CUTERA, INC.
2013 PROXY STATEMENT AND 2012 ANNUAL REPORT
Dear Stockholders:
You are cordially invited to attend the 2013 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 19, 2013 at 10:00 a.m. Pacific Time.
The attached Notice of 2013 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 2012 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)
(2)
(3)
(4)
(5)
Title of each class of securities to which transaction applies:
Aggregate number of securities to which transaction applies:
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):
Proposed maximum aggregate value of transaction:
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)
(2)
(3)
(4)
Amount Previously Paid:
Form, Schedule or Registration Statement No.:
Filing Party:
Date Filed:
NOTICE OF 2013 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 19, 2013
10:00 A.M. Pacific Time
To our Stockholders:
You are cordially invited to attend the 2013 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 19, 2013 at 10:00 a.m. Pacific Time, for the following purposes:
1.
2.
3.
4.
5.
To elect three Class III directors to each serve for a three-year term that expires at the 2016 Annual Meeting
of Stockholders and until their successors have been duly elected and qualified;
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, 2013;
To approve our amended and restated 2004 Equity Incentive Plan;
To hold a non-binding vote on the compensation of our Named Executive Officers; and
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 2012 Annual Report, with instructions on how to access our
proxy materials over the Internet, including this proxy statement, our 2012 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 22, 2013 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 29, 2013
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—RATIFICATION OF ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit and Non-Audit Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL THREE— APPROVAL OF AMENDED AND RESTATED 2004 EQUITY INCENTIVE PLAN. .
PROPOSAL FOUR— NON-BINDING VOTE ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of 2012 Executive Compensation Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors’ Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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PROXY STATEMENT
FOR
2013 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 19, 2013
The Board of Directors of Cutera, Inc., a Delaware corporation, is soliciting the enclosed proxy from you. The proxy
will be used at our 2013 Annual Meeting of Stockholders to be held on Wednesday, June 19, 2013, 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, 2012, filed with the U.S. Securities and
Exchange Commission (the “SEC”) on March 15, 2013, and the term “Annual Meeting” means our 2013 Annual
Meeting of Stockholders.
We are sending the Notice of Internet Availability of Proxy Materials on or about May 9, 2013, to all stockholders of
record at the close of business on April 22, 2013 (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 22, 2013). 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 2012 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.
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, 14,674,829 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 14,674,829
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 7,337,415 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 three nominees to serve as Class III directors on our Board;
2. the ratification of Ernst & Young LLP as the Independent Registered
Public Accounting Firm for the 2013 fiscal year;
3. the approval of our amended and restated 2004 Equity Incentive Plan: and
4. a non-binding vote on executive compensation.
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 ratification of Ernst & Young LLP as the Independent
Registered Public Accounting Firm for the 2013 fiscal year, “FOR” the approval of
our amended and restated 2004 Equity Incentive Plan and “FOR” the approval of a
non-binding vote on executive compensation.
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 three 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 III 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.
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.”
Approval of our amended and restated 2004 Equity Incentive Plan. For the
approval of our amended and restated 2004 Equity Incentive Plan, 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.”
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.”
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” ratification of Ernst & Young LLP as our
Independent Registered Public Accounting Firm, “FOR” the adoption of the
amended and restated 2004 Equity Incentive Plan, “FOR” the approval, by non-
binding vote, of executive compensation, 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 approval of the amended and restated 2004 Equity Incentive Plan and the
non-binding vote on executive compensation 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 Executive Vice President and 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 and Legal 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 2014, the written
proposal must be received by our corporate Secretary at our principal executive
offices no later than January 8, 2014, 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 8, 2014.
-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 42 (including our Chief
Executive Officer and our Chief Financial 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 22, 2013 (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 14,674,829 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
(8 persons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*Less than 1%.
Warrants
and
Options
Exercisable
Within 60
Days
—
60,823
13,490
556,634
23,719
70,823
50,823
273,701
70,823
Approximate
Percent
Owned
7.9%
*
*
7.6%
1.3%
*
*
2.0%
*
Number of
Shares
Outstanding
1,156,629
33,796
—
598,971
162,573
23,389
19,354
22,699
21,104
881,886
1,120,836
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, 2012 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. We
believe Dr. Apfelberg’s technical qualifications as a physician and Clinical Professor of Plastic Surgery at the Stanford
University Medical Center, understanding of our products, tenure with the Company and his knowledge of the
aesthetics market make him suitable for this lead independent director position. 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 four standing committees, an Audit Committee, a Compensation
Committee, a Nominating and Corporate Governance Committee and a Strategic Transactions 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. In 2012 our Board established the Strategic Transactions Committee to evaluate business
development opportunities and to report back to the full Board with their recommendations.
-9-
Committees of the Board
Our Board has four standing committees: the Audit Committee, the Compensation Committee, the Nominating and
Corporate Governance Committee and the Strategic Transactions 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
Strategic
Committee
Transactions
X*
X
X
7
X
X*
X
3
X
X *
X
X
X
0
X
X
1
X
*
**
***
= Committee member
= Chairman of Committee
= Mr. Gollnick is a member of our Board and a consultant to our Company.
= Mr. Barrett became the Chairman of the Compensation Committee effective January 1, 2013.
Audit Committee. The Audit Committee oversees the Company’s accounting and financial reporting processes and the
audits of its financial statements. The committee operates under a written charter adopted by the Board of Directors in
January 2004, and amended on July 24, 2009. A copy of the charter can be found at www.cutera.com under the
Corporate Governance section. 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 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
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
www.ir.cutera.com.
-10-
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.
Strategic Transactions Committee. The Strategic Transactions Committee reviews and evaluates any potential strategic
business combination transactions as the possibilities arise and other related or pertinent strategic alternatives for the
Company (which may include, but are not limited to, a merger, other business combination, recapitalization,
acquisition, spin-off, split-off, acquisition of a subsidiary, division or unit, or other similar transaction).
Meetings Attended by Directors
During 2012, the Board held five meetings, the Audit Committee held seven meetings, the Compensation Committee
held three meetings, the Strategic Transactions Committee held one meeting and the Nominating and Corporate
Governance Committee held no meetings. No director attended fewer than 75% of the meetings of the Board or
committee(s) on which he served during 2012.
The directors of the Company are encouraged to attend the Company’s Annual Meeting of Stockholders. In 2012,
director Kevin P. Connors attended the meeting in person and directors David B. Apfelberg, Jerry P. Widman and W.
Mark Lortz attended the meeting telephonically. 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.
-11-
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.
Director Nominees at our 2013 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 shares of
Cutera common stock which vest over a one-year period, awarded to our non-employee directors in the fiscal year
ended December 31, 2012.
2012 Director Compensation Table
Name
David B. Apfelberg . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gregory Barrett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David A. Gollnick . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W. Mark Lortz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timothy J. O’Shea . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jerry P. Widman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Fees Earned
or Paid
in Cash (1)
$
61,500
54,500
45,000
53,750
57,500
71,000
Stock
Awards (2)
60,000(4) $
60,000(5)
60,000(6)
60,000(7)
60,000(8)
60,000(9)
All Other
Compensation (3)
21,600(4) $
—
109,360(6)
—
—
—
Total
143,100
114,500
214,360
113,750
117,500
131,000
(1)
(2)
(3)
(4)
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.
The amounts reported in this column represent the aggregate grant date fair value of shares of Cutera
common stock which vest over a one-year period, awarded during the fiscal year ended December 31, 2012
calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification
(ASC) Topic 718.
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.
At December 31, 2012, Dr. Apfelberg held options to purchase 52,000 shares of Cutera common stock.
From January 1, 2012 to April 20, 2012, Dr. Apfelberg was the Medical Director of the Cutera Clinic, and,
in connection with this role, was paid $21,600 during the fiscal year ended December 31, 2012.
At December 31, 2012, Mr. Barrett held options to purchase 14,000 shares of Cutera common stock.
(5)
(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 $109,360 during the fiscal year ended December
31, 2012. At December 31, 2012, Mr. Gollnick held options to purchase 35,001 shares of Cutera common
stock.
At December 31, 2012, Mr. Lortz held options to purchase 62,000 shares of Cutera common stock.
At December 31, 2012, Mr. O’Shea held options to purchase 42,000 shares of Cutera common stock.
At December 31, 2012, Mr. Widman held options to purchase 62,000 shares of Cutera common stock.
(7)
(8)
(9)
-12-
For 2012, 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); $7,500 for Audit Committee meetings (for
members other than the Chairman); and $5,000 for Strategic Transactions 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 (for members other than the Chairman). The Chairman of the Audit Committee and
the Compensation Committee each earned an annual retainer of $20,000 for their services on the respective
committees. The Chairman of the Nominating and Corporate Governance Committee earned an annual retainer of
$5,000 for his services. 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 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. These shares vest on the one-year anniversary of the grant
date.
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 January 1, 2011, 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
The Compensation Committee consists of the following members: David Apfelberg, Gregory Barrett and Jerry
Widman. No member of this 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 2012 and 2011 were $109,360 and $181,920, 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.
-13-
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.
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.
As required by Nasdaq rules, the Audit Committee of the Cutera, Inc. Board of Directors is composed of three
independent directors. The committee operates under a written charter adopted by the Board of Directors and posted on
our website.
The Audit Committee recommends to the Board of Directors, subject to stockholder ratification, the selection of an
accounting firm to be engaged as the Company’s Independent Registered Public Accounting firm. The Independent
Registered Public Accounting Firm is responsible for performing an independent audit of the Company’s financial
statements in accordance with generally accepted auditing standards and to issue a report thereon. Management is
responsible for our internal controls and the financial reporting process. The Audit Committee is responsible for
monitoring and overseeing these processes.
The Audit Committee held seven meetings during the fiscal year 2012. Management represented to the Audit
Committee that our financial statements were prepared in accordance with U.S. generally accepted accounting
principles. In 2013, the Audit Committee met and reviewed and discussed the audited financial statements for fiscal
year 2012 with management and the Company’s Independent Registered Public Accounting Firm.
The Audit Committee discussed with the Independent Registered Public Accounting Firm the matters required to be
discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended (AICPA,
Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in
Rule 3200T.
The Audit Committee has received and reviewed the written disclosures and the letter from the Independent Registered
Public Accounting Firm, Ernst & Young LLP as required by applicable requirements of the Public Company
Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee
concerning independence. Additionally, the Audit Committee has discussed with Ernst & Young LLP the issue of its
independence from Cutera, Inc.
Based on its review of the audited financial statements and the various discussions noted above, the Audit Committee
recommended to the Board of Directors that the audited financial statements be included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2012.
The foregoing report is provided by the undersigned members of the Audit Committee.
W. Mark Lortz
Timothy J. O’Shea
Jerry P. Widman
-15-
Classes of the Board of Directors
PROPOSAL ONE—ELECTION 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 2015; 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) (4) . . . . . .
David B. Apfelberg(1)(3) . . . . . . .
Class III Directors
W. Mark Lortz(2)(3) (4) . . . . . . . . . .
Gregory Barrett(1)(3) . . . . . . . . . . .
Jerry P. Widman(1)(2)(3) . . . . . . . .
Term
Expires
Age
Principal Occupation
2014
2014
51 President and Chief Executive Officer
49 Former Executive Vice President of Research and
Development
2015
2015
60 Managing Director, Oxo Capital
71 Clinical Professor of Plastic Surgery, Stanford
University Medical Center
2013
2013
61 Former Chief Executive Officer, TheraSense, Inc.
59 Former Chairman, President and Chief Executive
Officer, BÂRRX Medical
2013
70 Former Chief Financial Officer, Ascension Health
Director
Since
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.
(4) Member of the Strategic Transactions Committee.
Director Nominees
The Board has nominated W. Mark Lortz, Gregory Barrett and Jerry P. Widman for re-election as Class III directors.
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
Insulet, a publicly-traded manufacturer of insulin infusion systems. 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 as well as two privately-held companies in the healthcare industry. 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.
-16-
Gregory Barrett has served as a member of our board of directors since October 2011. Mr. Barrett was the Chairman,
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.
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.
If elected to our board of directors, directors W. Mark Lortz, Gregory Barrett and Jerry P. Widman would each hold
office as a Class III director until our Annual Meeting of Stockholders to be held in 2016 or until his earlier
resignation, removal, or death.
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” EACH OF THE THREE
NOMINEES FOR CLASS III DIRECTOR LISTED ABOVE.
Directors Whose Terms Extend Beyond the 2013 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.
-17-
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.
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.
-18-
PROPOSAL TWO—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,
2013. Ernst & Young LLP audited the Company’s consolidated financial statements for the fiscal year 2012 and
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 2013. 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 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 2013.
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 2012 the Audit Committee retained Ernst & Young LLP to audit
the Company’s consolidated financial statements for 2012. For 2001 to 2011, the Audit Committee retained
PricewaterhouseCoopers LLP to audit the Company’s consolidated financial statements and provide other auditing and
advisory services. 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 their independence in
the conduct of their 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 Ernst & Young LLP and 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 2012 and 2011 were as follows:
-19-
Service Category
2012
2011
Ernst & Young LLP
Audit Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Ernst & Young LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PricewaterhouseCoopers LLP
Audit Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total PricewaterhouseCoopers LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
403,092
403,092
30,000
223,907
29,000
282,907
$
$
$
$
—
—
643,250
147,338
1,800
792,388
(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 2012 and 2011 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. The 2012 PricewaterhouseCoopers LLP audit fees, relate to the consent for inclusion
of the 2010 and 2011 audited financial statements in the 2012 Form 10-K.
(2) Tax fees are fees for tax compliance services.
(3) All other fees for 2012 relate to the Iridex acquisition and the transition of audit services to Ernst &
Young LLP. For 2011 they relate to a subscription fee for a PricewaterhouseCoopers LLP online service
used for accounting research purposes.
-20-
PROPOSAL THREE
APPROVAL OF OUR AMENDED AND RESTATED 2004 EQUITY INCENTIVE PLAN
We are asking our stockholders to approve the amendment and restatement of the Cutera, Inc. 2004 Equity Incentive
Plan (the “Plan”). In particular, we are seeking stockholder approval of the material terms of the Plan for purposes of:
(i) complying with Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”);
(ii) extending the term of the Plan through our 2018 Annual Meeting; and
(iii) approving annual limits on the size of awards that may be granted to non-employee directors.
Our Board has approved the amendment and restatement of the Plan, subject to approval from stockholders at the
Annual Meeting. If stockholders do not approve the amendment and restatement of the Plan, the Plan will continue
under its current terms and conditions, except that our Chief Executive Officer and three most highly compensated
officers (other than the Chief Financial Officer) would not be eligible to receive awards under the 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 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 is important to the future success of Cutera.
Summary of the Proposal
Approval of the Plan will allow us to continue to have the ability to grant awards that qualify as “performance based
compensation” under Section 162(m). Section 162(m) generally denies a corporate tax deduction for annual
compensation exceeding $1 million paid to the chief executive officer and other “covered employees” as determined
under Section 162(m) and applicable guidance. However, certain types of compensation, including performance-based
compensation, are generally excluded from this deductibility limit. By approving the Plan, the stockholders will be
approving the material terms of the Plan, which include, among other things:
•
•
the eligibility requirements for participation in the Plan, including the ability of the Chief Executive
Officer and three most highly compensated officers (other than the Chief Financial Officer) to receive
awards under the Plan
the performance criteria that the Compensation Committee may use to qualify certain awards as
performance based compensation, which include the following:
revenue growth of certain
product lines
earnings per share
net income
operating cash flow
operating income as a
percentage of revenue
operating expenses
product
revenue
profit after-
tax
cash position
revenue growth
total stockholder return
new product releases
-21-
•
the following award limits:
Award Type
Stock Options
Restricted Stock
Restricted Stock Units
Stock Appreciation
Rights
Performance Shares
Performance Stock Units
General Annual Limit
1,000,000 shares
300,000 shares
300,000 restricted stock
units
New Hire Limit
1,000,000 shares
300,000 shares
300,000 restricted stock
units
Maximum Limit
2,000,000 shares
600,000 shares
600,000 restricted stock
units
1,000,000 shares
1,000,000 shares
2,000,000 shares
300,000 shares
$2,000,000
300,000 shares
N/A
600,000 shares
$2,000,000
While we would have the ability to grant awards that qualify as “performance based compensation” under Section
162(m), it would not be required to do so. Rather, the Compensation Committee would be able to grant awards under
the Plan, together with providing other forms of compensation, that it determines best accomplishes the goals of the
Company and this may include granting awards under the Plan that do not qualify as “performance based
compensation” under Section 162(m).
In addition to the foregoing, if the amended and restated Plan is approved:
•
•
it will remain in effect through our 2018 Annual Meeting, unless sooner terminated by the Board or further
extended. If the amended and restated Plan is not approved, it will terminate in 2014;
our non-employee directors will be able to receive awards under the Plan up to a maximum of 25,000 shares
per non-employee director (as of the record date we had six non-employee directors).
Vote Required
Approval of the amendment and restatement of the 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 APPROVAL OF THE
AMENDED AND RESTATED PLAN.
Summary of the Amended and Restated Plan
The following is a summary of the principal features of the Plan and its operation. It is qualified in its entirety by
reference to the Plan set forth in Appendix A.
The 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 Plan
include employees, directors and consultants who provide services to us or our subsidiaries. As of April 22, 2013, we
had approximately 220 employees and 6 outside directors who were eligible to participate in this Plan. The Plan allows
us to grant Awards to consultants, however, it has been our practice not to grant awards to consultants.
-22-
Number of Shares of Common Stock Available Under the Plan. A total of 1,750,000 shares of common stock were
initially authorized for issuance under the 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 Plan. In 2008, stockholders approved an amendment to the Plan which eliminated the “evergreen”
provision which provided for an automatic annual increase in the number of shares available in the Plan. As of April
22, 2013, approximately 11,210,000 shares were authorized for issuance under the Plan, of which 1,602,938 shares
remained available for future awards. The shares may be authorized, but unissued or reacquired common stock.
