840,381
(961,500)
—
267,274
(146,291)
5,583
1,005,447
(1,206,500)
—
746,273
(77,225)
6,542
Number of
Shares
3,081,733 $
1,409,371 $
(527,721) $
(1,270,828) $
—
—
2,692,555 $
961,500 $
(90,362) $
(267,274) $
—
—
3,296,419 $
1,206,500 $
(207,624) $
(746,273)
—
—
12.94
8.51
0.55
17.55
—
—
10.87
10.14
3.74
9.91
—
—
10.93
8.61
5.92
13.40
—
—
Balances as of December 31, 2008 . .
Options granted (2) . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . .
Options cancelled (expired or
forfeited) (2) . . . . . . . . . . . . . . . . . . . . .
Stock awards granted . . . . . . . . . . . . . . .
Restricted stock units cancelled
(expired or forfeited) . . . . . . . . . . . . .
Balances as of December 31, 2009 . .
Options granted (2) . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . .
Options cancelled (expired or
forfeited) (2) . . . . . . . . . . . . . . . . . . . . .
Stock awards granted . . . . . . . . . . . . . . .
Restricted stock units cancelled
(expired or forfeited) . . . . . . . . . . . . .
Balances as of December 31, 2010 . .
Options granted (2) . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . .
Options cancelled (expired or
forfeited) (2) . . . . . . . . . . . . . . . . . . . . .
Stock awards granted . . . . . . . . . . . . . . .
Restricted stock units cancelled
(expired or forfeited) . . . . . . . . . . . . . .
Balances as of December
31, 2011 . . . . . . . . . . . . . . . . . . . . . . .
Exercisable as of December 31,
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options Outstanding
Weighted-
Average
Exercise
Price
Weighted-Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
(in $ millions)(1)
6.0
4.6
5.1 $
1.6
4.4 $
1.1
474,537
3,549,022 $
9.92
1,806,558 $
10.86
4.6 $
3.5 $
0.4
0.4
(1) Based on the closing stock price of the Company’s stock of $7.45 on December 30, 2011, $8.29 on December 31,
(2)
2010 and $8.51 on December 31, 2009.
Included in options granted and options cancelled are shares granted and cancelled in connection with the
Company’s Option Exchange Program in 2009 (see ‘Option Exchange Program’ above for more details).
74
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 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, 2011. The aggregate intrinsic amount changes based on the fair market value
of the Company’s common stock. Total intrinsic value of options exercised was $521,000 in 2011, $128,000 in 2010,
and $3.2 million in 2009. The options outstanding and exercisable at December 31 of the respective year were in the
following exercise price ranges:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$4.25–$8.48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.49–$8.49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.66–$8.66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.72–$8.72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.75–$9.74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.24–$10.24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.43–$14.14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14.78–$24.46 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25.39–$25.39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25.73–$25.73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4.25–$25.73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
Outstanding
381,425
296,773
599,833
811,500
174,000
625,916
423,196
207,254
20,000
9,125
3,549,022
Weighted-Average
Remaining
Contractual Life
(in years)
3.69
2.93
4.20
6.31
7.62
5.18
2.92
3.04
2.47
2.59
4.63
Number
Outstanding
179,508
258,193
414,797
—
45,376
259,982
412,323
207,254
20,000
9,125
1,806,558
Weighted-
Average
Exercise
Price
$
$
5.15
8.49
8.66
—
9.38
10.24
11.85
20.26
25.39
25.73
10.86
As of December 31, 2010 there were 1,679,268 options that were exercisable at a weighted average exercise price of
$12.12.
Restricted Stock Units and Stock Awards
Information with respect to restricted stock units activity is as follows (in thousands):
Outstanding at December 31, 2010 . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2011 . . . . . . . . . . . . . .
Number
of
Shares
$
67,096
$
77,225
(82,526) $
(6,542) $
$
55,253
Weighted-Average
Grant-
Date Fair
Value
Aggregate
Fair Value (1)
(in thousands)
10.24
8.32
8.93
9.99
9.55
$
691(3)
(1) Represents the value of the Company’s stock on the date that the restricted stock units vest.
(1) 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 $737,000.
Stock-Based Compensation
Stock-based compensation expense for stock options, restricted stock units, stock awards and ESPP shares for the year
ended December 31, 2011, 2010 and 2009 was as follows (in thousands):
Stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and Stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
$
$
75
Year Ended December 31,
2010
2009
2011
3,047
775
85
3,907
$
$
3,628
927
95
4,650
$
$
3,763
360
113
4,236
Total stock-based compensation expense by department recognized during the year ended December 31, 2011, 2010
and 2009 was as follows (in thousands):
Year Ended December 31,
2010
2009
2011
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
$
$
659
788
698
1,762
3,907
$
$
724
1,189
629
2,108
4,650
$
$
717
1,044
473
2,002
4,236
As of December 31, 2011, the unrecognized compensation cost, net of expected forfeitures, was $4.6 million for stock
options and stock awards, which will be recognized using the straight- line attribution method over an estimated
weighted-average remaining amortization period of 2.49 years. For the ESPP, the unrecognized compensation cost, net
of expected forfeitures, was $31,000, which will be recognized using the straight- line attribution method over an
estimated weighted-average amortization period 0.33 years.
Valuation Assumptions and Fair Value of Stock Option and ESPP Grants
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
2011
2010
2009
2011
Stock Purchase Plan
2010
2009
Estimated fair value of grants during
the year . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years)(1) . . . . . . . . .
Risk-free interest rate(2) . . . . . . . . . . .
Volatility(3) . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield(4) . . . . . . . . . . . . . . . . . .
$
$
3.10
4.15
1.41%
43%
—%
$
3.76
3.84
1.73%
46%
—%
$
3.93
4.23
2.6%
55%
—%
$
2.06
0.50
0.08%
39%
—%
$
2.41
0.50
0.2%
40%
—%
2.39
0.50
0.1%
52%
—%
(1) The expected term represents the period during which the Company’s stock-based awards are expected to be
outstanding. The estimated term is based on historical experience of similar awards, giving consideration to the
contractual terms of the awards, vesting requirements, and expectation of future employee behavior, including
post-vesting terminations.
(2) The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of
the option as of the date of grant.
(3) Expected volatility is a 50%/50% blend of implied and historical volatility. The Company has determined that
this is a more reflective measure of market conditions and a better indicator of expected volatility, than its limited
historical volatility since the IPO of its common stock.
(4) The Company has not historically issued any dividends and does not expect to do so in the foreseeable future.
The Company periodically estimates forfeiture rates based on its historical experience within separate groups of
employees and adjusts the stock-based payment expense accordingly.
76
NOTE 6—COMMON STOCK REPURCHASES
Restricted Stock Unit Withholdings
The Company issues restricted stock units as part of its equity incentive plans, which are described more fully in “Note
5—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. The Company withheld 16,629 in 2011, 14,283 in 2010, and 3,934 in
2009, shares of common stock to satisfy its employees’ tax obligations of $146,000 in 2011, $126,000 in 2010, and
$32,000 in 2009. 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 7—INCOME TAXES
The Company files income tax returns in the U.S. federal and various state and local jurisdictions and foreign
jurisdictions. The components of the provision for income taxes are as follows (in thousands):
Year Ended December 31,
2010
2009
2011
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes
$
$
The Company’s deferred tax asset consists of the following (in thousands):
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accruals and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset before valuation allowance . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset after valuation allowance . . . . . . . . . . . . . . . . .
(52) $
69
208
225
(13)
13
18
18
243
$
$
$
(154) $
37
235
118
(45)
45
(116)
(116)
2
$
(1,973)
32
338
(1,603)
9,686
871
(46)
10,511
8,908
December 31,
2011
2010
8,939
6,374
3,374
2,062
312
370
429
206
(143)
21,923
(21,553)
370
$
$
6,281
5,644
3,385
1,488
558
388
303
146
63
18,256
(17,868)
388
77
The Company’s deferred tax asset balance is reported in the following captions in the Consolidated Balance Sheets (in
thousands):
Deferred tax asset (current portion) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net of current portion . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities (current deferred tax liability) . . . . . . . . . . . . . . .