In 2012 the stockholders approved a “fungible share” provision whereby for each full-value award issued under the
Plan results in a requirement to subtract 2.12 shares from the shares reserved under the Plan.
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 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 Plan. 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 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 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 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 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 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 Plan. Our Board, or its Compensation Committee, or a committee of directors or of other
individuals satisfying applicable laws and appointed by our Board (the “Administrator”), administers the 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) (so that we can receive a federal tax deduction for certain compensation paid under the
Incentive Plan).
Subject to the terms of the 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 Plan), to interpret the provisions of the 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.
-23-
Automatic Director Grants. The Plan provides for an automatic grant to outside directors of an option to purchase
14,000 shares (the “First Option”) on the date the person first becomes an outside director. Each First Option 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 an award 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. These
shares vest on the one-year anniversary of the grant date.
Options. The Administrator is able to grant non-statutory stock options and incentive stock options under the Plan. The
Administrator determines the number of shares subject to each option, although the 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 1,000,000 shares.
The Administrator determines the exercise price of options granted under the 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 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 Plan, will have complete discretion to determine the terms and conditions of SARs granted under the
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.
-24-
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.
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 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.
Limits on Awards Granted to Non-Employee Directors. Our non-employee directors will not be granted awards under
the Plan in excess of 25,000 shares per non-employee director on the date of each Annual Meeting during any calendar
year.
-25-
Transferability of Awards. Awards granted under the 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.
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 Plan. The Administrator has the authority to amend, alter, suspend or terminate the
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 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 Plan will remain in effect through the Annual General Meeting in 2018, 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 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 Plan during the last fiscal year, and (b) the average per
share exercise price of such options
Name of Individual or Group
Kevin P. Connors
President and Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ronald J. Santilli
Executive Vice President and Chief Financial Officer. . . . . . . . . . . . . . . . . . . . . .
Leonard C. DeBenedictis
Chief Technology Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . .
Number
of Options
Granted
Average Per
Share Exercise
Price
91,000
32,500
30,000
153,500
—
768,000
$
$
$
$
$
$
6.88
6.88
6.88
6.88
—
7.07
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Federal Tax Aspects
The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and us of
Awards granted under the 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.
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
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 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.
-27-
Tax Effect for Us; Section 162(m). We generally will be entitled to a tax deduction in connection with an Award under
the 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), 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 approval of the 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 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.
-28-
PROPOSAL FOUR—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 31 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. Our Company is a small company and all of our employees report into our Chief Executive
Officer or Chief Financial Officer. With the departure of our Chief Technical Officer, we only have two Named
Executive Officers.
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 2012 Executive Compensation Program
Following is a summary of some of the key features of our 2012 executive compensation program:
• The primary objectives of our executive compensation programs are that they be fair, objective and consistent.
Further 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 2012, our Compensation Committee engaged an outside compensation consultant to review our executive
compensation program, in comparison to a peer group of companies, and recommend modifications to it. Based on the
recommendations received, the Compensation Committee modified the executive compensation package of our Named
Executive Officers and also made it more variable based on the achievement of certain performance targets. The
changes made align the executives’ compensation with our stockholders’ interests of long-term value creation.
In addition, the Compensation Committee adopted stock ownership guideline for our Named Executive Officers. For a
detailed discussion about our compensation philosophy, policies and practices, and other changes that we have made to
our corporate governance policies, see the section titled “Executive Compensation” below beginning on page 31.
-29-
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.
-30-
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, 2012.
Name
Kevin P. Connors . . . . . . . . . . . . . . . .
Ronald J. Santilli . . . . . . . . . . . . . . . .
Leonard C. DeBenedictis . . . . . . . . .
Age
51
53
72
Position(s)
President, Chief Executive Officer and Director
Executive Vice President and Chief Financial Officer
Former Chief Technology Officer
Further information regarding Kevin P. Connors is provided above under “Directors Whose Terms Extend Beyond the
2013 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 served as our Chief Technology Officer between January 5, 2011 and September 21, 2012.
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.
Overview
Compensation Discussion and Analysis
Our Named Executive Officers in fiscal 2012 were: Mr. Connors, Mr. Santilli and Mr. DeBenedictis (whose
employment terminated in September 2012).
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.
-31-
Financial Highlights
Fiscal 2012 was a year of improvement and achievement amidst a slowly improving market. We reported 28% revenue
growth which included an increase in U.S. revenue of 37% in 2012, compared to 2011, and an increase of 23% in
international revenue, compared to 2011. More specifically, revenue grew from $60.3 million in 2011 to $77.3 million
in 2012. Further, in the fourth quarter of 2012, we returned to profitability and earned $0.08 per diluted share. 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 our truSculpt platform, which is
designed for the non-invasive body contouring market. In addition, in February 2012 we acquired certain assets of
IRIDEX Corporation’s (“Iridex”) global aesthetic business. As a result of this acquisition, we integrated their service
business into ours and also added the VariLite product to our current product offering.
Executive Compensation Actions
In our 2012 Annual Meeting of Stockholders we solicited a stockholder advisory vote on the compensation of our
Named Executive Officers and a majority of the votes cast on this advisory proposal approved the compensation of our
Named Executive Officers.
Based on the recommendations received, the Compensation Committee modified the executive compensation package
of our Named Executive Officers and also made it more variable based on the achievement of certain performance
targets. The changes made align the executives’ compensation with our stockholders’ interests of long-term value
creation.
In 2012, our Compensation Committee conducted a review of our executive compensation policies and practices and
engaged an outside compensation consultant to study the design, pay mix, and pay levels of our executives; compare
our program to that of our peers; and then make recommendations for changes to our policies or practices that were
inconsistent with “best practices.” As part of this review, our executives also directly contacted some of our major
stockholders to solicit their input on our executive compensation policies and practices.
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:
• Developed a Peer Group (as defined on page 35) to compare our executives’ compensation with and to ensure
•
that our compensation is competitive and market-based.
Increased the annual base salary of Mr. Connors by 4%, Mr. Santilli’s by 7% and maintained the salary of Mr.
DeBenedictis at the 2011 level due to his recent hire into the Company.
• Maintained an annual bonus program to base bonus determinations solely on the Company’s actual financial
performance, as measured against multiple objective performance criteria. In response to the competitive
market data of our Peer Group, and to promote the retention of our executives, the target bonus opportunity,
expressed as a percentage of base salary, of our Named Executive Officers was changed in 2012 as follows:
- Mr. Connors- increased from 60% to 95%;
- Mr. Santilli- increased from 45% to 55%; and
- Mr. DeBenedictis- maintained at his 2011 level of 50% due to his recent hire into the Company.
• Granted Performance Share Units (“PSUs”) to our Chief Executive Officer and our Chief Financial Officer to
acquire shares of Cutera common stock based on the performance and revenue achievements of certain
revenue targets as discussed in greater detail in the section titled Equity Incentive Compensation below.
• Granted market based stock option and restricted stock unit (“RSU”) awards at levels that the Compensation
Committee believed met competitive market concerns, satisfied our retention objectives and rewarded
corporate and individual performance as discussed in greater detail in the section titled Equity Incentive
Compensation below.
• Adopted stock ownership guidelines for our executive officers and non-employee directors.
-32-
The Compensation Committee concluded that the changes to the compensation of our Named Executive Officers
strengthen the alignment of their interests with those of our stockholders, should be sufficient to maintain
competitiveness with the executives in comparable positions at the companies in our Peer Group, and promote their
retention. Further, the Compensation Committee also took into consideration the fact that, consistent with our
compensation objectives, the equity awards granted increase 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 2012:
• The Compensation Committee is comprised solely of independent directors who have established effective
means for communicating with stockholders regarding executive compensation issues and concerns.
• We have a Nominating and Corporate Governance Committee that is comprised of independent directors who
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.
• The Compensation Committee conducts an annual review and approval of our compensation strategy,
including a review of our Peer Group. In this regard, the Compensation Committee engaged its own
compensation consultant, Compensia, to assist with its 2012 compensation reviews. We ensure that our
compensation practices remain current with market conditions by having them reviewed by compensation
consultants from time to time. 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:
- 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;
- 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;
- Executive officers are not entitled to any tax reimbursement payments (including “gross-ups”) on
any severance or change-in-control payments or benefits;
- 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);
- We use performance-based short-term and long-term incentives; and
- We adopted stock ownership guidelines for our executive officers and non-employee directors.
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 (who terminated in September 2012) – 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
www.ir.cutera.com.
-33-
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.
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, Mr. Jerry P. Widman and Mr. Gregory Barrett
(chairman). 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. Following the SEC’s reforms relating to executive compensation disclosure, the Compensation Committee
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.
-34-
The Compensation Committee engaged Compensia in December 2011 to perform the following activities for each of
our Named Executive Officers:
• Review the components of the total compensation package;
• Evaluate and develop a group of public companies that would be suitable to use as a Peer Group;
• Gather competitive market data with respect to compensation of executive officers of the Peer Group;
• Compare our Named Executive Officers’ 2011compensation against the Peer Group;
• Recommend any adjustments that should be considered for cash-based and equity-based compensations; and
• Recommend compensation components that would make the compensation variable based on the performance
of the Company
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. For 2012, 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;
•
• market capitalization of between 0.5x to 2.5x Cutera (approximately $64 million and $320 million).
revenue of between 0.5x to 2.0x Cutera (approximately $39 million and $154 million); and
This set of selection criteria led us to revise at the beginning of 2012 the then-existing Peer Group to include the
following companies:
Atrion Corporation
AtriCure
Biolast Technology
Cardiovascular Systems
Cryolife
Cynosure
Exactech
Kensey Nash
Lemaitre Vascular
Palomar Medical Technologies
Photomedex
RTI Biologics
Solta Medical
Spectranetics
Synergetics USA
Theragenics
Young Innovations
Zeltiq Aesthetics
-35-
Compensation Components
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:
• Cash Compensation 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 2012 pursuant to
which cash bonuses were determined quarterly based on the Company’s performance for the then-preceding quarter.
Target Bonus Opportunities
For 2012, 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.
For 2012, based on the evaluation of the compensation of our Named Executive Officers performed by Compensia, the
Compensation Committee established the following target cash bonus opportunities, expressed as a percentage of base
salary, for 2012:
Named Executive Officer
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
95%
55%
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.
Corporate Performance Measures
For 2012, 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 stock-based compensation expense and non-operational expenses. The Compensation Committee decided
that non-operational expenses should be excluded from the operating profit amount as they were deemed unrelated to
quarterly “operating” performance.
-36-
Using these measures, each fiscal quarter the Compensation Committee compared our performance against the same
fiscal quarter in the prior year, 2011, 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 2012 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.
Based on the actual quarterly revenue growth and adjusted operating profit for each of the quarters in 2012, the Named
Executive Officers earned the following bonus payout multipliers of their respective target bonus opportunity.
Revenue
Growth
(expressed
as a
percentage)
35.34%
30.73%
27.53%
21.52%
Revenue
Growth
Multiplier
176.68%
153.65%
137.66%
107.60%
Factor
5
5
5
5
Adjusted
Operating
Profit
(expressed
as a
percentage)
-20.60%
-2.40%
0.20%
8.40%
Factor
5
5
5
5
Fiscal
Period
First quarter . . . . . . . .
Second quarter . . . . .
Third quarter . . . . . . .
Fourth quarter . . . . . .
Adjusted
Operating
Profit
Multiplier
—
—
1.00%
42.00%
Total
Payout
Multiplier
176.68%
153.65%
138.66%
149.60%
On an annual basis, the cash bonus opportunity, and the amount actually earned, for fiscal 2012 was as follows:
Named Executive Officer
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual
Cash
Bonus
Target
Annual
Cash
Bonus Paid
(1)
for 2012
$
$
$
370,563
158,667
78,000(2)
$
$
$
564,428
243,280
128,829(2)
(1) The Annual Cash Bonus Target represents the amount that would be payable for 100% achievement of the
corporate performance measures of (i) revenue growth, and (ii) Adjusted Operating Profit as a percentage of
revenue. In each of the quarters of 2012, given our revenue growth was in excess of the target, this resulted in
the Annual Cash Bonus Paid being greater than the target in each of the quarters.
(2) These amounts reflect Cash Bonus Target and Cash Bonus Paid for Q1 and Q2 of 2012, as Mr. DeBenedictis
terminated employment prior to the end of Q3 2012.
-37-
Profit-Sharing Program
We also have a profit sharing program for our Named Executive Officers and other employees pursuant to which
quarterly cash payments are made. 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 2012, our Chief Executive Officer, our Chief Financial Officer and our Chief Technology Officer earned $4,620,
$3,307 and $0 in profit sharing payments respectively.
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;
•
• 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, 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 RSUs annually on the date of our Annual Meeting of Stockholders
that vest on the one-year anniversary of the grant date. 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 July 2012, our Board, with the approval of our non-employee directors, granted the following number of stock
options, RSUs and PSU awards to our Named Executive Officers. In granting these awards, our Board considered the
recommendations of the compensation consultants hired by the Compensation Committee; individual performance and
contribution to 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 Named Executive Officer.
-38-
Stock Option
Awards:
Number of
Securities
Underlying
Options
91,000
32,500
30,000
Number of
Restricted
Stock Unit
Awards –
Shares (1)
—
6,250
8,000
Number of
Performance
Share Unit
Awards-
Shares(2)
Exercise Price
for Stock
Options and
Base Price of
RSU and PSU
Awards
Grant
Date Fair
Value of
All Equity
Award
36,000
6,250
$
$
$
6.88
6.88
6.88
$
$
$
466,016
163,977
127,019
Names
Mr. Connors . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . .
(1) These RSU awards vest as to one-third of the shares on each of June 1, 2013, 2014 and 2015, subject to the
recipient’s continuing service.
(2) The PSU awards reflect the number of shares of stock that would get issued assuming 100% achievement of
each of the performance targets discussed below.
Stock Option:
Each of the stock options granted to our Named Executive Officers had a vesting commencement date of June
1, 2012, a term of seven years and vest 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, 2012 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.
Restricted Stock Unit Awards:
The RSU awards granted to our Chief Financial Officer and our Chief Technology Officer vest as to one-third
of the shares on each of June 1, 2012, 2013 and 2014, subject to the recipient’s continuing service.
Performance Stock Unit Awards:
Commencing with 2012, our Board, with the approval of our non-employee directors, started granting PSUs
to the Named Executive Officers. The actual number of shares of common stock that will get issued to the
recipient will vary based on the percentage achievement of three revenue based performance goals as stated
below. The number of Performance Share awards will be calculated by multiplying the Target Number of
Performance Shares by the percentage of the revenue goal achievement.
The three performance goals level of Company performance as measured in terms of three equally weighted
revenue goals relating to:
(1) Sales of products and services from the Iridex aesthetic business acquisition and cross-selling
opportunities of Cutera products and services related thereto.
(2) Revenue from sales to the podiatry market.
(3) Sales of the truSculpt product.
The number of PSUs to be awarded to each recipient will be based on revenue achievements as measured
during the period April 1, 2012 through March 31, 2013 for the first two goals and July 1, 2012 through
March 31, 2013 for the third goal. Specifically, if revenue achievement is below 50% for a performance goal,
then zero (0) Performance Shares shall vest for that performance goal; if revenue achievement is greater than
50% for a performance goal, then a pro rata number of Performance Shares shall vest for that performance
goal. The Performance Shares shall vest on June 1, 2013, subject to the recipient’s continuing service.
The following matrix provides an example of the achievement at 50%, 100% and 150%:
-39-
Name
Kevin J. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ronald J. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Shares of Common Stock that Would be Paid Out
on June 1, 2013
At 100% of
Target
Performance*
At 50% of
Target
Performance*
At 150% of
Target
Performance*
18,000
3,125
36,000
6,250
54,000
9,375
* Each of the three revenue performance goals discussed above is equally weighted and the PSU awards represent the
aggregate number of shares of common stock that would be earned from all three revenue performance goals.
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;
401(k) plan with 25% employer matching contributions, capped at 6% of total cash compensation; 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 2012, 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.
-40-
Accounting for Stock-Based Compensation
We follow Financial Accounting Standard Board Accounting Standards Codification Topic 718 (“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.
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, 2012.
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)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)) (c)
3,788,239
$
—
3,788,239
$
9.44
—
9.44
1,644,356
—
1,644,356
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, 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 . . . . . . . . . . . . . . . . .
Stock Ownership Guideline
(as a multiple of base salary)
Three times
One time
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.
-41-
2012 Summary Compensation Table
The following table sets forth summary compensation information for the fiscal years ended December 31, 2012, 2011
and 2010 for our Named Executive Officers−Chief Executive Officer and our Chief Financial Officer− and our former
Chief Technology Officer.
Name and Principal
Position
Kevin P. Connors
President and Chief
Salary
Bonus(1)
Option
Awards(2)
Stock
Awards
(2)
Non-Equity
Incentive Plan
Compensation
All Other
Compensation
Total
Executive Officer
2012 . . . . . . . . . . . . . . . $ 428,750 $ 569,048 $ 218,336 $ 247,680 $
2011 . . . . . . . . . . . . . . . 420,000
2010 . . . . . . . . . . . . . . . 420,000
95,920
337,920
359,508
391,852
―
―
Ronald J. Santilli
Executive Vice
President and
Chief Financial
Officer
2012 . . . . . . . . . . . . . . . $ 301,667 $ 247,087 $ 77,977 $
2011 . . . . . . . . . . . . . . . 290,000
2010 . . . . . . . . . . . . . . . 290,000
239,672
171,266
―
―
86,000 $
65,400
225,280
― $
226,365(3)
―
23,520 (5) $ 1,487,334
1,101,793
1,149,772
―
―
― $
117,389(3)
―
15,032 (5) $ 727,763
712,461
686,546
—
―
Leonard C.