Net deferred tax asset after valuation allowance . . . . . . . . . . . . . . . . .
December 31,
2011
2010
$
$
55
446
(131)
370
$
$
63
325
—
388
The differences between the U.S. federal statutory income tax rate to the Company’s effective tax are as follows:
U.S. federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax rate, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit for research and development credit . . . . . . . . . . . . . . . . . . . .
Changes in unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income inclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to beginning deferreds for state rate changes. . . . . . . . .
Tax effect of other comprehensive income . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* Certain items have changed for classification purposes.
Year Ended December 31,
2011
2010*
2009*
35.00%
2.56
6.02
(0.02)
0.19
(0.88)
(2.15)
2.34
(9.64)
4.30
(2.01)
(37.54)
(0.65)
(2.48)%
35.00%
2.81
2.97
2.59
0.98
(0.63)
—
(1.13)
(1.54)
(0.53)
—
(38.31)
(2.21)
0.00%
35.00%
(0.38)
1.05
0.71
5.42
(0.76)
(0.32)
11.00
(8.91)
(0.47)
—
(142.18)
(1.73 )
(101.57)%
The Company recognizes deferred tax assets for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit
carryforwards. The Company records a valuation allowance to reduce the deferred tax assets to their estimated
realizable value, when it is more likely than not that it will not be able to generate sufficient future taxable income to
realize the net carrying value. The Company reviews the deferred tax asset and valuation allowance on a quarterly
basis, and considers whether positive and negative evidence exists to effect the realization of deferred tax assets. After
considering both the positive and negative evidence as of September 30, 2009, the Company determined that it was not
more-likely-than-not that it would realize the full value of its deferred tax assets. As a result, the Company established
a valuation allowance of $10.2 million against the net deferred tax asset balance as of December 31, 2008. In addition,
the Company recorded a valuation allowance against its deferred tax assets generated in 2009, 2010 and 2011, which
resulted in a valuation allowance of $21.6 million as of December 31, 2011.
As of December 31, 2011, the Company had cumulative net operating loss carry-forwards for federal and state income
tax reporting purposes of approximately $24.0 million and $9.6 million, respectively. The federal net operating loss
carry-forwards expire through the year 2031 and the state net operating loss carry-forwards expire at various dates
through the year 2031. 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. The Company will record approximately $3.9
million as a credit to additional paid in capital as and when such excess tax benefits are ultimately realized.
78
As of December 31, 2011, the Company had research and development tax credits for federal and state income tax
purposes of approximately $3.2 million and $3.6 million, respectively. The federal research and development tax
credits expire through the year 2031. The state research and development credits can be carried forward indefinitely,
except for $284,000, which will expire at various dates through the year 2020. The Company maintained a valuation
allowance against these tax credits as of December 31, 2011. The Tax Reform Act of 1986 and similar state provisions
limit the use of net operating loss carryforwards in certain situations where equity transactions result in a change of
ownership as defined by Internal Revenue Code Section 382. In the event the Company should experience an
ownership change, as defined, utilization of its federal and state net operating loss carryforwards could be limited.
Undistributed earnings of the Company’s foreign subsidiaries net of foreign income inclusion of approximately $2.7
million at December 31, 2011, 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.
Uncertain Tax Positions
The Company establishes reserves for uncertain tax positions in accordance with the ASC. The subtopic prescribes the
minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Additionally, the subtopic provides guidance on derecognition, measurement, classification, interest and penalties, and
transition of uncertain tax positions. 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. The Company’s policy is to include interest and penalties related to gross unrecognized tax benefits within the
provision for income taxes.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits in December 31,
2009 to December 31, 2011 (in thousands):
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . .
Increases related to current year tax positions . . . . . . . . . . . . . . . . . . . . .
Decreases related to lapsing of statute of limitations . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Year Ended December 31,
2010
2009
2011
555
—
—
44
(16)
583
$
$
787
—
(29)
24
(227)
555
$
$
1,640
88
(857)
29
(113)
787
The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate were
approximately $400,000 and $405,000 as of December 31, 2011 and 2010, respectively. The Company had accrued
approximately $79,000 and $71,000 for payment of interest as of December 31, 2011 and 2010, respectively. Interest
included in the provision for income taxes was not significant 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 not change
within the next 12 months.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The
2004 through 2011 tax years generally remain subject to examination by U.S., federal and most state tax authorities
due to the Company’s net operating loss and credit carryforwards. For significant foreign jurisdictions, the 2006
through 2011 tax years generally remain subject to examination by their respective tax authorities.
79
NOTE 8—NET LOSS PER SHARE
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares
outstanding during the year. Diluted net income per share is calculated by using the weighted-average number of
common shares outstanding during the year 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, Employee Stock Purchase Plan shares and restricted stock units is reflected in diluted net income
per share by application of the treasury stock method, which includes consideration of stock-based compensation.
For years presented with a net loss, diluted net loss per common share is the same as basic net loss per common share,
as the effect of the potential common stock equivalents is anti-dilutive and as such is excluded from the calculations of
the diluted net loss per share.
The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares
used in computing basic and diluted net loss per share (in thousands):
Numerator:
Net loss—basic and diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(10,061) $
(10,518) $
(17,679)
Year Ended December 31,
2010
2009
2011
Denominator:
Weighted-average number of common shares outstanding used in
computing basic net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive potential common shares used in computing diluted net
loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total weighted-average number of shares used in computing
diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive Securities
13,807
13,540
13,279
—
—
—
13,807
13,540
13,279
The following number of weighted shares outstanding, prior to the application of the treasury stock method, were
excluded from the computation of diluted net loss per common share for the years presented because including them
would have had an anti-dilutive effect (in thousands):
Options to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 9—DEFINED CONTRIBUTION PLAN
Year Ended December 31,
2011
2010
2009
3,667
61
70
3,798
3,187
48
66
3,301
2,746
5
84
2,835
In the United States, the Company has an employee savings plan (401(k) 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 401(k) Plan up to 100% of their annual compensation, subject to statutory annual limitations. From
April 1999 to December 31, 2008, the Company made discretionary matching contributions of 50% to 75% of all U.S.
employees’ contributions in each 401(k) Plan year. The Company made no discretionary contributions in 2011, 2010
and 2009 under the 401(k) Plan.
For the Company’s Japanese subsidiary, it has established an employee retirement plan at its discretion. In addition, for
some of the Company’s other foreign subsidiaries, the Company deposits funds with insurance companies, third-party
trustees, or into government-managed accounts consistent with the requirements of local laws. The Company has fully
funded or accrued for its obligations as of December 31, 2011, and the related expense for each of the three years then
ended was not significant.
80
NOTE 10—SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
In accordance with the FASB ASC 280 guidance on disclosures about segments of an enterprise and related
information, operating segments are identified as components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision maker, or decision-making group, in making
decisions how to allocate resources and assess performance. The Company’s chief decision maker, as defined under the
FASB’s ASC 280 guidance, is a combination of the Chief Executive Officer and the Executive Vice President and
Chief Financial Officer. To date, the Company has viewed its operations, managed its business, and used one
measurement of profitability for the one operating segment – the sale of aesthetic medical equipment and services, and
distribution of cosmeceutical and dermal filler products, to qualified medical practitioners. In addition, substantially all
of the Company’s long-lived assets are located in the United States. As a result, the financial information disclosed in
the Company’s Consolidated Financial Statements represents all of the material financial information related to the
Company’s operating segment. The following table summarizes revenue by geographic region, which is based on the
shipping location of where the product is delivered, and product category (in thousands):
Revenue mix by geography:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia, excluding Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue mix by product category:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Titan hand piece refills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dermal filler and cosmeceuticals(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Year Ended December 31,
2010
2009(1)
2011
23,313 $
15,019
4,984
3,571
13,403
60,290 $
33,703 $
3,505
13,411
4,686
4,985
60,290 $
19,337 $
13,625
5,131
5,801
9,380
53,274 $
27,808 $
4,824
13,231
3,863
3,548
53,274 $
21,019
9,636
4,727
7,087
11,213
53,682
26,842
6,343
13,186
5,599
1,712
53,682
(1) Beginning in 2010, we classified revenue from dermal fillers and cosmeceuticals product in the revenue category
‘Dermal fillers and cosmeceuticals.’ Previously, we classified this revenue under the category of ‘Products.’ As such,
we reclassified the 2009 revenue from ‘Products’ to ‘Dermal fillers and cosmeceuticals.’