DeBenedictis
Former Chief
Technology
Officer
2012 . . . . . . . . . . . . . . . $ 227,500 $ 128,829 $ 71,979 $
2011 . . . . . . . . . . . . . . . 312,000
2010 . . . . . . . . . . . . . . .
—
50,550 (4) 460,686
—
—
55,040 $
32,700
―
— $
140,249(3)
—
336,000 (6) $ 819,348
996,185
—
—
—
(1) The amounts reported in this column represent the bonus earned for each of the years covered in the table in
accordance with our bonus plans.
(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 2012, 2011 and 2010 calculated in accordance with ASC Topic 718. See
Note 6 of the Consolidated Notes to Financial Statements included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2012 filed with the SEC on March 15, 2013 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.
(5) Amounts represent 401(k) employer-match contributions and a non-cash benefit associated with a Company
sponsored, non-business event for achieving sales targets in accordance with our commission incentive plan.
(6) Amounts shown included accrued vacation and severance payouts upon Mr. DeBenedictis’ termination in
September 2012.
-42-
The following table lists grants of plan-based stock options, RSU and PSU awards made to our Named Executive
Officers during the fiscal year ended December 31, 2012.
2012 Grants of Plan-Based Awards Table
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Threshold Target Maximum
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
All Other
Option
Awards:
Number of
Securities
Underlying
Options
Exercise or
Base Price
of Option
Awards (1)
Grant Date
Fair Value
of Stock
and Option
Awards (2)
—
—
__
—
—
__
—
—
__
36,000
12,500
91,000 $
6.88 $
466,016
32,500 $
6.88 $
163,977
8,000
30,000 $
6.88 $
127,019
Name
Mr. Connors . . . . . . . . .
Mr. Santilli . . . . . . . . . .
Mr. DeBenedictis . . . . . .
Grant
Date
07/27/2012
07/27/2012
07/27/2012
(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, 2012 filed with the SEC on March
15, 2013 for a discussion of the valuation assumptions for our stock-based compensation.
2012 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, 2012.
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
33,300
100,000
120,000
100,000
60,000
—
14,753
10,000
15,000
13,700
50,000
55,000
45,834
40,000
—
$
—
—
—
—
—
20,000(1)
60,000(1)
91,000(1)
—
—
—
—
—
—
9,166(1)
40,000(1)
32,500(1)
4.25
20.25
10.43
10.43
8.66
10.24
8.72
6.88
4.25
13.30
20.25
10.43
10.43
8.66
10.24
8.72
6.88
Option
Expiration
Date
8/13/2013
7/28/2015
5/28/2015
5/28/2015
6/08/2016
5/14/2017
5/27/2018
7/27/2019
8/13/2013
7/20/2014
7/28/2015
5/28/2015
5/28/2015
6/08/2016
5/14/2017
5/27/2018
7/27/2019
Stock Awards
Market
Value of
Shares or
Units of
Stock that
Have Not
Vested
Number of
Shares or
Units of
Stock that
Have Not
Vested
Date Awards
Will be Fully
Vested
3,667(2) $
36,000 (3)
33,003 (2)
324,000 (3)
6/01/2013 (2)
6/01/2013 (3)
2,500 (2) $
6,250 (3)
6,250 (4)
22,500 (2)
56,250 (3)
56,250 (4)
6/01/2013 (2)
6/01/2013 (3)
6/01/2015 (4)
(1) 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.
(2) These unvested shares represent RSU awards granted in 2011 that will vest on June 1, 2013.
(3) These unvested shares represent the PSU awards assuming they are paid at target performance levels and will
vest on June 1, 2013.
(4) One-third of the shares underlying this award vest on the first, second and third anniversary of the vesting
commencement date of June 1, 2012.
-43-
2012 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, 2012.
Name
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. DeBenedictis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise
Value Realized
on
Exercise (1)
Number of
Shares
Acquired on
Vesting
Value
Realized
Upon
Vesting (2)
—
3,372
72,223
$
$
$
—
16,234
28,141
14,667
9,833
1,250
$
$
$
98,562
66,078
8,400
(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 2012.
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 2012.
Employment Agreements
We do not have employment agreements with any of our Named Executive Officers.
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:
-44-
•
•
•
•
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 of these agreements were renewed in 2013 for another 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).
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, 2012.
Name
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Total Value
of Cash
Payment
$
$
870,000
310,000
Estimated
Total Value
of Health
Coverage
Continuation
$
$
20,518
29,775
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, 2012.
-45-
Name
Mr. Connors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mr. Santilli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Total Value
of Cash
Payment
$ 1,283,250
480,500
$
Estimated
Total Value
of Health
Coverage
Continuation
20,518
$
29,775
$
Value of
Accelerated
Equity (1)
$
$
566,723
251,100
(1) We estimate the value of acceleration of the outstanding and unvested stock options, RSU and PSU awards
(assuming paid at 100% of target) held by each of our Named Executive Officers based on a market price of
$9.00 per share for Cutera common stock as of December 31, 2012.
Severance payments upon termination or change in control would be payable to the recipient only if the executive signs
and does not revoke a release of claims with the Company (in a form reasonably acceptable to the Company) and
provided that such release of claims becomes effective no later than sixty (60) days following the termination date. In
addition, the executive would need to have complied with the terms of any confidential information agreement
executed by executive in favor of the Company and the provisions of the severance agreements.
-46-
COMPENSATION COMMITTEE REPORT
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,
/s/ Kevin P. Connors
Kevin P. Connors
President and Chief Executive Officer
Brisbane, California
April 29, 2013
-48-
CUTERA, INC.
2004 EQUITY INCENTIVE PLAN
APPENDIX A
(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:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
“Administrator” means the Board or any of its Committees as will be administering the Plan, in
accordance with Section 4 of the Plan.
“Affiliated SAR” means an 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.
“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.
“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.
“Board” means the Board of Directors of the Company.
“Change in Control” means the occurrence of any of the following events:
(i)
(ii)
(iii)
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
The consummation of the sale or disposition by the Company of all or substantially all of
the Company’s assets;
A change in the composition of the Board occurring within a two-year period, as a result of
which less 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
-49-
(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.
“Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the
Code herein will be a reference to any successor or amended section of the Code.
“Committee” means a committee of Directors or of other individuals satisfying Applicable Laws
appointed by the Board in accordance with Section 4 hereof.
“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.
“Director” means a member of the Board.
“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.
“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.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“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.
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
“Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
-50-
(i)
(ii)
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 deter-
mination, as reported in The Wall Street Journal or such other source as the Administrator
deems reliable;
(iii)
In the absence of an established market for the Common Stock, the Fair Market Value will
be determined in good faith by the Administrator.
“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.
(t)
(u)
(v)
(w)
“Inside Director” means a Director who is an Employee.
(x)
(y)
“Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to
qualify as an Incentive Stock Option.
“Officer” means a person who is an officer of the Company within the meaning of Section 16 of the
Exchange Act and the rules and regulations promulgated thereunder.
(z)
“Option” means a stock option granted pursuant to the Plan.
(aa)
“Outside Director” means a Director who is not an Employee.
(bb)
“Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section
424(e) of the Code.
(cc)
“Participant” means the holder of an outstanding Award.
(dd)
“Performance Goals” will have the meaning set forth in Section 12 of the Plan.
(ee)
(ff)
(gg)
“Performance Period” means any Fiscal Year or such other period as determined by the
Administrator in its sole discretion.
“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.
“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.
-51-
(hh)
(ii)
(jj)
(kk)
“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.
“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.
(ll)
“Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect
when discretion is being exercised with respect to the Plan.
(mm)
“Section 16(b) “ means Section 16(b) of the Exchange Act.
(nn)
“Service Provider” means an Employee, Director or Consultant.
(oo)
“Share” means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan.
(pp)
(qq)
(rr)
(ss)
“Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with an
Option, that pursuant to Section 9 is designated as a SAR.
“Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in
Section 424(f) of the Code.
“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).
“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.
3.
Stock Subject to the Plan.
(a)
(b)
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.
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
-52-
(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).
(d)
Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep
available such number of Shares as will be sufficient to satisfy the requirements of the Plan.
4.
Administration of the Plan.
(a)
Procedure.
(i)
(ii)
(iii)
(iv)
Multiple Administrative Bodies. Different Committees with respect to different groups of
Service Providers may administer the Plan.
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.
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.
Other Administration. Other than as provided above, the Plan will be administered by (A)
the Board or (B) a Committee, which committee will be constituted to satisfy Applicable
Laws.
(b)
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:
(i)
(ii)
to determine the Fair Market Value;
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;
(v)
with the approval of the Company’s stockholders, to institute an Exchange Program;
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(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;
(vii)
to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(viii)
to prescribe, amend and rescind rules and regulations relating to the Plan, including rules
and regulations relating to sub-plans established for the purpose of satisfying applicable
foreign laws;
(ix)
(x)
(xi)
(xii)
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;
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);
to authorize any person to execute on behalf of the Company any instrument required to
effect the grant of an Award previously granted by the Administrator;
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
(xiii)
to make all other determinations deemed necessary or advisable for administering the Plan.
(c)
Effect of Administrator’s Decision. The Administrator’s decisions, determinations and
interpretations will be final and binding on all Participants and any other holders of Awards.
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.
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.
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(ii)
The following limitations will apply to grants of Options:
(1)
(2)
(3)
(4)
No Service Provider will be granted, in any Fiscal Year, Options to purchase more
than 1,000,000 Shares.
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.
The foregoing limitations will be adjusted proportionately in connection with any
change in the Company’s capitalization as described in Section 14.
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.
(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.
(i)
Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise
of an Option will be determined by the Administrator, subject to the following:
(1)
In the case of an Incentive Stock Option
a)
b)
c)
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.
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.
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.
(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
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.
intended
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(ii)
(3)
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.
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.
(i)
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.
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.
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.
-56-
(ii)
(iii)
(iv)
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.
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.
7.
Restricted Stock.
(a)
(b)
(c)
(d)
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.
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.
Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on
Shares of Restricted Stock as it may deem advisable or appropriate.
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(e)
(f)
(g)
(h)
(i)
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.
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.
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)
(b)
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.
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.
(c)
Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be
entitled to receive a payout as specified in the Award Agreement.
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(d)
(e)
(f)
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.
Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will
be forfeited to the Company.
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.
(a)
(b)
(c)
(d)
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.
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.
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.
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.
(e)
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.
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(f)
(g)
(h)
Exercise of Freestanding SARs. Freestanding SARs will be exercisable on such terms and conditions
as the Administrator, in its sole discretion, will determine.
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.
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 from the date of
grant) and Section 6(d) relating to post-termination exercise also will apply to SARs.
(i)
Payment of SAR Amount. Upon exercise of an SAR, a Participant will be entitled to receive payment
from the Company in an amount determined by multiplying:
(i)
The difference between the Fair Market Value of a Share on the date of exercise over the
exercise price; times
(ii)
The number of Shares with respect to which the SAR is exercised.
(iii)
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)
(b)
(c)
(d)
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.
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.
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.
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.
-60-
(e)
(f)
(g)
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.
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 and Award Grants to Outside Directors.
All grants of Options and Awards to Outside Directors pursuant to this Section will be automatic and
nondiscretionary and will be made in accordance with the following provisions:
(a)
(b)
(c)
(d)
Type of Option. All Options granted pursuant to this Section will be Nonstatutory Stock Options and,
except as otherwise provided herein, will be subject to the other terms and conditions of the Plan.
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).
First Option. Each person who first becomes an Outside Director following the Registration Date
will be automatically granted an Option to purchase 14,000 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 Award. Each Outside Director will be automatically granted an award of shares
represented by the quotient of $60,000 divided by the closing market price of the Company’s
common stock on the date of the annual meeting of the stockholders of the Company (a “Subsequent
Award”), if as of such date, he or she will have served on the Board for at least the preceding six (6)
months.
(e)
Terms. The terms of each Option granted pursuant to this Section will be as follows:
(i)
(ii)
The term of the First Option will be seven (7) years.
The exercise price per Share will be 100% of the Fair Market Value per Share on the date of
grant of the First Option.
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(iii)
(iv)
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.
Subject to Section 14, the Subsequent Award will vest as to 100% of the Shares subject to
such Award on the first anniversary of its date of grant, provided that the Participant
continues to serve as a Director through such date.
(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.
(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.
Procedures. To the extent necessary to comply with the performance-based compensation provisions of
(c)
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.
-62-
13.
14.
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.
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)
(b)
(c)
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.
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.
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.
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.
-63-
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)
(b)
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).
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.
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.
-64-
18.
19.
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.
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.
(a)
(b)
(c)
Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate
the Plan.
Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the
extent necessary and desirable to comply with Applicable Laws.
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.
(a)
(b)
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.
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.
Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body
22.
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.
-65-
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CUTERA, INC.
2013 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 29, 2013 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 2013 Annual Meeting of Stockholders of Cutera, Inc. to be held on June 19, 2013 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
The Board of Directors of Cutera, Inc. recommends a vote FOR the following proposals:
Please mark your votes as indicated:
1. Election of Directors:
FOR
WITHHOLD
2.
CLASS III NOMINEES:
W. Mark Lortz
Gregory Barrett
Jerry P. Widman
Ratification of Ernst &
Young LLP as our
Independent Registered
Public Accounting Firm
for the fiscal year ending
December 31, 2013.
FOR
AGAINST
ABSTAIN
THE STOCKHOLDER MAY
WITHHOLD AUTHORITY
TO VOTE FOR ANY
NOMINEE BY STRIKING
OUT THE INDIVIDUAL’S
NAME ABOVE
3.
Approval of the amended
and restated 2004 Equity
Incentive Plan.
4. A non-binding advisory
vote on the approval of
executive compensation.
FOR
AGAINST
ABSTAIN
FOR
AGAINST
ABSTAIN
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 III
DIRECTORS; (2) FOR THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM; (3) FOR THE APPROVAL OF OUR
2004 EQUITY INCENTIVE PLAN (AS AMENDED); (4) FOR THE APPROVAL, BY NON-BINDING VOTE,
OF EXECUTIVE COMPENSATION; 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, 2012
Commission file number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
77-0492262
(I.R.S. Employer Identification Number)
3240 Bayshore Blvd.
Brisbane, California 94005
(415) 657-5500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
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, 2012 (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 June 29, 2012, was approximately $86 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 28, 2013 was 14,557,155.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2013 Annual Meeting of
Stockholders.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15. Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
ITEM 1.
BUSINESS
PART I
We are a global medical device company headquartered in Brisbane, California specializing in the design,
development, manufacture, marketing and servicing of laser and other energy based aesthetics systems for practitioners
worldwide. We offer easy-to-use products based on eight platforms—CoolGlide®, Xeo®, Solera®, GenesisPlusTM,
ExcelVTM, myQTM, VariLiteTM, and truSculptTM— 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 ExcelV 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.
VariLite- In February 2012 we acquired certain assets of IRIDEX Corporation’s (“Iridex”) global aesthetic
business and added the VariLite product to our current product offering. This is a dual wavelength ─ 532 nm
and 940 nm ─ laser system for vascular, benign pigmented and cutaneous lesions. This system supports
treatment of all Fitzpatrick skin types from I to VI and is an economical system with no disposables.
truSculpt- In August 2012, we commenced shipments of our truSculpt platform with a 25cm2 hand piece.
truSculpt is a high-powered radio frequency (“RF”) platform designed for the non-invasive body contouring
market. This system is designed to treat all body areas and with its unique electrode design is able to achieve
comfortable, uniform heating of the subcutaneous fat. In the fourth quarter of 2012, we commenced shipping
a larger 40cm2 hand piece that enables faster treatments of larger areas.
Each of our laser and other energy based platforms consists of one or more hand pieces and a console that incorporates
a universal graphic user interface, a laser or other energy based module, control system software and high voltage
electronics. However, depending on the application, the laser or other energy 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.
3
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 and truSculpt
hand piece refills, and Dermal filler and cosmeceuticals.
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, tattoos, or fat in undesirable areas of the body, 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 12.25 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 48 to 66 in 2012 ─
represented approximately 75 million people, or nearly 25%, of the U.S. population in 2012. The size and
wealth 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.
Wide acceptance of aesthetic procedures and increased focus on body image and appearance. According to
the ASAPS survey in 2010, 51% of Americans (including 53% of women and 49% of men) approved of
cosmetic surgery, and 67% of Americans responded that they would not be embarrassed if their friends or
family knew they had undergone a cosmetic procedure. Broader social acceptance of aesthetic treatments, and
reducing average cost of treatments resulting from competition, has also driven the growth in aesthetic
procedures.
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Non-Surgical Aesthetic Procedures for Improving the Skin’s Appearance and Their Limitations
Many alternative therapies are available for improving a person’s appearance by treating specific structures within the
skin. These procedures utilize injections or abrasive agents to reach different depths of the dermis and the epidermis. In
addition, non-invasive and minimally-invasive treatments have been developed that employ laser and other energy
based technologies to achieve similar therapeutic results. Some of these more common therapies and their limitations
are described below.
Hair Removal- Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis and laser and
other energy based hair removal. The only techniques that provide a long-lasting solution are electrolysis and other
energy based hair removal. Electrolysis is usually painful, time-consuming and expensive for large areas, but is the
most common method for removing light-colored hair. During electrolysis, an electrologist inserts a needle directly
into a hair follicle and activates an electric current in the needle. Since electrolysis only treats one hair follicle at a
time, the treatment of an area as small as an upper lip may require numerous visits and many hours of treatment. In
addition, electrolysis can cause blemishes and infection related to needle use.
Leg and Facial Veins- The current aesthetic treatment methods for leg and facial veins include sclerotherapy and laser
and other energy 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 other energy-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 5.67 million injections of Botulinum
Toxin and 1.89 million injections of collagen and other soft-tissue fillers were administered; and 1.11 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 other energy based non-surgical treatments for hair removal, veins, skin rejuvenation and body contouring
are discussed in the following section and in the section entitled “Our Applications and Procedures,” below.
Laser and Other Energy-Based Aesthetic Treatments
Laser and other energy-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.