The Company had one customer that accounted for 8% at December 31, 2011 and 10% at December 31, 2010 of the
Company’s total accounts receivable balance.
NOTE 11—COMMITMENTS AND CONTINGENCIES
Facility Leases
As of December 31, 2011, the Company was committed to minimum lease payments for facilities and other leased
assets under long-term non-cancelable operating leases as follows (in thousands):
Year Ending December 31,
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future minimum rental payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Amount
1,680
1,739
1,717
1,370
1,310
1,346
9,162
Gross rent expense was $1.9 million in 2011, $1.7 million in 2010 and $1.6 million in 2009.
81
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 with its suppliers were not significant at December
31, 2011.
Indemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations,
warranties, and indemnification obligations. For example, the Company has entered into indemnification agreements
with each of its directors and executive officers. The Company’s exposure under its various indemnification
obligations is unknown and not reasonably estimable as they involve future claims that may be made against the
Company. As such, the Company has not accrued any amounts for such obligations.
Litigation
A Telephone Consumer Protection Act, or TCPA, class action lawsuit was filed against the Company in January 2008
and settled in 2009 on a class-wide basis. In 2009, the Company paid a total of $950,000 in exchange for a full release
of all claims and recorded a charge of $850,000 in its 2009 Consolidated Statements of Operations for the cost of the
settlement, net of the administrative expenses and contributions from its insurance carrier.
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, 2011, the Company was not a party to
any pending litigation that the Company believes will have a material impact to its results of operations other than
those described above in the “Litigation” section.
82
NOTE 12—SUBSEQUENT EVENT
On February 2, 2012, the Company completed the acquisition of certain assets of IRIDEX Corporation’s global
aesthetic business for $5.1 million in cash. The company will account for this acquisition as a business combination.
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
Dec. 31,
2011
Sept. 30,
2011
June 30,
2011
March 31,
2011
Dec. 31,
2010
Sept. 30,
2010
June 30,
2010
March 31,
2010
Quarter ended:
Net revenue . . . . . . . . . . . . $ 18,542 $ 15,232 $ 14,895 $ 11,621 $ 15,216 $ 12,092 $ 12,217 $ 13,749
Cost of revenue . . . . . . . . .
5,829
Gross profit . . . . . . . . . . . .
7,920
Operating expenses:
Sales and marketing . . . .
Research and
7,506
11,036
6,476
8,419
5,224
6,397
6,233
8,983
5,661
6,431
5,335
6,882
6,772
8,460
6,348
6,779
5,799
6,452
6,123
5,946
6,426
6,361
development . . . . . . . . .
General and
administrative . . . . . . . .
Litigationsettlement . . . . .
Total operating
expense . . . . . . . . . . . . . .
Loss from operations. . . .
Interest and other
income, net . . . . . . . . . .
2,313
2,352
2,346
2,130
2,173
1,871
1,506
1,454
2,878
—
2,310
—
2,588
—
2,328
—
2,238
—
2,352
—
2,744
—
2,242
—
11,970
11,088
(2,628)
11,282
(2,863)
10,404
(4,007)
10,534
(1,551)
10,022
(3,591)
10,702
(3,820)
10,057
(2,137)
(934)
140
91
199
184
144
132
141
166
Loss before income
taxes . . . . . . . . . . . . . . . .
(794)
(2,537)
(2,664)
(3,823)
(1,407)
(3,459)
(3,679)
(1,971)
Provision (benefit) for
income taxes . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . $
Net loss per share—
basic . . . . . . . . . . . . . . . . $
Net loss per share—
diluted . . . . . . . . . . . . . . . $
Weighted average
93
47
(887 ) $ (2,863) $ (2,456) $ (3,855) $ (1,280) $ (3,459 ) $ (3,761) $ (2,018)
(208)
(127)
326
—
82
32
(0.06 ) $ (0.21) $ (0.18) $
(0.28) $
(0.09) $
(0.25 ) $ (0.28) $
(0.15)
(0.06 ) $ (0.21) $ (0.18) $
(0.28) $
(0.09) $
(0.25 ) $ (0.28) $
(0.15)
number of shares used
in per share
calculations:
Basic . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . .
13,930
13,930
13,862
13,862
13,765
13,765
13,667
13,667
13,622
13,622
13,589
13,589
13,501
13,501
13,438
13,438
83
SCHEDULE II
CUTERA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
For the Years Ended December 31, 2011, 2010 and 2009
Deferred tax assets valuation allowance
Year ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year ended December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,868 $
13,838 $
1,367 $
4,148 $
5,347 $
13,131 $
463 $
1,317 $
660 $
21,553
17,868
13,838
Balance at
Beginning
of Year
Additions
Deductions
Balance
at End of
Year
Balance at
Beginning
of Year
Additions
Deductions
Balance
at End of
Year
Allowance for doubtful accounts receivable
Year ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year ended December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20 $
586 $
61 $
39 $
116 $
675 $
51 $
682 $
150 $
8
20
586
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.
84
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 management,
including the CEO and CFO, as appropriate to allow timely decisions regarding required 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, 2011. The effectiveness of our internal control over financial
reporting as of December 31, 2011 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 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 2012 Annual Meeting of Stockholders will be held at its principal executive
offices located at 3240 Bayshore Blvd., Brisbane, CA 94005-1021 on June 13, 2012 at 10:00 a.m. and the record date
for the purposes of voting in that meeting shall be April 16, 2012.
85
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 2012 Annual Meeting of Stockholders with the Securities
and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2011.
PART III
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.
86
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(1)
(2)
(3)
The financial statements required by Item 15(a) are filed as Item 8 of this annual report.
The financial statement schedule required by Item 15(a) filed as Item 8 of this annual report.
Exhibits.
Exhibit No.
3.2(1)
3.4(1)
4.1(4)
10.1(1)
10.2(1)
10.3(1)
10.4(5)
10.6(1)
Description
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,
10.10(2)
10.11(3)
10.13(4)†
10.14(6)
10.18(7)
10.19(8)
10.20(9)
23.1
24.1
31.1
31.2
32.1
L.P. for office space located at 3240 Bayshore Boulevard, Brisbane, California.
Settlement Agreement and Non-Exclusive Patent License, each between the Registrant and Palomar
Medical Technologies, Inc. dated June 2, 2006.
Form of Performance Unit Award Agreement.
Distribution Agreement between the Registrant and PSS World Medical Shared Services, Inc., a
subsidiary of PSS World Medical dated October 1, 2006.
Cutera, Inc. 2004 Equity Incentive Plan, as amended by its Board of Directors on April 25, 2008.
Consulting Agreement dated March 2, 2009 by and between the Company and David A. Gollnick.
First Amendment to Brisbane Technology Park Lease dated August 11, 2010 by and between the
Company and BMR-Bayshore Boulevard LLC, as successor-in-interest to Gal-Brisbane, L.P., the
original landlord, for office space located at 3240 Bayshore Boulevard.
Change of Control and Severance Agreement dated January 5, 2011 by and between the Company and
Len DeBenedictis, Chief Technology Officer of Cutera, Inc.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (see page 88).
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.
Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
(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.
(6) Incorporated by reference from our Definitive Proxy Statement on Form 14A filed with the SEC on April 28,
2008.
(7) Incorporated by reference from our Current Report on Form 8-K filed on March 4, 2009.
(8) Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 1, 2010.
(9) Incorporated by reference from our 2010 Annual Report on Form 10-K filed on March 15, 2011.
† Confidential Treatment has been requested for certain portions of this exhibit.
87
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 15th day of March, 2012.