5
Ablative skin resurfacing is a method of improving the appearance of the skin by removing the outer layers of the skin.
Ablative skin resurfacing procedures are considered invasive or minimally invasive, depending on how much of the
epidermis is removed during a treatment. Non-ablative skin resurfacing is a method of improving the appearance of the
skin by treating the underlying structure of the skin without damaging the outer layers of the skin. Practitioners can use
laser and other energy based technologies to selectively target hair follicles, veins or collagen in the dermis, as well as
cells responsible for pigmentation in the epidermis, without damaging surrounding tissue. They can also use these
technologies to safely remove portions of the epidermis and deliver heat to the dermis as a means of generating new
collagen growth.
Safe and effective laser and energy-based treatments require an appropriate combination of the following four
parameters:
Energy Level- the amount of light or radio frequency emitted to heat a target;
Pulse Duration- the time interval over which the energy is delivered;
Spot Size or Electrode Size- the diameter of the energy beam, which affects treatment depth and area; and
Wavelength or Frequency- the position in the electromagnetic spectrum which impacts the absorption and
therefore the effective depth 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, myQ, and truSculpt platforms provide the long-lasting
benefits of laser and other energy-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 other energy-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. ExcelV 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. truSculpt is a mono-polar radio frequency platform and has a unique electrode design
that delivers high-powered energy at 1 MHz for the deep and uniform heating of the subcutaneous fat tissues
at sustained therapeutic temperatures. This system includes real-time skin temperature sensing and a large
40cm2 surface area for faster treatments over large areas of the body.
6
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.
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 other
energy 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. We have launched three new platforms over the past three
consecutive years with GenesisPlus in 2010, ExcelV in 2011 and truSculpt in 2012. 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.
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 2011and 2012 we
increased our focus on marketing our GenesisPlus product to podiatrists and our VariLite and ExcelV
products to dermatologists and plastic surgeons.
Leveraging our Installed Base - With the introduction of ExcelV and now truSculpt we are able to effectively
offer additional platforms into our existing installed base. In addition, each of these platforms allows for
potential future upgrades to offer additional indications or capabilities. We believe this 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 in their practice.
Generating Revenue from Services and Refillable Hand Pieces- Our Titan, truSculpt 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.
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Products
Our CoolGlide, Xeo, Solera, GenesisPlus, Excel V, truSculpt and myQ platforms allow for the delivery of multiple
laser and energy-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:
Hair
Removal:
Vascular
Lesions:
Products:
System
Platforms:
CoolGlide . . . CV
Year:
2000
2001
Excel
2002
Vantage
Xeo . . . . . . . . . Nd:YAG
2003
2003
OPS600
2004
LP560
Titan S
2004
ProWave 770 2005
AcuTip 500 2005
2006
Titan V/XL
2006
LimeLight
2007
Pearl
2008
Pearl
Fractional
Solera . . . . . . . Titan S
2004
ProWave 770 2005
2005
OPS 600
LP560
2005
AcuTip 500 2005
2006
Titan V/XL
2006
LimeLight
2010
Genesis
Plus . . . . . . . . .
Excel V . . . . .
myQ . . . . . . . .
VariLite . . . . .
truSculpt . . . .
2011
2011
2012
2012
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
f
g
x
x
x
x
x
x
x
Skin Rejuvenation
Texture,
Lines and
Wrinkles:
Skin
Laxity:
Melasma
&Tattoo
Removal:
Dyschromia:
Non Invasive
Body
Contouring:
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Energy Source: a. 1064nm Nd:YAG laser; b. flashlamp; c. Infrared laser; d. 2790 nm YSGG laser; e. combined
frequency 532 nm and 1064 nm Nd:YAG laser; f. Combined frequency 532 nm and 940 nm diode laser; g. Radio
frequency at 1 MHz
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, VariLite, ExcelV 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. Our truSculpt control console includes a high-powered, mono-polar RF
generator at 1MHz capable of delivering up to 300 watts of energy. The truSculpt system dynamically adjusts current,
voltage and power during treatment as needed to reach and maintain the appropriate treatment levels.
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.
ExcelV Hand Piece- The ExcelV system introduced in February 2011 delivers 1064 nm and 532 nm laser energy to the
treatment area for vascular treatments. The ExcelV 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.
VariLite Hand Piece- VariLite has an ergonomic hand piece that can be used with both the 532 nm and 940 nm
wavelengths in performing treatments of vascular, benign pigmented and cutaneous skin lesions.
truSculpt Hand Piece- The truSculpt product introduced in August 2012 is used for the non-invasive heating of the
subcutaneous fat tissue. It has a large 40 cm2, light weight, proprietary hand piece design, which allows for the
uniform heat distribution delivered by the hand piece. In addition, the hand piece has a built-in, real time, temperature
sensing system to monitor the temperature during the treatment. The hand piece can be used to treat multiple areas of
the body and is ergonomically designed for operator comfort. After a set number of treatments, the customer is
required to send the hand piece back to the factory for refurbishment, which we refer to as ‘refilling.’ The periodic
refilling process provides us with a source of recurring revenue.
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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 provide 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.
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 and truSculpt Hand Piece Refills
Each Titan and truSculpt 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 (“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 ExcelV 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.
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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 ExcelV 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.
Skin Rejuvenation- Our Nd:YAG laser and other energy 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 (“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 ExcelV and VariLite can also be used to treat pigmented lesions in
substantially the same way as described above with the pulsed light devices.
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Practitioners can also treat dyschromia and other skin conditions with our Pearl hand piece. During these treatments,
the heat delivered by the Pearl hand piece will remove the outer layer of the epidermis while coagulating a portion of
the epidermis. That coagulated portion will gently peel off over the course of a few days, revealing a new layer of skin
underneath. Treatment of the full face can usually be performed in 15 to 30 minutes. Patients receive on average
between one and three treatments at monthly intervals.
Skin Laxity- Our Titan technology allows our customers to use deep dermal heating to tighten lax skin. The practitioner
delivers a spectrum of light to the skin through our Titan hand piece. This hand piece includes our proprietary light
source and wavelength filter which tailors the delivered spectrum of light to provide heating at the desired depth in the
skin.
In treating skin laxity, the hand piece is placed directly on the skin and then the light pulse is triggered. A sustained
pulse causes significant heating in the dermis. This heating can cause immediate collagen contraction while also
stimulating long-term collagen re-growth. Several treatments may be required to obtain the desired degree of tightening
of the skin. The treatment of a full face can take over an hour and there are typically four weeks between treatments.
Our CE Mark allows us to 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.
Non-Invasive Body Contouring- our truSculpt technology allows physicians to apply a hand piece directly to the skin
and deliver high-powered RF energy that results in the deep and uniform heating of the subcutaneous fat tissue at
sustained therapeutic temperatures. This heating can cause selective destruction of fat cells, which are eliminated from
the treatment area through the body’s natural wound healing processes. The treatment takes approximately 45 minutes
and two or more treatments may be required to obtain the desired aesthetic results.
Our CE Mark allows us to market the truSculpt in the European Union, and certain other countries outside the United
States for fat reduction, body shaping and body contouring. In the United States we have 510(k) clearance for deep
dermal heating for the temporary relief of minor muscle and joint pain and the temporary improvement in the
appearance of cellulite.
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, 2012, we had a U.S. direct sales force of 29
employees. We internally manage our U.S. and Canadian sales organization as one North American sales region with
33 territories as of December 31, 2012. 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 $1.1million in 2012, $1.6 million in
2011, and $2.6 million in 2010.
International sales are generally made through a worldwide distributor network in over 60 countries, as well as a direct
international sales force of 25 employees, as of December 31, 2012. As of December 31, 2012, we had direct sales
offices in Australia, Canada, France and Japan. Our international revenue as a percentage of total revenue represented
59% in 2012, 61% in 2011 and 64% in 2010.
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.
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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 other energy-based products offered by public companies, such as
Cynosure, Elen (in Italy), Palomar, Solta, Zeltiq and Syneron, as well as private companies, including, Alma, Lumenis,
Sciton and several other companies.
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, 2012, our research and development activities were
conducted by a staff of 24 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 $8.4
million in 2012, $9.1 million in 2011 and $7.0 million in 2010.
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, 2012, we had a 42-person global service department.
Internationally, we provide direct service support through our Australia, Canada, France and Japan offices, and also
through the network of distributors and third-party service providers in over 60 countries. In February 2012, we
acquired Iridex’s aesthetic business, which resulted in an increase in our service and support team and service revenue.
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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.
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 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, 2012, we had 24
issued U.S. patents and 18 pending U.S. patent applications. In the U.S. and several foreign countries, we have
registered our Company name and several of our product names as trademarks, including Cutera, Acutip 500,
CoolGlide, CoolGlide Excel, Limelight, myQ, Pearl, ProWave 770, Solera, Titan, Xeo and truSculpt. We may have
common law rights in other product names, including ExcelV, Pearl Fractional, Solera Titan and VariLite. We intend
to file for additional patents and trademarks to continue to strengthen our intellectual property rights.
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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, VariLite, myQ and ExcelV); and other revenue from service contracts, Titan and
truSculpt 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.
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;
Recordkeeping;
Pre-market clearance or approval;
Advertising and promotion;
Production;
Product sales and distribution; and
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.
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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Date
Received:
June 1999
March 2000
January 2001
June 2002
October 2002
Pulsed-light technologies:
- treatment of pigmented lesions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- hair removal and vascular treatments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
truSculpt
- for deep heating for the temporary relief of minor muscle and joint pain; and temporary
improvement in the appearance of cellulite; both with a 25cm2 hand piece . . . . . . . . . . . . . . . .
GenesisPlus
- for clearance of nails that are infected with onychomycosis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April 2008
April 2011
truSculpt
- for deep heating for the temporary relief of minor muscle and joint pain; and temporary
improvement in the appearance of cellulite; both with a 40cm2 hand piece . . . . . . . . . . . . . . . .
January 2012
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.
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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 regulations, which require manufacturers, including third-party manufacturers, to follow
stringent design, testing, control, documentation and other quality assurance procedures during all aspects of
the manufacturing process;
• Labeling regulations and FDA prohibitions against 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.
•
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;
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• Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
• Criminal prosecution.
The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have
manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on our
business.
We are also subject to a wide range of federal, state and local laws and regulations, including those related to the
environment, health and safety, land use and quality assurance. We believe that compliance with these laws and
regulations as currently in effect will not have a material adverse effect on our capital expenditures, earnings and
competitive and financial position.
International
International sales of medical devices are subject to foreign governmental regulations, which vary substantially from
country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter
than that required for FDA clearance or approval, and the requirements may be different.
The primary regulatory environment in Europe is that of the European Union, which consists of a 27 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, 2012, we had 227 employees, compared to 200 employees as of December 31, 2011. Of the 227
employees at December 31, 2012, 85 were in sales and marketing, 54 in manufacturing operations, 42 in technical
service, 24 in research and development and 22 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.
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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 2012, our U.S. revenue increased by approximately 37%, compared to 2011. Even though our U.S. revenue has
increased in 2012, 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.
In 2012, our U.S. revenue increased by approximately 37%, compared to 2011. Even though our U.S. revenue
increased in 2012, it continues to be significantly below the pre-2009 levels due to several factors, some of which are:
• Our Product and Upgrade average selling prices (“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, with the exception of 2009, and our
revenue increases following the introduction of new products. In 2010, we launched GenesisPlus, in 2011
Excel V, and in 2012 VariLite and truSculpt. Even though we have introduced these new products and
experienced sales increases as a result, there can be no assurance that we will continue to introduce a new
product each year or that these products introduced will translate into increased revenue in the long term in the
U.S.
Though our U.S. quarterly revenue has improved over the past seven quarters ended December 31, 2012, compared
with the respective quarters in the prior year, due primarily to new product introductions, this growth was partly
attributable to our U.S. direct sales force expansion, acquisition of the Iridex aesthetic business in February 2012,
improved U.S. macroeconomic environment, and availability of credit at reduced interest rates. The improved
macroeconomic environment also contributed to increased corporate confidence and spending. If the current economic
recovery does not hold, or there is another recession in the U.S., our future revenue growth would be adversely
impacted.
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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We have had net operating losses historically and only recently became profitable, and we are unable to predict
whether we will remain profitable.
Although we had a profitable fourth quarter in 2012, there is no guarantee that we will be profitable in the future. We
have a recent history of net losses and only became profitable on a quarterly basis for the first time since 2009. Any
predictions about future performance of our going forward operations may not be as accurate as they could be if we
had a longer history of sales from some of our newer products. For example, we launched our truSculpt product in
August 2012 which we anticipate will comprise significant portion of our revenues. If truSculpt does not generate
expected revenues, our overall revenue will be adversely affected and we may not be able to maintain profitability.
You should not therefore rely on our operating results for any prior quarterly or annual periods as an indication of our
future operating performance.
Our ability to sustain profitability depends on the extent to which we can maintain or increase revenue and control our
costs in order to, among other things, counter any unforeseen difficulties, complications, product delays or other
unknown factors that may require additional expenditures. Because of the numerous risks and uncertainties associated
with our growth prospects, product development, sales and marketing and other efforts, we are unable to predict the
extent of our profitability or future losses. If we are unable to achieve adequate growth, we may not sustain
profitability.
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, every year we lose some of our trained sales professionals to
competitors and other industries.
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.
We have experienced significant turnover of our European sales team. While we continue to have a direct sales and
service organization in France, and have consolidated our operations with the newly acquired aesthetic business of
Iridex there, we have restructured the rest of our European operation. We shut down our direct European hub in
Switzerland in December 2011, and in March 2012 we decided to shut down our direct sales offices in Spain and the
United Kingdom. We have engaged a distributor in Switzerland and are in the process of identifying new distributor
partners in Spain and the United Kingdom. As we restructure parts of our European business towards a more
distributor focus, there can be no assurance given that these initiatives will result in improved European-sourced
revenue or profitability in the future.
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.
If our revenue does not continue to improve, 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 (revenue less cost) declined to 54% in, 2012, compared to 57% in 2011. 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, a shift in our product mix towards
products with lower average selling prices, or a shift in our product mix towards products with lower margin.
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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 and sales and marketing activities.
In 2012, we expanded our global direct sales force to 54 employees at December 31, 2012, from 48 at December 31,
2011. While we have added sales and marketing personnel, it may take time before our new sales representatives
become productive and for the revenue that they generate to become accretive to our operating income. We plan to
continue making such investments in order to bring new products to market and to distribute them effectively. If these
investments do not yield in increased revenue, we may continue to generate losses and consume cash.
If our revenue does not continue to improve, 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.
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 body contouring, 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, etc. In 2012, we launched truSculpt for the body contouring market and acquired VariLite for
vascular and pigmented lesions. In 2011, we launched our vascular laser product – ExcelV – 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 other energy based aesthetic procedures. In addition, 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 / or 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:
• 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.
•
•
•
•
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.
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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.
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.
However, beginning in 2013, medical device manufacturers have to pay an excise tax of 2.3% on certain U.S. medical
device revenues. Though there are some exceptions, this excise tax will apply to all of our products manufactured and
sold within the U.S. and 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:
• 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;
•
• An increase in malpractice lawsuits that result in higher insurance costs; and
• The lack of credit financing for some of our potential customers.
Failure to build and maintain relationships with opinion leaders within the various market segments;
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.
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 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.
23
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
To successfully market and sell our products internationally, we must address many issues that are unique to our
international business.
International revenue represented 59% of our total revenue for the year ended December 31, 2012, compared to 61%
for the same period in 2011. 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.
We have experienced significant turnover of our European sales team. While we continue to have a direct sales and
service organization in France, and have consolidated our operations with the newly acquired aesthetic business of
Iridex there, we have restructured the rest of our European operation. We shut down our direct European hub in
Switzerland in December 2011 and in March 2012 we shut down our direct sales operations in Spain and the United
Kingdom. We have engaged a distributor in Switzerland and are in the process of identifying new distributor partners
in Spain and the United Kingdom. As we restructure parts of our European business towards a more distributor focus,
there can be no assurance given that these initiatives will result in improved European-sourced revenue or profitability
in the future.
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.
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:
Fluctuating foreign currency exchange rates;
Foreign certification and regulatory requirements;
• Difficulties in staffing and managing our foreign operations;
• Export restrictions, trade regulations and foreign tax laws;
•
•
• 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;
•
• Reduced protection for intellectual property rights in some countries.
Preference for locally-produced products; and
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.
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:
Identify and develop clinical support for new indications of our existing products;
Product performance;
Product pricing;
Speed of new and innovative product development;
•
• Effective strategy and execution of new product launches;
•
•
•
• Quality of customer support;
• Development of successful distribution channels, both domestically and internationally; and
•
Intellectual property protection.
24
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.
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.
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 other-energy 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:
• Consumer disposable income and access to consumer credit, which as a result of the unstable economy, may
have been significantly impacted;
• The cost of procedures performed using our products;
• The cost, safety and effectiveness of alternative treatments, including treatments which are not based upon
laser or other energy-based technologies and treatments which use pharmaceutical products;
• The success of our sales and marketing efforts; 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.
25
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:
• Damage to our brand reputation;
• Loss of customer orders and delay in order fulfillment;
•
•
• Diversion of resources from our manufacturing and research and development departments into our service
Increased costs due to product repair or replacement;
Inability to attract new customers;
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.
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 and one key employee, 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. The staff we hire to perform administrative functions may be become stretched due to our
increased growth and they may not be able to perform their jobs effectively or efficiently as a result. 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.
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 clearance of nails that are infected with 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, state authorities and international regulatory bodies have broad enforcement powers. If we fail to comply
with applicable regulatory requirements, it could result in enforcement action by the FDA, state agencies or
international regulatory bodies.
The FDA, state authorities and international regulatory bodies have broad enforcement powers. For example, in July
2012, we received a warning letter from the FDA concerning the labeling language for one of our products on our U.S.
website. The FDA determined that some of the claims, such as the one related to Skin Rejuvenation, constituted
Indications for Use and were subject to 510(k) clearance. We are actively working with the FDA to reach an agreement
on the appropriate labeling language for use on our U.S. website. Depending on the final labeling approved by the
FDA, any changes made to our marketing material may adversely impact sales of some of our products.