SIGNATURES
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
Kevin P. Connors
President, Chief Executive Officer and Director (Principal
Executive Officer)
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Executive Vice President and Chief Financial Officer (Principal
Accounting Officer)
Director
David B. Apfelberg
/s/ GREGORY A. BARRETT Director
Gregory A. Barrett
/s/ DAVID A. GOLLNICK Director
David A. Gollnick
/s/ MARK LORTZ
Mark Lortz
Director
/s/ TIM O’SHEA
Tim O’Shea
Director
/s/ JERRY P. WIDMAN
Jerry P. Widman
Director
88
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin P. Connors, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Cutera, Inc.:
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;
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;
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 fiscal 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 auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
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 15, 2012
/s/ KEVIN P. CONNORS
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald J. Santilli, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Cutera, Inc.:
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;
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;
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 fiscal 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 auditors and the audit committee of the registrant’s board
of directors (or any other persons performing the equivalent functions):
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 15, 2012
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)
EXHIBIT 32.1
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
In connection with the annual report on Form 10-K of Cutera, Inc. a Delaware corporation, for the period
ended December 31, 2011, as filed with the Securities and Exchange Commission, each of the undersigned officers of
Cutera, Inc. certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his respective knowledge:
(1) the annual report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) the information contained in the annual report fairly presents, in all material respects, the financial
condition and results of operations of Cutera, Inc. for the periods presented therein.
Date: March 15, 2012
Date: March 15, 2012
/s/ Kevin P. Connors
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Ronald J. Santilli
Ronald J. Santilli
Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)
Corporate Information (as of April 30, 2012)
BOARD OF DIRECTORS
Kevin P. Connors, President and
Chief Executive Officer, Cutera, Inc.
David B. Apfelberg, MD2,4, Clinical
Surgery,
Professor
Stanford University Medical Center
Gregory Barrett2, President and Chief
Executive Officer, BÂRRX Medical
(recently acquired by Covidien)
Plastic
of
David A. Gollnick, Former Executive
Vice President of Research and
Development at Cutera, Inc.
Mark Lortz1, Former Chief Executive
Officer, TheraSense, Inc.
Timothy
J. O'Shea1, Managing
Director, Oxo Capital
Jerry P. Widman1,2,3 , Former Chief
Financial Officer, Ascension Health
1-Audit Committee member
2-Compensation Committee member
3-Chairman of Audit Committee
4-Chairman of Compensation Committee
MANAGEMENT TEAM
Kevin P. Connors, President, Chief
Executive Officer and Director
Ronald J. Santilli, Executive Vice
President and Chief Financial Officer
Leonard C. DeBenedictis, Chief
Technology Officer
ANNUAL MEETING
Annual meeting of stockholders will be
held on June 13, 2012, 10:00 a.m.
(PDT) at: 3240 Bayshore Blvd.,
Brisbane, California 94005.
TRANSFER AGENT
Computershare Trust Company, Inc.
350 Indiana St., Suite 800
Golden, Colorado 80401
303-262-0600
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
2012- Ernst & Young LLP,
Redwood City, California
2011- PricewaterhouseCoopers LLP,
San Jose, California
CORPORATE LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati,
P.C., Palo Alto, California
CORPORATE/STOCKHOLDER
INFORMATION
Our Form 10-K was filed with the
Securities and Exchange Commission
on March 15, 2012. For additional
copies of this report, Form 10-K, or
other financial information, without
charge, please visit
Investor
Relations page on our website at:
www.cutera.com
to
ir@cutera.com.
write
the
or
STOCK LISTING
AND MARKET DATA
Our common stock is traded on The
NASDAQ Global market under the
symbol "CUTR." We have not declared
or paid any cash dividends on our
capital stock since our inception. We
currently expect
future
retain
to
the
if any, for use
earnings,
operation and expansion of our
business and do not anticipate paying
any cash dividends in the foreseeable
future. As of February 29, 2012, we
believe there were approximately 2,000
holders of record of our common stock.
in
The following table sets forth quarterly
high and low closing sales prices per
share of our common stock as reported
on The NASDAQ Global Market for
the periods indicated.
Common Stock
2011
2010
High Low High Low
7.01
6.99
8.62
8.25
4th Qtr. $ 7.93 $ 6.96 $ 8.39 $
3rd Qtr. 8.74 7.03
9.00
2nd Qtr. 9.46 7.59 12.04
1st Qtr. 9.94 8.08 11.03