If we fail to comply with any of the applicable regulatory requirements of the FDA, or state, or one of the international
regulatory bodies, it could result in enforcement action by the agencies, which may include any of the following sanctions:
• Warning letters, fines, injunctions, consent decrees and civil penalties;
• Repair, replacement, recall or seizure of our products;
• Operating restrictions or partial suspension or total shutdown of production;
• Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or
modifications to existing products;
• Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
• Criminal prosecution.
If any of these events were to occur, it could harm our business.
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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 and a full quality system audit in October 2012. 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.
For example, we designed a larger 40cm2 hand piece for our truSculpt product and had to get that approved by the
FDA before we could market it, which approval was received in January 2012. 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.
28
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 annual minimum dollar amounts of their product. 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 its 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.
29
We cannot provide any assurances that we will realize the anticipated benefits from the Iridex aesthetic acquisition
or that we will not have to record an impairment charge with respect to the intangible assets related to this
acquisition.
On February 2, 2012, we completed the acquisition of certain assets of IRIDEX Corporation’s global aesthetic
business. This acquisition was considered a business combination for accounting purposes, and as such, in addition to
valuing all the assets, we recorded goodwill associated with the expected synergies from leveraging the customer
relationships and integrating new product offerings into our business in the future. At December 31, 2012, we have net
intangible assets of $2.3 million and $1.3 million of goodwill. While the integration of the operations, service business
and the VariLite product has been completed, we cannot provide any assurances that we will ultimately realize the
anticipated benefits from this acquisition.
Identifiable intangible assets and goodwill are subject to impairment testing and are reviewed for impairment when
events or circumstances indicate that such assets may not be recoverable at their carrying value. We evaluate the
recoverability of the carrying value of the identifiable intangibles based on future estimated undiscounted cash flows. If
the future estimated undiscounted cash flows or the significant operating assumptions upon which they are based,
change in the future, we may be required to recognize an impairment charge in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such assets.
Should conditions and estimates used for recording the identifiable intangibles and goodwill be different from
management’s original estimates, material write-downs of long-lived assets and / or goodwill may be required, which
would adversely affect our operating results and could negatively impact 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, 2012, our balance in marketable investments was $62 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, 2012 would have
potentially decreased by approximately $745,000, 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).
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 February 19, 2013, approximately 39% 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:
• 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;
30
• 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.
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 have limited experience as a team
with acquiring companies and products. If we decide to expand our product offerings beyond laser and other energy-
based products, we may spend time and money on projects that do not increase our revenue. Any cash acquisition we
pursue would diminish our available cash balances to us for other uses, and any stock acquisition could be dilutive to
our stockholders.
While we from time to time evaluate potential 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;
•
31
•
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.
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, 2012, we had 24 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, and Canadian Dollar. As a result, changes in the exchange rates of these currencies to the U.S.
Dollar will affect our results from operations.
32
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.
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 and one key employee, 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 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
France . . . . . . . . Approximately 2,239
expires in March 2015.
One lease which expires in October 2021 but can be terminated with
six months’ notice prior to October 2015 and 2018.
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.
33
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 28,
2013, the closing sale price of our common stock was $12.90 per share.
Common Stockholders
We had 10 stockholders of record as of February 28, 2013. Since many stockholders choose to hold their shares under
the name of their brokerage firm we believe the actual number of stockholders was approximately closer to 2,300
shareholders.
Stock Prices
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated fiscal
periods:
2012
2011
High
Low
High
Low
Common Stock
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.77 $
7.60
9.13
9.67
7.34 $
6.46
6.47
7.09
7.93 $
8.74
9.46
9.94
6.96
7.03
7.59
8.08
Performance Graph
Below is a graph showing the cumulative total return to our stockholders during the period from December 31, 2007
through December 31, 2012 in comparison to the cumulative return on the NASDAQ Composite Index (U.S.) and the
NASDAQ Medical Equipment Index during that same period.
34
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.
Sales of Unregistered Securities
We did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
Securities Authorized for Issuance under Equity Compensation Plans
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.
See Part III, Item 12 for information regarding securities authorized for issuance under equity compensation plans.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
77,277 $
35,737
41,540
2011
60,290 $
25,978
34,312
2008
2010
2009
53,274 $ 53,682 $ 83,379
21,759 32,358
23,058
31,923 51,021
30,216
Year Ended December 31,
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net. . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairments of long-term
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . .
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Loss available to common stockholders used in
basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . $
Net Loss per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average number of shares used in per share
calculations:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,664
8,427
11,276
—
48,367
(6,827)
497
25,499
9,141
10,104
—
44,744
(10,432)
614
—
(6,330)
218
(6,548) $
—
(9,818)
243
(10,061) $
6,810
24,735
7,004
9,576
—
41,315
(11,099) (10,343)
1,572
24,286 35,354
7,550
10,320 11,270
—
42,266 54,174
(3,153)
3,046
850
583
—
(10,516)
(3,554)
(3,661)
(792)
(10,518) $ (17,679) $ (2,869)
—
(8,771)
8,908
2
(6,548) $
(10,061) $
(10,518) $ (17,679) $ (2,869)
(0.46) $
(0.73) $
(0.78) $
(1.33) $
(0.22)
14,089
13,807
13,540
13,279 12,770
35
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 . . . . . . . . . . . . . .
$
2012
23,546
62,026
—
88,788
112,794
$
2011
14,020
74,666
3,027
$
As of December 31,
2010
12,519
77,484
6,784
$
89,075
111,353
90,339
111,805
(9,873)
90,774
(3,325)
91,567
6,736
95,417
2009
22,829
76,780
7,275
96,015
121,352
17,254
100,853
$
2008
36,540
60,653
9,627
101,644
137,476
31,410
112,108
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, 2012. 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, 2012.
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Executive Summary
Company Description. We are a global medical device company specializing in the design, development, manufacture,
marketing and servicing of laser and other energy-based aesthetics systems for practitioners worldwide. We offer easy-
to-use products based on eight platforms — CoolGlide®, Xeo®, Solera®, GenesisPlusTM, ExcelVTM, myQTM,
VariLiteTM and truSculptTM— each of which enables physicians and other qualified practitioners to perform safe and
effective aesthetic procedures for their customers. 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 and truSculpt hand piece refills, and dermal fillers and cosmeceuticals. In
February 2012, we acquired certain assets of IRIDEX Corporation’s global aesthetic business and added their VariLite
product and their service business into our operations.
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 60
countries. Outside of the United States, we have a direct sales presence in Australia, Canada, France and Japan.
Products. Our revenue is derived from the sale of Products, Upgrades, Service, Titan and truSculpt 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 other energy 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 other energy based module is sometimes contained in the hand piece such as with our Pearl and Pearl
Fractional applications instead of within the console.
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. For our Titan and truSculpt hand
pieces, after a set number of treatments have been performed, the customer is required to send the hand piece back to
the factory for refurbishment, which we refer to as ‘refilling’ the hand piece. 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 and truSculpt hand piece refills, and Dermal fillers and cosmeceutical products.
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Our U.S. revenue increased by 37% and our international revenue increased by 23% in 2012, compared to 2011. We
believe the increase in U.S. revenues was attributable to several factors, including:
• Continued growth of ExcelV shipments, which began shipping in the second quarter of 2011.
• Commencement of truSculpt shipments in the third quarter of 2012.
•
• Expansion of our direct sales force in the United States.
Improvements in the U.S. macroeconomic environment.
•
Incremental revenue from the Iridex aesthetic acquisition in February 2012.
Our total international revenue increased by 23% in 2012, compared to 2011, and represented 59% of our total
revenue. The international revenue growth was sourced primarily from Japan, France, and several of our international
distributor countries. In Japan, our revenue increased by 19%, primarily as a result of Product sales and continued
growth from our Dermal fillers and cosmeceuticals business.
Our gross margin declined to 54% in 2012, compared to 57% in 2011, which was attributable to several factors,
including:
• A product mix shift towards lower margin products;
• An increase in Service revenue primarily as a result of the acquisition of the Iridex service business that has a
lower margin than our blended margin; and
• An increase in sales through distributors, which typically has a lower margin than our direct revenue.
Our sales and marketing expenses increased to $28.7 million in 2012, compared with $25.5 million in 2011. This
increase was associated with higher personnel expenses and an increase in travel and entertainment expenses
associated with the increase in revenue, along with increased product demonstration related expenses. As a percentage
of net revenue, our 2012 sales and marketing expenses declined to 37%, compared to 42% in 2011, due to the higher
revenue in 2012.
Our research and development, or R&D, expenses decreased to $8.4 million in 2012, compared with $9.1 million in
2011. This decrease was associated with reduced personnel expenses resulting primarily from lower headcount and a
decrease in material spending due to the timing, complexity and material component costs of the product being
developed. As a percentage of net revenue, R&D expenses decreased to 11% in 2012, compared to 15% in 2011 due
primarily to the higher revenue in 2012.
Our general and administrative, or G&A, expenses increased to $11.3 million in 2012, compared with $10.1 million in
2011. This increase was due primarily to approximately $527,000 of non-recurring integration expenses associated
with the Iridex business acquisition, higher legal and accounting fees and increase personnel expenses, partially offset
by a decrease in facility costs – associated with the relocation of one of our Japan offices and the closure of our
Switzerland (in 2011) and Spanish offices (March 2012). As a percentage of net revenue, G&A expenses decreased to
15% in 2012, compared to 17% in 2011, due to the higher revenue in 2012.
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.”
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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 and truSculpt 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 evaluation 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 the later of
meeting all acceptance criteria or the cash receipt.
We frequently enter into revenue arrangements that contain multiple elements or deliverables such as system and
services. Judgments are required as to the allocation of the proceeds received from an arrangement to the multiple
elements of the arrangement. For multiple element arrangements entered into on or after January 1, 2010, we allocate
revenue to all deliverables based on their relative selling prices. Because we have neither vendor-specific objective
evidence (“VSOE”) nor third-party evidence of selling price (“TPE”) for our systems, the allocation of revenue has
been based on our best estimate of selling prices (“BESP”). The objective of BESP is to determine the price at which
we would transact a sale if the product or service was sold on a stand-alone basis. We determine BESP for our
deliverables by considering multiple factors including, but not limited to, features and functionality of the system,
geographies, type of customer and market conditions. Typically, for our sales transactions involving systems and
services, we deliver all system components to the customer at the same time and we defer the revenue for any
undelivered the service component of the arrangement. 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.
Stock-based Compensation Expense
Stock options
We account for stock-based compensation in accordance with the fair value recognition provisions of U.S. GAAP. We
use the Black-Scholes-Merton option-pricing model which requires the input of highly subjective assumptions. These
assumptions include:
• Estimating the length of time employees will retain their vested stock options before exercising them
(“expected term”);
• Estimated volatility of our common stock price over the expected term;
• Number of options that will ultimately not complete their vesting requirements (“forfeiture rate”); and
• Expected risk-free interest rate and dividend rate over the expected term.
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The assumptions for expected volatility and expected term are the two assumptions that significantly affect the grant
date fair value.
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The
expected term is based on the observed and expected time to post-vesting exercise of options by employees. We use
historical exercise patterns of previously granted options in relation to stock price movements to derive an employee
behavioral pattern used to forecast expected exercise patterns.
We estimate volatility based on historical volatility and we also consider implied volatility when there is sufficient
volume of freely traded options with comparable terms and exercise prices in the open market.
U.S. GAAP requires us to develop an estimate of the number of share-based awards that will be forfeited due to
employee turnover. Adjustments in the estimated forfeiture rates can have a significant effect on our reported share-
based compensation, as we recognize the cumulative effect of the rate adjustments for all expense amortization in the
period the estimated forfeiture rates were adjusted. We estimate and adjust forfeiture rates based on a periodic review
of recent forfeiture activity and expected future employee turnover. If a revised forfeiture rate is higher than previously
estimated forfeiture rate, we may make an adjustment that will result in a decrease to the expense recognized in the
financial statements during the period when the rate was changed. Adjustments in the estimated forfeiture rates could
also cause changes in the amount of expense that we recognize in future periods.
Changes in expected risk-free interest rate and dividend rate do not significantly impact the calculation of fair value,
and determining this input is not highly subjective.
Changes in the subjective assumptions of expected term, volatility and forfeiture rate can materially affect the estimate
of fair value of stock-based compensation and, consequently, the related amount recognized on the Consolidated
Statements of Income.
Restricted Stock Units
We grant restricted stock unit (“RSU”) awards to our management employees, officers and directors. RSUs are
measured based on the fair market values of the underlying stock on the dates of grant and the stock based
compensation expense is recognized over the vesting period using the straight-line method. Shares are issued on the
vesting dates net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees.
As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding. Furthermore,
we record the liability for withholding amounts to be paid by us as a reduction to additional paid-in capital when paid.
Performance Stock Units
Performance stock unit (“PSU”) awards were granted in 2012 for the first time to our officers. PSUs are issued at target
and the final award amount is determined at the end of the performance period, subject to the recipient’s continued
service through that date. PSUs are measured based on the fair market value on the dates of grant of the target number
of underlying shares. Stock based compensation expense is recognized over the vesting period using the straight-line
method and the expected degree of achievement of the performance goals. At the vest date, we will issue fully-paid up
common stock, net of the minimum statutory tax withholding requirements to be paid by us on behalf of our officers.
As a result, the actual number of shares issued will be fewer than the actual number of PSUs outstanding. Furthermore,
we will record the liability for withholding amounts to be paid by us as a reduction to additional paid-in capital when
paid.
Intangible Assets.
Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles include sub-licenses and
those acquired in conjunction with an acquisition in 2012. All of our identifiable intangibles have finite lives.
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In February 2012, we acquired the global aesthetic business unit of IRIDEX Corporation, which included various laser
systems (such as the VariLite and Gemini) and an installed base of customers, whose products are being serviced by
us. This acquisition was considered a business combination for accounting purposes, and as such, in addition to valuing
all the assets, we recorded goodwill associated with the expected synergies from leveraging the customer relationships
and integrating new product offerings into our business. The fair values of the assets acquired were determined to be
$4.8 million of net tangible and intangible assets and $1.3 million of goodwill.
Identifiable intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when
events or circumstances indicate that such assets may not be recoverable at their carrying value. We evaluate the
recoverability of the carrying value of these identifiable intangibles based on estimated undiscounted cash flows to be
generated from such assets. If the cash flow estimates or the significant operating assumptions upon which they are
based change in the future, we may be required to record additional impairment charges. When events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be recoverable, we recognize such
impairment in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to
such assets.
The valuation and classification of intangible assets and goodwill and the assignment of useful amortization lives for
the intangible assets involves judgments and the use of estimates. The evaluation of these intangibles and goodwill for
impairment under established accounting guidelines is required on a recurring basis. Changes in business conditions
could potentially require future adjustments to asset valuations. When we determine that the useful lives of assets are
shorter than we had originally estimated, we accelerate the rate of amortization over the assets’ new, shorter useful
lives. No impairment charge or accelerated amortization was recorded for the years ended December 31, 2012, 2011,
and 2010. A considerable amount of judgment is required in assessing impairment, which includes financial forecasts.
Should conditions be different from management’s current estimates, material write-downs of long-lived assets may be
required, which would adversely affect our operating results.
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.
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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 changes in the valuation allowance,
foreign operations, research and development tax credits, state taxes, and certain benefits realized related to stock
option activity. Our current effective tax rate does not assume U.S. taxes on undistributed profits of foreign
subsidiaries. These earnings could become subject to incremental foreign withholding or U.S. federal and state taxes,
should they either be deemed or actually remitted to the United States. The effective tax rate was approximately (3)%
in 2012, (2)% in 2011, and 0% in 2010. Our future effective tax rates could be adversely affected by earnings being
lower in countries where we have lower statutory rates and being higher 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, 2012, we had an aggregate of approximately $2.9 million of unremitted earnings of foreign
subsidiaries that have been, or are intended to be, indefinitely reinvested for continued use in foreign operations.
Depending on the timing and nature of the distribution, if the total undistributed earnings of foreign subsidiaries were
remitted while the Company is able to utilize its net operating losses, it is likely there would be no material additional
tax resulting from the distribution.
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. We have fully reserved our U.S. federal and state deferred tax assets due to our history of operating
losses.
Litigation
We have been, and may in the future become, subject to legal proceedings related to securities litigation, intellectual
property, product liability claims, contractual disputes 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.
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Results of Operations
The following table sets forth selected consolidated financial data expressed as a percentage of net revenue.
Year Ended December 31,
2011
2010
2012
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
46%
54%
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37%
11%
15%
63%
(9)%
1%
(8)%
—%
(8)%
100%
43%
57%
42%
15%
17%
74%
(17)%
1%
(16)%
1%
(17)%
100%
43%
57%
47%
13%
18%
78%
(21)%
1%
(20)%
—%
(20)%
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
% Change
Year Ended December 31,
2011
% Change
2010
$ 31,949
37% $ 23,313
21% $ 19,337
41%
39%
36%
$ 17,826
8,902
4,958
13,642
45,328
19% $ 15,019
4,984
79%
3,571
39%
13,403
2%
36,977
23%
10% $ 13,625
(3)% 5,131
(38)% 5,801
9,380
43%
33,937
9%
59%
61%
64%
Total consolidated revenue . . . . . . . . . . . . . . . . . .
$ 77,277
28% $ 60,290
13% $ 53,274
Revenue mix by product category:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Titan and truSculpt hand piece refills(1) . . . . . . . . .
Dermal fillers and cosmeceuticals . . . . . . . . . . . . . .
Total consolidated revenue . . . . . . . . . . . . . . . . . . . .
$ 46,762
2,843
17,220
4,807
5,645
$ 77,277
39% $ 33,703
(19)% 3,505
13,411
28%
4,686
3%
13%
4,985
28% $ 60,290
21% $ 27,808
(27)% 4,824
13,231
1%
3,863
21%
41%
3,548
13% $ 53,274
(1)
In the fourth quarter of 2012, we commenced shipments of our truSculpt hand piece refills.
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Revenue by Geography:
In 2012 our net revenue increased by 28%, compared to 2011, and in 2011 it increased by 13%, compared to 2010.
Our U.S. revenue increased by 37% in 2012, compared to 2011. We believe the increase in U.S. revenues in 2012,
compared to 2011, was attributable to several factors, including:
• Continued growth of ExcelV shipments, which began shipping in the second quarter of 2011.
• Commencement of truSculpt shipments in the third quarter of 2012.
•
• Expansion of our direct sales force in the United States in 2012, compared to 2011.
•
Incremental revenue from the Iridex aesthetic acquisition in February 2012.
Improvements in the U.S. macroeconomic environment.
Our U.S. revenue increased by 21% in 2011, compared to 2010, which we believe was attributable to several factors,
including:
FDA clearance of our GenesisPlus system for onychomycosis, or toenail fungus, in April 2011.
•
• Commencement of ExcelV shipments in the second quarter of 2011.
• Effective U.S. sales management changes implemented in early 2011.
International revenues increased by 23% in 2012, compared to 2011, and increased by 9% in 2011, compared to 2010.
The growth in our international revenue in 2012 was derived from higher product revenue in Japan, France, several of
our international distributor countries and by higher Dermal fillers and cosmeceuticals sales in Japan. In 2011our total
international revenue increased by 9%, with growth being sourced primarily from Australia, Canada and Japan,
partially offset by declines in Europe.
Revenue by Product Category:
Our product revenue increased by 39% in 2012 and by 21% in 2011, compared to the respective prior year periods. The
2012 increase in product revenue was primarily attributable to the continued growth of ExcelV shipments, which began
shipping in 2011, the commencement of truSculpt shipments in the third quarter of 2012 and incremental revenue from
the Iridex aesthetic acquisition in February 2012. 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 ExcelV
shipments in the second quarter of 2011.
Upgrade revenue decreased by 19% in 2012 and by 27% in 2011, 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 standalone products (GenesisPlus in 2010, ExcelV in 2011 and truSculpt in 2012),
which has resulted in a decline of our upgrade revenue since 2008.
Our service revenue increased by 28% in 2012 and by 1% in 2011, compared to the respective prior year periods. The
ratable recognition of service contract fees is the primary component of our service revenue. The increase in 2012 was
primarily the result of the Iridex business acquisition. The increase in 2011 was the result of higher international
service revenue being partially offset by a decline in U.S. service revenue.
Our Titan and truSculpt hand piece refill revenue increased by 3% in 2012 and by 21% in 2011, compared to the
respective prior year periods. The increase in 2012 was due primarily to the introduction of truSculpt refills in the
fourth quarter of 2012. 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.
Our Dermal filler and cosmeceutical business increased by 13% in 2012, compared to 2011, and by 41% in 2011
compared to 2010. 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.
44
Gross Profit
(Dollars in thousands)
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . .
2012
$ 41,540
54%
% Change
Year Ended December 31,
2011
% Change
2010
21% $ 34,312
14% $ 30,216
57%
57%
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 declined to 54% in 2012, compared to 2011, which
was primarily attributable to the following:
• A product mix shift towards lower margin products;
• An increase in Service revenue primarily as a result of the acquisition of the Iridex service business that has a
lower margin than our blended margin; and
• An increase in sales through distributors, which typically has a lower margin than our direct revenue.
Our 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.
Sales and Marketing
(Dollars in thousands)
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . .
2012
$ 28,664
% Change
Year Ended December 31,
2011
% Change
2010
12% $ 25,499
3% $ 24,735
37%
42%
47%
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 $3.2
million in 2012, compared to 2011, which was primarily attributable to the following:
•
•
•
$2.2 million increase in personnel expenses attributable primarily to higher headcount and commission
expenses due to the higher revenue;
$660,000 of higher product demonstration related expenses; and
$418,000 increase in travel, entertainment and sales meeting expenses due to increased headcount and sales
activity.
In 2011, sales and marketing expenses increased by $764,000 compared to 2010. This increase was primarily
attributable to:
•
•
$988,000 increase in personnel expenses attributable primarily to higher commission expenses as a result of
the higher revenue;
$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 relations and other marketing activities.
Sales and marketing expenses as a percentage of net revenue, decreased to 37% in 2012, compared to 42% in 2011 and
47% in 2010. The decrease in 2012 was due primarily to a larger increase in our revenue, compared to the increase in
expenses, in 2012.
45
Research and Development (“R&D”)
(Dollars in thousands)
Research and development . . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . . .
2012
$ 8,427
% Change
Year Ended December 31,
2011
% Change
2010
(8)% $ 9,141
31% $ 7,004
11%
15%
13%
Research and development expenses consist primarily of personnel expenses, clinical, regulatory and material costs.
R&D expenses decreased $714,000 in 2012, compared to 2011, which was primarily attributable to:
$444,000 decrease in personnel expenses due to lower headcount; and
•
• A decrease in material spending of $107,000 due to the timing, complexity and material component costs of
the product being developed.
In 2011, R&D expenses increased by $2.1 million, compared to 2010, which 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.
General and Administrative (“G&A”)
(Dollars in thousands)
General and administrative . . . . . . . . . . . . . . . . . . .
As a percentage of total revenue . . . . . . . . . . . .
2012
$ 11,276
% Change
Year Ended December 31,
2011
% Change
2010
12% $ 10,104
6% $ 9,576
15%
17%
18%
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 $1.2 million in 2012,
compared to 2011, which was primarily attributable to:
•
•
•
•
•
$527,000 of non-recurring integration expenses associated with the Iridex business acquisition;
$366,000 of higher legal fees and costs of settlements;
$207,000 of higher accounting fees;
$187,000 of higher personnel expenses; partially offset by,
$162,000 decrease in facilities costs due the relocation of our offices in Tokyo, Japan and the closure of our
office in Switzerland in 2011which did not reoccur in 2012.
In 2011, G&A expenses increased by $528,000, compared to 2010. This increase 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, which did not recur in 2011.
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 . . . . . . . . . .
2012
$
$
481
16
497
46
% Change
Year Ended December 31,
2011
% Change
2010
(19)% $
(20)%
(19)% $
594
20
614
10% $
(55)%
5% $
539
44
583
Interest income decreased 19% in 2012, compared to 2011, and increased 10% in 2011, compared to 2010. The
decrease in interest income in 2012 was primarily attributable to a decrease in our cash, cash equivalents and
marketable investments balances. 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. Our cash, cash equivalents, marketable investments and long-term investments were $85.6 million at
December 31, 2012, $91.7 million at December 31, 2011 and $96.8 million at December 31, 2010.
Provision for Income Taxes
(Dollars in thousands)
Loss before income taxes . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . .
$
2012
(6,330) $
218
(3)%
$ Change
Year Ended December 31,
2011
$ Change
3,488
(25)
$ (9,818) $
243
698
241
(2)%
2010
$ (10,516)
2
0%
Despite a loss before income taxes, we recorded an income tax provision of $218,000, $243,000, and $2,000 in 2012,
2011 and 2010, respectively. Our tax provision is primarily related to foreign tax expenses, as a full valuation
allowance was applied against all U.S. federal and state deferred tax assets arising during the years.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2011
Change
2012
$ 23,546
62,026
—
$ 85,572
$ 14,020
74,666
3,027
$ 91,713
$
9,526
(12,640)
(3,027)
$ (6,141)
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. . . . . . . . . . . . . . . . . . . .
Cash Flows from Operating Activities
Year ended December 31,
2011
2010
2012
$ (2,300) $ (5,168 ) $ (8,059)
(2,777)
526
$ (10,310)
10,153
1,673
9,526
5,287
1,382
1,501
$
$
We used net cash of $2.3 million in operating activities during 2012, which was primarily attributable to:
•
•
$3.7 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, 2012, compared to the same period in 2011;
$1.9 million used from net loss of $6.5 million after adjusting for non-cash related items of $4.7 million,
consisting primarily of stock-based compensation expense of $3.2 million and depreciation and amortization
expense of $1.6 million; partially offset by
47
•
•
$1.9 million generated from an increase in deferred revenue due primarily to an increase in our service
business following the acquisition of the Iridex aesthetic customer base and a two-for-one service contract
pricing promotion; and
$1.2 million generated from the reduction of inventories resulting from the increase in revenue in 2012.
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.
Cash Flows from Investing Activities
We generated net cash of $10.2 million from investing activities in 2012, which was primarily attributable to:
•
•
•
•
$74.6 million in net proceeds from the sales and maturities of marketable investments; partially offset by
$58.8 million of cash used to purchase marketable investments;
$5.1 million of cash used for the Iridex acquisition; and
$516,000 of cash used to purchase property and equipment.
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.
Cash Flows from Financing Activities
Net cash provided by financing activities in 2012 was $1.7 million, which resulted from the issuance of stock through
our stock option and employee stock purchase plans.
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.
Adequacy of cash resources to meet future needs
We had cash, cash equivalents and marketable investments of $85.6 million as of December 31, 2012. 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 several years.
48
Contractual Obligations
The following are our contractual obligations, consisting of future minimum lease commitments related to facility
leases as of December 31, 2012:
Contractual Obligations
Operating leases . . . . . . . . . . . . . . . .
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
$
7,607
$
1,759
$
3,184
$
2,664
$
—
Payments Due by Period ($’000’s)
Purchase Commitments
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, 2012. 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 $412,000 in long-term income tax liability with respect to
unrecognized tax benefits and accrued interest as of December 31, 2012. 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.
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 of generally
less than eighteen months. Based on discounted cash flow modeling with respect to our total investment portfolio as of
December 31, 2012 and 2011,assuming a hypothetical increase in interest rates of one percentage point, the fair value
of our total investment portfolio would have potentially declined by approximately $745,000 and $608,000
respectively.
49
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 Comprehensive Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
51 - 53
54
55
56
57
58
59
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years ended
December 31, 2012, 2011 and 2010 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
82
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.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Cutera, Inc.
We have audited the accompanying consolidated balance sheets of Cutera, Inc. as of December 31, 2012, and the
related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year
ended December 31, 2012. Our audit also included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Cutera, Inc. at December 31, 2012, and the consolidated results of its operations and its cash flows
for the year ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Cutera, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 15, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Redwood City, California
March 15, 2013
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Cutera, Inc.
We have audited Cutera, Inc.’s internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Cutera, Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
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 (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.
In our opinion, Cutera, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the 2012 consolidated financial statements of Cutera, Inc. and our report dated March 15, 2013
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Redwood City, California
March 15, 2013
52
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cutera, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 2011 and the related consolidated statements of
operations, comprehensive income (loss), stockholders’ equity and of cash flows for each of the two years in the period
ended December 31, 2011, present fairly, in all material respects, the financial position of Cutera, Inc. and its
subsidiaries at December 31, 2011, and the results of their operations and their cash flows for each of the two 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 for each of the two years in the period ended
December 31, 2011 presents fairly, in all material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our
opinion.
/s/PricewaterhouseCoopers LLP
San Jose, CA
March 15, 2012
53
CUTERA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $0 and $20,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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: 14,233,476 and 13,948,395 shares at December 31, 2012
and 2011, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2012
2011
$
23,546
62,026
$
14,020
74,666
8,841
11,114
40
1,439
107,006
933
—
553
2,566
1,339
397
112,794
2,107
9,493
6,618
18,218
1,288
2,102
412
22,020
$
$
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
—
—
14
100,552
(9,873)
81
90,774
112,794
$
14
95,719
(3,325)
(841)
91,567
111,353
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
54
CUTERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average number of shares used in per share calculations:
Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2011
2010
2012
$
$
$
60,057
17,220
77,277
26,911
8,826
35,737
41,540
$
46,879
13,411
60,290
17,545
8,433
25,978
34,312
$
40,043
13,231
53,274
15,805
7,253
23,058
30,216
28,664
8,427
11,276
48,367
(6,827)
497
(6,330)
218
24,735
25,499
7,004
9,141
9,576
10,104
41,315
44,744
(11,099)
(10,432)
583
614
(10,516)
(9,818)
2
243
(6,548) $ (10,061) $ (10,518)
(0.46) $
(0.73) $
(0.78)
14,089
13,807
13,540
The accompanying notes are an integral part of these consolidated financial statements.
55
CUTERA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Year Ended December 31,
2011
2012
(6,548) $ (10,061) $ (10,518)
2010
Net change in unrealized gain (loss) on available-for-sale
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Reclassification adjustment for (gains) losses on investments
recognized during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gain (loss) on available-for-sale
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax provision (benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
959
(19)
723
(5)
(20)
(74)
940
18
922
(5,626) $
718
(197)
915
(94)
—
(94)
(9,146) $ (10,612)
$
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
Balance at December 31, 2009 . . . . . . . . . . . . . . . 13,436,163 $
Issuance of common stock for employee purchase
13 $
85,248 $
17,254 $
(1,662) $
100,853
—
Balance at December 31, 2010 . . . . . . . . . . . . . . . 13,629,713
Issuance of common stock for employee purchase
—
6,736
(94)
(1,756)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gain (loss) on available-
for-sale investments (net of full valuation
allowance on tax effect) . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gain (loss) on available-
for-sale investments (net of $197 of tax
benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Balance at December 31, 2011 . . . . . . . . . . . . . . . 13,948,395
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gain (loss) on available-
43,859
90,362
59,329
—
—
—
45,161
207,624
65,897
—
—
—
46,982
211,551
26,548
—
—
—
—
1
—
—
—
—
—
14
—
—
—
—
—
—
—
14
—
—
—
—
—
—
306
337
(126)
4,650
—
—
—
—
8
—
—
(10,518)
—
—
—
—
—
—
—
90,423
276
1,230
(146)
3,907
—
—
—
—
29
—
—
(10,061)
—
—
—
—
—
—
—
95,719
289
1,480
(101)
3,159
6
—
—
(3,325)
915
(841)
—
—
—
—
—
(6,548)
—
—
—
—
—
—
306
338
(126)
4,650
8
(10,518)
(94)
95,417
276
1,230
(146)
3,907
29
(10,061)
915
91,567
289
1,480
(101)
3,159
6
(6,548)
for-sale investments (net of $18 of tax
provision) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Balance at December 31, 2012 . . . . . . . . . . . . . . . 14,233,476 $
—
14 $
—
100,552 $
—
(9,873) $
922
81 $
922
90,774
The accompanying notes are an integral part of these consolidated financial statements.
57
CUTERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . .
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase
plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit related to stock-based compensation . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental and non-cash disclosure of cash flow information:
Cash paid (received) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2011
2010
2012
$
(6,548) $ (10,061) $ (10,518)
3,160
6
(6)
1,606
(87)
(3,690)
1,167
859
89
(466)
(177)
(62)
1,915
(66)
(2,300)
(516)
(5,091)
—
31,564
43,009
(58,813)
10,153
3,907
29
(22)
637
107
(1,000)
(4,281)
2,604
(486)
1,277
2,970
45
(895)
1
(5,168)
(751)
—
36
21,198
47,935
(63,131)
5,287
4,650
8
(8)
717
(77)
(759)
(275)
2,314
—
215
(2,646)
(200)
(1,208)
(272)
(8,059)
(275)
—
—
42,830
42,505
(87,837)
(2,777)
1,667
6
1,673
9,526
14,020
23,546
307
$
$
1,360
22
1,382
1,501
12,519
14,020
518
8
526
(10,310)
22,829
12,519
$
(1,345) $
272
$
$
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 other energy based aesthetic systems for
practitioners worldwide. The Company designs, develops, manufactures, and markets the CoolGlide, Xeo, Solera,
GenesisPlus, ExcelV, VariLite (acquired in 2012) and truSculpt (introduced in 2012) 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 and truSculpt 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 and
Japan, 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
Prior to December 31, 2012 the Company held a variety of interest bearing auction rate securities (“ARS”) that
represented investments in pools of student loan assets issued by the Federal Family Education Loan Program
(“FELP”). Since 2008, uncertainties in the credit markets affected the majority of ARS investments and auctions for
the Company’s investments in these securities had failed to settle on their respective settlement dates. However, as of
December 31, 2012, all outstanding ARS had been redeemed at full par value.
As of December 31, 2012 and 2011, the Company had $0 million and $3.0 million, respectively, of fair valued ARS
classified as long-term investments.
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
After determining the fair value of available-for-sales debt instruments, gains or losses on these securities are recorded
to other comprehensive income, until either the security is sold or the Company determines that the decline in value is
other-than-temporary. The primary differentiating factors that the Company considers in classifying impairments as
either temporary or other-than-temporary impairments is the intent and ability to retain the investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in market value, the length of the time and the extent to
which the market value of the investment has been less than cost, the financial condition and near-term prospects of the
issuer. There were no other-than-temporary impairments in the years ended December 31, 2012, 2011, and 2010.
Allowance for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on the Company’s estimates of potential future product returns and other
allowances related to current period product revenue. The Company analyzes historical returns, current economic
trends and changes in customer demand and acceptance of our products.
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts.
The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the
age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
60
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 three major financial institutions 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.
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.
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. As of
December 31, 2012 and 2011 no single customer represented more than 10% of net accounts receivable as of
December 31, 2012 and 2011.
During the years ended December 31, 2012, 2011, and 2010, domestic revenue accounted for 41%, 39%, and 36%,
respectively, of total revenue, while international revenue accounted for 59%, 61%, and 64%, respectively, of total
revenue, for each of the years. No single customer represented more than 10% of total revenue for the years ended
December 31, 2012, 2011, and 2010.
The Company is also 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, Food and Drug Administration and/ or international regulatory approvals required for
new products and compliance with government regulations.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on a standard cost basis (which
approximates actual cost on a first-in, first-out basis) and market being determined as the lower of replacement cost or
net realizable value.
The Company includes demonstration units within inventories. Demonstration units are carried at cost and amortized
over their estimated economic life of two years. Amortization expense related to demonstration units is recorded in cost
of revenue or in the respective operating expense line based on which function and purpose for which 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, net of accumulated depreciation. Depreciation is on a straight-line basis over
the estimated useful lives of the assets, generally as follows:
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Useful Lives
Lesser of useful life or term of lease
3 years
3 years
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.
61
Depreciation expense related to property, equipment and leasehold improvements was $436,000, $446,000 and
$525,000 in 2012, 2011, 2010.
Goodwill and Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair value of net tangible and identifiable
intangible assets, is not subject to amortization, but is subject to at least an annual assessment for impairment, applying
a fair-value based test.
The Company’s intangible assets are comprised of purchased technology sub-licenses and those acquired in
conjunction with an asset acquisition in February 2012 including, existing customer relationships, product portfolio
and a manufacturing process for the products acquired. All identifiable intangibles have finite lives and are carried at
cost, net of accumulated amortization. Amortization is recorded using the straight-line method, over their respective
useful lives, which range from approximately 11 months to 10 years.
Impairment of Long-lived Assets
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least
annually or as circumstances indicate their value may no longer be recoverable. The Company does not have intangible
assets with indefinite useful lives other than goodwill. Goodwill impairment test is generally performed annually
during the fourth fiscal quarter (or earlier if impairment indicators arise). The Company continues to operate in one
segment, which is considered to be the sole reporting unit and therefore, goodwill was tested for impairment at the
enterprise level. As of December 31, 2012, there has been no impairment of goodwill.
The Company evaluates the recoverability of its long-lived assets, which include amortizable intangible and tangible
assets. Acquired intangible assets with definite useful lives are amortized over their useful lives. The Company
evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
value of long-lived assets may not be recoverable. The Company recognizes such impairment in the event the net book
value of such assets exceeds the future undiscounted cash flows attributable to such assets. No impairment losses were
incurred in the periods presented.
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
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 Company
determined that its multiple-element arrangements are generally comprised of the following elements that are
recognized as separate units of accounting: system and upgrade sales; and service contracts.
For multiple-element arrangements revenue is allocated to each element based on their relative selling prices. Relative
selling prices would be based first on vendor specified objective evidence (“VSOE”), then on third-party evidence of
selling price (“TPE”) when VSOE does not exist, and then on estimated selling price (“ESP”) when VSOE and TPE do
not exist. Because the Company has neither VSOE nor TPE for its systems, the allocation of revenue has been based on
the Company’s ESPs. The objective of ESP is to determine the price at which the Company would transact a sale if the
product was sold on a stand-alone basis. The Company determines ESP for its systems by considering multiple factors
including, but not limited to, features and functionality of the system, geographies, type of customer, and market
conditions. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met
for each element.
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, 2012, 2011, and 2010 was $17.2 million, $13.4 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.
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 both 2012and 2011, and $947,000 in 2010.
Stock-based Compensation
The Company accounts for stock-based employee compensation plans under the fair value recognition and
measurement provisions under U.S. GAAP. The Company’s stock-based compensation cost is measured at the grant
date, based on the fair value of the award, and is recognized as expense over the requisite service period. 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”), performance stock units (“PSUs”) 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.
U.S. GAAP requires the cash flows resulting from the tax benefits due to tax deductions in excess of the compensation
cost recognized for stock-based awards for options exercised and RSUs vested during the period.(excess tax benefits)
to be classified as financing cash flows.
63
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. The Company maintains a full valuation allowance against its U.S. federal and state deferred tax asset due to
a history of operating losses.
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.
Computation of Net Income per Share
Basic net income per share is computed using the weighted-average number of shares outstanding during the period.
Diluted net income per share is computed using the weighted-average number of shares and dilutive potential shares
outstanding during the period. Dilutive potential shares primarily consist of employee stock options.
U.S. GAAP requires that employee equity share options, non-vested shares and similar equity instruments granted by
the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted
shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share
price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee
must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet
recognized, and the amount of tax benefits that would be recorded in additional-paid-in-capital (“APIC”) when the
award becomes deductible are all assumed to be used to repurchase shares.
64
Comprehensive Loss
Comprehensive loss includes all changes in stockholders’ equity except those resulting from investments or
contributions by stockholders. For the periods presented, the accumulated other comprehensive income consisted
solely of the unrealized gains or losses on the Company’s available-for-sale investments, net of tax.
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, 2012. 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, 2012.
Segments
The Company operates in one segment. Management uses one measurement of profitability and does not segregate its
business for internal reporting. As of December 31, 2012 and 2011, 85% and 77% , respectively, of all long-lived
assets were maintained in the United States. See Note 10 for details relating to revenue by geography.
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,
2012
2011
$
2,198
$
2,153
17,348
4,000
23,546
4,009
24,958
4,206
10,519
18,334
62,026
7,318
4,549
14,020
3,665
41,565
6,134
4,747
18,555
74,666
Long-term investments in ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash equivalents, marketable securities and long term investments . . . .
—
$ 85,572
3,027
$ 91,713
65
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, 2012
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
23,546
$
Gross
Unrealized
Gains
Gross
Unrealized
Gains
Fair Market
Value
$
—
$
—
$
23,546
4,005
24,910
4,184
10,515
18,281
61,895
—
4
48
23
4
59
138
—
—
—
(1)
—
(6)
(7)
—
4,009
24,958
4,206
10,519
18,334
62,026
—
$
85,441
$
138
$
(7) $
85,572
Decmber 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 . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Gains
$
14,020
$
—
$
— $
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
The realized gains and losses associated with short-term investments were as follows (in thousands):
Realized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Realized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 $
—
5 $
—
78
(4)
Year Ended December 31,
2011
2010
2012
66
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, 2012
U.S. government
agencies . . . . . . . . . . . . . $
Municipal securities . . . .
Commercial paper . . . . . . .
Corporate debt
securities . . . . . . . . . . . .
Long-term investments
in ARS . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . $
Less Than 12 Months
12 Months or Greater
Total
Fair Market
Value
Gross
Unrealized
Losses
Fair Market
Value
Gross
Unrealized
Losses
Fair Market
Value
Gross
Unrealized
Losses
— $
299
—
4,844
—
5,143 $
— $
(1)
—
(6)
—
(7) $
— $
—
—
—
—
— $
— $
—
—
—
—
— $
— $
299
—
4,844
—
5,143 $
—
(1)
—
(6)
—
(7)
December 31, 2012
U.S. government agencies . . .
Municipal securities . . . . . . . .
Commercial paper . . . . . . . . . .
Corporate debt securities . . . .
Long-term investments in
ARS . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
Less Than 12 Months
12 Months or Greater
Total
Fair Market
Value
Gross
Unrealized
Losses
Fair Market
Value
Gross
Unrealized
Losses
Fair Market
Value
Gross
Unrealized
Losses
$
$
12,758 $
929
999
—
—
14,686 $
(14) $
(1)
(1)
—
—
(16) $
— $
—
—
7,799
— $
—
—
(34)
12,758 $
929
999
7,799
3,027
10,826 $
(873)
(907) $
3,027
25,512 $
(14)
(1)
(1)
(34)
(873)
(923)
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, 2012 (in thousands):
Due in less than one year (fiscal year 2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due in 1 to 3 years (fiscal year 2014- 2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 3 to 5 years (fiscal year 2016-2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 5 to 10 years (fiscal year 2018-2023) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in greater than 10 years (fiscal year 2024 and beyond) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Amount
28,651
33,375
—
—
—
62,026
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, 2012
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
67
Level 1
Level 2
Level 3
Total
17,348 $
—
— $
4,000
— $
—
17,348
4,000
—
62,026
—
62,026
—
17,348 $
—
66,026 $
—
— $
—
83,374
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Level 1
Level 2
Level 3
Total
7,318 $
—
— $
4,549
— $
—
7,318
4,549
—
74,666
—
74,666
—
7,318 $
—
79,215 $
3,027
3,027 $
3,027
89,560
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 investments include
U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may
include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark
securities, bids, offers and reference data including market research publications. The average remaining maturity of
the Company’s Level 2 investments as of December 31, 2012 is less than 36 months and all of these investments are
rated by S&P and Moody’s at A or better.
At December 31, 2012, the Company had no Level 3 financial assets.
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, 2012 (in thousands):
Balance at December 31, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total gains or losses (realized or unrealized)
Included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses (realized or unrealized)
Included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amount
6,784
668
(4,425)
3,027
262
(3,289)
—
NOTE 3—ACQUISITION
On February 2, 2012, Cutera acquired certain assets and liabilities of Iridex’s global aesthetics business unit for $5.1
million in cash. This business is engaged in developing, manufacturing, marketing and servicing laser-based medical
systems and delivery devices. The business purpose of this transaction was to acquire access to an expanded installed
base of customers, add to Cutera’s product offerings and acquire a recurring stream of service revenue. This acquisition
was considered a business combination for accounting purposes, and as such, in addition to valuing all the assets, the
Company recorded goodwill associated with the expected synergies from leveraging the customer relationships and
integrating new product offerings into the Company’s business.
The fair values of the assets acquired were determined to be $4.8 million of net tangible and intangible assets and $1.3
million of goodwill. The customer relationship intangible assets are being amortized over 5 years on a straight-line
basis. Other intangible assets are being amortized over 11 months to 5 years from the date of acquisition on a straight-
line basis.
68
The following table summarizes the fair value as of February 2, 2012 of the net assets acquired (in thousands):
Purchase price paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,091
Assets (liabilities acquired):
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationship intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other identified intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,552
2,510
780
1,339
(780)
(310)
5,091
The identifiable intangible assets and goodwill identified above shall be deductible for income taxes over a useful
economic life of 15 years.
The Company acquired the Iridex aesthetics business unit on February 2, 2012. Disclosure of the amounts of revenue
and earnings of the assets and liabilities of the acquired Iridex aesthetics business, separately from the Company’s, is
not practicable because the acquired business was immediately integrated into the Company’s operations. Based on
Iridex’s Form 10-K for the year ended December 2011, the revenue of the aesthetics business unit was reported to be
$10.8 million and $11.4 million and the earnings were $469,000 and $1.4 million for the fiscal years ended December
31, 2011 and January 1, 2011, respectively.
NOTE 4—BALANCE SHEET DETAIL
Inventories
Inventories consist of the following (in thousands):
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,221 $
3,893
11,114 $
6,587
4,142
10,729
December 31,
2012
2011
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,
2012
2011
620 $
2,888
3,252
6,760
(5,827)
933 $
590
2,761
2,893
6,244
(5,391)
853
69
Goodwill and Other Intangible Assets
Goodwill and other intangible assets comprise a patent sublicense acquired from Palomar in 2006; a technology
sublicense acquired in 2002; and, intangible assets and goodwill related to the acquisition of Iridex’s aesthetic business
unit. The components of intangible assets at December 31, 2012 and 2011 were as follows (in thousands):
Gross
Carrying
Amount
Accumulated
Amortization
Amount
Net
Amount
December 31, 2012
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationship intangible related to acquisition . . . . . . . . . . . . . .
Other identified intangible assets related to acquisition . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2011
Patent sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology sublicense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
1,218
538
2,510
780
1,339
6,385
1,218
538
1,756
$
$
$
$
$
931
538
460
551
—
2,480
793
517
1,310
$
$
$
$
$
287
—
2,050
229
1,339
3,905
425
21
446
Amortization expense for intangible assets was $1.2 million in 2012, $191,000 in 2011, and $192,000 in 2010.
Based on intangible assets recorded at December 31, 2012, 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,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Amount
696
696
569
558
47
2,566
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31,
2012
2011
4,721
1,212
1,085
404
389
359
343
249
131
600
9,493
$
$
4,172
1,121
839
149
483
434
276
1,054
191
543
9,262
70
NOTE 5—WARRANTY AND SERVICE CONTRACTS
The Company has a direct field service organization in the United States. Internationally, the Company provides direct
service support through its wholly-owned subsidiaries in Australia, Canada, France and Japan 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.
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,
2012
2011
1,121
3,525
(3,434)
1,212
$
$
796
4,043
(3,718)
1,121
December 31,
2012
2011
5,838
14,112
(11,411)
8,539
$
$
6,765
8,332
(9,259)
5,838
$
$
$
$
Costs incurred under service contracts amounted to $7.2 million in 2012, $4.6 million in 2011, and $4.3 million in
2010, and are recognized as incurred.
NOTE 6—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION
EXPENSE
As of December 31, 2012, the Company had the following stock-based employee compensation plans:
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.
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. Options granted under the Plan to employees generally vest over a four year term from the vesting
commencement date and become exercisable 25% on the first anniversary of the vesting commencement date and an
additional 1/48th on the last day of each calendar month until all of the shares have become exercisable. During 2012,
2011 and 2010 the officers of the Company were granted options that vest over a three year term at the rate of 1/3rd on
the one year anniversary of the vesting commencement date and 1/36th thereafter. The contractual term of the options
granted in 2012, 2011 and 2010 was seven years.
In accordance with the 2004 Equity Incentive Plan, prior to 2012, the Company’s non-employee directors were granted
$60,000 of grant date fair value, fully vested, stock awards annually on the date of the Company’s Annual Meeting of
stockholders. Commencing with 2012, the Company’s non-employee directors get $60,000 of restricted stock units
(RSUs) annually that cliff-vest on the one year anniversary of the grant date. In the year ended December 31, 2012 and
2011, the Company issued 52,938 and 37,925 shares of stock respectively.
71
In addition, in the year ended December 31, 2012 and 2011, the Company’s Board of Directors granted 95,250 and
39,300, 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.
2004 Employee Stock Purchase Plan
On January 12, 2004, the Board of Directors adopted 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.
The 2004 ESPP has an evergreen provision based on which 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:
600,000 shares;
i.
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, 2012 and
2011. The price of the common stock purchased is the lower of 85% of the fair market value of the common stock at
the beginning or end of a six month offering period. Under the 2004 ESPP the Company issued 46,982 shares in 2012
and 45,161 shares in 2011. At December 31, 2012, 1,009,954 shares remained available for future issuance.
Option Activity
Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:
Options Outstanding
Weighted-
Average
Remaining
Contractual Life
(in years)
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
(in $ millions)(1)
1.6
5.1
4.4 $
1.1
4.6 $
0.4
Shares
Available
For Grant
1,840,381
(961,500)
—
267,274
(146,291)
5,583
1,005,447
(1,206,500)
—
746,273
(77,225)
6,542
474,537
1,910,000
(921,500)
—
Number of
Shares
2,692,555 $
961,500 $
(90,362) $
(267,274) $
—
—
3,296,419 $
1,206,500 $
(207,624) $
(746,273) $
—
—
3,549,022 $
—
921,500 $
(211,551) $
470,732
(314,159)
(470,732)
—
10.87
10.14
3.74
9.91
—
—
10.93
8.61
5.92
13.40
—
—
9.92
—
7.04
7.00
9.45
—
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 . . . . . . .
Additional shares reserved (3) . . . . . . . . . . . .
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, 2012 . . . . . . .
Exercisable as of December 31, 2012 . . . .
24,746
1,644,356
—
3,788,239 $
2,224,660 $
—
9.44
10.50
4.3 $
3.3 $
2.6
0.8
72
(1)
(2)
(3)
Based on the closing stock price of the Company’s stock of $9.00 on December 31, 2012, $7.45 on December 30,
2011 and $8.29 on December 31, 2010.
Included in options granted and options cancelled are shares granted and cancelled in connection with the
Company’s Option Exchange Program in 2009.
Approved by stock holders in 2012.
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, 2012. The aggregate intrinsic amount changes based on the fair market value
of the Company’s common stock. Total intrinsic value of options exercised was $397,000 in 2012, $521,000 in 2011,
and $128,000 in 2010. 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–$6.54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6.88–$6.88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7.11–$8.49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.52–$8.52 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.66–$8.66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.72–$8.72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8.75–$9.74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.24–$10.24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.43–$14.14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14.78–$25.73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4.25–$25.73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
Outstanding
81,180
765,500
427,626
18,000
518,596
694,758
102,000
557,917
411,033
211,629
3,788,239
Weighted-Average
Remaining
Contractual Life
(in years)
1,51
6.56
3.56
6.05
3.41
5.38
5.19
4.35
1.97
1.85
4.34
Number
Outstanding
79,283
—
317,441
2,708
475,115
286,635
54,563
386,253
411,033
211,629
2,224,660
$
$
Weighted-
Average
Exercise
Price
5.14
—
8.37
8.52
8.66
8.72
9.28
10.24
11.81
20.47
10.50
As of December 31, 2011 there were 1,806,558 options that were exercisable at a weighted average exercise price of
$10.86.
RSU and Stock Awards Activity Table
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of
Shares
$
67,096
77,225
$
(82,526) $
(6,542) $
$
55,253
148,188
$
(41,522) $
(13,210) $
$
148,709
Weighted-
Average
Grant-
Date Fair
Value
Aggregate
Fair Value (1)
(in thousands)
10.24
8.32
8.93
9.99
9.55
6.85
9.79
7.39
6.99
$
$
691(3)
279(4)
(1)
(2)
(3)
(4)
Represents the value of the Company’s stock on the date that the restricted stock units vest.
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.
On the grant date, the fair value for these vested awards was $737,000.
On the grant date, the fair value for these vested awards was $407,000.
73
Performance Stock Units
In the third quarter of 2012, the Company granted its executive officers 42,250 PSUs that shall vest on June 1, 2013
subject to the recipient’s continued service through that date. At the vest date, the Company shall issue fully-paid up
common stock based on the actual revenue achievement as a percentage of three revenue based performance goals. If
the revenue achievement is below 50% for a performance goal, then zero (0) shares of common stock shall be issued
for that goal; and for achievement of greater than 50% the number of common stock shares to be issued shall be
prorated but capped at 200% of the target.
Stock-Based Compensation
Stock-based compensation expense for stock options, restricted stock units, stock awards and ESPP shares for the year
ended December 31, 2012, 2011 and 2010 was as follows (in thousands):
Stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2012
Year Ended December 31,
2011
2010
2,421
501
138
100
3,160
$
$
3,047
775
—
85
3,907
$
$
3,628
927
—
95
4,650
As of December 31, 2012, the unrecognized compensation cost, net of expected forfeitures, was $4.0 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 2.46 years. For the ESPP, the unrecognized compensation cost, net
of expected forfeitures, was $43,000, which will be recognized using the straight- line attribution method over an
estimated weighted-average amortization period 0.33 years.
The amount of cash received from the exercise of stock options and employee stock purchases, net of taxes withheld
and paid was $1.7 million in 2012, $1.4 million in 2011, and $518,000 in 2010, and the total direct tax benefit (deficit)
realized, including the excess tax benefit (deficit), from stock-based award activity was $6,000 in 2012, $29,000 in
2011, and $8,000 in 2010. 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.
Total stock-based compensation expense recorded by department during the year ended December 31, 2012, 2011 and
2010 was as follows (in thousands):
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . .
$
$
2012
Year Ended December 31,
2011
2010
658
657
514
1,331
3,160
$
$
659
788
698
1,762
3,907
$
$
724
1,189
629
2,108
4,650
74
Valuation Assumptions and Fair Value of Stock Options 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:
2012
Stock Options
2011
2010
Stock Purchase Plan
2011
2012
2010
Estimated fair value of grants
during the year . . . . . . . . . . . . . . . . .
Expected term (in years)(1) . . . . . . . .
Risk-free interest rate(2) . . . . . . . . . .
Volatility(3) . . . . . . . . . . . . . . . . . . . . . .
Dividend yield(4) . . . . . . . . . . . . . . . . .
$
$
2.47
4.17
0.45%
44%
—%
$
3.10
4.15
1.41%
43%
—%
$
3.76
3.84
1.73%
46%
—%
$
2.16
0.50
0.15%
43%
—%
$
2.06
0.50
0.08%
39%
—%
2.41
0.50
0.2%
40%
—%
(1)
(2)
(3)
(4)
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.
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.
Estimated volatility is based on historical volatility. The Company also considers implied volatility when there
is sufficient volume of freely traded options with comparable terms and exercise prices in the open market.
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.
RSU Withholdings
For RSU’s granted to employees, the number of shares issued on the date the RSUs vest is net of the statutory
withholding requirements paid on behalf of the employees. The Company withheld 14,974 in 2012, 16,629 in 2011,
and 14,283 in 2010, shares of common stock to satisfy its employees’ tax obligations of $101,000 in 2012, $146,000 in
2011, and $126,000 in 2010. 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 Company’s loss before provision for income taxes consisted of the following (in thousands):
2012
Year Ended December 31,
2011
(10,458) $
640
(9,818) $
(6,767) $
437
(6,330) $
2010
(11,114)
598
(10,516)
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
75
The components of the provision for income taxes are as follows (in thousands):
2012
Year Ended December 31,
2011
2010
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
The Company’s deferred tax asset consists of the following (in thousands):
$
(13) $
(56)
366
297
(12)
—
(67)
(79)
218
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
December 31,
2012
2011(1)
9,409
6,560
3,259
2,261
796
436
466
180
(31)
23,336
(22,906)
430
$
$
8,660
6,374
3,374
2,062
312
370
429
206
(143)
21,644
(21,274)
370
$
$
$
(1) The Company revised the 2011 tax footnote to reduce deferred tax assets by approximately $280,000 related to
future tax benefits for net operating losses that were not properly recorded in the previous period. This reduction in
deferred taxes was offset by a corresponding reduction in the valuation allowance, and as such had no impact to the
Consolidated Financial Statements, earnings per share, statement of cash flows, or statement of equity for any period
presented.
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,
2012
2011
40
553
(163)
430
$
$
55
446
(131)
370
76
The differences between the U.S. federal statutory income tax rates to the Company’s effective tax rate 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income inclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*Certain items have changed for classification purposes.
Year Ended December 31,
2012
35.00%
3.28
3.40
1.06
(0.05)
1.07
(16.95)
0.28
(25.51)
(5.03)
(3.45)%
2011*
35.00%
2.56
6.02
(0.02)
(2.15)
2.34
(9.64)
(2.01)
(34.70)
.12
(2.48)%
2010*
35.00%
2.81
2.97
2.59
—
(1.13)
(1.54)
—
(38.31)
(2.39)
0.00%
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 has recorded a full valuation allowance against its U.S. federal and state
deferred tax assets due to its history of operating losses.
As of December 31, 2012, the Company had cumulative net operating loss carry-forwards for federal and state income
tax reporting purposes of approximately $25.5 million and $9.2 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 2032. Included in the net operating loss carryforwards are approximately $4.0 million of excess tax
benefits from employee stock option exercises, for which the Company has not recorded a deferred tax asset. When
such excess tax benefits are ultimately realized, the Company will record the deferred tax asset and the credit to
additional paid in capital.
As of December 31, 2012, the Company had research and development tax credits for federal and state income tax
purposes of approximately $3.2 million and $4.0 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, 2012.
The Tax Reform Act of 1986 and similar state provisions limit the use of net operating loss and research and
development credit carry-forwards 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 carry-forwards and credits could be limited and may
expire unutilized.
Undistributed earnings of the Company’s foreign subsidiaries net of foreign income inclusion of approximately $2.9
million at December 31, 2012, are considered to be indefinitely reinvested and, accordingly, no provision for federal
and state income taxes has been provided thereon. Depending on the timing and nature of the distribution, if the total
undistributed earnings of foreign subsidiaries were remitted while the Company is able to utilize its net operating
losses, it is likely there would be no material additional tax resulting from the distribution.
77
Uncertain Tax Positions
The Company establishes reserves for uncertain tax positions based on 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 Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The
2004 through 2012 tax years generally remain subject to examination by U.S., federal and California state tax
authorities due to the Company’s net operating loss and credit carryforwards. For significant foreign jurisdictions, the
2007 through 2012 tax years generally remain subject to examination by their respective tax authorities.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits in December 31,
2010 to December 31, 2012 (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,
2011
2010
2012
583
—
—
29
(76)
536
$
$
555
—
—
44
(16)
583
$
$
787
—
(29)
24
(227)
555
The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate were
approximately $325,000 and $400,000 as of December 31, 2012 and 2011, respectively. The Company had accrued
approximately $86,000 and $79,000 for payment of interest as of December 31, 2012 and 2011, 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 materially
change within the next 12 months.
NOTE 8—NET LOSS PER SHARE
Diluted earnings per share is the same as basic earnings per share for the periods presented because the inclusion of
outstanding common stock equivalents would be anti-dilutive. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 9—DEFINED CONTRIBUTION PLAN
Year Ended December 31,
2011
2010
2012
3,746
97
78
8
3,929
3,667
61
70
—
3,798
3,187
48
66
—
3,301
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. The
Company made no discretionary contributions in 2011 and 2010 under the 401(k) Plan, however in 2012, the Company
made discretionary contributions of $146,000.
78
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, 2012, and the related expense for each of the three years then
ended was not significant.
NOTE 10—SEGMENT INFORMATION AND REVENUE BY GEOGRAPY AND PRODUCTS
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.
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 and truSculpt hand piece refills(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dermal filler and cosmeceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
In 2012, we introduced truSculpt hand piece refills
NOTE 11—COMMITMENTS AND CONTINGENCIES
Facility Leases
Year Ended December 31,
2011
2010
2012
$
$
$
$
31,949
17,826
8,902
4,958
13,642
77,277
46,762
2,843
17,220
4,807
5,645
77,277
$
$
$
$
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
As of December 31, 2012, 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,
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future minimum rental payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Amount
1,759
1,754
1,430
1,318
1,346
7,607
Gross rent expense was $1.6 million in 2012, $1.9 million in 2011 and $1.7 million in 2010.
79
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, 2012.
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 and one other key employee. 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 and Litigation Settlements
The Company is named from time to time as a party to product liability and contractual lawsuits in the normal course
of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes related to legal
matters and claims, as well as ranges of probable losses. A determination of the amount of the reserves required, if any,
for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than
not that the Company shall incur a loss, and whether the loss is estimable. As of December, 2012, the Company had
accrued $233,000 related to pending product liability and contractual lawsuits.
80
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
June 30,
2012
Sept. 30,
2012
Dec. 31,
Quarter ended:
2012
Net revenue . . . . . . . . . . . $ 22,533 $ 19,426 $ 19,591 $
Cost of revenue . . . . . . . .
9,790
Gross profit . . . . . . . . . . .
12,743
Operating expenses:
Sales and marketing . . .
Research and
8,828
10,598
9,274
10,317
7,101
7,112
7,014
March 31,
2012
15,727 $ 18,542 $ 15,232 $ 14,895 $
Sept. 30,
2011
June 30,
2011
Dec. 31,
2011
7,845
7,882
7,506
11,036
6,772
8,460
6,476
8,419
March 31,
2011
11,621
5,224
6,397
7,437
6,779
6,426
6,348
5,946
development . . . . . . . .
General and
administrative . . . . . . .
Total operating
expense . . . . . . . . . . . . .
Income (loss) from
operations . . . . . . . . . . .
Interest and other
income, net . . . . . . . . .
Income (loss) before
income taxes . . . . . . . .
Provision (benefit) for
income taxes . . . . . . . .
2,122
2,217
1,872
2,216
2,313
2,352
2,346
2,130
2,452
2,475
2,854
3,495
2,878
2,310
2,588
2,328
11,675
11,706
11,838
13,148
11,970
11,088
11,282
10,404
1,068
(1,108)
(1,521)
(5,266)
(934)
(2,628)
(2,863 )
(4,007)
105
152
144
96
140
91
199
184
1,173
(956)
(1,377)
(5,170)
(794)
(2,537)
(2,664 )
(3,823)
Net income (loss) . . . . . . $ 1,077 $
Net income (loss) per
share—basic . . . . . . . . $
Net income (loss) per
share—diluted . . . . . . . $
Weighted average
96
(64)
(892) $ (1,466) $
89
97
(5,267) $
93
(208 )
(887) $ (2,863) $ (2,456 ) $
326
32
(3,855)
0.08 $
(0.06) $
(0.10) $
(0.38) $ (0.06) $
(0.21) $
(0.18 ) $
(0.28)
0.08 $
(0.06) $
(0.10) $
(0.38) $ (0.06) $
(0.21) $
(0.18 ) $
(0.28)
number of shares
used in per share
calculations:
Basic . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . .
14,173
14,272
14,127
14,127
14,095
14,095
13,960
13,960
13,930
13,930
13,862
13,862
13,765
13,765
13,667
13,667
81
SCHEDULE II
CUTERA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
For the Years Ended December 31, 2012, 2011 and 2010
Deferred tax assets valuation allowance
Year ended December 31, 2012 . . . . . . . . . . . . . . . .
Year ended December 31, 2011(1) . . . . . . . . . . . . . .
Year ended December 31, 2010 . . . . . . . . . . . . . . . .
Allowance for doubtful accounts receivable
Year ended December 31, 2012 . . . . . . . . . . . . . . . .
Year ended December 31, 2011 . . . . . . . . . . . . . . . .
Year ended December 31, 2010 . . . . . . . . . . . . . . . .
Balance at
Beginning
of Year
21,274
17,868
13,838
Balance at
Beginning
of Year
8
20
586
$
$
$
$
$
$
$
$
$
$
$
$
Additions
Deductions
1,773
3,869
5,347
$
$
$
141
463
1,317
Additions
Deductions
66
39
116
$
$
$
74
51
682
Balance
at End of
Year
22,906
21,274
17,868
Balance
at End of
Year
—
8
20
$
$
$
$
$
$
(1) The Company revised the 2011 tax footnote to reduce deferred tax assets by approximately $280,000 related to
future tax benefits for net operating losses that were not properly recorded in the previous period. This reduction in
deferred taxes was offset by a corresponding reduction in the valuation allowance, and as such had no impact to the
Consolidated Financial Statements, earnings per share, statement of cash flows, or statement of equity for any period
presented.
82
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Attached as exhibits to this Annual Report are certifications of the Company’s Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of
1934, as amended (Exchange Act). This Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a
more complete understanding of the topics presented.
The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and
procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (Disclosure Controls) as of the
end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls
evaluation was conducted under the supervision and with the participation of the Company’s management, including
the CEO and CFO. Based on this evaluation, the CEO and our CFO have concluded that as of the end of the period
covered by this report the Company’s disclosure controls and procedures were effective at a reasonable assurance
level.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be
disclosed in the Company’s reports filed under the Exchange Act, such as this Report, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also
designed to reasonably assure that such information is accumulated and communicated to the Company’s 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, 2012. The effectiveness of our internal control over financial
reporting as of December 31, 2012 has been audited by Ernst & Young LLP, an Independent Registered Public
Accounting Firm, as stated in their report, which is included herein.
83
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 2013 Annual Meeting of Stockholders will be held at its principal executive
offices located at 3240 Bayshore Blvd., Brisbane, CA 94005-1021 on June 19, 2013 at 10:00 a.m. and the record date
for the purposes of voting in that meeting shall be April 22, 2013.
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, 2012.
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.
84
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.
Description
Exhibit
No.
3.2(1) Amended and Restated Certificate of Incorporation of the Registrant (Delaware).
3.4(1) Bylaws of the Registrant.
4.1(4) Specimen Common Stock certificate of the Registrant.
10.1(1) Form of Indemnification Agreement for directors and executive officers.
10.2(1) 1998 Stock Plan.
10.3(1) 2004 Equity Incentive Plan.
10.4(5) 2004 Employee Stock Purchase Plan.
10.6(1) Brisbane Technology Park Lease dated August 5, 2003 by and between the Registrant and Gal-Brisbane,
L.P. for office space located at 3240 Bayshore Boulevard, Brisbane, California.
10.10(2) Settlement Agreement and Non-Exclusive Patent License, each between the Registrant and Palomar
Medical Technologies, Inc. dated June 2, 2006.
10.11(3) Form of Performance Unit Award Agreement.
10.13(4)† Distribution Agreement between the Registrant and PSS World Medical Shared Services, Inc., a subsidiary
of PSS World Medical dated October 1, 2006.
10.14(6) Cutera, Inc. 2004 Equity Incentive Plan, as amended by its Board of Directors on April 27, 2012.
10.18(7) Consulting Agreement dated March 2, 2009 by and between the Company and David A. Gollnick.
10.19(8) 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.
10.20(9) Change of Control and Severance Agreement dated January 5, 2011 by and between the Company and Len
DeBenedictis, Chief Technology Officer of Cutera, Inc.
16.1(10) Letter regarding change in certifying accountants.
23.1(11) Consent of Independent Registered Public Accounting Firm.
23.2(11) Consent of Independent Registered Public Accounting Firm.
24.1 Power of Attorney (see page 80).
31.1(11) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(11) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(11) 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.
101(11) The following materials from Cutera Inc.’s Annual Report on Form 10-K for the year ended December 31,
2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Loss, (iv)
Consolidated Statement of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes
to Consolidated Financial Statements, tagged at Level I through IV.
(1)
Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was
declared effective on March 30, 2004.
Incorporated by reference from our Current Report on Form 8-K filed on June 2, 2006.
Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2005.
Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 8, 2006.
Incorporated by reference from our 2006 Annual Report on Form 10-K filed on March 16, 2007.
Incorporated by reference from our Definitive Proxy Statement on Form 14A filed with the SEC on April 30, 2012.
Incorporated by reference from our Current Report on Form 8-K filed on March 4, 2009.
Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 1, 2010.
Incorporated by reference from our 2010 Annual Report on Form 10-K filed on March 15, 2011.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) Incorporated by reference from Current Report on Form 8-K filed March, 26, 2012.
(11) Filed herewith.
† Confidential Treatment has been requested for certain portions of this exhibit.
85
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, 2013.
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)
March 15, 2013
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
March 15, 2013
/s/ DAVID B. APFELBERG
David B. Apfelberg
Director
/s/ GREGORY A. BARRETT
Gregory A. Barrett
Director
/s/ DAVID A. GOLLNICK
David A. Gollnick
/s/ MARK LORTZ
Mark Lortz
/s/ TIM O’SHEA
Tim O’Shea
/s/ JERRY P. WIDMAN
Jerry P. Widman
Director
Director
Director
Director
86
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
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, 2013
/s/ KEVIN P. CONNORS
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
EXHIBIT 31.2
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 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, 2013
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Executive Vice President and Chief Financial Officer
(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, 2012, 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)
(2)
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
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, 2013
Date: March 15, 2013
/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 Financial and Accounting Officer)
Corporate Information (as of April 29, 2013)
BOARD OF DIRECTORS
Kevin P. Connors, President and
Chief Executive Officer, Cutera,
Inc.
David B. Apfelberg, MD2, Clinical
Professor of Plastic Surgery,
Stanford University Medical Center
Gregory Barrett2,4, President and
Chief Executive Officer, BÂRRX
Medical (recently acquired by
Covidien)
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
ANNUAL MEETING
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 to retain future
earnings, if any, for use in the operation and
expansion of our business and do not
anticipate paying any cash dividends in the
foreseeable future. As of February 28, 2013,
we believe there were approximately 2,300
holders of record of our common stock.
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
2012
2011
Low
High
High
Low
$ 9.77 $ 7.34 $ 7.93 $ 6.96
7.03
7.59
8.08
7.60
9.13
9.67
8.74
9.46
9.94
6.46
6.47
7.09
4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.
Annual meeting of stockholders will
be held on June 19, 2013, 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, 2013. For additional
copies of this report, Form 10-K, or
other financial information, without
charge, please visit the Investor
Relations page on our website at:
www.cutera.com or write to
ir@cutera.com.